What Have we Learned about Homeownership?

Lessons from Current Research

Stephanie Moulton, PhDJohn Glenn School of Public Affairs

The Ohio State Universitymoulton.23@osu.edu

Overview1. Homeownership Benefits

• Types of benefits• Reasons for benefits

2. The State of Homeownership• Homeownership trends & gaps• The subprime boom & bust

3. Homeownership Sustainability• Causes of mortgage delinquency and default• The role of homebuyer education, lenders and nonprofits

4. Homeownership Affordability• CRA and affordable lending programs• The MRB program

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

The State of Homeownership

Source: US Census

Source: US Census

Source: US Census

25-30%25-30%

From Herbert et al. 2005

Why Gaps in Homeownership?

From Hibler et al. 2008; Haurin et al. 2007; Herbert et al. 2005

1. Income, Wealth & Credit Constraints2. Household Formation3. Location Preferences4. Information Constraints (lack of information about

process)5. Supply Side Constraints

– Access to lending institutions– Access to affordable housing – Discrimination

From Haurin and Morrow-Jones 2005

Subprime Boom and Bust

Source: HMDA Data 2004-2008

Subprime Boom and Bust

Subprime Boom and Bust

Source: Mortgage Bankers Association

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

Homeownership Sustainability

Options Perspective• Equity in the home “skin

in the game”• Interest rates• Housing values• Transaction costs

Triggering Events

• “Exogenous” shocks• Change in income or life

circumstance• Change in payments or

mortgage terms

Avery et al. 1996

Moderators

• Credit constraints• Social support, education• Community characteristics• Lender/ institutional characteristics

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

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

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 relationshipsHirad and Zorn 2002; Quercia and Spader

2008; Hartarska and Gonzalez-Vega 2005

• 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

Affordable Mortgage Programs: Community Reinvestment Act (CRA) Lending

Immergluck 2009; Laderman and Reid 2009; Canner and Bhutta 2008; Ding et al. 2008

Affordable Mortgage Programs: The Mortgage Revenue Bond (MRB) Program

Source: HMDA Data, First Lien Owner-Occupied Originated Mortgages

Affordable Mortgage Programs: The Mortgage Revenue Bond (MRB) Program• Lender Participation

• Larger, local, FHA (+); High cost (-)• Borrower Need

Moulton 2009

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

Concluding Thoughts

• Potential Benefits of Homeownership• Homeownership Gaps• Lessons from Subprime Lending• Causes of Mortgage Delinquency• Role of Affordable Mortgage Programs

DISCUSSION

References & ResourcesAlexander, 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.

References & ResourcesHaurin, 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.