Successes for Affordable

It’s a rough time to be a young adult. Many people in their late 20s and early 30s are a bit behind earlier generations when it comes to buying their first home. Many are in debt, unemployed, and living in the basement of their parent’s house. They are taking their time and trying to find some sort of financial footing before they are settling into a new home. Renting a home is about 40% more expensive than purchasing a home which means that buying a home in many areas is relatively affordable, especially in the post-recession market. Moreover, many programs help people find lower down payments which in turn allows for first time homeowners to be able to take advantage of the lower market by making a reasonable down payment. Sadly, not everyone has access to these programs, which is causing many first timers to stay away from homeownership. With affordable housing supply in the District being very limited, this has created a perfect storm of turmoil for District millennials; these problems need to be fixed quickly.

While there is no quick fix to the many systemic issues fueling this problem, the District has several programs in place to help combat these inequities and in recent weeks several pieces of legislation have been passed to strengthen these efforts. Two of those bills being the Affordable Homeownership Preservation and Equity Accumulation Act of 2013 and The Housing Production Baseline Funding Act.

The District has a pot of money called the Housing Production Trust Fund which it uses to help develop affordable housing, including ownership housing. With this assistance come covenants and resale restrictions that often hamper more affordable ownership development and trap homeowners in financially unsustainable situations. The Affordable Homeownership Preservation & Equity Accumulation Act of 2013 reduces these covenants in distressed parts of the city, while providing a recycle and recapture model to return all city subsidies to the Housing Production Trust fund for more affordable development. The Trust Fund Baseline Funding Act simply realizes that the Trust Fund services a great need, and funding it annually with at least $100 million dollars is needed to keep addressing these needs. In addition to these efforts, there are other amazing programs like HPAP (Home Purchase Assistance Program) and LRSP (Local Rent Supplement Program) that are there to assist District residents reduce their monthly housing costs.

With assistance from the Housing Production Trust Fund and similar subsidy/loan programs, Manna has been able to build over 1,200 units of affordability, generating over $60 million in equity for District families – steps being taken in the right direction.

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Hellowallet vs. Homeownership

Homeownership has been knocked around lately. Mutterings have been heard suggesting that low- and moderate-income people would be better off renting. A more outlandish claim uttered by some is that the reckless lending of the mid 2000s was not really reckless but “predatory borrowing” or consumers irresponsibly stretching their budgets and buying homes that were too large and extravagant.

Now comes along a new study by HelloWallet called a “House of Cards: The Misunderstood Consumer Finance of Homeownership”. HelloWallet describes its mission as democratizing financial advice and claims that 80 percent of Americans lack access to financial advice. According to its website, HelloWallet makes software that helps employers and employees work together to make financial decisions for employees.

HelloWallet’s study finds that more than one half of current homeowners, or 40 million homeowners, would have been better off financially by renting and investing. And the investing should include 401 (k) or Individual Retirement Accounts (IRAs).  Hmm…if these millions of homeowners would rent, who would be their financial advisor?

HelloWallet runs a simulation for consumers across the country. For households, would they be better off renting or home owning? In the simulation, the net benefit of buying is the value of the home plus the tax advantage of owning minus mortgage debt and property taxes. If the monthly payments of owning a home is cheaper than renting, the savings is invested according to HelloWallet’s model. For renting, the net benefit is savings invested if cases where the monthly rent is cheaper than mortgage costs.

The methodology makes some sense in the abstract but then the reader does not see actual numbers for each variable but rather several assumptions about each variable. In addition, the assumptions likely add up to a model with poor predictive power. For example, the report assumes a down payment of 20 percent. However, several Manna home purchasers benefited from low down payment programs. Since down payments are a major cost, the prevalence of low down payments for borrowers in nonprofit programs means that HelloWallet’s down payment assumption will often produce incorrect conclusions for borrowers in nonprofit programs.

Another significant shortcoming with HelloWallet’s model is that it operates at a highly aggregated or national level and cannot account for localized variables. The duration of homeownership, the timing of home purchase, the particular neighborhood in which the home is located, and the terms of financing (responsible or abusive high interest rate loans) are all key factors determining the net benefits of homeownership. Some of these variables are talked about in a general way in HelloWallet’s paper but other variables are missed completely such as the terms of financing.

