The quest to raise homeownership rates. (Cover Report: Industry Trends).Studies of the most effective ways to raise homeownership rates suggest direct cash assistance gets the most bang for the buck Buck
after murder of his master, leads wolf pack. [Am. Lit.: The Call of the Wild]
See : Dogs
clever and temerarious dog perseveres in the Klondike. [Am. Lit.: Call of the Wild]
See : Resourcefulness . The simulations of home-buying behavior show cash assistance outstrips the effectiveness of the lower mortgage rates brought about by conforming loans Conforming loans
Mortgage loans that meet the qualifications of Freddie Mac or Fannie Mae, which are bought from lenders and issued as pass-through securities. .
A POLICY PRIORITY IN THE UNITED STATES United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. IS to increase the rate of homeownership. To achieve that objective, policy-makers rely on a host of policies and programs that reallocate Verb 1. reallocate - allocate, distribute, or apportion anew; "Congressional seats are reapportioned on the basis of census data"
allocate, apportion - distribute according to a plan or set apart for a special purpose; "I am allocating a loaf of billions of dollars of resources. Several of these policies and programs try to increase homeownership by reducing mortgage rates. More specifically, federal sponsorship for Fannie Mae Fannie Mae: see Federal National Mortgage Association. and Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. is one of the major tools that policymakers rely on to reduce mortgage rates.
Given the public resources involved, it seems reasonable for the general public, mortgage and housing professionals, and policymakers to consider the degree to which the mortgage rate reduction produced by Fannie Mae and Freddie Mac increases homeownership. Most of the evidence reviewed in this article finds that mortgage rate changes need to be around 2 percentage points before they have what many would consider a modest but not trivial TRIVIAL. Of small importance. It is a rule in equity that a demurrer will lie to a bill on the ground of the triviality of the matter in dispute, as being below the dignity of the court. 4 Bouv. Inst. n. 4237. See Hopk. R. 112; 4 John. Ch. 183; 4 Paige, 364. effect on homeownership. Because Fannie Mae and Freddie Mac reduce mortgage rates on the order of 20 to 50 basis points, the effect of their rate reduction on homeownership is likely to be quite modest although, again, not trivial.
Moreover, the evidence presented here also suggests that a more direct method of subsidizing potential homeowners would have a larger effect on homeownership (while using the same amount of resources) than the reductions in mortgage rates attributed to Fannie Mae and Freddie Mac.
Several caveats are in order when considering these conclusions. Analysis of homeownership and mortgage rates is complicated by a number of factors, including the complexity of the decision to own and data concerns. As a result, the studies summarized all have important weaknesses. In addition, Fannie Mae and Freddie Mac could increase homeownership through means other than lowering rates, such as encouraging reductions in down payments.
Moreover, the two firms have several explicit legislative objectives, and "increasing homeownership" is not one of them. Even with these limitations, the evidence discussed here appears relevant for the existing, vigorous public discussion centered on mortgage rates, homeownership and Fannie and Freddie's activities.
Mortgage rates and homeownership
The 2002 annual report of the Federal Reserve Bank of Minneapolis The Federal Reserve Bank of Minneapolis covers the 9th District of the Federal Reserve, including Minnesota, Montana, North and South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan. features a discussion of how changes in mortgage rates affect homeownership (available online at www. minneapolisfed.org See .org.
(networking) org - The top-level domain for organisations or individuals that don't fit any other top-level domain (national, com, edu, or gov). Though many have .org domains, it was never intended to be limited to non-profit organisations.
RFC 1591. ). I have summarized the material from that discussion in this article, focusing on simulation evidence. Specifically, analysts use two types of simulations to examine how changes in mortgage rates affect homeownership. In the first type, they simulate simulate - simulation the loan underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. process to determine how mortgage rates affect the ability of households to qualify for a mortgage.
In this underwriting simulation approach, analysts choose a reference house. They then review financial data to determine the percentage of households or families that would qualify for a mortgage on the reference house using specified mortgage qualification criteria and a prevailing mortgage rate. The analysts can then adjust the qualification criteria and the mortgage rate to examine how the change alters the number of households or families that can qualify for a mortgage on the reference house.
