Whether you’re an Independent, a Republican or a Democrat, we can all agree that today’s political environment is toxic and unproductive, preventing Washington from accomplishing important work for our nation. Every policy proposal is viewed through the lens of maximizing political advantage instead of what is best for the people. Decorum and civil dialogue are rare.
As a veteran of the mortgage industry, a voracious reader of history, and a close observer of politics, I hereby offer a few observations on housing policy that seek to strike common ground in this highly polarized political time.
In general, conservatives have core beliefs in individual liberty and self-determination. They eschew the role of government in our lives and see it as generally limiting to liberty. People should be rewarded in society by individual merit and effort, period, conservatives believe.
These underlying principles, as it relates to housing, means that some conservatives begrudge government involvement in the mortgage and housing market, whether through direct or indirect subsidization of housing or through risk transfer to the federal government in the mortgage market. In the wake of the mortgage meltdown 10 years ago, some conservatives believe that the federal government should not be involved in guaranteeing FHA loans. As for down payment assistance, conservatives typically are opposed, given the added perceived risks it transfers to the federal government in terms of loan guarantees. Generally, conservatives argue that if a borrower is unable to save up enough money for a down payment, he or she should not be buying a home.
Liberals, meanwhile, typically believe that fairness and equality should be the hallmark of our nation. As such, they seek to help the underdog, by using government programs, funds, and policies to lift people up in their efforts to achieve fairness. Under this approach, government should tax advantaged groups in order to transfer some benefits to disadvantaged groups. As it relates to housing policy, liberals believe in a highly regulated market to curtail bad actors, coupled with generous subsidies and benefits to help minorities and underserved markets get the help they need. Liberals are staunch supporters of government programs administered by HUD. As it relates to down payment assistance, they tend to be more favorably disposed, viewing it as a tool that helps constituents they tend to champion.
Beyond this general contrast in political philosophy, Democrats see Republicans as being uncaring, selfish, and likely to value profit and self-interest over the needs of the broader populace. On the other hand, Republicans see Democrats as wasteful spenders who create perverse market incentives, distort market efficiencies, and undervalue personal responsibility, thereby harming those they seek to help and creating inter-generational government dependency.
Is there a way, at least in the housing arena, to create policies that conform to the core beliefs of each party? I believe there is.
The Gap in Homeownership
There is an abiding perception in our nation that the rich are getting richer while the poor and middle class are stuck at the bottom of the socioeconomic ladder, faring worse than their parents in income and social mobility. If this is true, can we see evidence of it in the state of housing today?
Here are some supporting facts. According to data from 2016, 71% of white households own a home, while only 41% of African American households and 46% of Latino households do.[i] Since 2001, the black homeownership rate has declined dramatically compared to other ethnic groups, falling 5% compared with a 1% drop for whites and an increase for Latinos and “other” families, defined mostly as Asian Americans and Pacific Islanders.[ii] The latest Survey of Consumer Finances, published every three years by the Federal Reserve, found that the average net worth of a homeowner was $195,400 – 36 times that of the average renter, with a net worth of $5,400.
Given this picture, it’s easy to see why many Democratic constituencies see the American Dream as applicable to only the privileged, reinforcing their core principle of pursuing equality for all. We also know that owning a home is the No. 1 determinant of household wealth. Homeowners enjoy more family stability, less stress, improved physical and psychological health, and higher rates of childhood educational achievement. It is not surprising that our country continues to struggle with racial tensions given such a disparity in homeownership rates and opportunities for upward mobility.
One of the main factors preventing homeownership is a lack of a down payment. Whites enjoy a much higher level of familial wealth. Programs such as FHA allow for families to gift down payments to help a new household get on the path of homeownership. If you come from a family that lacks savings and disposable income (a reality in many minority communities), homeownership may be delayed or never happen, as young households become old households, ever trying to save up a down payment, while the price of homes becomes further and further out of reach. If such families had access to down payment assistance, it would have enabled them to achieve homeownership early in life, enjoy equity appreciation, and reap all of the social and emotional benefits that flow from homeownership.
