The Challenges to Homeownership in America

Jim Carr delivers remarks at the HomeFree-USA Conference on October 27, 2013.

Aluminum siding has been stripped from an abandoned home in East Cleveland, Ohio, September 24, 2014. (AP/Mark Duncan)
Aluminum siding has been stripped from an abandoned home in East Cleveland, Ohio, September 24, 2014. (AP/Mark Duncan)

Good afternoon. I am honored to have been asked to share a few thoughts on the current housing and economic challenges faced by many of America’s families and communities. Since the collapse of the housing market and onset of the foreclosure crisis, the idea of and public policies to support homeownership have been under attack.

Six years into the crisis, the housing market continues to struggle, and many influential policymakers have made it their goal to significantly limit access to homeownership for the American public, in particular first-time homebuyers, borrowers of color, and low- and moderate-income families. Yet for more than 60 years, owner-occupied housing has not only been a source of pride and self-esteem for America’s families but also the cornerstone of the American Dream and the most significant and reliable source of asset building for the typical household.

The assault on homeownership can be linked to widespread misunderstanding by many key policymakers, as well as the public, on three critical housing issues:

  1. The reasons for the collapse of the housing market and the foreclosure crisis
  2. The government’s role in ensuring the availability of the 30-year fixed-rate mortgage and the to-be-announced market
  3. The current state of the housing recovery and its implications for families, communities, and the overall economy

1. Reasons for the collapse of the housing market and the foreclosure crisis

In spite of a voluminous amount of data and other information on the causes of the foreclosure crisis, there remains substantial misunderstanding and confusion about the housing market’s collapse. There are three dominant public narratives on these causes: (1) A failed experiment in expanding homeownership to households that were not prepared to accept that responsibility; (2) the Community Reinvestment Act, or CRA, forced banks to make unsound and risky loans; and (3) people took out loans they could not afford.

Both facts and common sense easily dismiss all three of these explanations. According to the Center for Responsible Lending, for example, only 9 percent of subprime loans, the high-cost loan products that were at the center of the housing market’s woes, were originated to first-time homebuyers. The majority of subprime loans were utilized for home refinancing.

The argument that CRA was responsible is equally without merit; the Federal Reserve Board concluded that only 6 percent of subprime loans were covered under CRA. The vast majority of mortgages were originated and securitized by non-CRA covered institutions or did not otherwise meet CRA standards. And the idea that loans were originated to borrowers that financial firms felt were not eligible to receive them is, well, simply illogical.

That fact is that in the decade leading up to the foreclosure crisis, the housing market had become saturated with reckless and unsustainable loans that were highly profitable to financial firms yet highly risky to consumers. And a major share of subprime loans were actually designed to fail—that is, they were designed to trigger an unaffordable increase in the loan’s interest rate typically two or three years after origination. That process was intended to force borrowers back to their lenders to refinance their loans back down to an affordable interest rate and, in the process, pay another round of unjustified high origination fees.

The public’s confusion on this issue is, however, not happenstance. Substantial money has been poured into the development of policy papers, media outreach, and conference presentations directly designed to misrepresent the facts of the causes of the crisis. Misleading the public as to the real causes of the crisis serves to deflect attention away from the need for greater regulation of the financial markets.

2. The government’s role in ensuring the availability of the 30-year fixed-rate mortgage and to-be-announced market

Most Americans take the features of our housing finance system for granted and assume that the unique mortgage products available in the United States are made possible solely by private financial firms. However, there is substantial government involvement that directly supports homeownership in America, including Fannie Mae; Freddie Mac; the Federal Housing Administration, or FHA, the Federal Home Loan Banks; the Veterans Administration, or VA; and several additional programs managed by the Department of Housing and Urban Development and the Department of Agriculture.

Strong federal support for homeownership in the United States is the reason that our nation is the only country to offer homeowners a 30-year fixed-rate loan. Yet most Americans are not likely aware of the connection between the 30-year fixed-rate loan product and government’s role in housing. Most consumers likely think it is simply a product of private-sector financial engineering and ingenuity. As a result, proposals to eliminate or severely restrict the federal presence in housing do not appear to be of great concern to the general public.

Moreover, most Americans do not seem to be aware of the significant role played by special government programs, such as the FHA, to the overall performance of the U.S. economy. According to Moody’s Analytics, the countercyclical role played by the FHA during the recent housing-market collapse helped the United States avoid a second recession, an additional home-price decrease by an additional 25 percent, and a sizable increase in the national unemployment rate.

