Traditional Mortgage Finance Creates Social Inequality
By: Jarrod Epps
Tags: Social Inequality, Mortgage, Discrimination, Alternative Credit, New Home Purchase

It’s time to innovate home finance for the first-time buyer

First the good news: homes usually appreciate in value

Most people want to own a home at some point, and with good reason. Owning your home creates a sense of stability, and it’s a great way to build wealth. While there’s no guarantee that the home you buy will appreciate, there’s a pretty good chance. According to the Federal Housing Finance Agency’s House Price Index, home values have appreciated an average of 3.6% each year since 1991. For instance, if you purchased a home for $100,000 in 1991, your home could be worth around $280,000 today. In addition to the amount you’d have paid off on your mortgage during that time, this appreciation in value builds even more equity, therefore increasing your net worth. Simple and effective, right?

Now the bad news: home lending structures block millions of well-qualified buyers

Unfortunately, for many who can’t meet financing requirements to purchase their first home, this price growth adds another negative to their unfavorable personal financial situation, as those spiraling home values accompanied by existing mortgage lending structures block their path to homeownership.

Over the last decade, mortgage lending practices tightened and the reliance on outdated consumer credit evaluation systems increased. These policies created significant hurdles even for well-qualified buyers faced with the requirement to drain more of their savings accounts to make an initial down payment while increasing their monthly payments well above rental costs.

Even worse, once they overcome these hurdles to purchase they are shouldering the burden of any potential economic downturn which could result in the loss of income and a sinking value of their home alongside a potential underwater, forced sale.

More households are renting, resulting in greater social inequality

In the last decade, the share of renters has increased to 34% of America’s general population, reaching over 100 million persons for the first time. According to census data, between 2007 and 2017, the United States added less than 1 million households in owner-occupied homes, but 6.5 million in renter-occupied homes, removing that key source of potential financial security for many.

This lack of homeownership further exacerbates the schism of wealth across the United States, increasing the number of people who are struggling to gain a financial foothold and achieve economic stability.

Using data from the 2015 Survey of Income and Program Participation, Jonathan Eggleston, an economist, and Donald Hays, a survey statistician in the Bureau’s Social, Economic and Housing Statistics Division, found that the wealth inequality between homeowners and renters is striking, with the former having a median net worth 80 times that of the latter.

Further, the median net worth for homeowners gained 15% over the most recent 3-year period, compared to a loss of 5% for renters.

The resulting breakdown of our social fabric in many communities is palpable

In real terms, for more than 75 million Americans the dream of owning a home is dying. The decline of homeownership is breaking down the connection between residents and their communities, as rents and evictions increase and houses fall into greater disrepair due to neglectful institutional landlords. As the economic advantages of homeownership are transferred away from residents and the sense of community dissipates, hopelessness creeps into the forefront, families face increasing financial/emotional stresses, and frustration can boil over to civil conflict.

To reverse these damaging trends, we must change the way we finance home purchasing. In doing so, we can create economic opportunities to make homes more affordable, individuals healthier, families more stable, and communities more prosperous.

Traditional finance structures are the biggest hurdle to homeownership

Although millions of prospective buyers are faithfully-paying tenants and strong potential homeowners, the majority of aspiring buyers cannot access the advantageous prime headline rates and accompanying favorable terms promoted by mortgage institutions.

Four in five Americans have never defaulted on a credit product, yet less than half have access to prime credit options due to outdated, often discriminatory underwriting and lending practices.

Acquiring financing is the key first step to building wealth through homeownership. However, the requirements for attaining a mortgage present an unnecessarily high hurdle for most potential borrowers. Research shows less than half of people have access to prime credit, despite never having defaulted on any of their loans. As well, lenders deny mortgages for Black applicants at a rate 80% higher than that of White applicants, according to 2020 data from the Home Mortgage Disclosure Act.

Most lending institutions are structured not to take on any home loan that isn’t substantially backed by the U.S. government, and they must work within the narrow parameters allowed by Fannie Mae and Freddie Mac which are locking millions of well-qualified buyers out of the market.

As a result, due to the prevailing expectations of how homeownership should be structured, buyers are often required to:

· Empty their savings to make an initial down payment on a home, thereby reducing their ability to service ongoing loans, upkeep their home, and handle other financial emergencies that may rise

· Increase the cost of their monthly payments compared to what they’d pay in rent for the same home, and

· Take on the risk of losing their home (and that chunky initial deposit) should they lose their job and the market goes through an inevitable period of a market downturn when they can’t unload the property at a reasonable price and in a reasonable timeframe.

Additionally, the expectation set by traditional mortgage structures is the buyer should commit to paying off 30 years of a home, when in reality today’s buyer will only use the home for an average of 5.5 years before moving to a new property. This disproportionate requirement is singularly associated with housing — and why is that? Imagine if you were asked to take out loans for a 30-year supply of any other product you use…

Poor alternative home finance structures

Until now the primary alternative solutions to traditional mortgages were the disadvantageous, risky, and sometimes outright usurious rent-to-own schemes tuned to get people into houses owned by institutions who demand tenants take on maintenance costs and have massive equity penalties should they ever decide to leave the home for whatever reason.

In the last three years, multiple venture-backed startups have also come to market trying to address this need of getting people into a homeownership scenario; however, each has failed to solve key problems in three critical areas:

· Reducing monthly expenses compared to traditional mortgages

· Allowing participation in home price growth while eliminating downside risk, and

· Giving buyers the flexibility to move out and take their equity/earnings with them as and when they like.

Equanest: Incremental homeownership

Equanest’s mission is to help consumers build personal wealth and engender community stability through the provision of innovative home finance structures which make first-time homeownership achievable, affordable, and safer for millions of well-qualified, underserved renters.

We are working to change the status quo through a transformational structure called Incremental Homeownership, servicing well-qualified first-time homebuyers who recognize the significant risks and disadvantages of traditional mortgages.

Incremental Homeownership is a program that allows buyers to move into a home they choose and to purchase that home over time instead of making the full commitment from day one. It functions much the same as a mortgage but removes the key hurdles around cost and risk.

The benefits of the Incremental Homeownership model include:

· A requirement of little-to-no money down

· Lower monthly fixed costs compared to traditional mortgages

· Monthly payments that reduce over time

· Downside home price protection

· The flexibility to move out as and when clients need, taking their equity and upside price growth with them, and

· The ability to transfer the purchase into a traditional mortgage whenever they reach an equity threshold that makes them feel more financially comfortable.

This flagship program from Equanest gives prospective homebuyers the opportunity to participate in homeownership with less out of pocket and substantially lowered risk compared to traditional mortgages, and is structured with flexible payments to meet your changing needs, all formulated so 10-year costs and ownership can match what buyers achieve with traditional mortgages.

Our vision is a market where more buyers can purchase a home in a healthier financial structure than offered by traditional mortgages, thereby building a housing ecosystem that fosters well-being in individuals and families, an intrinsic connection within communities, and greater socio-economic equality across the United States.

Stay tuned to www.equanest.com for more news.