Lessons from Homeownership Research: Benefits, Sustainability, and Affordability

1. What Have we Learned about Homeownership? Lessons from Current Research Stephanie Moulton, PhD John Glenn School of Public Affairs The Ohio State University moulton.23@osu.edu

2. Overview Homeownership Benefits • Types of benefits • Reasons for benefits The State of Homeownership • Homeownership trends & gaps • The subprime boom & bust Homeownership Sustainability • Causes of mortgage delinquency and default • The role of homebuyer education, lenders and nonprofits Homeownership Affordability • CRA and affordable lending programs • The MRB program

3. Homeownership Benefits Economic Well-Being • Housing security, build wealth, stabilize housing costs Neighborhood Stabilization • Less turnover, fewer vacant or abandoned properties Child Outcomes • Improved reading and math scores, graduation rates Social Capital • Political involvement, community involvement, home maintenance Mediators • Residential stability, parental well-being, neighborhood quality • Quality of housing and geographical location • Cost of housing, equity accumulation, house price appreciation Engelhardt 2009; Haurin et al. 2002; Galster et al. 2007; McCarthy et al. 2001

4. The State of Homeownership Source: US Census

5. Source: US Census

6. 25-30% Source: US Census

7. From Herbert et al. 2005

8. Why Gaps in Homeownership? Income, Wealth & Credit Constraints Household Formation Location Preferences Information Constraints (lack of information about process) Supply Side Constraints • Access to lending institutions • Access to affordable housing • Discrimination From Hibler et al. 2008; Haurin et al. 2007; Herbert et al. 2005

9. From Haurin and Morrow-Jones 2005

10. Subprime Boom and Bust Source: HMDA Data 2004-2008

11. Subprime Boom and Bust

12. Subprime Boom and Bust Source: Mortgage Bankers Association

13. Lessons from Subprime Lending Prevalence among low income and minority borrowers • 1/3 of the gains to homeownership among minorities from subprime • 2004 HMDA: high cost first lien 32.4% minority; 8.7% non-minority Adversely selecting borrower • 30-50% could have qualified for prime mortgages • Less educated consumers (75% subprime search; 90% prime) Lender differences/ Institutional determinants • Brokers and non-CRA institutions (IMC 5xs high cost in Cleveland) • Crowd out between subprime and affordable lending Calem, Gillen and Wachter 2004; Carr, James H. & J. Schuetz. 2001; Immergluck 2009; Lax et al. 2004; Nelson 2009

14. Homeownership Sustainability Options Perspective Triggering Events “Exogenous” shocks Change in income or life circumstance Change in payments or mortgage terms • Equity in the home “skin in the game” • Interest rates • Housing values • Transaction costs • Moderators • Credit constraints • Social support, education • Community characteristics • Lender/ institutional characteristics Avery et al. 1996

15. Performance of Low-Income and Minority Mortgages (LIMM) LIMM borrowers more likely to default than other borrowers • More external shocks, less equity, less information LIMM borrowers are less likely to refinance (prepay) when it would be cost-beneficial to do so • Poor credit quality, high LTV ratios, less mobility, less information Predictors • Credit score: less than 620 5 times more likely to default than borrowers with credit scores between 680-720. • High Loan to Value ratio: more likely to default • Lower income: more likely to default • High debt to income: may be more likely to default • Higher costs of loan: more likely to default Firestone et al. 2007; Alexander et al. 2002; Moulton 2009

16. Mortgage Outcomes: Institutions Matter! Lenders Matter • Loans originated by Third Party Originators more likely to default • Loans originated by community lenders less likely to default • Loan servicers matter Alexander et al. 2002; Moulton 2009

17. Mortgage Outcomes: Homebuyer Education? Freddie Mac’s “Affordable Gold” program (Hirad and Zorn 2002) • 40,000 borrowers • Face to face counseling reduced delinquency 41 percent • Face to face education reduced delinquency 23 percent • No reduction for telephone or book education/counseling Other Research? • Some evidence that counseled borrowers are more likely to refinance under “optimal” conditions; only face to face counseling or education Limitations • Selection • Education: the mode or the content? • Support, advice and relationships Hirad and Zorn 2002; Quercia and Spader 2008; Hartarska and Gonzalez-Vega 2005

18. Affordable Mortgage Programs: Community Reinvestment Act (CRA) Lending What is the CRA? • Covers insured depository lending institutions, lending within their assessment areas- where they have bank offices or branches. • Demonstrate “reinvestment,” 50% of which is a “lending test”; evaluated on lending to LMI borrowers with incomes below 80% AMI. Did CRA loans cause (or contribute to) the mortgage crisis? • Only 6 percent of high cost loans were eligible for CRA credit. • CRA loans have lower interest rates and more affordable terms. • CRA loans 70% less likely to default than similar subprime loans. • CRA loans less likely to default when made locally, in assessment areas. • CRA loans mostly originated by banks, rather than brokers Immergluck 2009; Laderman and Reid 2009; Canner and Bhutta 2008; Ding et al. 2008

19. Affordable Mortgage Programs: The Mortgage Revenue Bond (MRB) Program Source: HMDA Data, First Lien Owner-Occupied Originated Mortgages

