02/23/2022
Restoring the Role of Housing as an Engine of Economic Growth
The housing sector has long been considered a leading indicator of the economic cycle. A surge in housing construction and in the financing of new and existing remodeled homes leads to increased spending on housing construction materials, home furnishings, and other home goods and services. Overall spending in the housing sector, in turn, is expected to result in the increased production of goods and services nationwide, thus resulting in an economic boom. Correspondingly, a sharp downturn in housing has long been regarded a precursor to an economic recession.
The housing sector alone represents an important component of the nation’s economy. Its combined contribution to the nation’s gross domestic product generally averages 15 to 18 percent of GDP. Taken together, spending for residential investment and housing services accounted for 17.5 percent of GDP in 2020.
Since the housing crisis, however, residential investment has remained well below its peak as a percentage of GDP, while home sales have still not recovered to pre-recession levels. Since 2016, the decline of immigration growth by more than 40 percent has further reduced the demand for housing Increasing the supply of immigrant workers would not only vastly stimulate the housing sector but also accelerate America’s economic growth.
In addition, the limited supply of housing and shortage of construction workers have driven up housing costs, particularly at the bottom of the market, and prevented hundreds of thousands of first-time homebuyers from owning a home. Since minorities and other underserved households represent an increasingly growing share of the nation’s population, the housing market stands to expand substantially by meeting their housing needs effectively.
Over the past two decades, the homeownership rate of Blacks has significantly declined from 48.4 percent in 2001 to 44.8 percent in 2021. Similarly, the rate of Hispanic homeownership grew from 47.3 percent in 2001 to 48.4 percent in 2021, an increase of merely one percentage point. Were it not for the pivotal role a growing cadre of professional Latino realtors and lenders has played in improving Latino homeownership growth, it is not certain that the homeownership rate of Latinos would have grown at all.
Restoring the role of housing as an engine of economic growth is critically needed. In particular, the following policies and solutions are recommended in order to increase the supply of affordable housing, provide adequate credit access to a greater number of homebuyers, and encourage the housing market to expand homeownership opportunities for a greater number of American households.
Increasing the Supply of Affordable Housing Across the Country. For well over a decade the nation has built far too few homes to meet demand. This deepening shortage, which has entirely come at the bottom of the market, is driving up housing costs and adversely affecting households of more modest means. National house prices went up by 19 percent in 2021, the biggest increase in the last 45 years. Consequently, the percentage of first-time homebuyers has fallen to its lowest level in decades.
Today, fewer than half of Hispanics own their homes and only about two in five Blacks own theirs, a level that has barely changed over the past two decades. This dramatic housing shortage is widening the wealth gap between renters and owners, forcing more families to live farther from jobs, thereby undermining job creation and growth.
Currently, even if President Biden’s Build Back Better Bill that includes funding to increase the supply of affordable housing is not enacted, several programs are already positioned to do so. For instance, the Housing Trust Fund and Capital Magnet Fund provide grants to nonprofit organizations to invest in affordable housing in lower-income communities. Mostly through the production of multi-family rental units, both programs have the basic framework and flexibility needed to scale up and provide affordable housing where it is most needed. In addition, the Low-Income Housing Tax Credit and Neighborhood Homes Investment Act use tax incentives to do much the same thing. There is no shortage of well-developed, even bipartisan options.
Increasing the supply of overall housing, especially for new homeowners, however, requires expanding programs that increase homeownership opportunities and policies that reform land-use and zoning laws. To stimulate adequate housing production, developers can also be incentivized to set aside affordable ownership housing to low- and moderate-income households, and require that transit-based development plans around employment centers include the construction of condominium units or other high-density units.
In addition, local communities can grant tax breaks and density bonuses to developers who set aside affordable housing units for minority and other underserved low- and moderate-income households. Other similar reforms could include allowing homeowners to convert an existing single-family structure into a same-size duplex, triplex, or fourplex, providing tax breaks for new home construction, and rezoning commercially zoned properties for housing and mixed-use. Communities can also encourage the building of homes on vacant lots in urban or suburban areas located between existing homes where there is already cold water, sewerage, and power available.
The Federal Housing Administration alone could boost the supply of affordable housing by allowing the conversion of existing urban buildings into condos or coops for first-time homebuyers. Finally, FHA could streamline and expand its 203(k) program in order to repair, improve, or upgrade existing affordable homes, especially in markets with high concentrations of minority households and construction workers.
Addressing the Homeownership Needs of Underserved Communities Effectively. The mortgage market has a long history of neglecting the homeownership needs of underserved communities; yet by 2045, people of color, who remain vastly underserved, will make up more than half of the nation’s population. For example, consider the population growth of Hispanics alone. Over the next quarter century, more than half of new households in this country will be formed by Hispanics. An overwhelming amount of the total demand for housing will thus come from Hispanics, particularly among those buying their first home.
The mortgage market today, however, is not set up to serve underserved population groups effectively. U.S. Census data show that Hispanic households, for example, are often composed of extended family members, many of whom contribute to monthly expenses like the rent or mortgage. However, mortgage underwriting rules typically only consider the income of the person who is named on the mortgage.
Many minority borrowers also tend to be immigrants and self-employed. Yet mortgage underwriting rules remain challenging for those who do not collect a regular paycheck from a full-time employer. On average, immigrants and self-employed individuals possess a strong ability to finance a home based on their minimal use of credit since they traditionally pay in cash for most purchases. Yet mortgage underwriting relies heavily on credit history to assess future credit worthiness.