Given the significance of housing to the well-being of America’s families, communities, and the economy, policy debates on the issue of homeownership should be a priority. Yet the limited degree of public awareness and interest is leaving the future of housing finance in a vulnerable position. The wrong choices could have potentially catastrophic consequences for the household wealth of America’s families and the financial well-being of the housing industry.

Access to mortgage credit has rarely been more constrained, particularly for African Americans and Latinos, as well as young households and low- and moderate-income families. For this reason if no other, we need to reform our housing finance system. And the manner in which Fannie Mae and Freddie Mac are restructured or eliminated will significantly impact access to home mortgage finance.

According to the Federal Reserve, nationwide mortgage originations for borrowers with credit scores between 620 and 680 have fallen by 90 percent since the onset of the housing crisis. And a study for the state of Illinois, conducted in June 2009 by the Woodstock Institute, found that in ZIP codes that had 80 percent or more African Americans, 75 percent of consumers had a credit score of 699 or less.

Furthermore, even borrowers who can put down sizable down payments are being denied conventional mortgages. The average mortgage applicant who was denied credit in September 2013 had a down payment of 16 percent.

Research on performing, Qualified Mortgage-conforming loans originated between 2004 and 2008 demonstrates that 60 percent of loans to African Americans and 49 percent to Hispanics had down payments of 10 percent or less. As we might expect, the effect of unnecessarily tight credit standards on lending to African Americans and Latinos has been large: Analysis of Home Mortgage Disclosure Act data by ComplianceTech shows that loans for African Americans have fallen from 1.3 million in 2005 to 280,000 in 2011—a drop of nearly 80 percent. During that same period, loans to Latinos fell from 1.9 million to 442,000, or 76 percent.

Moreover, housing policies that once were considered virtually sacred, such as the continuation of the mortgage-interest deduction, cannot be taken for granted given the continuing difficult battles over the federal budget.

Without a major change in attitude among policymakers and the public toward homeownership, the ability of millions of creditworthy borrowers to access homeownership may be lost. And because homeownership is the single-most important asset of the typical American family, lack of homeownership access means less household wealth accumulation and further reduced economic mobility for communities and the nation in the future. Between 2007 and 2009, the Pew Research Center finds that Latinos in America lost an estimated two-thirds of their net worth, and Asian and African American wealth has fallen by more than half.

The most effective way to help rebuild this lost wealth is with adequate access to homeownership opportunities. Moreover, people of color will constitute 7 out of 10 net new household formations over the next decade. As a result, failing to meet the mortgage-credit needs of these households will not bode well for the overall health of the housing market.

Yet it is not just borrowers of color who are struggling with the housing market and economy. Young adults, regardless of race or ethnicity, are also struggling. The homeownership rate for young adults has declined markedly, and the share of young adults living with their parents is at a 40-year high.

And the poor labor market for young adults is compounding the asset-accumulation goals of our next generation. Over the past 12 years, the United States has fallen from first place to last place among wealthy economies, in terms of the share of employed 25- to 34-year-olds.

When combined with nearly $1 trillion dollars of student-loan debt, young adults are en route to becoming the first generation of Americans to experience a lower level of economic success than their parents. In fact, recent research by the Urban Institute already bears this out. It finds that young adults ages 29 to 37 have 21 percent less wealth than did their parents at the same age.

3. The current state of the housing recovery and its implications for families, communities, and the overall economy

A final fundamental challenge facing homeownership is a lack of public awareness of the health of the housing market. There is an increasing perception that the housing market is recovering on its own and that significant public policy intervention may not be necessary. After all, foreclosures have fallen significantly from their peak, home prices are rising, construction starts have increased, sales of new and existing homes are up, and mortgage originations are strong. But a closer examination of almost any of these data calls for qualifiers.

Take mortgage originations, for example. For more than the past year, in excess of 70 percent of conventional mortgage originations have been for refinancing a home, not home-purchase mortgages.

This trend has continued into the current year, as roughly two-thirds of conventional originations in the second quarter were to refinance. In a healthy market, the refinancing versus purchase originations shares would be reversed. This unusually high proportion of refinancing as a share of all originations is an indicator of a market still struggling.

Refinancing lowers the long-term cost of a home for borrowers, and that’s good for families. And refinancing generates earnings for financial firms. But refinancing activity is simply churning the same mortgages—it does not represent an expansion of homeownership, which is essential to a healthy housing market and expanded asset accumulation by households. Similar weaknesses can be found in the good news about rising home prices.

