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Paths to Homeownership for Low-Income and Minority Households

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Fall 2012   


        Paths to Homeownership for Low-Income and Minority Households
        Individual Development Accounts: a Vehicle for Low-Income Asset Building and Homeownership
        Shared Equity Models Offer Sustainable Homeownership

Paths to Homeownership for Low-Income and Minority Households


      • Creditworthy low-income and minority families face significant barriers to sustainable homeownership, a major vehicle for building wealth and economic opportunity.
      • Access to sustainable homeownership is expanded with fiscal assistance, housing counseling, sound lending, flexible underwriting that ensures the ability to pay, and backing by FHA’s mortgage insurance.
      • Efforts to make homeownership accessible to low-income and minority households ultimately depend on economic recovery, a healthy housing market, and increased protections for consumers, investors, and taxpayers.

Homeownership is in the nation’s interest when it brings stability to families, vitality to distressed communities, and overall economic growth.
Homeownership is in the nation’s interest when it brings stability to families, vitality to distressed communities, and overall economic growth. Sage Computing
The current economic environment, characterized by slow growth, eroded household net worth, strict lending standards, and tight credit, presents sobering challenges to would-be homeowners, particularly if they earn low incomes or belong to a racial or ethnic minority. Renter households have seen their incomes fall and rents increase since the economic downturn, and the number of renters among the severely housing cost-burdened has risen.1 Although house prices and interest rates have declined, purchasing a home is out of reach for many of these families because they have insufficient cash for down payment and closing costs, cannot pay down debts, have low credit scores, and are subject to higher borrowing costs.2 For American families, who typically borrow to purchase homes, access to credit represents opportunity and financial security. In the wake of the housing crisis and the resulting spike in foreclosures, however, credit is extremely difficult to obtain and is likely to remain so for some time.3

Because low-income and minority families are especially vulnerable financially in a post-recession, post-housing crisis era, stakeholders have questioned whether homeownership remains a reliable wealth-building vehicle for these households. The answer to this question depends on a number of factors that influence wealth accumulation, including household income, duration of ownership, time of purchase in relation to market performance, home characteristics (such as condition, age, location, and type of structure) that affect upkeep costs and rate of appreciation, and the terms of the mortgage.4

Households with few resources have limited avenues for developing a sound economic base on which to build their future. Therefore, policymakers working to prevent another housing crisis must take care to not unduly burden families who are able to realize the benefits of homeownership, the largest source of household wealth in the United States.5 Housing policy analysts are reexamining assumptions about the best way to make homeownership feasible and sustainable to low-income and minority families. As Alan Mallach of the Brookings Institution stresses, growing the number of low-income homeowners is not enough; policymakers must adopt measures that will "foster a sustainable model of homeownership for lower-income households."6 With the aftermath of the recession and housing crisis still very much present, this article examines the importance — and challenges — of low-income and minority homeownership.

Effects of Homeownership

Recent homeownership rates show that 73.5 percent of owners are white, while African-American and Hispanic homeownership rates remain below 50 percent. Similarly, the homeownership rate for households with very low incomes was 43.8 percentage points below the rate for high-income households (figure 1). These are long-standing differences. Since the 1980s, federal policies have eased the path to homeownership for low-income and minority families, which potentially benefits both individual households and society at large by countering poverty.7 Homeownership contributes to financial security and stability by offering homeowners protection from rising housing costs, increased savings and purchasing power, the ability to borrow against the equity of the home, and the opportunity to refinance at lower interest rates. Such benefits are not guaranteed, however, and as Christopher Herbert and Eric Belsky’s review and synthesis of the research notes, homeownership should be viewed as "an investment that carries with it significant risks and uncertainties. For any number of reasons, homeowners can end up losing money on their homes or earn less of a return than if they had rented over some period."8 The recent recession and burst of the housing bubble provide a clear example of this risk; real net household wealth fell by 57 percent from 2006 to 2011. This decline hit low-income and minority households especially hard because home equity accounts for a larger share of their wealth.9 This impact is poignantly illustrated in the Chicago metropolitan area, where six counties are suffering from particularly high foreclosure rates and declines in home values in the aftermath of the housing crisis. In these counties, negative home equity was disproportionately concentrated in low-wealth, minority neighborhoods, where nearly half of the properties were either underwater or nearly so. Compared with white neighborhoods, these borrowers were twice as likely to have little or no equity in their homes at the end of 2011.10

However, 46,000 low-income owners had a very different experience with affordable, sustainable mortgages underwritten by the Community Advantage Program (CAP). CAP, a joint community reinvestment program initiative by the Center for Community Self-Help, the Ford Foundation, and Fannie Mae, makes secondary market capital accessible to low-income and minority borrowers. With carefully underwritten loans, these borrowers were able to build wealth even during tough economic times. CAP loans are always 30-year, fixed-rate mortgages underwritten with a household’s income and ability to sustain homeownership in mind and serviced proactively to help troubled borrowers.11 Only 9 percent of these loans were seriously delinquent in the latter part of 2011 compared with 15 percent of prime adjustable-rate mortgages, 20 percent of subprime fixed-rate mortgages, and 36 percent of subprime adjustable-rate mortgages.12 From the origination date of their loans through mid-2011, CAP owners "realized a median annualized return on their equity of 27 percent."

