After the Storm: The Future of Low-Income Homeownership in America

During a week where the FDIC, the White House, Congress and the Treasury Department are embroiled in a battle over how to best address the millions of Americans who are the brink of losing their homes to foreclosure, it may seem odd to discuss new strategies for helping more low-income families become homeowners. There is no disputing the fact that the foreclosure crisis and the larger global economic crisis it helped spawn, are the immediate issues at hand. However, once the dust has settled it will be necessary for government officials, advocates, and politicians to come together and have an honest discussion about the future of homeownership policies for low- and moderate-income Americans.

If you are still operating under the false assumption that the Community Reinvestment Act or low-income "predatory borrowers" are to blame for the economic crisis please read this excellent blog post by my New America colleague Ellen Seidman or even better, this recent statement by Comptroller of the Currency John Dugan.

Despite the crisis, homeownership remains one of the best ways for American families to build wealth and assets. According to NCB Capital Impact, nonelderly homeowner have an average net worth of $57,000 while nonelderly renters have an average net worth of less than $5,000. Home equity is the single largest source of wealth for most Americans and accounts for the vast majority of this difference. However, as the recent crisis has shown us, homeownership is not without its risks and for low-income families these risks are even greater.

So what can policymakers do to address this dilemma? Is there a way that low-income families can enjoy the asset building and many other benefits of homeownership without being exposed to an excessive amount of risk? The good news is that there is a solution to this problem and it is called shared equity homeownership.

What is shared equity homeownership you ask? It is a type of homeownership where low-income families share both the risks and rewards of homeownership with a third party that represents the interests of the community, usually a local government entity or nonprofit organization (The types of shared equity homeownership discussed here should not be confused with any of the private sector versions with similar names such as shared equity financing and mortgages, which many times can be quite bad for low-income families). There are several different types of shared equity homeownership, but they all involve a public or nonprofit third party providing some type of subsidy (i.e. land through a community land trust or money to lower the purchase price) to the homeowner in order to make the purchase more affordable and less risky.

In exchange for this subsidy, when they sell the home the homeowner agrees to recoup less home equity than they would in the traditional housing market (assuming that home values have risen). The rest of the home equity is used by the third party to provide the same shared equity homeownership opportunity to the next low-income family. It is this mechanism that allows programs like these to be financially self-sustaining under most circumstances in a rising real estate market. They do not continually require additional taxpayer money, but can still provide homeownership opportunities to more low-income families.

Under the scenario where home values actually decrease between the time of purchase and sale (sound familiar), homeowners are also protected because the third party will either absorb the losses at no cost to the homeowner or at the very least the homeowners losses will be smaller than they would be in the traditional housing market.

In order for shared equity homeownership to reach its full potential many details have to be appropriately addressed (i.e. the exact size of the subsidy). Furthermore, different models work better in different real estate markets. The best model for New York City is not necessarily the best for Albuquerque. However, we already know that shared equity homeownership can work. It has helped thousands of low-income families to become homeowners in a safe and responsible manner in places like Vermont, Minnesota and San Francisco.

When the financial crisis eventually reaches its resolution (hopefully sooner than later) policymakers will need to take several steps to make homeownership both safer and more accessible to low-income families. Shared equity homeownership should be one of them and the conversation should begin sooner rather than later.