Housing has always been an engine of economic growth. But that engine could stall if action isn’t taken to increase the supply of affordable housing and expand opportunities for lending to underserved families.
The nation’s gross domestic product generally averages 15% to 18% on housing. Spending on residential investment and housing services accounted for 17.5% of GDP in 2020. For the past 15 years, since the subprime housing crisis, housing’s impact has been well below its peak.
As a driver of the economy, housing should be bolstered by:
- Non-bank lending institutions to lend in lower-income areas and to minorities in the same way that CRA provides for banks
- Reducing government-insured and guaranteed mortgage loan fees
Action must be taken to provide adequate credit access to homebuyers and encourage the housing market to expand opportunities for American households. Black homeownership rates have declined from 48.4% in 2001 to 44.8% in 2021. The Hispanic homeownership rate grew moderately to 48.4%, partly due to organized advocacy and the work of Latino Realtors and lenders.
Housing costs, particularly at the bottom of the market, have skyrocketed with a limited supply of housing and a severe shortage of construction workers. Since 2016, legal immigration growth has declined by 40%. Increasing the supply of legal immigrant construction workers would accelerate economic growth.
A surge in the sale of new and existing homes leads to increased spending on housing construction materials and home furnishings, goods, and services. These increased expenditures result in an economic boom. On the other hand, a sharp downturn in housing has long been regarded a precursor to an economic recession.
Increasing the supply of affordable housing
Our nation’s shortage of 3.8 million housing units comes entirely at the bottom of the market. This drives up housing costs and adversely affects households of more modest means. This deepening shortage widens the wealth gap between renters and owners, forces more families to live farther from jobs and undermines their upward mobility.
In 2021, housing prices jumped by 19% – the biggest rise in a half-century, with the percentage of first-time homebuyers falling to its lowest level in decades (31%).
While home inventories remain low, the prospects for first-time buyers diminish. Prices continue to rise. Competition favors institutional investors and households with higher incomes and stellar credit.
Programs to scale up affordable housing
President Biden’s Build Back Better Bill includes funding to increase the supply of affordable housing. Even if it is not enacted, other programs are positioned to help. For example, the Housing Trust Fund and Capital Magnet Fund provide grants to nonprofit organizations to invest in affordable housing in lower-income communities. If they are fully funded, both programs could scale up and provide affordable housing where it is most needed.
Incentivizing developers is necessary
Increasing the overall housing supply requires reforming land-use and zoning laws. To stimulate production, local governments can incentivize developers to set aside affordable housing for underserved households, especially by granting tax breaks and density bonuses. Another option would be to require the construction of high-density housing units when planning transit-based development plans around employment centers. Local governments could also rezone commercially zoned properties to reuse them for housing or they could allow homeowners to convert existing single-family structures into more units.
The federal government could also boost the supply of affordable housing by streamlining and expanding its HUD 203(k) program in order to repair, improve, or upgrade existing affordable homes. Even at the Executive level, President Biden could appoint an official to coordinate housing policies aimed at increasing the supply of both rental and homeownership units.
The need for change in current mortgage underwriting guidelines
The mortgage market is not effectively addressing underserved population groups. Hispanic households, in particular, are often composed of extended family members, many of whom contribute to monthly housing expenses. But mortgage underwriting rules typically only consider the income of the person who is named on the mortgage.
More than half of new households in this country will be formed by Hispanics over the next quarter-century, many of whom have achieved considerable gains in education, income, and business ownership. Many minority borrowers are also immigrants and self-employed. Yet, mortgage underwriting rules remain challenging unless borrowers collect paychecks from full-time employers. Immigrants and self-employed individuals also tend to pay in cash for many purchases. Nonetheless, mortgage underwriting relies heavily on credit history to assess future creditworthiness.
Because of the disconnect between traditional underwriting and how underserved households manage their finances, many mortgage lenders are not accurately assessing credit risk. Credit scoring is prejudiced against borrowers with fewer than three established lines of credit, or with limited credit histories. This system is failing minorities, underbanked Americans, immigrants, and those with thin-file credit histories.
Lenders need guidelines that consider prospective homebuyers’ histories, including on-time rent payments, multigenerational household structures with multiple income streams, or creditworthy borrowers who do not fit in mainstream credit boxes. The mortgage market must reassess its rules and adopt alternative credit scoring methods, to evolve with the nation it serves.
By now, most of us are aware that homeownership is a fundamental vehicle for Americans to achieve economic prosperity, create businesses, and build the wealth needed to climb into America’s middle class. The inability to build equity presents a major barrier to significantly growing the housing sector and the nation’s economy.
Committing non-bank lending institutions
Ensuring that non-bank lenders are obliged to lend in lower-income areas and minorities is critical. In 2020, non-bank mortgage lenders accounted for 68% of all originations that year.
The Community Reinvestment Act (CRA) aims to meet neighborhoods’ credit needs, including in low- and moderate-income neighborhoods. CRA requires periodic evaluation of each institution’s record in helping meet the needs of its entire community. While non-bank lenders are not bound by CRA requirements, they do have an obligation to serve underserved communities and people of color.
Many of these non-bank lenders only operate where they can make the most profit, with higher-income borrowers with stellar credit. Many of these independent mortgage bankers (IMBs) don’t serve all households in their communities, especially those that are most vastly underserved.
Some communities are not equitably served because lenders say they are unable to recruit and hire minority loan officers who reside in these communities. Lenders must increase, recruit, and train culturally adept professionals who have a passion for meeting the homeownership needs of underserved populations and who can rise to executive-level positions.
Currently, the continuation of record-low interest rates and the increased availability of low- down payment and down payment assistance program should enable more American households to achieve homeownership. The use of down payment assistance can also be substantially leveraged; for example, it can be used in tandem with VA’s zero down payment program, HUD’s Voucher Homeownership Program or with USDA’s 502 homeownership program for the rural poor.
Reducing government-insured and guaranteed mortgage loan fees
Homeownership opportunities for hundreds of thousands of hard-working households can be increased if the Administration reduces the Federal Housing Administration’s mortgage insurance premiums and GSE fees. At their current level, FHA’s premiums are blocking its goal to provide mortgage insurance to more underserved borrowers.
The FHA program is currently showing exceptional profitability. Its Mutual Mortgage Insurance Fund Capital Ratio is now at 8.03%, exceeding its statutory minimum of 2% for the seventh consecutive year. Despite the pandemic, FHA is expected to perform well and has funding to cover future losses. As the primary resource for minority and underserved homebuyers, FHA should lower its costs, increase homeownership opportunities, and help sustain and grow the nation’s housing sector and economy.
Reduce loan-level price adjustment
Fannie Mae and Freddie Mac should in reduce the loan-level price adjustment (LLPA) fees. These conventional loan fees raise loan prices considerably and boost the actual mortgage rate paid by “riskier” borrowers. These fees should be eliminated for loans already covered by private mortgage insurance.
Currently, the GSE fees are excessively high and discriminate against households with lower credit scores and limited credit histories. Overall costs to borrowers could also be reduced if mortgage insurance pricing and underwriting were more appropriately regulated.
Increasing the supply of housing, addressing the homeownership needs of underserved households effectively, encouraging lenders to make loans to all households in the communities they serve, and lowering mortgage costs will help millions of American families achieve sustainable homeownership.
Combining these efforts with sound and improved underwriting and with the expanded use of low down payment and down payment assistance programs will result in restoring the role of housing as a vital engine of the nation’s economic growth.
Alejandro Becerra is the former director of research for the National Association of Hispanic Real Estate Professionals.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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