Financial gain is not the only reason a majority of American households aspire to own a home; social benefits are also associated with homeownership. In a recently released National Housing Survey sponsored by Fannie Mae, the most cited reasons for wanting to own a home were to have a good place to raise children, a safe place to live, more space for family, and control over one’s living space.13 Herbert and Belsky found that the nonfinancial benefits associated with homeownership, which have been linked to better physical and psychological health, are evident but not assured.14 Some of these benefits pertain to greater satisfaction — with life, one’s home, and one’s neighborhood. In a comparison of attitudes about homeownership held by renters and owners, Harris Interactive (for the National Association of Realtors) found owners more satisfied with most aspects of their community, including access to the outdoors and natural resources, healthcare, shopping, educational opportunity, entertainment, arts and culture, transportation, and a family-oriented environment. Homeowners viewed their communities as stronger, safer, and more stable than did renters and were more likely to report that they felt connected to others, knew their neighbors, and were civically engaged.15 In a different study, CAP owners, when compared with a group of matched renters, likewise were found to have more social ties leading to increased social interaction and involvement, a greater sense of being able to control important aspects of their lives and resolve problems, and less overall stress following the financial crisis despite having experienced similar levels of financial stress and hardship.16

Although William Rohe and Roberto Quercia also found that owners were more satisfied with life and had larger social networks than the renters with whom they were compared, they did not find that "participation in voluntary associations, neighborhood satisfaction, self-esteem, or perceptions of opportunity" were significantly related to homeownership. They hypothesized that low-income and higher-income buyers may experience the impact of homebuying differently, that the impacts of ownership are realized over time, and that methods used for measuring those impacts may be inadequate.17

Homeowners such as Aishon Jones, standing in front of her new home in Syracuse, New York, seek the economic and social benefits associated with successful homeownership.
Homeowners such as Aishon Jones, standing in front of her new home in Syracuse, New York, seek the economic and social benefits associated with successful homeownership. NeighborWorks America
Other positive effects identified with homeownership include improved outcomes for children. Researchers have not yet determined whether such outcomes can be attributed directly to homeownership, the stability it invokes, unidentified or uncontrolled variables, particular research methods, or selection bias (in which the children would have realized similar benefits regardless of whether their parents achieved homeownership).18 Nevertheless, homeownership has been associated with outcomes such as educational attainment (longer stays in school, higher graduation rates, greater likelihood of achieving postsecondary education, improved math and reading scores), better employment and earnings opportunities, and fewer behavioral problems.19 Recent studies indicate that if homeownership has positive effects on the health and well-being of parents, their children are more likely to benefit from having healthier, engaged parents as well as from fiscal training.20 One investigation found that homeownership was strongly associated with the incidence of very good or excellent child health, but the relationship also depended on the household’s resources.21 A new study revisiting the question of homeownership’s impact on children concludes that the dropout rate for children in owner-occupied homes was 2.6 percent lower — and the teen birth rate 5 percent lower — than for children in rental households. Findings also indicate that when borrowers make some investment in the down payment, no matter how small, the result is better outcomes for their children than when they put none of their own money down.22

Despite its potential benefits, however, homeownership is a risk, and its outcomes may be neither anticipated nor desired. If a homeowner has too much house to pay for, does not refinance to take advantage of interest rate declines, experiences unanticipated repairs or trigger events (such as a divorce or medical emergency), has a home that declines in value or appreciates very slowly, or has a mortgage with predatory terms, then ownership is difficult to sustain.23 In 2004 and 2006, HUD studies found a high probability that half of lower-income and minority families return to renting within five years of a home purchase, due to unemployment or a decline in earnings, mortgage rate changes, housing cost burdens, or other trigger events.24 More recently, Van Zandt and Rohe found that the housing market crisis left a sizable number of low-income homeowners at risk of being unable to sustain ownership after just two years due to unexpected costs and needed home repairs.25

Homeownership Rate Trends and Differences

Historically, disparities have existed in access to homeownership by low-income and minority households. The factors that shape, impede, or facilitate homeownership opportunities for these households have been the subject of substantial research, including studies commissioned by HUD’s Office of Policy Development and Research in the early to mid-2000s. One focus of these inquiries, arising from concerns about fairness and discrimination, has been differences in homeownership rates across income and racial or ethnic groups (figure 1). The persistence of these disparities, according to a body of related research, suggests that demographic and economic factors play a significant role in shaping homeownership trends. Analyses of the composition of the homeownership gap have concluded that socioeconomic variables explain a large percentage of the difference, leaving a smaller portion attributable to discrimination and unidentified influences.26