Down Payment Assistance - An Elevating Tool
What if there were a way for a Republican to lift the poor out of poverty, while at the same time reduce their dependence upon government, improve neighborhoods, and reduce crime? What if were possible for a Democrat to help those most in need in a manner that preserved individual dignity and self-worth without creating costs for the federal government?
In fact, there is such a tool. Down payment assistance provides a means to allow a homebuyer to purchase a home now, instead of waiting years to accumulate savings while real estate becomes ever more unaffordable. Countless studies have shown that individuals who are homeowners are less dependent upon government handouts, enjoy higher education for children, better long-term wealth creation, and more stable communities. These are outcomes that Republicans and Democrats jointly support. If used responsibly, down payment assistance can be a tool that is mutually appealing to the right and left and, most importantly, benefits those Americans who need it most.
Despite the effectiveness of down payment assistance, there are concerns that merit attention. Several of these are addressed below.
1. People with down payment assistance have a higher likelihood of defaulting on the loan, which creates a risk to the federal government because of its guarantees.
This statement is likely accurate, and on the surface, it validates concerns expressed by Republicans and other opponents of down payment assistance. But risk can be actuarially managed. In addition, steps can and should be taken to reduce risk. One of these is requiring a bona fide educational component for recipients of down payment assistance, which has been shown to drastically improve loan performance. Even after accounting for this and other risk-lowering strategies, it’s worth considering whether the cost – a slightly higher risk – is worth taking for the benefits. Here’s what I mean by that. The average default rate for people receiving down payment assistance is 5%, which is 2% higher than the default rate for traditional loans. As a society, do we believe that this slightly higher level of default risk is worth taking if it means helping the remaining 95 out of 100 people who will not default and have a shot at achieving the benefits of homeownership outlined above? To me, the answer is a resounding yes.
2. Are we returning to the loose lending standards that led to a prior market crash?
In the years leading up to the most recent crash, irresponsible lending practices were distorting the market. These practices included “liar loans,” which allowed people to make up income and assets in order to qualify for a loan. Aided by such practices, rampant speculation fueled a housing bubble, leading to a cascade of problems. In the wake of the crash, Congress passed laws to prevent a repeat of these lending practices – and the troubles they caused. Down payment assistance should only be provided to people who demonstrate an acceptable credit history and an ability to repay. For more on this, please see a separate blog post, which further addresses how responsible down payment assistance done right was not the reason for the crash.
3. We already have a critical shortage of affordable housing in this country. Won’t enabling more people to buy homes exacerbate this problem?
This is a legitimate concern. But it is not an excuse for keeping more than one-third of our population – including nearly 60% of African Americans – in a permanent economic underclass, bound to intergenerational dependence on landlords concerned only about maximizing their project CAP rates. As rents get more expensive, the federal government, through programs administered by HUD, is pouring an increasing amount of taxpayer dollars into rent subsidies, enriching landlords along the way. Conservatives should not stand for this. Housing supply is a real issue. Policies that promote housing development, such as President Donald Trump’s Opportunity Zones, should be applauded. Barriers to developing available land should be lifted. If we decrease the number of renters, subsidies will decline, decreasing federal costs.
While down payment assistance is not a cure all for societal ills, when administered properly, it is a powerful tool to lift households out of poverty and reduce dependence upon the federal government, while costing taxpayers nothing. In fact, by reducing the ranks of renters and thereby decreasing subsidization, down payment assistance can actually cut costs to the federal government.
Given its benefits, we encourage the parties to set aside their political differences and support efforts by responsible, experienced organizations to increase access to down payment assistance and other sustainable housing opportunities. Their constituents deserve no less.
[i] Goodman, Laurie and McCargo, Alanna, A closer look at the 15-year drop in black homeownership, Feb. 13, 2018. Urban Wire: Housing and Housing Finance, The Urban Institute, Washington, D.C.