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A reasoned approach to affordable housing.

Homeownership trends have been signaling a growing need for affordable housing programs in this country. But the industry must find valid ways to get low-income borrowers into homes they can afford to keep.

AFFORDABLE HOUSING. It's a hot topic and a major focus for lenders, legislators, secondary market investors, insurers and housing advocates. It's also front-page news. Amid allegations of mortgage discrimination and with interest rates the lowest they've been in 20 years, a variety of legislative, economic and social forces have converged to create today's changing, sometimes volatile, affordable housing market.

Affordable housing has become a top priority for the industry, particularly for lenders, mortgage insurers and secondary market investors. Regulators are giving increased emphasis to Community Reinvestment Act (CRA) compliance, while legislators are considering proposals to expand and strengthen CRA requirements. Meanwhile, community housing advocates are pushing for more flexible underwriting guidelines to further increase homeownership opportunities for low- and moderate-income households.

All this affordable housing activity is occurring as Home Mortgage Disclosure Act (HMDA) studies alleging racial discrimination continue to surface. Many groups are calling for changes in lender practices and underwriting guidelines to correct perceived lending biases.

Why all this attention to affordable housing now? What do we mean by "affordable housing?" Who exactly needs affordable housing? How do we measure progress? Let's take a closer look at affordable housing by defining the needs and suggesting the goals. We examine the environment for affordable housing lending, highlighting concerns about the effects of the growing pressure on lenders and offering responsible approaches to effectively serve the housing needs of America's low- and moderate-income families.

Defining the need

The Joint Center for Housing Studies of Harvard University in this year's "State of the Nation's Housing" profiles the segments that were shut out of homeownership in the 1980s. The findings point to where the affordable housing need is greatest today. Specifically:

* For households headed by individuals from 25- to 34 years old, homeownership rates are down 10 percentage points since 1980. Only 33.1 percent of 25- to 29-year-olds were homeowners in 1992, compared with 43.3 percent in 1980; half of the households headed by someone aged 30 to 34 were homeowners in 1992 compared with 61.1 percent in 1980. In addition, 62.4 percent of household heads aged 35 to 39 were homeowners in 1992, compared with 70.8 percent in 1980, a decline of 8.4 percentage points.

* Compared with whites, the problem for blacks and Hispanics is worse. Ownership rates declined from 43.9 percent in 1980 to 42.3 percent in 1992, versus a 67.5 percent homeownership rate for whites.

* For single-parent households in the 25 to 34 age group, homeownership rates also dropped more than 10 percentage points, down from 31.8 percent homeownership in 1980, to 21.3 percent in 1992.

The Harvard study indicates that approximately 2.2 million more households would own homes today if homeownership rates had remained at 1980 levels. All the statistics point to a need for expanded access to mortgage credit, especially among younger households, minorities and those headed by single parents. These groups, in general, tend to be among the lower-income groups, generally at or below the median income.

All of us in mortgage finance acknowledge that the affordable housing need is real and the desire for homeownership strong. The challenges are also real. This explains the intense affordable housing focus on the legislative, regulatory and social fronts, and why everyone in mortgage finance wants and needs to do more going forward.

What's the goal?

Quite simply, the goal of affordable housing initiatives should be to improve homeownership rates among the underserved segments we have identified. The goal at the Mortgage Guaranty Insurance Corporation (MGIC), which is shared by many others, is to go one step further and not only improve homeownership rates among these groups, but to also ensure that the households have the ability to maintain homeownership over time.

Put another way, the goal should be twofold: To put people into homes and keep them there.

At MGIC, affordable housing is our business; it has been at the heart of the company's mission since it was founded. Today's affordable housing environment represents a unique opportunity to expand the homebuying market we have served since our inception.

The biggest barrier to putting people into homes is saving for a down payment and closing costs, which points to the need for low down payment mortgages. As a private mortgage insurer, the business of insuring low down payment mortgages is critical to expanding homeownership to the underserved potential homebuyers previously identified.

What's happening today?

We are currently operating in an environment where a majority of attention is being given to the first part of the affordable housing equation--putting people into homes. There is mounting pressure to increase affordable housing volume. This pressure comes from three main areas: CRA compliance, last year's government-sponsored enterprise (GSE) legislation and housing advocates.