Source: U.S. Census Bureau, Housing Vacancy Surveys and Current Population Survey, Annual Social and Economic Supplements.
Source: U.S. Census Bureau, Housing Vacancy Surveys and Current Population Survey, Annual Social and Economic Supplements.
Homeownership rates are highest for older households, married couples, and those with more education. These characteristics are related to income and influence homeownership decisions differently across income levels.27 Homeownership decisions are also shaped by patterns of household formation that differ by economic, demographic, and social circumstances. Typical factors that affect household formation include racial and ethnic differences, age structure of the population, marriage and divorce patterns, typical leaving-home ages, the cost of living, housing costs, and living in group quarters for military or educational purposes.28

Along with income, household wealth determines whether families can afford down payment and closing costs and can sustain homeownership after purchase. In a 2004 study commissioned by HUD, minorities and whites at similar income levels were equally likely to become homeowners, but wealth was a better predictor of minority transition to homeownership. Minority households required higher levels of wealth to achieve the same probability of homeownership as white households had, all other things being equal. Wealth gaps were evident across ethnic and racial groups. In one example, found by examining measures of wealth among renters, a large share of black and Hispanic renters had so little wealth that zero-down payment loans were the only mortgage option available to them. The net worth of white households at the 50th percentile level of wealth was roughly equivalent to the net worth of black and Hispanic households at the 75th percentile. In other words, at the 50th percentile level of wealth, white renters had a net worth of $10,000 (in 1998 dollars), but not until the 75th percentile did black renters have a net worth of slightly more than $10,000 and Hispanics have about $8,500.29

The differential in household wealth continues, according to the Pew Research Center. One-fifth of U.S. households had zero or negative net worth in 2009. Of this group, 35 percent were black households, 31 percent were Hispanic, 19 percent were Asian, and 15 percent were white. Excluding home equity, median household wealth in 2009 was $29,169 for whites, $20,300 for Asians, $2,806 for Hispanics, and $1,050 for blacks.30 Therefore, as noted above, the decline in net worth of U.S. households during the recession hit minorities the hardest because they depended more on home equity as a source of wealth.

Location and geography also influence homeownership disparities across groups through their effect on housing supply and demand. Factors such as land prices, regulatory environments, zoning and building codes, population density, and demographic characteristics all affect potential buyers’ ability to purchase a home. Central cities, for example, historically have had lower homeownership rates than suburban areas, partly because homeownership has been associated largely with single-family homes that are less prevalent in cities. As a result, minorities and low-income families concentrated in inner cities have had access to fewer homeownership opportunities.31

Intervention on Behalf of First-Time, Low-Income, and Minority Homeowners

Homebuyers and volunteers provide sweat equity and labor to build Habitat for Humanity homes in Miami, Florida.
Homebuyers and volunteers provide sweat equity and labor to build Habitat for Humanity homes in Miami, Florida. Victor Antunez
Homeownership is in the nation’s interest when it can bring stability to families, new vitality to distressed communities, and overall economic growth, say experts in the field.32 These hoped-for outcomes are why a balanced housing policy that safeguards choice is preferable to promoting homeownership at any cost. Eric Belsky, director of the Joint Center for Housing Studies of Harvard University, puts it succinctly: "It’s important for society, regulators, and the government to ensure that people have the opportunity to buy a home — and then leave [the choice] up to them."33 Yet the barriers to sustainable homeownership for low-income and minority families are powerful: insufficient income and household wealth to afford down payment and closing costs, inaccessible or poor credit, lack of knowledge about buying a home and sustaining homeownership, regulatory burdens, an insufficient supply of affordable housing, and discrimination.34

Governments, foundations, lending institutions, and community-based organizations have made efforts to address these barriers and to facilitate successful homeownership. Such entities work, often jointly, to create homeownership opportunities, innovative financing tools, and retention strategies. Janneke Ratcliffe, executive director of University of North Carolina’s Center for Community Capital, explains that these activities tend to fall into one of three categories: making homeownership affordable, expanding access to safe and sound financing, and preparing potential buyers to be successful homeowners.35 HUD initiatives are a significant part of this landscape, in which the department concentrates energy and resources on removing barriers and expanding opportunity for low-income and minority homeownership.

Making It Affordable

Affordability assistance helps low-income families overcome wealth barriers and achieve favorable debt-to-income ratios that keep monthly payments low. Examples of this type of backing include down payment assistance, grants, subsidies, homeownership vouchers, forgivable loans, and soft second mortgages.

Even small amounts of down payment assistance increase the probability of moving first-time buyers into homeownership.36 Although about one out of five first-time homebuyers receives such help from their families, low-income households are less likely to have this option available.37 One source of help for these households is the Federal Housing Administration (FHA), which facilitates first-time homeownership for low-wealth buyers. FHA’s minimum down payment requirement is set at 3.5 percent of the contract sales price. Edward Szymanoski, HUD’s associate deputy assistant secretary for economic affairs, notes that FHA’s traditional role — serving creditworthy first-time homebuyers — is particularly important to families with young children, who may benefit most from early access to homeownership. "First-time buyers often lack cash to pay the down payment and closing costs charged by conventional lenders and would otherwise have to defer homeownership for many years," Szymanoski says.38