For Manna and other nonprofits, two key variables are the duration of homeownership and terms of financing. The longer a household remains a homeowner, the more likely the homeowner will benefit from homeownership. Nonprofits offering post purchase counseling are able to assist owners experiencing temporary crisis and help them maintain homeownership. Nonprofits can also guide borrowers through the lending process, making sure that they receive responsible and affordable loans.

Christopher Herbert and his colleagues at the Joint Center for Housing Studies at Harvard released a paper in September of 2013 that reviewed several studies concerning the benefits of homeownership. An informative discussion in the paper focusses on the difference between simulations like HelloWallet’s study and research based on survey data. Simulations often conclude that renting is better than homeownership because of the assumption that renters will invest every last drop of their savings in astute investment vehicles. In reality, however, most renters will not save and invest like crazy; instead, it is the chance to own a home that induces savings for a down payment.

Herbert and colleagues review several survey studies concluding that homeownership is beneficial for minorities and low- and moderate-income people. They then conduct their own econometric research, finding that even during the crisis from 1999 through 2009, homeownership enabled owners, including minorities and modest income owners, to accumulate equity.

It is true that homeownership is not for everyone and that is why Manna develops rental housing. And it is also true that homeownership’s tax benefits and the mortgage interest deduction is skewed to wealthy homeowners as HelloWallet asserts. Tax reform is in order. I would also agree with HelloWallet that people need to be careful using mortgage calculators when deciding whether to buy a home makes sense. These calculators often operate with incomplete data. Better to consult with a trusted advisor or reputable counselor. But the overall thrust of HelloWallet’s study was bombastic and self-serving. If done correctly, homeownership provides enormous benefits for minorities and modest income households.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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Another ViewPoint for sound underwriting

To quote the folksy President Ronald Reagan, “here we go again.” Conservative critics will never give up insisting that big government and Fannie Mae and Freddie Mac caused the housing crisis. The latest salvo was issued by Peter Wallison of the American Enterprise Institute in a recent column appearing in the New York Times entitled “Underwriting the Next Housing Crisis”[1]

These attacks must not be underestimated. What is at stake is whether low- and moderate-income people will be able to buy homes. An attack on Fannie Mae and Freddie Mac is an attack on housing finance as it has been practiced since the Great Depression. Neither Fannie Mae nor Freddie Mac make loans but buy loans from banks and enable banks to make more loans. By buying loans and selling loans to investors, Fannie Mae and Freddie Mac have played an essential role in increasing lending to modest income people by decreasing the risk held by banks and diversifying risk across the financial industry. In 1992, Congress insisted that Fannie Mae and Freddie Mac must have affordable housing goals or specific targets for financing loans made to low- and moderate-income people.

Wallison asserts that the government applied so much pressure on Fannie Mae and Freddie Mac to buy loans made to modest income people that “underwriting standards declined.”

Well, let us examine the evidence. The Office of the Comptroller of the Currency (OCC) conducts a quarterly survey of at least half of the mortgages outstanding in the United States and consistently finds lower delinquency rates for mortgages financed by Fannie Mae and Freddie Mac. The most recent survey looking at performance in March 2014 finds that the seriously delinquency rate was 1.3 percent for mortgages financed by Fannie Mae and Freddie Mac in contrast to an overall rate of 3.1 percent. High-interest rate subprime mortgages had a delinquency rate of 13 percent!

In a study published by the Federal Reserve Board, Avery and Brevoort conclude, “We find little evidence to support the view that either the Community Reinvestment Act (CRA) or the GSE goals (for Fannie Mae and Freddie Mac) caused excessive or less prudent lending than otherwise would have taken place.”[2]

When the Federal government imposes mandates on Fannie Mae, Freddie Mac, and the banks to serve modest income homebuyers, the government accompanies these requirements with safety and soundness regulation. The part of the industry that engaged in the reckless, high interest rate, subprime loans were mortgage companies and Wall Street investment firms that were not subjected to safety and soundness regulation. That is why the OCC consistently finds that loans, particularly high cost ones, not financed by Fannie Mae and Freddie Mac, have higher delinquency rates. And that is why the most sophisticated statistical analysis done by mainstream and reputable economists like Avery and Brevoort confirm the superior performance of Fannie, Freddie, and CRA-covered loans.