It would appear that regulators are no longer satisfied with lenders' outreach and marketing efforts to demonstrate CRA compliance, but rather see increased origination volume as the best evidence of compliance.

The GSE legislation mandates that 30 percent of Fannie Mae's and Freddie Mac's loan purchases come from a combination of loans to those with incomes at or below 100 percent of the area median and mortgages to homeowners in central cities. This is a powerful force driving affordable housing volume today.

Finally, housing advocates are adding pressure to increase affordable housing originations. Theirs is a passionate mission to reduce the gap between the housing "haves" and "have nots," and in the process improve neighborhoods and the quality of life for low- and moderate-income families nationwide.

These three forces provide strong motivation for lenders and investors to develop affordable housing programs. Despite these strong motivations, there is a desire to expand CRA legislation even further to include nondepository institutions. We believe, however, that the solution to improve homeownership rates does not lie in more legislation.

The GSE legislation combined with CRA and HMDA reporting requirements is more than sufficient to motivate the entire mortgage lending industry--lenders, mortgage insurers, Fannie Mae and Freddie Mac--to do as much affordable housing business as possible. It's important now, though, to let the natural market forces work, at least for a while.

More legislation and regulation are not only unnecessary, but dangerous because it is likely to put even more pressure on volume (i.e., simply putting people into homes). To be truly successful, however, it is imperative that we also focus attention on the second part of the equation--keeping families in their homes, based on quality underwriting, pre- and post-purchase counseling and extra servicing support when necessary. This is because experience has shown that when the mortgage finance industry focuses on quantity of origination volume, without an equally strong commitment to quality, there are often negative consequences. Let's put today's situation in historical perspective.

Lessons from the 1980s

The affordable housing pressures and challenges we face today are not unlike the early 1980s. Today, as then, housing affordability is based on two main elements--down payment and monthly payment. While both are always important affordability issues, in the early 1980s, the bigger challenge was monthly payment due to high interest rates.

Today, the housing payment portion of the equation is more affordable than it has been in two decades, with the accumulation of down payment and closing costs representing the larger obstacle. Many people can't come up with the down payment--not even 5 percent--especially young households with low and moderate incomes. Such families often have the ability to make the monthly payments, but lack the down payment.

In the early 1980s, as is the case today, there was a need for creative approaches to improving affordability and getting people into homes. The industry responded with new products and programs that made the monthly payment affordable, such as graduated payment mortgages (GPMs), temporary buy-downs, and deeply discounted and negatively amortizing ARMs, where the risk was unknown.

At that time, there was a lack of understanding of the risk factors related to such untested programs. Because inflation had prevented serious losses prior to that time, there was little concern for risk of loss resulting from foreclosures. Underwriting concerns, therefore, were largely ignored.

What was the result? People were put into homes they couldn't afford. There were abuses of well-intended programs. And, when economies collapsed in the energy states, there were widespread foreclosures. Real estate markets were devastated. Lenders, investors and mortgage insurers suffered huge losses, and families lost their homes.

Given our experience in the 1980s, the question today is, how can the mortgage finance industry balance the pressure to do more affordable housing business with the need to originate good-quality mortgages? Will we repeat the same mistakes, or will we develop necessary safeguards to ensure a more-successful result this time?

A delicate balancing act is required. Those who suffered losses from the 1980s are reluctant to expand guidelines too quickly for fear of experiencing similar disastrous results. Our previous experiences will undoubtedly influence affordable housing underwriting today. However, that should not constrain our efforts to "think outside the square" when it comes to underwriting.

This will be a learning process. The key will be to incorporate the lessons learned in the 1980s while adopting a fresh approach to affordable housing underwriting in the future. This is one of the big challenges we face going forward.

Keys to success

Based on MGIC's affordable housing experience and working with lenders, community-based organizations, investors and others, we believe four ingredients are key for developing successful programs.


Those who approach affordable housing business as an opportunity, rather than a regulatory problem, are more likely to succeed. It's important to recognize that there are currently potential homebuyers who are not being adequately served. In today's low interest rate environment, the opportunity has never been better to reach these households and make some meaningful progress in improving homeownership rates.