Eligible homebuyers can also obtain assistance with down payment and closing costs through the HOME Investment Partnerships (HOME) and Community Development Block Grant (CDBG) programs. Through these programs, HUD awards block grants to cities and states, who then decide how to use the funds. HOME monies are dedicated to enhancing local affordable housing strategies that increase homeownership opportunities for low-income people. One study found that nearly all HOME programs offer assistance with down payment and closing costs in addition to other types of support such as loan guarantees, write-downs of the sales price, and interest rate buy-downs.39

Between 2004 and 2008, the American Dream Downpayment Initiative (now part of HOME) helped more than 26,000 low-income, first-time homebuyers with the biggest hurdle to homeownership: down payment and closing costs, plus rehabilitation expenses. Although the program capped assistance at the larger of $10,000 or 6 percent of the purchase price, the average amount was $5,000 per household.40 A 2005 HUD study concluded that small amounts of down payment assistance like this can be very effective in helping renters become homeowners and that as little as $1,000 can lead to a 19-percent increase in the number of low-income households buying a home. While the size of the increase declines as the level of assistance rises, assistance of up to $10,000 can lead to a 34-percent increase in overall homeownership, although the effect on underserved groups is greater — a 41-percent increase in low-income homeownership.41

Some buyers are able to lower their overall investment with sweat equity through HUD’s Self-Help Homeownership Opportunity Program (SHOP). National and regional nonprofits and consortia receiving SHOP grantees developed 16,957 homeownership housing units for low-income families between 1996 and 2008. The grants are used to buy land and make infrastructure improvements that cannot exceed an average cost of $15,000 per unit; additional funds for construction or rehabilitation must be leveraged. Grantees may carry out SHOP activities themselves or contract with nonprofit affiliates to develop SHOP units, select homebuyers, coordinate sweat equity and volunteer efforts, and help arrange for interim and permanent financing for homebuyers. To significantly reduce purchase prices, homebuyers are required to put in a minimum number of hours of sweat equity, including painting, carpentry, trim work, and drywall, roofing, and siding installation. Without this sweat equity contribution, total development costs would range from 0.2 to 14.7 percent higher for each housing unit, according to an unpublished study by HUD’s Office of Policy Development and Research.42

Renters of HUD-assisted units may become homeowners via the Housing Choice Voucher Homeownership program, which has been responsible for nearly 15,000 homeownership closings in the past decade. This program allows participating public housing agencies to offer residents the option to apply their rental voucher subsidy toward monthly ownership expenses. After satisfactorily completing a preassistance counseling program that covers home maintenance, budgeting and money management, credit counseling and credit repair, and mortgage financing, the purchaser finds an eligible home. In its analysis, Abt Associates found that the number of public housing agencies choosing to implement this program grew from 12 pilot sites in 1999 to more than 450 in 2006. Foreclosure, delinquency, and default rates were quite low for these buyers, who were mostly single mothers with children, minorities, and people with disabilities moving into neighborhoods with higher homeownership rates and slightly lower poverty rates than the neighborhoods where they had rented.43

An alternative form of assistance to low-income homebuyers, lease-purchase, is available through HOME, CDBG, and Housing Choice Voucher Homeownership funds. An evaluation of a low-income homeownership program that preceded HOME found that 10 percent of participating families became owners by leasing to buy. This option allowed homebuyers who needed a little more time to accrue the savings needed for a down payment or to clear up credit problems while living in the home they would eventually purchase. One locality used lease-purchase in a transitional housing program as the final step to help formerly homeless families become homeowners.44

Safe and Sound Financing

Expanding access to homeownership involves making sound mortgages available to more households through such tools as flexible and alternative underwriting guidelines that reduce the risk of homeownership. Examples include CAP’s secondary mortgage market program, which has enabled banks around the country to help more than 50,000 lower-income families purchase homes. Other examples include vehicles such as tax-exempt bonds that state and local governments issue through housing finance agencies to help fund affordable mortgages for qualifying first-time homebuyers.45

Source: Office of the Comptroller of the Currency Survey of Credit Underwriting Practices. N = 84 lenders in 2012
Source: Office of the Comptroller of the Currency Survey of Credit Underwriting Practices.
N = 84 lenders in 2012.
HUD’s largest role in supporting safe and sound lending is through FHA, as mentioned above, which was created in 1934 as a home mortgage insurance program. This insurance supports creditworthy loans with flexible underwriting, accommodating lower down payments, and higher payment-to-income ratios while making allowances for weaker credit histories. FHA was the first organization to establish national underwriting standards and has been the only broadly accessible government guaranty linking mortgage borrowers with the lower-cost credit of mortgage lenders. During the recent precrisis housing boom, FHA remained true to its underwriting standards, which led to a significant decline in market share as borrowers sought nontraditional loans elsewhere. Private market products such as teaser rates, hybrid adjustable rate mortgages, and negative amortization were often used to qualify borrowers who would be ineligible under traditional underwriting practices. These nontraditional mortgages, with their higher costs and higher-risk qualifying advantages, disproportionately went to minorities and low-income borrowers and clearly were not designed for sustainable homeownership.46