Finally, Wallison goes after low down payment lending as excessively risky, including such lending financed by Fannie Mae and Freddie Mac. Recent data analysis by the Urban Institute, however, finds little risk in low down payment lending.[3]

Contrary to Wallison’s assertions, new government regulations involving “qualified mortgages” and “risk retention” will not promote risky lending by permitting lower down payments. These new rules prohibit the worst practices of reckless subprime lending such as not documenting borrower incomes.

Before we listen to Wallison and needlessly curtail wealth building opportunities for modest income Americans, a little look at the data would be wise. And all the serious data analysis reveals that Wallison is an ideologue whose ideas would make it much harder for organizations like Manna to provide homeownership opportunities. But Wallison won’t quit: a book he wrote is coming out soon. When the book is released, use this blog as evidence for refuting it.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

 

 

 

 

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Sound Underwriting Please?

In Peter Wallison’s recent New York Times op-ed “Underwriting the Next Housing Crisis”, he makes broad and unsupported statements about the role of government in hurting the real estate and mortgage finance sector, including the assertion that “If the government got out of the way, would sound underwriting standards come back? History suggests yes.”

This opinion piece uses the issue of government enterprise support for lower down payments as a starting point for advocating fundamental restructuring of the mortgage industry.  The ‘free market’ advocates label all government involvement as market destroying, but fail to understand, or even to mention, the facts related to the well documented drivers of mortgage default risk and the strong history of government involvement providing superior management of those risks relative to ‘private sector’ management. There are significant factual examples of what mortgage lending and homeownership would look like without government ‘getting in the way’. Pre-FHA and Fannie Mae, the mortgage lending models required 20-30% down payment, used biased judgments on what constituted responsible credit, and ensured homeownership was only available to a select segment of the reasonably wealthy.  Those lenders did not fair very well in the Great Depression, and that led to government stepping in to provide backstop guaranty.

In the last 30 years we have cycles of melt downs driven by private, non-government involved or encouraged lending, each of which required substantial government bailouts:

-       The original “no doc” cycle of late 1980s, driven by deregulation of the savings and loan industry and aggressive market share pushes which led Citibank and others to relax quality controls and allow no-income verification on a broad basis, leading to significant losses and federal bailouts (at one point Citibank was effectively insolvent);

-       The ‘oil patch’ recession in the 1980s when the collapse in oil prices led to regional recession and to private lending evaporating in entire regions of the country due to the herd mentality of fear, where only Fannie Mae, Freddie Mac and FHA provided mortgage lending kept entire states’ economies from crashing – just like they provided to the country during the most recent crisis.

-       The credit risk underpricing of the late 1990s, when Wall Street derivative transactions for mortgage loans undercut the risk pricing of Fannie Mae and Freddie Mac, and then blew up along with the Long Term Capital Management and other risk pricing hedge funds, requiring Federal Reserve intervention to prevent market collapses.

-       The 2005-2008 subprime/alternative mortgage debacle has been documented as led by rating agencies and Wall Street mortgage structures that underestimated mortgage risk, and failed to perform any due diligence or quality control.

While nothing is perfect, history has shown that expanding opportunities for fully documented, lower income, lower down payment borrowers has never caused a systemic failure. Irresponsible and predatory lending outside of government involvement has consistently created the biggest failures and bailouts. Good underwriting and comprehensive education are the tools proven to work, even in the financial collapse, and represent the needed foundation for a sound housing market which supports average wealth home buyers. Following the housing crisis of 2008, instead of increasing community engagement and development, private and public players have reduced efforts to support responsible low down payment lending.  Playing the blame game serves political and ideological interests, but distracts from learning from the successful models and delays the housing and general economic recovery which so badly needs sustainable low down payment lending.

-Frank Demarais
General Manager, Manna Mortgage Co.

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An Absence of Community Development

Do you have a bank branch in your neighborhood? Do you use it to make deposits and shop for bank products? Do you talk to branch personnel about loans?