Examples of this approach include "Who Could Afford to Buy a House in 1995," by Howard Howard, English noble family. Landowners in Norfolk from the 13th cent., the Howards obtained the duchy of Norfolk through the marriage of Sir Robert Howard to Margaret Mowbray, daughter of Thomas Mowbray, 1st duke of Norfolk. Savage, published by the U.S. Census Bureau Noun 1. Census Bureau - the bureau of the Commerce Department responsible for taking the census; provides demographic information and analyses about the population of the United States
Bureau of the Census in 1999, and "The Potential and Limitations of Mortgage Innovation in Fostering Homeownership in the United States The homeownership rate in the United States in 2005 remained similar to that in other post-industrial nations with 68.9% of all occupied housing units being occupied by the unit's owner. ," by David Listokin and colleagues, published in the Fannie Mae Foundation's Housing Policy Debate in 2001.
A problem with the underwriting simulations just discussed is they do not account for the likelihood that a household will actually want to buy a house. For example, some renters may not want to own a home even if they could qualify for a loan. To address that limitation, a number of analysts take a second "tenure-choice" approach in which they model the probability of a household owning a home as a function of several factors (which I greatly simplify in this article).
In a recent example, the variables used in such modeling include estimates of the relative price of housing; an estimate of the permanent income of the household; demographic variables such as household size, age, race and gender; and an estimate of whether a household was prevented, or constrained con·strain
tr.v. con·strained, con·strain·ing, con·strains
1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force.
2. , from buying a desired house because it could not meet a variety of underwriting guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. .
After estimating all of the necessary variables, the authors calculate the probability of ownership using various down payment requirements, housing debt-to-income requirements and mortgage rates. They then compare the probability of ownership resulting from the various scenarios. The comparisons indicate how changes in mortgage standards and mortgage rates affect the probability of ownership.
Examples of this approach can be found in "The Impacts of Affordable Lending Efforts on Homeownership Rates," by Roberto Quercia and colleagues for Freddie Mac in 2000, and "Implications of Privatization privatization: see nationalization.
Transfer of government services or assets to the private sector. State-owned assets may be sold to private owners, or statutory restrictions on competition between privately and publicly owned : The Attainment of Social Goals," by Susan Wachter and colleagues for several government agencies in 1996.
Figure 1 summarizes the results of six simulations conducted by many of the analysts already mentioned and using both simulation methods (the extended version of this article provides important details about differences and similarities between the simulations and discusses some additional analysis).
Three of the simulations examined a reduction in mortgage rates of 2 percentage points while a fourth examined a reduction of 3 percentage points. These reductions had virtually no effect on homeownership for African-American households, and would increase homeownership for all households by roughly 50 basis points (the range was from 80 basis points to -10 basis points).
The other two simulations examine mortgage rate increases, one of 2 percentage points and one of 50 basis points. The larger increase had virtually no effect on homeownership. The smaller mortgage rate increase had the largest effect on homeownership of all the simulations, reducing homeownership by roughly 3 percentage points for African-American households and around i percentage point for all households. However, when updating this last simulation, the authors noted that a technical weakness in methodology had led it to overestimate o·ver·es·ti·mate
tr.v. o·ver·es·ti·mat·ed, o·ver·es·ti·mat·ing, o·ver·es·ti·mates
1. To estimate too highly.
2. To esteem too greatly. effects on homeownership.
By way of context, 1 percent of renting households in 2000 equaled roughly 360,000. The average annual change in homeownership rates from 1960 to 2001 is 20 basis points. The average annual change in homeownership rates from 1995 to 2001 is 80 basis points.
What explains the central tendency of these results, which some might find smaller than expected? Simply put, changes in mortgage rates may not address all the barriers to homeownership for many households.
A lower mortgage rate allows more households to meet debt-to-income standards and could induce in·duce
1. To bring about or stimulate the occurrence of something, such as labor.
2. To initiate or increase the production of an enzyme or other protein at the level of genetic transcription.
3. a household to decide to buy. But a number of factors beyond mortgage qualification standards influence the ownership decision, including income, the relative price of ownership and demographic factors such as age and family structure. And, most important, many households in the simulations also appear to have insufficient cash to pay a standard down payment and closing costs Closing Costs
The numerous expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, .