Because of the disconnect between how many Hispanic and other underserved households manage their finances and how the rules of underwriting work, mortgage lenders consistently fail to accurately assess their credit risk. For example, FICO credit scoring currently favors the scoreable and prejudices those with less than a minimum of three established lines of credit with limited histories. This is not working at all for minorities, underbanked Americans, immigrants, and those with thin-file credit histories.
The current situation matters because too many underserved households are missing out on homeownership, a primary vehicle for Americans to achieve economic prosperity, help create more businesses, and build the wealth they need to climb into the middle class. Their inability to achieve homeownership and build equity that can help them create businesses and boost their purchasing power represents a lost opportunity to significantly grow the housing sector and the nation’s economy.
Enhancing the capacity of lenders to improve their assessment of the risks associated with the broader range of families seeking to buy a home today calls for lenders to implement underwriting guidelines that take into account that many prospective homebuyers have a history of on-time rent payments, are part of multigenerational households with a variety of income streams, or are creditworthy borrowers who simply do not fit in the credit box to get loans. This will require the agencies that together define our current underwriting system to reassess their rules and consider alternative credit scoring methods. Only then will the mortgage market be able to evolve along with the nation it serves.
Requiring Nonbank Lending Institutions to Adhere to CRA Provisions. The Community Reinvestment Act (CRA) encourages depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The Act requires that each depository institution’s record in helping meet the needs of its entire community be evaluated by the appropriate Federal financial supervisory agency periodically.
Nonbank lenders are currently not bound by CRA requirements Although CRA does not currently ensure that depository institutions can adequately meet the credit needs of the communities in which they operate, especially with regard to underserved households, nonbanks should also be required to comply with CRA provisions. Having nonbank lenders be required to comply with CRA provisions is critical because they now account for making a majority of all mortgage loans. In 2020, for example, nonbank mortgage lenders accounted for 68 percent of all mortgages originated that year.
In many communities across the country, many of these nonbank lending institutions open up offices in locations in which they only make the best loans possible to higher- income borrowers with stellar credit and avoid the rest, especially low- and moderate-income minority borrowers. Indeed, far too many of these independent mortgage bankers (IMBs), regardless of where they are located or headquartered, avoid or neglect serving all households in their communities, especially those that are most vastly underserved.
Nonbank lenders, for example, may move into the DC metropolitan area and open up offices in relatively prosperous communities like Fairfax County in Virginia or Montgomery County in Maryland, but fail to open up offices and extend lending to underserved communities in Prince George County, Maryland. Unfortunately, this practice prevails in most communities across the country.
Part of the reason why some communities are not equitably served by many lenders is that they are often unable to recruit and hire minority loan officers who reside in these communities. Lenders must therefore effectively increase, recruit, and train culturally adept professionals who have a passion for meeting the homeownership needs of underserved populations and, equally significant, who can also be groomed to move up in the housing ranks to executive level positions.
Government and the housing industry now have a unique opportunity to help more American households achieve homeownership because of prevailing record-low interest rates, the high aspirations of prospective homebuyers, and the increasing availability of low down payment loans and down payment assistance programs. Down payment assistance can also be substantially leveraged with other types of homebuyer assistance; for example, they can be used in tandem with low down payment loans, including VA’s zero down payment program, and with HUD’s Voucher Homeownership Program or with USDA’s 502 homeownership program for the rural poor.
Reducing Government Insured and Guaranteed Mortgage Loan Fees. The Administration can increase homeownership opportunities for hundreds of thousands of hard-working households by reducing the Federal Housing Administration’s mortgage insurance premiums and GSE fees. At their current high level, FHA’s premiums are singularly preventing FHA from fulfilling its statutory goal to provide mortgage insurance to more underserved borrowers, including low- to moderate-income, minority, and first-time homebuyers.
The FHA program is currently showing exceptional profitability. Its Mutual Mortgage Insurance Fund Capital Ratio is now at 8.03 percent, exceeding its statutory minimum of 2.0 percent for the seventh consecutive year. In spite of the pandemic, FHA is expected to continue to perform well and has considerable funding to cover any losses in the future. As the primary resource for minority and other underserved homebuyers, FHA stands to vastly lower their costs, increase their homeownership opportunities, and help sustain and grow the nation’s housing sector and economy.
Similarly, the Government Sponsored Enterprises, Fannie Mae and Freddie Mac, should reduce the fees they first started charging in 2008 that are known as loan-level price adjustments made on conventional loans. These fees are assessed based on “how risky a loan is” and are the government’s way of raising loan prices and therefore of boosting the actual mortgage rate paid by “riskier” borrowers.
As currently assessed, the fees are higher now than they were in the wake of the housing crisis, even though delinquencies and defaults have sharply declined. The fees also discriminate substantially against households with lower credit scores and limited credit histories. When LLPA pricing is added on top of mortgage insurance, creditworthy borrowers with FICO scores lower than 720 are forced to seek FHA loans, which are already burdened with high mortgage insurance premiums. Otherwise, these borrowers will simply find themselves unable to afford owning a home. According to Mark Zandi, Chief Economist at Moody’s Analytics, reducing the GSE guarantee fee alone would lower the mortgage rates by 10 to 15 basis points, which on a typical 30-year fixed rate loan translates into $20 to $25 in monthly mortgage payments.
Housing costs to mortgage loan borrowers could also be reduced if mortgage insurance pricing and underwriting were appropriately regulated. Currently, some mortgage insurance firms are giving special deals to select lenders, are paying up for premium credits, and are causing broad harm to the low down payment market. These mortgage insurance firms should be required to uphold their own “duty to serve obligation” and to adhere to the same policies that all lenders follow and apply with regard to borrowers with the same qualifications metrics.
Summary. 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.
