Financing Affordable Housing in the US

1
Financing Affordable Housing in the US

• by
• Michael Stegman,
• MacRae Professor of Public Policy, Planning, and
  Business
• University of North Carolina at Chapel Hill
• Presented at National Affordable Housing
  Conference
• Affordable HousingMaking it Happen
• Innovations in Policy and Practice
• Sydney, Australia
• June 21-23, 2005

2
1. Housing Prices Have Been Rising Exponetially
3
The rich get richerhome equity rises but what
happens to affordability?
4
US housing prices rising faster than rental
value A housing bubble?
5
Nationally, affordability rising due to income
gains and historically low interest rates
6
But this is not true in some overheated markets
7
2. How are Lenders and the Government Dealing
with Affordability in High-Cost Markets?
8
Lenders are introducing new mortgage
productsOutstanding Questions Do these
products heighten default risk and fuel further
price increases?
9
Some of the newer mortgage products

• Forty Year Fixed Rate Mortgage
• Interest-Only Adjustable Rate Mortgage (IO)
• Interest-Only Hybrid Mortgage
• The Pay Option Mortgage Loan

10
How government is responding

• Downpayment assistance grants
• Builder/developer-linked down payment gifts tied
  to Government-backed mortgage loansindirectly
  finances the downpayment into the mortgage via a
  price increase
• Proposed Government-backed zero down payment, 30
  year fixed rate mortgage.

11
But zero down payment loan would significantly
raise default risk

• By design, anticipates about twice the proportion
  of home owners to go into foreclosure than is the
  case under Federal Governments mainstream
  low-downpayment mortgage program
• Congressional Budget Office projects defaults at
  1 of borrowers each year, with a cumulative
  default rate of more than 30 over 30-year loan
  term

12
3. Penetrating Emerging Market Requires New
Partnerships
13
Expanding lending opportunities to immigrants and
minorities creates new opportunities for
nonprofits

• The 21st Century Homebuyer Different needs,
  anxieties, preferences, understanding, levels of
  trust
• Emerging Trend Nonprofit providers as first
  point of contact, and conduit to mortgage
  originators
• Why Now?
• Minority homebuyers will be the majority of new
  homeowners
• The homeownership counseling industry is maturing
• Growth in the number of community-based
  nonprofits
• Emergence of one-stop homeownership centers
• New technology tools for education and mortgage
  preparation

14
New education /outreach approaches

• Need to think creatively use nontraditional
  intermediaries
• Freddie Mac created 100 pages of web content for
  consumers on homeownership and credit
• First Venue McDonalds Technology Centers
• Focus on minority communities
• Outreach effort to bridge the digital divide
• Facilitate the creation of cyber cafes in
  McDonalds
• Empower residents with information on financial
  literacy, use of computers and the web, and
  homeownership

15
What does it look like?
16
What does it look like?
17
4. The Rise of Subprime and Predatory Lending
18
Improved risk assessment technology expands
subprime lending, while victimizing the unwary

• In 2004, there was a record 530 billion in
  subprime originationsa 60 percent increase over
  the previous year, and a ten-fold increase in the
  past decade.
• Subprime lenders originated 19 percent of all
  mortgages in 2004, more than double the market
  share in 2003.
• The surge in subprime lending partially accounts
  for the significant rise in minority
  homeownership.

19
Improved risk assessment technology expands
subprime lending, while victimizing the unwary

• Accompanying this surge in lending to
  credit-impaired borrowers has been an epidemic of
  unethical, and in some cases, fraudulent, and
  illegal lending practices.
• Some recent headlines
• Predatory Lending and Foreclosure Fraud Impacts
  Minorities Most, Consumer Education, Feb. 18,
  2005
• Con Artists Play Troubling Game Grand Theft
  Home, Washington Post Saturday, June 4, 2005
• Ehrlich Signs Bill Targeting Foreclosure Scams,
  Washington Post Friday, May 27, 2005 Homeowners
  victimized by foreclosure resuce scam, Minnesota
  Public Radio, Oct. 22, 2003
• Predatory Lending in New Jersey The Rising
  Threat to Low-Income Homeowners, New Jersey
  Institute for Social Justice, Feb. 2002.