According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the simulations conducted by the Census Bureau, renting households typically have both wealth and income constraints CONSTRAINTS - A language for solving constraints using value inference.
["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. . In the Census sample, 70 percent of renters have an inability to pay a down payment and closing costs, and too little income to meet debt-service requirements. Only 2 percent of renters are constrained by income alone.
The authors of the simulations conducted for Freddie Mac also found that limited wealth prevents lower rates from having a large effect on homeownership.
The authors note, "Consistent with the literature, the down payment requirement is a greater detriment Any loss or harm to a person or property; relinquishment of a legal right, benefit, or something of value.
Detriment is most frequently applied to contract formation, since it is an essential element of consideration, which is a prerequisite of a legally enforceable contract. to home purchase than the income requirement. Thus, lowering the cost of borrowing does not necessarily allow more people to purchase, once the down payment requirement becomes binding. For instance, although the percentage of income-constrained households decreases as a result of a 200 basis point drop from 8 percent to 6 percent in the interest rate, the percent of people that could actually buy a house remained the same because the percentage of down payment--constrained households remained unchanged. This implies that there is a significant overlap o·ver·lap
1. A part or portion of a structure that extends or projects over another.
2. The suturing of one layer of tissue above or under another layer to provide additional strength, often used in dental surgery.
v. between the two constrained measures. Because lack of wealth to meet the necessary down payment is the dominant constraint Constraint
A restriction on the natural degrees of freedom of a system. If n and m are the numbers of the natural and actual degrees of freedom, the difference n - m is the number of constraints. , most households that are income-constrained are also wealth-constrained. However, the reverse is not the case.
The issue of credit quality
Of course, mortgage lenders also consider credit quality when making loans. The borrowers may not qualify for a loan because of their credit quality or, perhaps more likely, they will not meet the higher down payment or mortgage rate the lender requires to compensate for low credit quality. It is important to note, therefore, that none of the simulations considers credit quality. As a result, some of the households that qualify for a mortgage with the lower rate in the simulation may not actually qualify because of a low credit score.
Suggesting the potential importance of credit quality, research by Stuart Rosenthal for the Research Institute for Housing America (RIHA RIHA Research Institute for Housing America
RIHA Roanoke Island Historical Association (North Carolina, USA)
RIHA Réseau Indépendant d'Hébergeurs Autogerés
RIHA Rock Island Housing Authority (Illinois) ) found that removal of credit constraints could increase the home-ownership rate by as much as 4 percentage points. A paper prepared for the Millennial Housing Commission The Millennial Housing Commission was created by Congress in 2000 as part of the FY 2000 Appropriations legislation. The Commission was directed by Congress to conduct a study that examines the importance of housing, particularly affordable housing, to the infrastructure of the United by Michael Collins Michael Collins is the name of:
tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es
1. To examine methodically by separating into parts and studying their interrelations.
2. Chemistry To make a chemical analysis of.
3. Home Mortgage Disclosure Act (HMDA HMDA Hexamethylene Diamine (chemistry)
HMDA Hitchhiker Motorized Door Assembly
HMDA High Mobility DGM Assemblage
HMDA Home Mortgage Disclosure Act of 1974 ) data and found that poor credit history is the most frequently cited reason by mortgage originators for the denial of single-family mortgages.
The simulations, not surprisingly, have other weaknesses. Some of the data used in the analysis comes from surveys. Survey respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy. may not correctly report the value of their assets or their incomes. In addition, the simulations reflect how mortgage rate changes or mortgage qualification standards affect households at a point in time. An increase in mortgage rates or a down payment requirement may delay, but not prevent, a household from owning a home.
The level and change in mortgage rates used in the simulations also seem to affect their results. Nonetheless, such simulations seem to be among the best available information on how mortgage rates affect homeownership. (Another analysis by professors Painter and Redfearn of the University of Southern California The U.S. News & World Report ranked USC 27th among all universities in the United States in its 2008 ranking of "America's Best Colleges", also designating it as one of the "most selective universities" for admitting 8,634 of the almost 34,000 who applied for freshman admission , using a completely different methodology, also found little effect on homeownership from changes in mortgage rates.)