In 2008 and 2009, as access to credit and housing finance became more difficult and the housing crisis worsened, mainstream financial lenders failed to serve low-income borrowers; families with weaker credit histories were increasingly rejected for mortgage credit or approved for loans with high interest rates. When private capital fled the market and credit tightened (figure 2), HUD Housing Finance Analysis Division economist John Comeau explains, "FHA filled the void to allow homeowners to access capital and keep housing markets in highly stressed areas from completely shutting down." FHA’s market share, which represented only 4.5 percent of all home purchase loans in 2005 and 2006, rose to 32.6 percent by 2009.47

FHA makes a critical difference by insuring mortgages for homebuyers, thereby protecting lenders and investors from loss. Because of these safeguards, first-time homebuyers and underserved groups have better access to sustainable loans.

Preparation for Homeownership

Housing counseling is another approach to affordable, sustainable homeownership. By providing good information and guidance, housing counseling combats the unfamiliarity with homebuying and homeowning processes that make many low-income and minority borrowers vulnerable to predatory lending practices and unprepared for homeownership. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires lenders to distribute a list of HUD-approved counseling providers to consumers, specifies the scope of homeownership counseling as "the entire process of homeownership, including the decision to purchase a home, the selection and purchase of a home, issues arising during or affecting the period of ownership of a home (including refinancing, default and foreclosure, and other financial decisions), and the sale or other disposition of a home."48

Local nonprofits enroll homebuyers in required pre-purchase education at an event held by Wells Fargo and NeighborWorks America in Twin Cities, Minnesota.
Local nonprofits enroll homebuyers in required pre-purchase education at an event held by Wells Fargo and NeighborWorks America in Twin Cities, Minnesota. NeighborWorks America
Since 1968, HUD has provided grants to nearly 500 local, regional, and national organizations for housing counseling programs that help consumers find, finance, maintain, rent, or own a home. HUD-approved counseling agencies also help families manage money and evaluate their readiness for a home purchase. Moulton et al. recently investigated the perceptions that first-time, low-income homebuyers have about their ability to assume mortgage debt. Nearly one-fourth of the study participants underestimated their own debt-to-income constraints, a perception associated with taking on more mortgage debt than they might if their estimates were accurate. This finding suggests that borrowers could benefit from a better understanding of their personal financial situation.49 These researchers also found that perceptions drive participation in counseling; borrowers who overestimate their debt are more likely to get financial counseling than those who are overconfident about their ability to repay debt (and most in need of counseling).

When clients decide to purchase a home, counselors assist borrowers in navigating the homebuying process, reviewing the loan documentation to avoid mortgage fraud, high interest rates, inflated appraisals, unaffordable repayment terms, and other conditions that lead to loss of equity, increased debt, default, and foreclosure. Foreclosure prevention counseling helps homeowners facing delinquency or default with expense reduction, negotiations with lenders and loan servicers, and loss mitigation. After 2005, the demand for counseling to help with mortgage delinquencies, refinancing, and reverse mortgages began to climb. Between fiscal years 2006 and 2007, the number of clients receiving foreclosure mitigation counseling increased by 55 percent. Counseling for homeowners on home maintenance or financial management also grew by 22 percent in 2007, reflecting the economic downturn and housing crisis. The total number receiving housing counseling in 2007 reached 1.7 million.50 HUD’s and Treasury’s latest Housing Scorecard report indicates that 8.5 million borrowers have met with HUD-approved housing counselors since April 2009.51

Two studies commissioned by HUD were released in early 2012 on the outcomes of counseling — on prepurchase counseling and on foreclosure counseling. One important role of prepurchase counseling is to identify potential buyers who are not yet ready for homeownership and advise them on how to lower their risk of default before they apply for a mortgage. The results of the first research study found that within 18 months of seeking homebuyer assistance, help with down payment or closing costs, or eligibility for a specific loan program, 35 percent of study participants had become homeowners. The second investigation reviewed the experiences of a group of homeowners who received foreclosure mitigation services in 2009. These homeowners were more likely than U.S. homeowners in general to be members of a racial or ethnic minority, have below-average annual incomes, and have fallen behind on their mortgages because of a loss of income; few had savings to cover missed payments. Most had contacted their lender when they first fell behind on mortgage payments but were unsuccessful in negotiating remedies. With counseling, 69 percent obtained a mortgage remedy and 56 percent were able to become current on their mortgages. Clients who sought help before becoming delinquent fared better than those who got help after falling six months or more behind on payments.52 "These studies," explains Marina L. Myhre, social science analyst in HUD’s Office of Policy Development and Research, "don’t represent all prepurchase or foreclosure counseling clients, of course, but the alignment of these findings with other housing counseling studies underscores the effectiveness of housing counseling and the important role it plays in helping families achieve and sustain homeownership."53

Safeguards for Borrowers and Lenders

These efforts to facilitate entry, affordability, and success for first time, low-income, and minority homeowners are presently being weighed in light of protecting the recovery and future health of the housing market and the economy.

