Low-Income Homeownership

Low-Income Homeownership: Examining the Unexamined Goal

Nicolas P. Retsinas
Eric S. Belsky
Copyright Date: 2002
Pages: 495
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  • Book Info
    Low-Income Homeownership
    Book Description:

    A generation ago little attention was focused on low-income homeownership. Today homeownership rates among under-served groups, including low-income households and minorities, have risen to record levels. These groups are no longer at the margin of the housing market; they have benefited from more flexible underwriting standards and greater access to credit. However, there is still a racial/ethnic gap and the homeownership rates of minority and low-income households are still well below the national average. This volume gathers the observations of housing experts on low-income homeownership and its effects on households and communities. The book is divided into five chapters which focus on the following subjects: homeownership trends in the 1990s; overcoming borrower constraints; financial returns to low-income homeowners; low-income loan performance; and the socioeconomic impact of homeownership.

    eISBN: 978-0-8157-0603-8
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Foreword
    (pp. ix-xii)
    Bruce Katz

    The United States is essentially a nation of homeowners and people who aspire to be homeowners. Belief in the benefits of homeownership cuts across racial, ethnic, class, and geographic lines. Homeownership builds wealth. Homeownership is a stable investment. Homeownership encourages neighborhood involvement by residents. Homeownership builds up communities. Homeownership creates positive environments for children and families.

    Unfortunately, the benefits of homeownership, while widely perceived, have not been universally realized. Homeownership rates have lagged considerably for low-income and minority households. Approximately three-fourths of white, non-Hispanic households own their homes, one and one half times the homeownership rate of African American and...

  4. Acknowledgments
    (pp. xiii-xvi)
  5. 1 Examining the Unexamined Goal
    (pp. 1-12)

    Anthropologists point out that the notion of ownership is a cultural construct. In some societies, land and buildings constitute community wealth; those societies would find the notion that an individual might “own” a house—and even the notion of “ownership” itself— bizarre.¹

    This construct, though, is embedded in American culture; it is oft equated with the American Dream. From its agrarian roots in medieval England, the concept of landholding as a precondition of liberty has evolved into a yearning for ownership.² We have the attendant rituals: the wedding checks amassed toward a down payment, the housewarming parties, the burn-the-mortgage celebrations,...

  6. Part 1. Homeownership in the 1990s

    • 2 Anatomy of the Low-Income Homeownership Boom in the 1990s
      (pp. 15-63)

      Despite an unprecedented boom in homeownership that added 7 million net owners between 1994 and 1999 and drove the homeownership rate nearly 3 percentage points higher, to 66.8 percent, relatively little is known about where people have been buying homes and the types of homes they have been buying. Analysis of the 1990s boom has focused principally on describing who is buying—by income, racial, ethnic, and family characteristics—not on where and what homes they are buying (Bostic and Surette, 2000; Wachter, 1999; Masnick, 1998).

      The concentration of the growth in homeowners among minorities has been especially striking. Though...

    • 3 The Industrial Structure of Affordable Mortgage Lending
      (pp. 64-104)

      Ensuring the widespread availability of mortgage credit for lower-income families and borrowers who reside in lower-income neighborhoods has long been a public policy concern. Legislative efforts aimed at financial institutions intensified during the 1970s with the passage of the Home Mortgage Disclosure Act (HMDA) in 1975 and the Community Reinvestment Act (CRA) in 1977 and the Federal Reserve Board’s promulgation of Regulation C.¹ Other legislative efforts have sought to ensure, by authorizing targets for loan purchases, that the secondary mortgage market facilitate lending to low-and moderate-income borrowers and those living in underserved areas, the first such regulations issued by the...

  7. Part 2. Overcoming Borrowing Constraints

    • [Part 2 Introduction]
      (pp. 105-110)

      Owing to the longest economic expansion in U.S. history, the lowest mortgage interest rates in a generation, and changes in the demographic makeup of the nation’s population, homeownership rates rose for six years in a row to a record level of 67.7 percent as of the third quarter of 2000.¹ The resulting increase in the homeownership rate has been broad based, spanning all racial/ethnic groups and income groups.

      For example, between 1994 and 2000, the homeownership rate for individuals with incomes below the median rose from approximately 48 percent to 51 percent, an increase of 6 percent, while those with...

    • 4 Eliminating Credit Barriers: How Far Can We Go?
      (pp. 111-145)

      Few symbols of personal economic success loom larger in the minds of Americans than owning one’s own home. Norms favoring homeownership have been further buttressed by the belief that because homeownership is a sites-specific investment homeowners take better care of their neighborhoods and therefore make good citizens.¹ Although evidence on whether homeowners make better neighbors is still tentative, it is certain that as a society we value homeownership for both personal and social reasons.² This is clear from a long history of tax policies that encourage homeownership by reducing the cost of housing for owner-occupiers (Rosen, 1979; 1985). In addition,...

