# Presentation: 538745

## Homeownership and Government Policy: The Impacts of Affordable Lending on Homeownership Rates

- Susan M. Wachter
- Professor of Real Estate and Finance
- The Wharton School of the University of Pennsylvania
- HPI Symposium
- March 10, 2003

## Homeownership and Government Policy

- Homeownership in a period of rising house prices
- Policy shifts of the 1990s and outcomes for homeownership
- How homeownership policy matters: some empirical results on affordable lending
- Policy stance going forward

## Homeownership, Rising Housing Prices and the New (?) Housing Price Regime

- Homeownership’s positive societal impact
- Role of homeownership in wealth building
- Rising house prices create disparate wealth outcomes with limited ownership access
- Homeownership is a hedge against rising rents and housing prices
- Why homeownership matters in a new (?) housing price regime

## Policy Shifts of the 1990s Context: Objective - Increased Access to Homeownership

- Initiatives to Increase Homeownership Opportunities
- CRA and GSE Affordable Lending Efforts
- Goal: To make borrowing more accessible to lower income and minority populations

## Impact of Initiatives

- Some evidence on the impact of affordable lending initiatives
- HMDA data
- # of loans to families w/ incomes at or below 80% of median increased 38% between 1993 and 1997, compared with 27% growth for loans to higher income families.
- GSE data on share of business going to low and moderate income households show same pattern
- Gap: No examination of impact of specific affordable lending programs
- omission since this information is crucial for evaluating impact of programs
- need to evaluate program design for populations of interest: minority, low to moderate income, young households, center city
- do downpayment or income requirements present a higher constraint to home ownership?

## The Impacts of Affordable Lending Efforts on Homeownership Rates

- Roberto G. Quercia, The University of North Carolina at Chapel Hill
- George W. McCarthy, The Ford Foundation
- Susan M. Wachter, The Wharton School at the University of Pennsylvania
- Forthcoming, *Journal of Housing Economics*

## GSE Conforming Loan Market Standards

- GSE downpayment
- standard 20%
- 10% with private mortgage insurance
- often purchase mortgages with 5% down payments
- GSEs payment-to-income ratios
- housing payments not to exceed 28% of income
- housing combined with other debt payments not to exceed 36% of income

## Four GSE Affordable Lending Products

- Freddie Mac Affordable Gold Initiatives
- For Income Qualified
- Affordable Gold 5: downpayment as low as 5%
- all funds from borrower’s personal cash
- Affordable Gold 3/2: downpayment as low as 5%
- only 3% must come from borrower’s own resources
- Affordable Gold 97: 97% loan to value ratio
- 3% downpayment from borrower’s personal resources
- Freddie Mac’s Alt 97: 3% downpayment
- downpayment need not come from borrower’s resources
- targeted to buyers with little savings but good credit history

## Literature

- Linneman and Wachter.  (1989) “The impacts of borrowing constraints on homeownership.”  *AREUEA Journal*.
- Zorn. (1989) “Mobility-tenure decisions and financial credit: Do mortgage qualification requirements constrain homeownership?” *AREUEA Journal.*
- Duca and Rosenthal. (1994) “Borrowing constraints and access to owner-occupied housing.”  *Regional Science and Urban Economics*.
- Wachter, Follain, Linneman, Quercia, and McCarthy. (1996) Response to Anthony M. Yezer’s comments. *Studies on privatizing Fannie Mae and Freddie Mac.*
- Haurin, Hendershott, and Wachter. (1997) “Borrowing constraints and the tenure choice of young households.” *Journal of Housing Research.*
- Linneman, Megbolugbe, Wachter, and Cho. (1997) “Do borrowing constraints change U.S. homeownership rates?” *Journal of Housing Economics.*
- Feldman.(2000) “Mortgage Rates, Homeownership Rates, and GSEs.” *Minn. FRB Bulletin.*

## Methodology of study and objective

- Objective: to determine changes in homeownership propensities that result from use of flexible underwriting guidelines
- Methodology: Three Parts
- 1. Construction of key variables
- 2. Logistic estimation of tenure choice equation
- 3. Simulation of changes in predicted probabilities of ownership under affordable lending scenarios

## Construction of Key Variables

- Key Variables
- Relative housing price
- value/rent and own/rent ratios
- Permanent income - estimation approach (Goodman 1998)
- Demographics
- age
- household size
- marital status
- male/female head of household
- minority status
- Income and downpayment constraints

## Borrowing Constraints

- Household defined as:
- Income constrained
- If mortgage payment on optimal home exceeds 28% of monthly income
- Wealth constrained
- If 10 % downpayment on optimal home exceeds household wealth

## Tenure Choice Estimation

- Tenure decision model
- Prob(own) = permanent income - transitory income -own/rent + value/rent + age - household size + married -male  +/-  black  +/-  Hispanic - income constrained-wealth constrained.

## Changes in Homeownership Propensity

## Slide 15

## Slide 16

## Table 5.  Logistic Estimation of Probability of Ownership (Baseline model, all households)

## Slide 18

## Implications

- The findings indicate that affordable lending efforts increase homeownership opportunities for underserved populations.  Freddie Mac’s Alt 97 increases the relative probability of homeownership for young households by 27.1%, for black households by 21% and for center city households by 15%.

## Implications

- Income constraint doesn’t matter much now
- Down payment constraint (and credit constraint) does
- Credit scoring, automating underwriting, declining mortgage rates

## Homeownership and Government Policy: Going Forward

- Pro-homeownership policy stance strengthened in the 1990s
- Is this a good thing?
- Homeownership disparities reduced
- Homeownership gains greatest for minority, young, low to moderate income and urban households
- Housing price and rent regime shift of the late 1990s

## Going Forward

- Decrease in mortgage rates leads to increase in housing prices but net result in general is gains in homeownership *when affordable*.
- Have we gone too far? Increase in default
- It is wrong to assert the policy push has increased foreclosure and default rates
- How do we know?
- Concentrated in FHA and Subprime markets.

## Going Forward: What is the role of housing prices?

- Increases in housing prices in underserved areas and the potential for more of the same drive the need for positive policy for home ownership.
- Interest rates are at lows which if reversed will increase the need to address affordability issues
- The role of the mortgage market structure and information adequacy and subprime mortgages increases the need to extend the role of the prime market.