In Manna’s immediate neighborhood, we see a Bank of America and TD Bank branch on or near Rhode Island Avenue as we walk to and from work.

Bank branches are important anchors of commerce and business activity. Small businesses place thousands of dollars of deposits in branches on a weekly basis. Neighbors place deposits and take out money at ATMs and work with tellers on more complex transactions. When a bank closes a branch and pulls out, this sends a devastating message to a neighborhood. It says the bank has lost confidence in the neighborhood as a place to do profitable business. Without bank branches, a neighborhood will decay and deteriorate…businesses will find it harder to do business and residents will find it harder to get loans.

That’s why we must tell federal agencies that bank branches are important. The federal agencies oversee a law called the Community Reinvestment Act (CRA). CRA requires banks to serve the credit and banking needs of communities, particularly low- and moderate-income communities. Under CRA, three federal agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) evaluate bank performance in serving communities and give them a “grade” or rating in a publicly available report card called a CRA exam. You can look up a CRA exam on the internet for any bank in the country – go to http://www.ffiec.gov.

The three federal agencies are proposing changes to a document called the interagency CRA Question and Answer (Q&A) document that would diminish the importance of bank branches on CRA exams. Their idea is that alternative means of delivering bank services such as through the internet has become more prevalent. We at Manna believe that this elevation of alternative service delivery and the demotion of bank branches pose a big problem for low- and moderate-income communities. On a daily basis, we see many hard-working clients trying to get home purchase loans and understand banks. We provide hundreds of hours of counseling to clients. It is naïve to think that hard-working people who are not familiar with banking will use the internet to shop for bank products. They need in-person assistance…whether that is at nonprofits or at bank branches. It is hard enough for anyone to understand the plethora of loans and bank products – and that includes staff at Manna who have been doing this work for years!

Tell the regulators that bank branches are important and that the agencies should not diminish the weight of bank branches as a factor on CRA exams! You can comment by sending an email to: comments@fdic.gov and using the subject line CRA exam Q&A. And you can read Manna’s comments and others via https://www.fdic.gov/regulations/laws/federal/2014/2014-community_reinvestment.html. If you can, comment by Monday, November 10 – the official end date for comments.

Finally, the agencies are doing one good thing: they are saying that community input on CRA exams will receive more weight. Congratulate them on that! And tell us your stories about the importance of bank branches and what happens when they are not in neighborhoods.

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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Legislative Support

There is a piece of legislation on the books that focuses on lending to credit worthy low-income borrowers. The Federal Housing Enterprises Financial Safety and Soundness Act requires the Federal Housing Finance Agency (FHFA) to establish annual housing goals for mortgages purchased by Fannie Mae or Freddie Mac. The purpose of these single-family housing goals is to motivate Fannie Mae and Freddie Mac to provide secondary market support for lending to creditworthy borrowers who have low incomes or live in traditionally underserved communities. It is important to keep in mind that many factors will together determine how adequately the enterprises serve low-income borrowers. While the goals could help at the margins, they will help only where these factors together create a more hospitable environment for lending to these borrowers.

The goals are broken up into four categories: (1) low-income home purchase loans; (2) very low income home purchase loans; (3) low- income areas home purchase loans, with a sub goal that excludes loans to moderate-income families in disaster areas; and (4) low-income family refinance loans.

This act put forward by the FHFA is a great foundation in ensuring credit worthy low-income borrowers have access to adequate financial services. On a local level, the District city council on this past Monday marked out of committee The Community Development Amendment Act of 2013, a piece of legislation that would incentive financial institutions who do business with the city government to better serve the credit needs of all District residents.

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A Day For Affordable

Yesterday, on Tuesday October 28th, two important affordable housing bills were passed by the District City Council. The Disposition of District Lands, a bill that provides an affordable housing mandate on all District government owned land being disposed of for development. The other bill, The Affordable Homeownership Preservation & Equity Accumulation Act of 2013, reduces resale restriction in distressed parts of the city, while providing a recapture & recycle model for the city that recaptures District subsidies and recycles them for the production of more affordable housing.

