Here is a riddle: Why did the homeowner stop making
their mortgage payments?
Because they ran out of money. The
riddle does not end with “because they only put down 3.5 percent of the
purchase price.”
It is the difference between bad
economic policy and bad lending policy – Federal Housing Administration (FHA)
lending policy in this example.
On the heels of the recent House Financial
Services Committee hearings, and the release of FHA’s Actuarial Report, we have
and are likely to continue to hear calls to drastically reshape and limit the
types of borrowers that FHA can insure. The borrowers most at risk of losing
this valuable bridge to homeownership are the ones who most need consideration
- low- to moderate-income Americans.
Low- to moderate-income Americans
were also disproportionately affected by the Great Recession – losing anywhere
between half and two-thirds of their household net worth. With the unemployment
rate sitting at recessionary levels for the past five years, stagnant wage
growth for those fortunate enough to have a job, and savings rates at negative levels,
it’s hard to imagine how or when these households’ economic circumstances will
improve. Given that the median net-worth of a homeowner is roughly forty times
higher than that of a renter, one would hope that policymakers will not lose
sight of these dire and vexing circumstances when it comes to housing reform. Homeownership
is virtually the last legitimate wealth creation opportunity for low- to
moderate-income families.
We are no longer facing a housing
market riddled with exotic subprime products with increasing interest rates and
payments. Instead the greatest
challenge facing these remaining low- to moderate-income homeowners, especially
those with loans backed by FHA who never offered such products, is economic
circumstances that either prevent them from becoming homeowners or trigger
their default. Today’s defaults are symptoms of other macro economic policies
and not necessarily the result of bad lending policy at the FHA.
As the saying goes, you can pay me
now or you can pay me later. Investing in helping these families, who make up
half of the country’s population with annual incomes of less than $50,000,
purchase their first home supports household financial stability. Investing in these families also helps
to control the future of entitlement spending given that they will not have any
money to take care of themselves when they get older otherwise. Let’s not
forget that the federal government is subsiding homeownership for wealthy Americans
to the tune of over $300 billion a year through tax write-offs and interest rate
deductions - which I am also in favor of. Lower income households deserve the
same opportunity to access housing credit. But access does not translate to
charity for these families. On the contrary, FHA has operated independently on
its lending profitability for over 80 years without ever receiving a nickel of
government appropriations.
So should we
stop lending to low-income and minority households simply because of the
economic climate? If so, how long would it take these households to save even a
modest five percent or ten percent downpayment required in the private market? The Mortgage Bankers Association
estimates that for median households – not even low-income households – in
major metropolitan areas a five percent downpayment would take up to five years
to save. A ten percent downpayment would take up to nine years to save. Even worse, a 20 percent downpayment,
as proposed by the regulators drafting the Risk Retention/Qualified Residential
Mortgage (QRM) rule, would take up to 18 years to save.
So again, do we wait for the ideal
economic circumstances to manifest to combat the causes of default or prevent a
family from saving enough for a five or ten percent downpayment? Or do we
strive for ways to meet these households where they are and provide them
meaningful venues for wealth creation through FHA lending policies which have
historically been used to assist these households and the housing market in
general.
Tim Rood, Collingwood Group Partner and Managing Director, was
recently interviewed on FOX Business discussing the role of FHA and housing
policy. The interview can be viewed here.