By Mark Goldhaber and James Bennison
(News & Observer, 1/19/13)
While there are many signs that our battered economy is slowly recovering, the nation’s home purchase market still lags behind. Without fundamental changes, it will not return as millions of potential and deserving homeowners continue to be shut out of the market.
This is a critical issue as the recent financial crisis left too many neighborhoods devastated, put local governments’ ability to pay for needed public services in jeopardy and threatened community businesses and overall economic health.
There needs to be a concerted effort to improve this system, open the way to successful homeownership to more Americans and provide it through a functioning housing finance system that properly balances access to credit and borrowers’ abilities to properly manage that credit.
The route that brought us to this state is now obvious and well-documented. The lending community, encouraged by federal policy, abandoned conventional underwriting principles by deciding it could accept ever increasing risks as long as it priced for it. Borrowers and lenders embraced an environment of expanding credit options with lower standards.
The results: Since 2007 millions of homes have been foreclosed on, and there still remains an additional 2.7 million seriously delinquent mortgages awaiting final resolution. Millions of other Americans are seeing the value of their homes and personal net worth depleted even though they remain current on their mortgages. Some studies estimate that neighbors close to foreclosures have lost $1.95 trillion in property value through no fault of their own.
Housing market participants cannot ignore the self-evident: A housing finance system that generates near double-digit foreclosure rates fails individuals, neighborhoods and communities. What needs to be done to re-establish a low-foreclosure mortgage market that provides appropriate and responsible access to individuals and families?
Homeownership is not an unreasonable or unattainable goal for hard-working Americans. A simple and focused program, “Home Ready Buyers,” that brings together state housing agencies, lenders, private mortgage insurance companies, credit counseling agencies and home buyers will provide a responsible way for first-time homebuyers to enter the market.
The Home Ready Buyers program would target those who were most challenged under the old system: first-time homebuyers, those who want to purchase homes but have impaired credit and those who need time to save for a 3 percent down payment.
State housing-finance agencies will set up the Home Ready Buyers programs. A modest fee on purchase mortgages will provide the funding for the program’s activities, which will include credit counseling. It will also incorporate a disclosure requirement highlighting the financial benefits of shorter-term mortgages, such as establishing equity more quickly and reducing financing costs.
The process starts with borrowers – who are committed to saving and credit improvement – working with state housing agencies to enter into a “Home Ready Loan Agreement” with a lender and mortgage insurer that would last up to 36 months and require:
• Establishing a minimum down payment goal of 3 percent plus appropriate closing costs.
• Entering into a credit improvement plan to increase the borrowers’ credit score to at least 680.
• Participating in a credit/financial counseling program to gain greater understanding of borrowing, saving and budgeting.
• Participating in a home maintenance and repair class.
Lenders will provide access to low-cost checking and savings accounts and, upon a borrower’s successful participation in the program, will agree to offer a mortgage and a mortgage insurer will agree to provide insurance.
Preparing first-time homebuyers with the tools to succeed as homeowners requires an investment. But, as the recent economic downturn has too clearly shown, that cost pales when compared with the tremendous social costs associated with putting people into homes they cannot afford with payments they cannot sustain.
Our economy cannot wait seven to 10 years on the hope that underwater borrowers will rehabilitate themselves. For a housing market recovery to be self-sustained, there must be a supply of capable, credit-worthy borrowers.
The Home Ready Buyers program will establish an infrastructure so borrowers and lenders can be responsible and succeed.
Mark Goldhaber of Raleigh, a 30-year veteran of the mortgage finance industry, served in the U.S. Department of HUD during the Reagan administration. James Bennison of Raleigh has over 20 years experience in capital markets and structured finance.