Knowledgeable participants are the second key ingredient for successful affordable housing programs. Such well-informed homebuyers understand what it takes to qualify for a mortgage and how to maintain their homeownership. Borrower counseling has proven an effective tool in this regard.

Knowledgeable lenders, secondary market investors, mortgage insurers and housing advocates understand the needs of local communities and the households they are trying to reach, as well as the factors that drive loan performance. The amount of borrower down payment, debt ratios and credit history, among others, are all important variables in determining loan performance.

Meanwhile, the value of borrower counseling and other factors as offsets to expanded guidelines on these variables is untested. Knowledge will be obtained through experimentation and with time, as loan performance data is developed and analyzed. It is important to acknowledge that affordable housing programs with expanded guidelines carry different, if not higher, risk. Risk that is acknowledged, understood and managed translates into opportunity.


How do lenders, brokers, mortgage insurers and other mortgage lending participants become more knowledgeable of the market? The best way is to get involved locally with community and housing groups to better understand the needs of potential homebuyers, identify important issues and develop solutions.

Affordable housing, at the very least, represents an expansion of an existing market and, in many respects, a whole new market. We are reaching out to lower-income groups than we have traditionally served, and to neighborhoods with higher percentages of minorities and single-parent households who often are first-generation homebuyers with unique needs and varying cultural values.

We have already learned much about the market we are trying to reach. For example, we continue to be surprised at the number of low- and moderate-income households that qualify for homeownership under existing standards, but simply didn't know they qualified. Often, the families would have remained unaware of their potential for homeownership except for special marketing and outreach efforts. The positive results of such efforts serve as added testimony to the fact that certain segments of the housing market have been underserved. Such situations demonstrate the importance of expanding affordable housing marketing and consumer education efforts.

High marks this year should be given to Fannie Mae for its proactive consumer information campaign that educated thousands of young families, minorities and those of lower incomes about the "how to's" of becoming homebuyers. Continued efforts in this area are crucial.

We also know that many of the potential borrowers we hope to serve do not have, and are not likely to accumulate, the minimum 5 percent cash down payment required under current conventional programs. Furthermore, many such borrowers may not have established credit, or long employment with the same employer, and very likely could have nontraditional savings patterns.

To better serve this market segment, new products and flexible underwriting approaches are needed. While the "3/2" programs offered through Fannie Mae and Freddie Mac offer part of the answer, market feedback suggests additional approaches may be needed.

Close market involvement also provides the important benefit of enhancing communication between lenders and community housing groups. It facilitates feedback on new developments, program issues and results. Adjustments can then be made quickly. A good communication link is vital in a new, developing market such as affordable housing.


While we may have the right attitude, have researched the market to understand its needs and have well-designed products, we still won't be able to improve and maintain homeownership rates unless we develop true affordable housing partnerships. Such partnerships help prevent potential abuses to well-intended programs and help break down additional barriers to homeownership.

Today's affordable housing environment is too often characterized by intimidation and negotiation. Housing advocates may choose intimidation as a means to get lenders to expand mortgage programs and underwriting guidelines used to originate loans. Lenders negotiate with secondary market investors and mortgage insurers on the terms of purchase or insurability. This atmosphere too often breeds distrust and puts the various participants into a win/lose situation.

A better approach is to create real partnerships among the various groups having a stake in the outcome. By this, we mean creating incentives for all participants to make affordable housing initiatives work. Again, making them work means putting people into homes and keeping them there.

There are many examples of such partnerships today. Let's briefly discuss two that MGIC has participated in.

The first is AFFORDS, a $10 million lease/purchase program, a unique public/private partnership in Madison, Wisconsin, involving MGIC, Robert W. Baird & Co., Inc. of Milwaukee, the City of Madison, Wisconsin, Heartland Properties, Fannie Mae, The Northwestern Mutual Life Insurance Co., Norwest Bank, local lenders and Realtors.

AFFORDS is an example of the kind of innovative partnership that can be developed using existing mortgage products and underwriting standards. The unique feature of the program is that it enables potential homebuyers to "lock-in" the affordable monthly payment today and then accumulate the down payment and closing costs with time.