Both bills take steps in the right direction in addressing key housing needs. However, the Gray administration expressed concerned with the Disposition of Public Lands bill, feeling the affordable housing mandate might tie the city’s hands. Originally the CFO would be able to waive the affordable housing mandates based on certain criteria, something the mayor believes should stay with the executive. However, amendments were added giving the District Council final oversight. In response to criticism of the Disposition of Public Lands, introducer Kenyan McDuffie’s said “This bill was never intended to be a panacea,” McDuffie said, responding to the administration’s criticism. “It’s just one more tool in the toolkit to ensure we’re creating housing across income levels.”

The Affordable Homeownership Preservation & Equity Accumulation Act of 2013 took a big step in providing more access to the benefits of traditional homeownership, such as the access to equity, and incentive for more affordable homeownership development in areas of the city that need it most. This bill also provides an innovative measure to the District that recaptures all pre-existing equity in a home and recycles it into the development of more affordable housing, having an effect far in the future.

Both of these bills are much needed tools the District can use to address its affordable housing disparity and needs. These actions show a concerted effort from advocates, constituents, and elected officials to make affordable housing available and workable for District residents and neighborhoods.

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Ownership is still cheaper

According to recent data released by Trulia it is still significantly cheaper to own in the DC region then to rent, 34% to be specific. This has been consistent all year and is slightly below the national average of 38%. Jed Kolko, chief economist for Trulia provides in-depth analysis providing further breakdown. For instance, it is 25% cheaper to own in Fairfax, VA than it is to rent, while it is 33% cheaper to own in the District of Columbia.

Trulia calculates this by using several factors, which includes average utility bills and tax deductions amongst other things, but one very important factor that was discovered was that the owner must remain in their home for at least 7 years. Trulia used many different variables to make these calculations like changing the length of the mortgage or type of loan, and every time ownership beats out renting.

This data lends significant strength to the solution of homeownership as a vehicle to help low-to-moderate income individuals achieve economic mobility. The District of Columbia already has programs in place to help lower income individuals purchase homes, like the HPAP program and development subsidies, but more can be done on the side of our financial institutions. A piece of legislation, the Community Development Amendment Act of 2013 would incentivize community development by evaluating the community development plans of financial institutions that apply for financial contracts with the city, and assigning contracts partly based on those plans. Now is the time for the city to lead the way in promoting economic mobility and holding financial institutions accountable!

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Touring With Councilmember Grosso

 

Grosso 1

This weekend, Manna, Inc. had the privilege of touring affordable developments and meeting with affordable homeowners with Councilmember David Grosso.  Throughout the experience the councilmember and his staffer were able to hear first hand from constituents what homeownership has meant for their families, as well as some of the difficulties associated with District homeownership programs.

Grosso2At our first tour stop, Councilmember Grosso met with Pam Johnson, an affordable homeowner in Historic Anacostia.

Grosso3The councilmember also met with Natalia Otero, an affordable homeowner in Columbia Heights, hearing what homeownership means to her family.

 

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The Disappearance of Affordable

It’s known that housing cost in the District of Columbia are through the roof, but the Urban Institute took it a step further, through illustration, showing the rapid decline in housing affordable throughout the District. According to the study there has been an almost 180 degree turn in the percentage of apartments in the District considered affordable compared to higher end ones. Specifically in 2005, 17 percent of all rental units went for under $500 in 2012 dollars, while 14.9 percent charged over $1,500. These numbers changed dramatically over a seven year period. In 2012, those sub-$500 units made up just 11.3 percent of the total stock, while the $1,500-plus ones were up to 35.9 percent of the total.  The report also shows that between 2000-2011 the stock of affordable apartments, those costing no more than 30% of a lower income individuals income, had plummeted.

Simply put, prices are going up and the stock of affordable units is going down. One of the biggest problems that has come from this is the rapid flight of affordable housing and section 8 building owners, who can barely wait  for their affordability obligations from government subsidies to expire so they can raise rates. While this loss of affordabilty from subsidized units has been a huge hit, the lack of adequete affordable developments has pushed rents up as more and more individuals migrate to the District. In order to truly address this crisis the District government must find creative ways to incentive subsidized development owners under affordabilty contracts, while providing a boost to affordable development.

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