Housing has always been an engine of economic growth. But that engine could stall if no action is taken to increase the supply of affordable housing and expand lending opportunities for underserved families.
The country’s gross domestic product typically averages 15% to 18% on housing. Spending on residential investment and housing services represented 17.5% of GDP in 2020. For 15 years, since the subprime crisis, the impact of housing has been well below its peak.
As the engine of the economy, housing must be strengthened by:
- Non-bank lending institutions lend to low-income and minority areas in the same way ARC does to banks
- Reduce the cost of government-insured and government-backed mortgages
Steps must be taken to provide adequate access to credit for homebuyers and encourage the housing market to expand opportunities for American households. Black homeownership rates have increased from 48.4% in 2001 to 44.8% in 2021. Hispanic homeownership rates have increased moderately to 48.4%, in part due to organized advocacy and the work of Latino realtors and lenders.
Housing costs, especially at the bottom of the market, have soared with a limited supply of housing and a severe shortage of construction workers. Since 2016, increase in legal immigration decreased by 40%. Increasing the supply of legal immigrant construction workers would accelerate economic growth.
An increase in sales of new and existing homes leads to increased spending on housing construction materials and furnishings, goods and services. This increased spending leads to an economic boom. On the other hand, a sharp decline in real estate has long been considered a precursor to an economic recession.
Increase the supply of affordable housing
The shortage of 3.8 million housing units in our country comes entirely from the bottom of the market. This increases the cost of housing and penalizes households with more modest means. This growing shortage widens the wealth gap between tenants and landlords, forces more families to live further away from their jobs and jeopardizes their upward mobility.
In 2021, housing costs jumped 19% – the biggest rise in half a century, with the percentage of first-time buyers falling to its lowest level in decades (31%).
While home inventories remain low, the outlook for first-time buyers is diminishing. Prices continue to rise. Competition favors institutional investors and households with higher incomes and exceptional credit.
Programs to develop affordable housing
President Biden’s Build Back Better bill includes funding to increase the supply of affordable housing. Although not enacted, other programs are well positioned to help. For example, the Housing Trust Fund and Capital Magnet Fund provide grants to non-profit organizations to invest in affordable housing in low-income communities. If fully funded, both programs could expand and provide affordable housing where it is needed most.
Incentivizing developers is necessary
To increase the overall housing supply, land use and zoning laws need to be reformed. To stimulate production, local governments can incentivize developers to reserve affordable housing for underserved households, including through tax breaks and density bonuses. Another option would be to require the construction of high-density housing units when planning transit-oriented development plans around employment centres. Local governments could also rezone commercially zoned properties to reuse them for housing or they could allow owners to convert existing single-family structures into more units.
The federal government could also stimulate the supply of affordable housing by streamlining and expanding its HUD 203(k) program to repair, improve, or upgrade existing affordable housing. Even at the executive level, President Biden could name someone responsible for coordinate housing policies aimed at increasing the supply of both rental and condominium units.
The Need to Change Current Mortgage Underwriting Guidelines
The mortgage market does not effectively cater to underserved population groups. Hispanic households, in particular, are often made up of extended family members, many of whom contribute to monthly housing expenses. But mortgage underwriting rules generally only consider the income of the person whose name is on the mortgage.
More than half of the new households in this country will be formed by Hispanics over the next quarter century, many of whom have made huge gains in education, income and business ownership. Many minority borrowers are also immigrants and self-employed. Still, mortgage underwriting rules remain tough unless borrowers collect paychecks from full-time employers. Immigrants and the self-employed also tend to pay cash for many purchases. Nevertheless, mortgage underwriting is highly dependent on credit history to assess future creditworthiness.
Due to the disconnect between traditional underwriting and how underserved households manage their finances, many mortgage lenders do not accurately assess credit risk. Credit scoring is detrimental to borrowers with less than three established lines of credit or with a limited credit history. This system is failing minorities, underbanked Americans, immigrants, and those with thin credit histories.
Lenders need guidelines that take into account the track record of potential buyers, including on-time rent payments, multi-generational household structures with multiple streams of income, or creditworthy borrowers who don’t fit into mainstream credit categories. The mortgage market needs to reevaluate its rules and embrace alternative credit scoring methods, to evolve with the nation it serves.
By now, most of us are aware that home ownership is a fundamental means for Americans to achieve economic prosperity, build businesses, and create the wealth needed to rise to the class. American average. The inability to build equity is a major impediment to meaningful growth of the housing sector and the national economy.
Non-bank credit institutions committing
It is essential to ensure that non-bank lenders are compelled to lend in low-income and minority areas. In 2020, non-bank mortgage lenders accounted for 68% of all issuance that year.
The Community Reinvestment Act (CRA) aims to meet the credit needs of neighborhoods, including in low- and middle-income neighborhoods. ARC requires periodic assessment of each institution’s record to help meet the needs of its entire community. While non-bank lenders are not bound by CRA requirements, they do have an obligation to serve underserved communities and people of color.
Many of these non-bank lenders only operate where they can make the most profit, with higher income borrowers with exceptional credit. Many of these Independent Mortgage Bankers (IMBs) do not serve all households in their communities, especially the most underserved.
Some communities are not served equitably because lenders say they are unable to recruit and hire minority loan officers who reside in those communities. Lenders need to grow, recruit, and train culturally appropriate professionals who have a passion for meeting the homeownership needs of underserved populations and who can rise to leadership positions.
Right now, interest rates continuing at record lows and the increased availability of down payment programs and small down payment assistance should allow more U.S. households to access the property. The use of down payment assistance can also be greatly optimized; for example, it can be used in tandem with VA’s Zero Down Payment Program, HUD’s Voucher Homeownership Program, or USDA’s 502 Homeownership Program for the Rural Poor.
Reduce the cost of government-insured and government-backed mortgages
Home ownership opportunities for hundreds of thousands of hard-working households can be increased if the administration reduces the Federal Housing Administration mortgage insurance premiums and GSE fees. At their current level, FHA premiums are blocking its goal of providing mortgage insurance to the most underserved borrowers.
The FHA program is currently showing exceptional profitability. Its capital ratio of the Mutual Mortgage Insurance Fund is now 8.03%, exceeding its legal minimum of 2% for the seventh consecutive year. Despite the pandemic, the FHA is expected to perform well and has funding to cover future losses. As the primary resource for minority and underserved homebuyers, the FHA is expected to reduce costs, increase homeownership opportunities, and help support and grow the nation’s housing industry and economy.
Reduce price adjustment at loan level
Fannie Mae and Freddie Mac should reduce the Loan Level Price Adjustment (LLPA) charge. These conventional loan fees dramatically increase loan prices and increase the actual mortgage rate paid by “riskier” borrowers. These fees should be eliminated for loans already covered by private mortgage insurance.
Currently, GSE fees are excessively high and discriminate against households with lower credit scores and limited credit histories. Overall costs for borrowers could also be reduced if the pricing and underwriting of mortgage loan insurance were better regulated.
Increasing housing supply, effectively meeting the homeownership needs of underserved households, encouraging lenders to extend loans to all households in the communities they serve, and reducing mortgage costs will help millions of American families. to become sustainable owners.
Combining these efforts with strong and improved underwriting and with the expanded use of low down payment and down payment assistance programs will restore the role of housing as a vital engine of economic growth in the country.
Alejandro Becerra is the Research Director of the National Association of Hispanic Real Estate Professionals.
This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.
To contact the author of this story:
Alejandro Becerra at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]