    • 5 Prepurchase Homeownership Counseling: A Little Knowledge Is a Good Thing
      (pp. 146-174)

      For the past three decades homeownership counseling has been an integral part of affordable lending in the United States. Myriad benefits have been attributed to these programs. Its advocates believe, for example, that counseling better prepares borrowers to recognize and accept the responsibilities of owning a home. By helping to get households into homes they can afford, and afford to keep, homeownership counseling has been credited with stabilizing families and neighborhoods and reducing default risk for lenders.

      This study uses data on almost 40,000 mortgages originated under Freddie Mac’s Affordable Gold program to assess the claim that prepurchase homeownership counseling...

    • 6 Supply-Side Constraints on Low-Income Homeownership
      (pp. 175-200)

      Homeownership is increasingly being utilized as a social policy believed to promote neighborhood health and stability, while also offering opportunities for low-income families to build financial assets through home equity. Between 1993 and 1997, mortgage lending overall grew by 20 percent; but in low-income census tracts in metropolitan areas it grew by over 30 percent (Can, Bogdon, and Tong, 1999). The surge in home buying among low-income households in the 1990s raises questions about the sustainability of this boom. Because the rate of house price appreciation proceeded at twice the rate of inflation in the late 1990s, one question often...

  8. Part 3. Returns to Homeownership

    • [Part 3. Introduction]
      (pp. 201-207)

      Equity in a home represents the single largest asset held by most Americans. Among owners with household incomes below $20,000, home equity accounts for approximately 72 percent of net household wealth; for those with incomes between $20,000 and $49,999, the accumulated equity in their homes constitutes 55 percent of their total wealth.

      Partly out of recognition of the contribution of homeownership to wealth formation and partly for ideological reasons, a number of public and private sector efforts have been undertaken in the past ten years to assist low-and moderate-income households in becoming homeowners. These include development of innovative financial products...

    • 7 Asset Appreciation, Timing of Purchases and Sales, and Returns to Low-Income Homeownership
      (pp. 208-238)

      Because home equity is low-income households’ dominant form of wealth, an understanding of the price dynamics of the housing stock held by these owners and the timing of their purchases and sales is important for understanding the risk-return tradeoffs associated with their decision to buy homes. In an ideal world, such an understanding would precede and inform efforts to lift the homeownership rates of low-income people. In reality, however, our understanding of price dynamics and how they intersect with the timing of purchase and sales decisions of low-income owners is limited. Only a handful of studies to date have aimed...

    • 8 Home Price Appreciation in Low-and Moderate-Income Markets
      (pp. 239-256)

      At the turn of the millennium, fully two-thirds of American households were owner-occupants. In addition, through the middle of the year 2000, real home prices were rising in all but a handful of major metropolitan areas in the United States. In such a climate, the benefits of homeownership seem obvious. Owners whose property appreciates accumulate wealth, and most are protected from rising out-of-pocket housing costs by fixed or slowly adjusting mortgage rates. Renter households, in contrast, are hurt by rising real rents, and they see the dream of homeownership becoming ever more elusive.

      But is homeownership the solution for all?...

    • 9 Policy Implications of Portfolio Choice in Underserved Mortgage Markets
      (pp. 257-274)

      Homeownership in low-income neighborhoods has positive personal and social benefits. It provides residents with an incentive to maintain both their own property and the local neighborhood. Recent research also suggests that homeownership is associated with “life satisfaction” (Scanlon, 1999). Still, these externalities and “internalities ” are not costless. A house is not only a dwelling; it is an investment asset. As such it has risk and return characteristics that should affect the purchase decision. This chapter examines the investment value of U.S. housing over the past twenty years. The results suggest that the capital appreciation of housing over the twenty-year...

  9. Part 4. Low-Income Loan Performance

    • [Part 4 Introduction]
      (pp. 275-278)

      This section contributes to our understanding of the asset-building potential of homeownership for low-income households by taking a careful look at the repayment performance of low-income and minority borrowers from a lender’s perspective. The results of the three studies have direct bearing on the evaluation of lending risks of low-income and minority borrowers and the pricing of mortgages in these markets.

      Mortgage lending in recent years, driven in part by enforcement of the Community Reinvestment Act (CRA) and the imposition of Affordable Lending Goals on government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, has expanded significantly in traditionally...