With this information as background, I can provide some context to the mortgage rate changes credited to Fannie Mae and Freddie Mac.
Mortgage rate reductions by GSEs
One aspect of federal policy to increase homeownership rates is to reduce mortgage rates through interventions in secondary mortgage market activity. The federal government uses two distinct types of institutions active in secondary mortgage markets to lower mortgage rates. I focus on the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, because of the greater scope of their activities. Fannie and Freddie have financed more mortgages than Ginnie Mae Ginnie Mae: see Federal National Mortgage Association. , and guarantee both full and timely repayment of funds to investors.
As is well known, Fannie Mae and Freddie Mac are privately owned, publicly traded firms. At the same time, observers see them as "sponsored" by the federal government because of their public attributes, and this sponsorship reduces their costs. Perhaps most important, the implied guarantee on Fannie Mae and Freddie Mac debt that results from sponsorship reduces their borrowing costs by making securities safer and more liquid.
Because they have lower costs of raising funds, the GSEs can pay a higher price for mortgages than non-GSE competitors, thereby reducing the interest rate on mortgages while still earning sufficient returns to attract capital. In this way, the lower cost made possible by federal sponsorship can work its way into lower mortgage rates for households.
To estimate the degree to which the GSEs lower mortgage rates, analysts examine the difference in rates between conforming mortgages (those eligible for purchase by the GSEs) and jumbo mortgages In the United States, a jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. , while trying to hold other factors constant. According to the most recent summaries of the research, analysts estimate that Fannie Mae and Freddie Mac lower mortgage rates between 20 and 50 basis points, with more recent estimates analyzing more current data generally falling toward the lower end of the range. A reduction in mortgage rates of around 20 to 50 basis points is, of course, considerably lower than the 2 percentage point rate change discussed earlier and thus should have a smaller effect on homeownership.
Given their methodology of examining a wide range of mortgages, analysts believe that the GSEs distribute their assistance broadly, which, in turn, helps to explain why the estimated mortgage rate reductions are relatively small per household. GSEs do not, for example, provide assistance solely to renters unable to become homeowners without GSE GSE
general somatic efferent system. help.
Data and analysis on first-time homebuyers First-Time Homebuyer
An IRA owner who is exempt from the early-distribution penalty (which applies to IRA distributions that occur before the IRA owner reaches age 59.5) for distributing funds from his or her IRA to buy, build, or rebuild a home when having had no interest in a from the U.S. Department of Housing and Urban Development (HUD Hud (hd), a pre-Qur'anic prophet of Islam. Hud unsuccessfully exhorted his South Arabian people, the Ad, to worship the One God. ) are suggestive sug·ges·tive
a. Tending to suggest; evocative: artifacts suggestive of an ancient society.
b. in this regard. The percentage of home-purchase loans financed by the GSEs that go to first-time buyers first-time buyer n → persona que compra su primera vivienda
first-time buyer n → personne achetant une maison ou un appartement pour la première fois
first-time buyer , particularly African Americans African American Multiculture A person having origins in any of the black racial groups of Africa. See Race. or Hispanics, is smaller than the percentage in the overall market and for Federal Housing Administration-insured (FHA-insured) loans (see Figure 2).
The GSEs' limited role in the first-time homebuyer market may reflect the fact that the majority of mortgages Fannie Mae and Freddie Mac finance have down payments exceeding 20 percent, even when borrowers have lower incomes. For example, HUD's analysis of the GSEs' funding of affordable loans, published in April 2002, found that "53 percent of the home loans purchased by Fannie Mae in underserved areas during 2000 had a more than 20 percent down payment, compared with [percent] of all home loans purchased by Fannie Mae."
Simulation evidence on cash assistance and down payment reductions
To provide additional context for the relationship between mortgage rate changes and homeownership, the simulations I reviewed compare the effect of mortgage rate reductions with other policy alternatives. Both underwriting and tenure-choice simulations review how reducing mortgage down payments cart affect the number of households that own homes. They find that down payment reductions have larger effects than mortgage rate reductions.
The underwriting simulations find that moving from a 5 percent down payment to a no-down-payment standard increases the percentage of all renters who can become owners by between 2 and 2.5 percentage points, and the percentage of African-American renters by between 1 and 2 percentage points.