20. Affordable Mortgage Programs: The Mortgage Revenue Bond (MRB) Program Lender Participation • Larger, local, FHA (+); High cost (-) Borrower Need Moulton 2009

21. Affordable Mortgage Programs: The Mortgage Revenue Bond (MRB) Program Mortgage Sustainability • Lower delinquency and foreclosure rates than other similar borrowers • Significant lender differences in delinquency and foreclosure Mortgage Affordability • Increase in MRB lending in an area, less likely to receive high cost mortgage 2004-2006 Next Steps • Homebuyer education • Targeting minority borrowers • Institutional networks and the MRB program

22. Concluding Thoughts Potential Benefits of Homeownership Homeownership Gaps Lessons from Subprime Lending Causes of Mortgage Delinquency Role of Affordable Mortgage Programs DISCUSSION

23. References & Resources Alexander, William P., Scott D. Grimshaw, Grant R. McQueen and Barrett A. Slade. 2002. Some Loans are More Equal than Others: Third Party Originators and Defaults in the Subprime Mortgage Industry. Real Estate Economics 30(4): 667-97. Avery, Robert, Raphael Bostic, Paul Calem and Glenn Canner. 1996. Credit Risk, Credit Scoring and the Performance of Home Mortgages. Federal Reserve Bulletin July 2006. Available online at: http://www.federalreserve.gov/pubs/bulletin/1996/796lead.pdf Canner, G., & Bhutta, N. 2008. Staff analysis of the relationship between the CRA and the subprime crisis. Memo to Sandra Braunstein, Director, Consumer and Community Affairs Division, Federal Reserve Board of Governors. Available online at http://www.federalreserve.gov/newsevents/speech/20081203_analysis.pdf Carr, James H. & J. Schuetz. 2001. Financial services in distressed communities: Framing the issue, finding solutions. Fannie Mae Foundation, August. Engelhardt, Gary, Michael Eriksen, William Gale, and Gregory Mills. 2009. What are the social benefits of homeownership? Experimental evidence for low-income households. Journal of Urban Economics. Forthcoming. Firestone, Simon, Robert Van Order and Peter Zorn. 2007. The Performance of Low-Income and Minority Mortgages. Real Estate Economics 35(4): 479-504. Galster, George, Dave E. Marcotte, Marvin B. Mandell, Hal Wolman, and Nancy Augustine. 2007. “The Impact of Parental Homeownership on Children’s Outcomes during Early Adulthood,” Housing Policy Debate, Vol. 18, No. 4, pp. 785-827. Hartarksa, Valentina, Claudio Gonzalez-Vega, and David Dobos. 2002. Credit Counseling and the Incidence of Default on Housing Loans by Low Income Households. Rural Finance Program, The Ohio State University. Haurin, Donald R., Toby L. Parcel and R. Jean Haurin (2002). “Does Homeownership Affect Child Outcomes?” Real Estate Economics, Vol. 30, No. 4, pp. 635-666.

24. References & Resources Haurin, Don and Hazel Morrow-Jones. 2006. The Impact of Real Estate Market Knowledge on Tenure Choice: A Comparison of Black and White Households. Housing Policy Debate. 17(4): 625-654. Herbert et al. 2005, Homeownership Gaps Among Low Income and Minority Borrowers, Available online at: http://www.huduser.org/Publications/pdf/HomeownershipGapsAmongLow-IncomeAndMinority.pdf Hilber, Christian A.L. and Yingchun Liu. 2008. Explaining the black–white homeownership gap: The role of own wealth, parental externalities and locational preferences. Journal of Housing Economics. 17: 152-174. Hirad, Abdighani and Peter M. Zorn. 2002. Pre-purchase Homeownership Counseling: A Little Knowledge is a Good Thing. Low Income Homeownership: Examining the Unexamined Goal. N. P. Retsinas and E. S. Belsky. Washington DC, The Brookings Institute: 146-174. Laderman, Elizabeth and Carolina Reid. 2009. CRA Lending During the Subprime Melltdown. Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act. San Francisco Federal Reserve Bank. Available online at: http://www.areaa.org/cms/cra_lending_during_subprime_meltdown.pdf. Lax, Howard, Michael Manti, Paul Raca and Peter Zorn. 2004. Subprime lending: An investigation of economic efficiency. Housing Policy Debate 15(3): 533-71. McCarthy, George, Shannon Van Zandt and William Rohe. 2001. The Economic Benefits and Costs of Homeownership.: A Critical Assessment of the Research. Research Institute for Housing America. Available online at: http://www.housingamerica.org/Publications/TheEconomicBenefitsandCostsofHomeownership:ACriticalAssessmentoftheResearch.htm Moulton, Stephanie. 2009. Originating Lender Localness and Mortgage Sustainability: An Evaluation of Delinquency and Foreclosure in Indiana’s Mortgage Revenue Bond program. Under Review. Nelson, Lisa. 2009. CRA Lending in the 4th District. A Look Behind the Numbers. Federal Reserve Bank of Cleveland 2(1). www.clevelandfed.org/communitydevelopment Quercia, Roberto and Jonathon Spader. 2008. Does Homeownership Counseling Affect the Prepayment and Default Behavior of Affordable Mortgage Borrowers? Journal of Policy Analysis and Management 27(2): 304-325.