 A volunteer contributes labor on a Southern Maryland Tri-county Community Action Committee Self-Help work day.
A volunteer contributes labor on a Southern Maryland Tri-county Community Action Committee Self-Help work day. Housing Assistance Council
Ordinarily, the secondary mortgage market has routed funds to borrowers by facilitating the resale of mortgages and mortgage-backed securities to purchasers such as Fannie Mae, Freddie Mac, and other financial institutions and investor conduits, creating market liquidity.54 In the aftermath of the housing crisis, investors have remained cautious and private capital has been slow to return to the mortgage market. Although FHA, Fannie Mae, Freddie Mac, and Ginnie Mae currently back more than 90 percent of new mortgages and therefore have mitigated some of the stress in the mortgage market, HUD Secretary Shaun Donovan explained that this rate is "far higher than we would like in normal times."55

In deciding how to reform and regulate the housing finance system, policymakers seek a balanced approach that makes homeownership possible without putting either borrowers or lenders at undue risk of failure. Ongoing discussions seek the appropriate form of government involvement in providing federal mortgage insurance, regulatory oversight, and protection from discrimination that is essential to maintain confidence in the market, as well as to safeguard lending to low-income and minority borrowers.56 Many stakeholders in these reforms have voiced opinions about how the new housing finance system should work and what it should accomplish. The Center for American Progress has collected, analyzed, and posted 21 recommended reform plans from different interested parties on its website for reference and comparison. The Center’s analysis suggests that most plans have at least three objectives: a government guarantee that is clear and limited in its scope, a larger role for private capital, and good government oversight.57

What Lies Ahead?

Although early signs of a housing recovery are present, that recovery is significantly constrained by a backlog of foreclosures and vacant units held off the market, an overall loss of housing wealth, unemployment, restricted lending to those without high credit scores, minimal capital for a secondary mortgage market, and precarious family finances. The return of private capital and liquidity to the secondary mortgage market is a high priority. "A key lesson from this crisis," states Secretary Donovan, "is that decisions made in the secondary market very clearly drive lending practices in the primary market — and the potential for disparate impact in the availability and quality of mortgages in underserved communities is very real."58 Because the housing market remains fragile, it will take time and thought to develop reforms that provide access to mortgages for creditworthy low-income and minority families while also reducing risk and increasing protection for consumers, investors, and taxpayers. These outcomes are vital to sustainable homeownership for millions of Americans and are central to the overall health of the economy.


