Faced with an unprecedented opportunity to help Americans find the road to financial security through homeownership, policymakers are looking the other way, according to a new report from a New Mexico nonprofit housing agency.
Instead of fostering programs that would help would-be homebuyers take advantage of record-low mortgage rates and rock-bottom housing prices, the report from Homewise says lawmakers and regulators are focusing on policies that "give significant competitive advantages to investors."
"We should be hearing calls for a renewed commitment to homeownership," says Michael Loftin, the report's chief author and executive director of Homewise. "Instead, federal housing policy has left behind its historic commitment to helping the middle class access homeownership in favor of another round of investor speculation."
The white paper from an obscure Santa Fe agency that promotes ownership though financial counseling and educational classes gains credibility here because it puts its money where its mouth is. Because Homewise invests its own capital in the process, it has what is called "skin in the game."
Homewise provides qualified buyers with amortizing second mortgages so they can meet today's tough lender loan-to-value ratio requirements. The second mortgages allow buyers to purchase with smaller down payments. Because the agency stands to lose if the buyer loses, it creates a strong incentive for Homewise to do a good job preparing people for long-term success.
Gambling that house prices would rise forever is arguably at the root of the housing debacle. Gamblers included not only investors who thought they could make a quick buck by buying today and selling tomorrow, but also families who overreached by buying more house than they could afford or opting for risky financing so they could take part in the game.
Now, in an effort to clear the blight that the millions of foreclosed and vacant houses have left upon the land, the government is pursuing programs that will allow investors to swallow swaths of single-family houses in one fell swoop.
The idea, of course, is to get these places occupied and off the books. But turning too many homes into rentals could put a drag on the housing recovery, the Homewise paper warns. And just at that rare moment when millions of working stiffs can finally afford sensible homeownership, author Loftin says public policies now favor what could easily turn into another round of speculation.
Investors realize that today's market presents an exceptional opportunity. Just last month, the Federal Housing Finance Agency reported "strong qualified bidder interest" in its pilot program to sell some 2,500 foreclosed homes owned by Fannie Mae in geographically concentrated locations across the country. But in the process, individual buyers, and even organizations like Homewise that are in a position to help families purchase their first homes, are being shoved aside.
"Cruel irony," Loftin says. "The strategy is particularly galling to community advocates who watched subprime lenders reap billions in profits by exploiting vulnerable neighborhoods and are now watching those same neighborhoods again exploited by investors who have a competitive advantage because of federal policies, restrictive lending practices and sheer financial might."
The Homewise white paper notes that the "historic and painful" housing bust has eroded confidence in ownership, to the point where many question whether the average family should buy a home, can buy a home or even would want to buy a home. Even long-standing housing advocates wonder whether ownership is a smart financial choice.
Considering the current market conditions, Loftin says "the better approach" is to pull away from the crowd and consider the implications of ownership as a tool to long-term financial stability. Do that, he argues, and you will see that the historic combination of low house prices and loan rates, combined with the enduring benefits of ownership, have created a unique opening -- "a golden opportunity" -- for middle-class families.
The benefits of owning over renting, beyond satisfying the basic human need of safe and decent housing, have been well-documented but bear repeating.
-- Stable housing costs: Whereas rent is unpredictable, subject to inflation and market fluctuations based on supply and demand, mortgage payments are relatively stable. For owners, the only portions of the house payment subject to change are taxes and insurance. The larger part of the payment, the amount paid to principal and interest, never changes, at least with the traditional fixed-rate mortgage.
-- Wealth building: Because part of each house payment goes toward principal reduction, increasing the owner's net worth each month as the loan is paid down, ownership serves as an automatic savings plan. In contrast, the amount a rental payment adds to the tenant's bottom line is, and always will be, zero.
-- Appreciation: As the house rises in value, so, too, does the owner's stake. Yes, the property can lose value, as we have painfully seen over the last five years. But even modest appreciation has a powerful cumulative effect, and it comes on top of the forced savings noted above.
-- Leverage: This is perhaps the most powerful wealth-building feature of all. Even though the owner pays only a portion of the home's value upfront in the form of a down payment, he benefits from appreciation on the entire asset, amplifying his total return.
"Homeownership is an incredibly powerful engine," the white paper says. "The opportunity for working families to achieve financial security through homeownership is too great to ignore. A national strategy of developing homebuyers and providing them with effective financing would help working families take advantage of today's affordability, and would help communities rebuild from the subprime and foreclosure crisis."
Unfortunately, Loftin doesn't expect federal housing agencies to take the lead in developing a coherent policy or advancing some bold strategy. That's just not realistic, he says. "History has shown us that these agencies are not readily adaptable or fleet of foot, and their current reaction to the problem only confirms this trend."
Instead, he believes the task of developing an effective strategy to support homeownership will once again fall to private nonprofits like Homewise, organizations that have been helping people become owners for years.
"The homeownership community has taken on many daunting challenges over decades without losing sight of our founding missions," Loftin says, "and we should rally again to take on this next challenge."