Families prequalified by MGIC and the lender select homes they desire to purchase and move into the homes as lessees. The city purchases the selected homes and then leases them to the families for about three years. Each month a portion of the lease payment is set aside by the city for the future down payment and closing costs.

Counseling is a key component to the program. AFFORDS borrowers receive home maintenance education and financial counseling throughout the entire lease period. By the time the lease period is over, the families understand the responsibilities of homeownership and have demonstrated both a commitment to the property and the ability to make monthly payments.

AFFORDS takes a long-term approach to counseling by providing continued support to the families even after they have moved into their homes. Although technically this is not post-purchase counseling, because the households are leasing the properties, in practice, the intent and effect are similar.

Such counseling is extremely important in helping low- and moderate-income families to maintain homeownership. Because many low down payment borrowers buy homes and then have little or no cash reserves, ongoing communication with the borrower helps identify and possibly resolve any financial problems sooner rather than later.

MGIC in partnership with the National Training and Information Center, (NTIC) based in Chicago, this year is piloting a post-purchase counseling program called "Preserving Homeownership" for community housing groups. The program provides community-based organizations with the skills and information necessary to counsel homebuyers who are in financial trouble and behind on their mortgage payments. The program is based on the philosophy that although financial difficulties are sometimes inevitable, losing one's home is often preventable. Preserving Homeownership represents a tangible example of the kinds of proactive efforts necessary to help keep families in their homes.

Other noteworthy examples of effective post-purchase homeowner assistance include extra servicing support where there is early contact with the household (often through the borrower counseling group) should a payment be missed and emergency relief funds that provide cash assistance to homeowners for emergency home repairs or medical expenses.

A final innovative affordable housing example is the "Special Edition HOME Program," in Milwaukee. This shared-risk program involves the Wisconsin Housing and Economic Development Authority (WHEDA), MGIC and Fannie Mae. Under the program, expanded guidelines are being made available to targeted census tract households in Milwaukee.

The program will allow purchase of homes with a 3 percent down payment or even less in certain instances. Housing payment ratios are being liberalized in instances where households have been paying rent at the higher level, and verification of cash is waived in recognition of the cultural practices of the constituents. These accommodations in underwriting rules meet a market need without putting any of the program partners at undue risk.

This program is possible because in return for the expanded underwriting guidelines, WHEDA has agreed to share in potential losses under the program with MGIC and Fannie Mae. WHEDA is at risk for 1 percent of the aggregate loan volume, which will be used to reimburse MGIC and Fannie Mae for a portion of the total loss on each loan.

All the program participants--the lender, mortgage insurer and investor--have a vested interest in making the program successful. This is an example of how true partnerships can further expand underwriting guidelines, without pushing disproportionate risk onto one or more participants.

In summary, the need for affordable housing is great. The evidence is seen in the declining trend in homeownership rates since 1980 among young households and minorities. The mortgage lending community has a great opportunity to reverse this trend, given the current low interest rates.

There are strong regulatory policies and social forces that are motivating the mortgage lending community to respond to this need. Unlike the 1980s, however, our goal must encompass not only putting people into homes, but also keeping them there.

The solution does not lie with expanded or strengthened legislation. Rather, the mortgage lending community must now be given the opportunity to respond positively and prudently to affordable housing pressures that are already great.

We recognize that we are servicing a new and expanded market that must be researched to identify and understand the needs, so that we can develop the products, programs and systems to meet those needs. The various industry participants who are committed to achieving the goal of expanded homeownership rates must all work together to share their knowledge, resources and expertise.

To the extent achieving this goal requires expansion of risk parameters into uncharted waters, participants will need to share the risk of loss. This type of partnership ensures that all parties benefit from well-designed, prudent approaches, most importantly the low- and moderate-income households that will join the ranks of homeowners.

Gordon H. Steinbach is executive vice president of affordable housing at MGIC, headquartered in Milwaukee, Wisconsin.
COPYRIGHT 1993 Mortgage Bankers Association of America
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Author:Steinbech, Gordon H.
Publication:Mortgage Banking
Date:Sep 1, 1993
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