After the Bursting of the Bubble, What Does Responsible Homeownership Look Like?
Cross posted at Huffington Post
While the burst of the housing bubble recedes into the past, its echo continues to reverberate throughout the economy and in communities across the land. The U.S. housing market remains a mess. Home values remain down and defaults and foreclosures remain up. Looking back in hindsight, it seems many that too many irresponsible actors were allowed to operate without supervision. They inflated housing prices and pushed people into loans they had no chance to maintain. The challenge now is to craft a more responsible housing policy. But what should it look like?
Policymakers will be expected to assist distressed homeowners and prevent mass displacements. The Obama administration’s anti-foreclosure plan needs to be updated once again. Homeowners should be offered greater latitude to re-write the basic terms of their mortgage, including the amount of principle owed. This is called a “cramdown” and just introducing this possibility into the mix will get banks and loan servicers to the table to work more diligently with besieged homeowners.
Still, we can’t lose sight of the underlying cause of the housing crisis: a finance system that allowed for the inflation of a now-burst housing bubble. The previous demise of the stock market bubble redirected capital back into global markets via our housing stock and a seemingly insatiable appetite for mortgage-backed securities. Eventually these securities were sliced, diced, and sold in such a manner that it became difficult to assess their underlying value and risk. Furthermore, a rise in predatory practices was used to get good people into bad loans that they could not afford over the long term. To put it plainly, these activities were unfair, deceptive, and abusive. Not only that, they were criminal.
This is why we need a new set of consumer protection to keep an eye out for when these practices reappear. This is the justification for creating a new Consumer Financial Protection Agency, which would have a mandate to promote transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products or services. It is a proposal which has already passed the House and is currently being debated in the Senate, where Senator Chris Dodd is trying to find common ground with Senator Richard Shelby, his Republican counterpart from Alabama.
I hope Senator Shelby finds a way to get on board because it is going to take this type of intervention to rebuild the financial services market. In recent years the growth of the alternative financial sector, marked by the explosion of payday lenders and subprime mortgage providers, meant that borrowers and lenders often met in space that lacked public oversight. Potential buyers need to know they won’t be tricked into products that will ultimately rip them off. Nowhere was this more evident than in the housing finance arena. It turned out there was a big downside when we skimped on underwriting and allowed loans to clear with low down payments and no documentation or income verification. Yet for the majority of borrowers, a standard 30-year fixed rate mortgage with a 10 percent down payment is appropriate and cost-effective. It should once again serve as the default product because it is an effective way to manage risk and ensure better outcomes for homebuyers and mortgage lenders alike.
Shoring up the housing finance system is a necessary step, but so is the recognition that homeownership is not for everyone. Homeownership does carry with it real risks, and we need to do a better job of communicating what these are families with different circumstances. When the pursuit of homeownership is not a good fit, we need to ensure that there is a sufficient stock of affordable rental housing that is located in stable neighborhoods which families can access. Our national housing policy can’t treat renters like second-class citizens.
Additionally, we should consider alternative ownership models, such as shared equity homeownership. In exchange for a public subsidy, families give up a portion of the home appreciation. This makes buying the home easier for the family and preserves affordability for the community over the long term. At the same time, the owner is placed within a community-based support system, such as a land trust or limited equity cooperative, which can mitigate the risks of homeownership. Shared equity housing has the potential to provide an attractive balance of affordability, access, and the opportunity to build up home equity. It has been modeled in a number of the communities across the country and ready for prime time.
But even if alternative ownership models proliferate, mortgages should not be available on demand. Savings and a reasonable down payment must be part of the equation, along with checks to verify steady or sufficient income. Homeownership should be approached as a process and not just an automatic right of passage.
Despite current economic woes, families will continue to aspire to own their own homes. For many, homeownership represents a path to stability, community, and long-term wealth building. But achieving these social and economic goals requires a new policy regime and regulatory framework that mitigates the inherent risks of the process. If done right, by matching buyers with appropriate mortgage products in a fair and transparent manner, we can make still make homeownership work for a broad range of American families, even those with low incomes and few resources.
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