  1. A severely housing cost-burdened household pays more than half of its income on housing costs. Laura Williams. 2012. “An Annual Look at the Housing Affordability Challenges of America’s Working Households,” Housing Landscape 2012, Center for Housing Policy.
  2. Christopher E. Herbert, Eric S. Belsky, and William C. Apgar. 2012. “Critical Housing Finance Challenges for Policymakers: Defining a Research Agenda,” Joint Center for Housing Studies of Harvard University.
  3. Christian E. Weller. 2007. “Access Denied: Low-Income and Minority Families Face More Credit Constraints and Higher Borrowing Costs,” Center for American Progress; Jesse Bricker, Arthur B. Kennickell, Kevin B. Moore, and John Sabelhaus. 2012. “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin 98:2, 69; Carolina Reid, David Min, and Janneke Ratcliffe. 2012. “Affordable Housing: The Way Forward From Here,” Center for Responsible Lending, Center for American Progress, and University of North Carolina Center for Community Capital.
  4. George C. Galster and Anna M. Santiago. 2008. “Low-Income Homeownership as an Asset-Building Tool: What Can We Tell Policymakers?” in H. Wolman and M.A. Turner, eds., Urban and Regional Policy and its Effects, Washington DC: Brookings Institution Press, 66–71.
  5. Herbert, Belsky, and Apgar; Pew Research Center. 2011. “Wealth Gaps Rise to Record Highs Between Whites, Blacks and Hispanics,” 25.
  6. Alan Mallach. 2011. “Building Sustainable Ownership: Rethinking Public Policy Toward Lower-Income Homeownership,” Federal Reserve Bank of Philadelphia, 19.
  7. Galster and Santiago, 62.
  8. Christopher E. Herbert and Eric S. Belsky. 2008. “The Homeownership Experience of Low-Income and Minority Households: A Review and Synthesis of the Literature,” Cityscape 10:2, 7–9.
  9. The Joint Center for Housing Studies of Harvard University. 2012. “The State of the Nation’s Housing,” 14.
  10. Spencer Cowan and Katie Buitrago. 2012. “Struggling to Stay Afloat: Negative Equity in Communities of Color in the Chicago Six County Region,” Woodstock Institute.
  11. Robert G. Quercia, Allison Freeman, and Janneke Ratcliffe. 2011. Regaining the Dream: How to Renew the Promise of Homeownership for America’s Working Families, Washington DC: Brookings Institution Press, 26–9, 82–4.
  12. Allison Freeman and Janneke Ratcliffe. 2012. “Setting the Record Straight on Affordable Homeownership,” Center for Community Capital, University of North Carolina at Chapel Hill, 3.
  13. Fannie Mae. 2012. “National Housing Survey: Future of Homeownership: Own-Rent Analysis, 15;” Rachel Bogardus Drew and Christopher Herbert. 2012. “Post-Recession Drivers of Preferences for Homeownership,” Joint Center for Housing Studies of Harvard University.
  14. Herbert and Belsky 2008, 9–10.
  15. National Association of Realtors. 2011. “American Attitudes About Homeownership,” 20–6.
  16. Kim Manturuk, Mark Lindblad, and Roberto Quercia. 2009. “Friends and Neighbors: Homeownership and Social Capital among Low-to Moderate-Income Families” and “Homeownership and Sense of Control During Economic Recession” (2010), Center for Community Capital at the University of North Carolina at Chapel Hill; Kim Manturuk, Sara Riley, and Janneke Ratcliffe. 2012. “Perception vs. reality: The relationship between low-income homeownership, perceived financial stress, and financial hardship,” Social Science Research 41, 276–86.
  17. William M. Rohe and Roberto G. Quercia. 2003. “Individual and Neighborhood Impacts of Neighborhood Reinvestment’s Homeownership Pilot Program (website content has changed and this document is no longer available),” The Center for Urban and Regional Studies, University of North Carolina at Chapel Hill.
  18. David Barker and Eric Miller. 2009. “Homeownership and Child Welfare,” Real Estate Economics 37:2, 279–303; Lisa L. Mohanty and Lakshmi K. Raut. 2009. “Homeownership and School Outcomes of Children: Evidence from PSID Child Supplement Data,” American Journal of Economics and Sociology 68:2, 465–89.
  19. Richard K. Green and Michelle J. White. 1997. “Measuring the Benefits of Homeowning: Effects on Children,” Journal of Urban Economics 41: 441–61; Herbert and Belsky 2008, 42–7; Thomas P. Boehm and Alan M. Schlottmann. 1999. “Does Home Ownership by Parents Have an Economic Impact on Their Children?” Journal of Housing Economics 8:3, 217–32; Donald R. Haurin, Toby L. Parcel, and R. Jean Haurin. 2001.”The Impact of Homeownership on Child Outcomes,” Joint Center for Housing Studies of Harvard University.
  20. Michal Grinstein-Weiss, Trina R. Williams Shanks, Kim R. Manturuk, Clinton C. Key, Jong-Gyu Paik, and Johann K. P. Greeson. 2010.“Homeownership and parenting practices: Evidence from the community advantage panel,” Children and Youth Services Review 32:5, 774–82; Michal Grinstein-Weiss, Jonathan Spader, Yeong Hun Yeo, Andréa Taylor, and Elizabeth Books Freeze. 2011. “Parental transfer of financial knowledge and later credit outcomes among low- and moderate-income homeowners,” Children and Youth Services Review 33:1, 78–85.
  21. Nandinee K. Kutty. 2008. “Using the Making Connections Survey Data to Analyze Housing Mobility and Child Outcomes among Low-Income Families,” Center for Housing Policy, 55.
  22. Richard K. Green, Gary D. Painter, and Michelle J. White. 2012. “Measuring the Benefits of Homeowning: Effects on Children Redux,” Research Institute for Housing America.
  23. Galster and Santiago, 63.
  24. Christopher E. Herbert and Eric S. Belsky. 2006. “The Homeownership Experience of Low-Income and Minority Families, U.S. Department of Housing and Urban Development, 50–4; Thomas P. Boehm and Alan Schlottmann. 2004. “Wealth Accumulation and Homeownership: Evidence for Low-Income Households,” U.S. Department of Housing and Urban Development.
  25. Shannon Van Zandt and William M. Rohe. 2011. “The sustainability of low-income homeownership; the incidence of unexpected costs and needed repairs among low-income home buyers,” Housing Policy Debate 21:2, 317–41.
