Sunday, August 22, 2010

Is housing the best way for low-income people to build wealth?

I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help's Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.

At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.

The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.

In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.

Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.

8 comments:

Stephanie said...

Should the 20 year mortgage be the standard, as opposed to the 30? Why is that with most lenders there's no difference in rates between the two?

Kien said...

On using 401(k) to facilitate saving for homeownership, see Singapore. This may partially explain Singapore's high rate of homeownership.

Norman said...

The ability to borrow money is not wealth. Just ask those you borrow from.

Costaricarealestate said...

The post is good & informative as all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving.

kristin said...

Well can't say exactly but yes its true that housing can help people to make profit but with high risk investment.I m also planning to invest but still confuse of its high interest rates.
Manakin Sabot mls

aiya said...

Office 2010
Microsoft Office 2010
Microsoft word
Office 2007
Microsoft Office
Microsoft Office 2007
Office 2007 key
Office 2007 download
Office 2007 Professional
Outlook 2010
Microsoft outlook
Microsoft outlook 2010
Windows 7

led said...

Christian Louboutin Tall Boots
Christian Louboutin Wedges
Christian Louboutin Pumps
Christian Louboutin Sandals
Jimmy Choo Shoes
Moncler Kid's Jackets
Moncler clothing wholesale
Wholesale Moncler Jackets
discount Moncler Jackets
http://www.shopmoncler.hk/moncler-jackets
http://www.utsource.net/BUK444-500B.html
http://www.utsource.net/MG50Q6ES41.html
http://www.utsource.net/UM150CDY-10.html
http://www.utsource.net/MP7002.html
http://www.utsource.net/TMS320F2812PGFA.html
http://www.utsource.net/CEM3374.html
http://www.utsource.net/2sj74.html

anni said...

I think we can not say that it is the best way..But there are many ways to get wealth and one among them is housing..
MBA in real estate