American Banker  |  Wednesday, January 7, 2009

By Orson Aguilar and Faith Bautista

As the presidential inauguration day draws near, it is increasingly clear that bailouts and government guarantees are unlikely to be successful unless government assistance is focused on the ten million or more American homeowners who are in trouble and the millions of jobs than can be created directly and indirectly through homeownership.  Many believe that President Bush was not wrong in promoting homeownership.  But we have learned that this cannot be achieved without careful government scrutiny, guidance and regulation of all industries that participate in the homeownership chain from mortgage brokers, to investor pools, to homebuilders.  

President Bush’s former Chief Economic Advisor Glenn Hubbard may have the best idea yet on how to create a stable homeownership society that does not depend on subprime lending.  His idea of a below market rate, thirty year fixed rate mortgage guaranteed by the government and available for both present homeowners and new homeowners, has much merit.   

This concept could create three to five million new jobs over the next three years in construction and in the industries related to homeownership such as appliances and furniture. 

The problem is that this proposal will, in its presently conceived form, primarily benefit the affluent and could have little or no impact on declining home prices and the preservation of low/moderate income neighborhoods.  “Stealing” from the Bush playbook, we would propose that the Obama administration, with special input from Barney Frank and Sheila Bair, devise the following plan for the next three years ending in 2011: 

• For all families at 120% or below median income, a thirty to fifty year fixed rate government guaranteed mortgage be made available at a maximum of 4.5% or 200 basis points above the rate of return for ten year Treasury notes (presently initially 2.2%), whichever is lower.
• These below market fixed-rate loans be available only up to the median regional home price.
• To partially equalize the disparity in tax benefits for homeownership between the seventy percent of Americans who live from paycheck-to-paycheck and America’s most affluent, all homeowners at 120% or below median income be allowed to opt for a $5,000 per annum tax credit rather than itemize their home deductions. 
• To ensure that homeowners have equity in their homes but at the same time have sufficient funds to meet down payment requirements, the lender be allowed to take a lien on the $5,000 dollar annual federal tax credit up to an amount that satisfies the down payment requirement. 

 
But you may ask what about the affluent American household?  Our answer is if there are sufficient funds, they too can be beneficiaries of this program.  Very affluent homeowners, for example, already get up to $30,000 dollars a year in tax benefits from the value of their mortgage interest and real estate tax deductions.  As for participating in the rest of the program, the government could limit the size of the mortgage eligible for the government guarantee at below market rates to mortgages that do not exceed the regional market price and allow the remainder of the mortgage to be financed at market rates.   

A disproportionately large percentage of homeowners facing default or foreclosure, face such difficulties due to subprime and/or exotic adjustable rate mortgages, including option ARMs and teaser rates.  The proposed program would make these types of instruments generally unnecessary.  In particular, they would become unnecessary if the government required lenders to use alternative credit scoring based upon for example, regular rental and utility payments.  Further, we should develop a method by which banks could ignore, where appropriate, recent default and foreclosure records of homeowners for credit scoring purposes when the problems were caused largely by fraudulent or misleading mortgage instruments.   

Additional safety and soundness could be built into these loans if the government agencies guarantying the loan required full documentation of income (with appropriate flexibility for small business owners and independent contractors), and implemented an independent and universal home appraisal system that was required for all government guaranteed loans.   

Once this homeownership program is successfully in effect, provisions can be adjusted to provide similar opportunities for all potential homeowners, up to twice the median income.  This would qualify over 90% of Americans including virtually all in need of assistance.   

Should these provisions be implemented, homeownership nationally could rise to a record 70% of households, help close the minority homeownership gap, and minimize the need for most subprime and/or high risk adjustable rate mortgages. 

Submitted by:

-Orson Aguilar, Executive Director of The Greenlining Institute

-Faith Bautista, Executive Director of Mabuhay Alliance, a California Homeownership and Small Business non-profit