    • 10 Prepayment Risk and Lower-Income Mortgage Borrowers
      (pp. 279-321)

      Over the 1990s the U.S. housing finance system increased its attention to issues of affordable housing. The government-sponsored enterprises (GSEs), notably Freddie Mac and Fannie Mae, introduced multiple special lending programs targeted to first-time home buyers and to households with income below 80 percent of area median. At the same time, regulators for the related issue of “redlining” have carefully scrutinized banks and other depository institutions seeking merger authorization.

      When loans are targeted to “affordable housing” needs, it is common to ask whether they engender differential default risk, and extensive investigation of this issue has occurred.¹ It has been less...

    • 11 Performance of Low-Income and Minority Mortgages
      (pp. 322-347)

      This chapter analyzes the performance of low-income and minority mortgage loans relative to other mortgages for a large sample of fixed-rate mortgages originated in the 1990s and followed through 1999. Evaluating performance differences is complicated. For instance, it is not just a matter of credit risk. For fixed-rate mortgages it is clearly the case that prepayment risk, the risk that comes from borrowers exercising their option to refinance when mortgage rates fall (which amounts to exercising a call option), has a cost of at least the same order of magnitude as credit risk. Hence low-income and minority loans may have...

    • 12 Performance of Community Reinvestment Loans: Implications for Secondary Market Purchases
      (pp. 348-374)

      The government-sponsored enterprises (GSEs) have been very successful in extending credit to nontraditional borrowers using technology, homeownership education, and outreach. For instance, between 1993 and 1999 the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) increased their combined total purchases of home loans by 22 percent. Their purchases of home loans originated to very low- and low-income borrowers increased at much higher rates (Bunce, 2000).

      In all likelihood, if the GSE affordable market is to continue to grow, the GSEs will need to expand their guidelines for affordable loan purchases. This requires the...

  10. Part 5. Socioeconomic Impacts of Homeownership

    • [Part 5. Introduction]
      (pp. 375-380)

      Owning a home and a piece of land to call your own is central to the American dream. Dictated by a unique American cultural imperative and relentlessly promoted by a complex web of public and private institutions built around housing and housing finance, homeownership enjoys a pivotal role in American culture.

      Historically, homeowners needed to enter the middle class before they could afford a house. In recent years, the growth of low down payment and flexible underwriting standards combined with explicit public policy goals, regulatory pressure, and an excellent economy to extend the mortgage market. Consequently, homeownership has reached into...

    • 13 Social Benefits and Costs of Homeownership
      (pp. 381-406)

      Homeownership is often thought to be an essential ingredient of the American Dream. Living in a single-family, owner-occupied dwelling unit is central to the American conception of a secure and successful life. Study after study has found that a large proportion of Americans would rather own than rent a home. In a recent national survey, for example, 86 percent of all respondents felt that people are better off owning than renting a home, and 74 percent said that people should purchase a home as soon as they can afford it, regardless of their marital status or whether they have children...

    • 14 Housing and Wealth Accumulation: Intergenerational Impacts
      (pp. 407-426)

      As is well known, for over sixty years the federal government has promoted homeownership as a critical component of achieving the American Dream. Housing policy has formed a significant cornerstone of the nation’s “poverty agenda” as well as represented a separate policy initiative. Two specific examples from the past decade illustrate this point. In 1991The President’s National Urban Policy Reportissued by the U.S. Department of Housing and Urban Development (HUD) contained six priorities that formed the department’s poverty agenda. One of these priorities was to encourage homeownership and expand affordable housing opportunities. More recently, the Clinton administration directed HUD...

    • 15 Impact of Homeownership on Child Outcomes
      (pp. 427-446)

      There are many claims that homeownership yields significant benefits for the owners, the owners’ local community, and the nation, but there are relatively few studies of this assertion that fully address the complex modeling, data, and estimation issues that the claim implies. Recently, there has been substantial interest in measuring the impact of homeowning on the children of homeowners. We add to this literature by focusing on measuring the impact of homeownership on the cognitive and behavioral outcomes of young children.

      Our child outcome measures include normed achievement test scores in mathematics and reading and an indicator of behavioral adjustment....

    • 16 Building Homes, Reviving Neighborhoods: Spillovers from Subsidized Construction of Owner-Occupied Housing in New York City
      (pp. 447-478)

      Promoting homeownership has always been a central aim of housing policy in the United States. The federal tax code delivers generous tax benefits to homeowners, the Federal Housing Administration (FHA) provides insurance on high loan-to-value mortgages, a variety of other FHA and state programs have offered below-market interest rates, and the Community Reinvestment Act of 1977 provides incentives for financial institutions to make mortgage loans in low-and moderate-income communities. As cities have become more centrally involved in implementing housing policy, local officials have also begun to sponsor a large number of homeownership programs in distressed communities.

      Although these efforts typically...

  11. Contributors
    (pp. 479-480)
  12. Index
    (pp. 481-495)