  26. Christopher E. Herbert, Donald R. Haurin, Stuart S. Rosenthal, and Mark Duda. 2005. “Homeownership Gaps Among Low-Income and Minority Borrowers and Neighborhoods,” U.S. Department of Housing and Urban Development, 141–43.
  27. Ibid.; Eric Fesselmeyer, Kien T. Le, and Kiat Ying Seah. 2012. “A household-level decomposition of the white-black homeownership gap,” Regional Science and Urban Economics 42:1–2, 58; R.W. Bostic and B. J. Surrette. 2001. “Have the Doors Opened Wider? Trends in Family Homeownership Rates by Race and Income,” Journal of Real Estate Finance and Economics 23:3, 411–34.
  28. Donald R. Haurin and Stuart S. Rosenthal. 2004. “The Influence of Household Formation on Homeownership Rates Across Time and Race,” U.S. Department of Housing and Urban Development; Herbert, Haurin, Rosenthal, and Duda, 29–33.
  29. Herbert, Haurin, Rosenthal, and Duda, 78.
  30. Pew Research Center. 13, 15, 16.
  31. Herbert, Haurin, Rosenthal, and Duda, 115, 142.
  32. Bipartisan Millennial Housing Commission. 2002. “Meeting Our Nation’s Housing Challenges.” Washington, DC.
  33. Interview with Eric Belsky, August 2012.
  34. U.S. Department of Housing and Urban Development. 2010. “Barriers to Minority Homeownership.”
  35. Interview with Janneke Ratcliffe, September 2012.
  36. Christopher E. Herbert and Winnie Tsen. 2007. “The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households,” Cityscape 9:2, 153–83.
  37. Sondra Beverly, Michael Sherraden, Min Zhan, Trina R. Williams Shanks, Yunju Nam, and Reid Cramer. 2008. “Determinants of Asset Building,” 24; Herbert, Belsky, and Apgar.
  38. Interview with Edward J. Szymanoski, August 2012.
  39. Jennifer Turnham, Christopher Herbert, Sandra Nolden, Judith Feins, and Jessica Bonjorni. 2004. "Study of Homebuyer Activity through the HOME Investment Partnerships Program," U.S. Department of Housing and Urban Development; U.S. Department of Housing and Urban Development, Office of Community Planning and Development. 2001. HOMEfires 3:7. Accessed 26 July 2012; Mercedes Márquez. 2012. "The HOME Investment Partnerships Program (HOME)," Rural Voices 17:1, 16–22; U.S. Department of Housing and Urban Development, Office of Community Planning and Development. 2012. "Home Investment Partnerships Program 2012 Summary Statement and Initiatives."
  40. American Dream Downpayment Initiative. Accessed 1 November 2012.
  41. Christopher E. Herbert and Winnie Tsen. 2005. "The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households," U.S. Department of Housing and Urban Development.
  42. U.S. Department of Housing and Urban Development. 2005. A Guide to Using Self-Help Homeownership Opportunity Program Funds, 1.2–1.4, 2–19, 3.1–3.24 and an unpublished study conducted in 2008 by the Office of Policy Development and Research.
  43. U.S. Department of Housing and Urban Development. 2006. “Voucher Homeownership Study,” Washington, DC.
  44. U.S. Department of Housing and Urban Development. 1996. “Evaluation of the HOPE 3 Program: Final Report,” Washington, DC.
  45. Interview with Janneke Ratcliffe.
  46. William Reeder and John Comeau. 2008. “Using HMDA and Income Leverage to Examine Current Mortgage Market Turmoil,” U.S. Housing Market Conditions Report, 2nd Quarter 2008, 4–13.
  47. U.S. Department of Housing and Urban Development. 2012. "Exhibit 16. FHA Market Share of 1- to 4-Family Mortgages: 2001–Present," U.S. Housing Market Conditions Report, 1st Quarter 2012, 76; Interview with John Comeau, August 2012. For a more detailed discussion of FHA's response to the housing crisis and its impact on the FHA insurance fund, see U.S. Department of Housing and Urban Development. 2012. "FY 2012 Annual Report to Congress on FHA Single-Family Mutual Mortgage Insurance Fund Programs."
  48. Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 21 July 2010.
  49. Stephanie Moulton, Cäzilia Loibl, J. Michael Collins, and Anya Savikhin. 2012. “Building Assets or Building Debt? Do First Time Homebuyers Know the Difference and Does It Matter? Working draft.”
  50. Christopher E. Herbert, Jennifer Turnham, and Christopher N. Rodger. 2008. “The State of the Housing Counseling Industry,” U.S. Department of Housing and Urban Development.
  51. U.S Department of Housing and Urban Development and U.S. Department of the Treasury. 2012. "Monthly Housing Scorecard, November 2012," 4. Accessed 26 November 2012.
  52. Jennifer Turnham and Anna Jefferson. 2012. “Pre-Purchase Counseling Outcome Study: Research Brief,” U.S. Department of Housing and Urban Development; Anna Jefferson, Jonathan Spader, Jennifer Turnham, and Shawn Moulton. 2012. “Foreclosure Counseling Outcome Study: Final Report,” U.S. Department of Housing and Urban Development.
  53. Interview with Marina Myhre, August 2012.
  54. Congressional Budget Office. 2010. “Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market.”
  55. U.S. Department of the Treasury and U.S. Department of Housing and Urban Development. 2011. “Reforming America’s Housing Finance Market: A Report to Congress”; Written testimony of Shaun Donovan, Secretary of U.S. Department of Housing and Urban Development, Hearing before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 15, 2011.
  56. Herbert, Belsky, and Apgar; Mallach; Edgar O. Olsen. 2007. “Promoting Homeownership Among Low-Income Households,” Opportunity and Ownership Project; Jim Millstein. 2012. “A Blueprint for Housing Finance Reform in America,” presented at Woodrow Wilson International Center for Scholars, Washington, DC, 22 May 2012.
  57. John Griffith. 2012. “The $5 Trillion Question: What Should We Do with Fannie Mae and Freddie Mac? Increasing Private Capital in the Mortgage Market by Winding Down the 2 Mortgage Giants,” Center for American Progress.
  58. Written testimony of Shaun Donovan.


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