Some of the tenure-choice simulations find even larger effects. In one case, moving from a percent to a zero percent down payment raised the probability of ownership by 4.5 percentage points for all households and percentage points for African-American households.
In this context, it is important to note that other aspects of the GSEs' operations beyond mortgage rate reductions can reduce the cost of buying a house. For example, the GSEs have special programs under which they will fund mortgages with down payments ranging from 3 to zero percent. (They have also relaxed other mortgage qualification standards.) Based on data provided in HUD's 2002 review of the GSEs' affordable loans, I calculate that in 1997, mortgages with down payments of equal to or less than percent equaled 2.5 percent of the home-purchase mortgages the GSEs financed. By 2000, the percentage had risen to 5.1 percent of the home-purchase mortgages the GSEs financed.
The earlier caveats about interpreting the simulation results apply for reviews of down payment changes as well. The absence of credit-risk data in these simulations, for example, may reduce the accuracy of the results. Those bearing the risk of the mortgage may want borrowers to have a higher credit score to compensate for the lower down payment.
The underwriting simulations also examine how providing lump-sum cash assistance to renters affects their ability to qualify for a mortgage. They find that such assistance can have a larger effect than either a down payment reduction or a mortgage rate reduction.
Cash payments starting around $5,000 have larger effects than other options on the ability of renting households to purchase a modestly priced home. One simulation found that a $5,000 payment increases the percentage of all renters who can buy a modestly priced home by 11 percentage points. (The percentage point increases are 13 and 7 for African-American and Hispanic Hispanic Multiculture A person of Mexican, Puerto Rican, Cuban, Central or South American, or other Spanish culture or origin, regardless of race Social medicine Any of 17 major Latino subcultures, concentrated in California, Texas, Chicago, Miam, NY, and elsewhere households, respectively.) A payment of $10,000 per household has an effect almost twice as large.
It could be that the larger effect of the cash payment, as compared with the mortgage rate reduction, simply reflects a greater subsidy subsidy, financial assistance granted by a government or philanthropic foundation to a person or association for the purpose of promoting an enterprise considered beneficial to the public welfare. . To examine that potential, I assume that a direct cash assistance program would receive the same subsidy that Fannie Mae and Freddie Mac receive.
Analysts at the Congressional Budget Office The Congressional Budget Office (CBO) is responsible for economic forecasting and fiscal policy analysis, scorekeeeping, cost projections, and an Annual Report on the Federal Budget. The office also underdakes special budget-related studies at the request of Congress. estimate that Fannie and Freddie received $8.3 billion in average subsidy annually from 1995 to 2000 (the GSEs dispute this estimate). I assume the program would provide $10,000 per renting household. Thus, the program would serve 830,000 households a year. In three years, the Years, The
the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109]
See : Time direct subsidy program would assist 2.5 million renting households.
There were 105 million households in the United States as of 2000, according to the Census Bureau, with 69.8 million homeowners. A direct subsidy program serving 2.5 million households over three years would, all else equal, increase the homeownership rate by 2.4 percentage points. Of course, this estimate is not particularly sophisticated. Nonetheless, it suggests that a direct subsidy program to address households' inability to qualify for a mortgage could materially increase homeownership in a short period of time.
This direct-subsidy approach also appears consistent with President Bush's plan to increase minority homeownership. The Bush plan argues that the single biggest barrier to homeownership, particularly for minority households, is accumulating funds for a down payment. To help address that barrier, the Bush plan builds upon existing efforts to provide grants to households to pay for down payments and closing costs, among other efforts.
[FIGURE 1 OMITTED]
Figure 2 First-Time Homebuyers, 1997-1999 As a Percentage of First-Time As a Percentage of FHA-Insured Home- Homebuyers All Home Purchases Purchase Loans All 41 81 African American and Hispanic 11 27 As a Percentage of First-Time GSE-Financed Home- Homebuyers Purchase Loans All 25 African American and Hispanic 3 SOURCE: AUTHOR'S CALCULATIONS BASED ON HUD DATA
Ron Feldman is assistant vice president with the Federal Reserve Bank of Minneapolis. The views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.