Additionally, recent impressive increases in home prices are, in important part, driven by investors purchasing formerly owner-occupied housing—often for cash. Some estimates suggest that 40 percent of investor purchases in May of this year were for cash. In some urban neighborhoods across the United States, 75 to 90 percent of all buyers are investors. And nationally, 68 percent of “damaged homes” sold in April went to investors, while only 19 percent went to first-time homebuyers.

Yet investor purchases are a mixed blessing for a variety of reasons. First, wealth accruing from rising home values on investor properties, for example, does not remain in communities to the extent the properties are owned by absentee landlords.

Second, a large proportion of investors’ purchases in distressed neighborhoods are in single-family units, thus raising potential management issues due to the scattered locations of these investment properties.

Third, while investors contribute to rising home prices, helping strengthen home prices in the near term, they can also distort the market prices—upward or downward—particularly if they are buying for cash, since the homes do not require inspections or appraisals.

Fourth, investors may also crowd out first-time homebuyers, including African Americans, Latinos, and young families, because those borrowers generally must go through the time-consuming loan-approval process, including property appraisals and inspections.

Finally, because investors purchase homes solely to make a profit, they will not likely invest in their properties the same way as do homeowners. Financial bottom-line considerations may discourage landlords from investing any dollars in their properties beyond improvements required to maintain homes to local building codes.

Moreover, a focus on financial returns could lead investors to dump properties in the event of an economic or housing-market downturn, thus driving down home prices if those assets fail to meet investor expectations. As a result, communities where investors are concentrated do not provide the same level of stability and sustainability as a homeowner-driven recovery.

Having said all that, investors can play a positive role in the housing market. But we must remain focused on the share of investors, as well as the manner in which they participate. If, for example, investors supported ownership-occupied housing as equity partners with owners, that would greatly enhance investor participation in the homeownership market while helping increase the wealth of families. This could be accomplished with shared-equity loans, wherein investors pay some or all of a borrower’s down payment in return for a predetermined share of the home’s future equity value resulting from rising home prices.

Unfortunately, during this housing crisis, federal agencies have invested no time in innovating loan products. Instead, they have disproportionately focused on finding ways to sell distressed and foreclosed properties directly to investors.

This focus on helping investors leverage the current low home-price and interest-rate environment is further compounding the growing wealth gaps between the middle class and the wealthy and between non-Hispanic white households and people of color.

Current state of housing reform legislation

Lack of public engagement to improve the functioning of the housing market may help explain why the predominant proposals to restructure the housing finance system are both far off track. The major legislative proposals before the House of Representatives and Senate are the Protecting American Taxpayers and Homeowners, or PATH, Act—introduced by U.S. House of Representatives Financial Services Committee Chairman Jeb Hensarling (R-TX)—and the Housing Finance Reform and Taxpayer Protection Act of 2013, a bipartisan bill introduced by Republican Sen. Bob Corker (TN) and Democratic Sen. Mark Warner (VA), also known as the Corker-Warner bill.

The PATH Act was introduced under the banner of bringing private capital back to the housing market. The bill proposes to wind down Fannie Mae and Freddie Mac over a five-year period and replace them with a purely private mortgage finance system. Lack of an explicit federal role to support financing the more than $1 trillion of mortgage credit extended annually is justified as protecting the taxpayers from another costly bailout of the financial system.

Ironically, the lack of an explicit federal role leaves taxpayers even more exposed to another costly bailout. This situation exists because federal policymakers would certainly step in to protect the financial system from a potential collapse if losses by private firms were large enough to pose a systemic risk. As a result, the proposed PATH Act leaves the government implicitly insuring the housing finance system, as it did in the years leading up to the recent housing crisis, while leaving taxpayers on the hook for the full tab of another potentially costly bailout.

In fact, the last time the United States had a truly private housing finance system was in the years leading up to the Great Depression—when loans were typically of a five-year duration, were nonamortizing, and had a required down payment of 50 percent or greater. The modern finance system—in which Americans enjoy access to a 30-year, fixed-rate, self-amortizing mortgage with typical down payments of less than 20 percent—was created as a result of the inherent inadequacies of a purely private mortgage market.

Removing the federal backing for housing would likely result in the loss of the 30-year fixed-rate mortgage, eliminate the ability of borrowers to lock in an interest rate during the period their loans are being approved, require high down payments—most likely 20 percent or more—and leave the mortgage market vulnerable to dramatic drops in the availability of mortgage credit as private lenders retreat during periods of economic downturn.

Reforming the housing finance system must be based on fact, not fiction, and history, not nostalgia, about the role of private capital in mortgage finance—as well as the increasing diversity of America’s future potential homeowners.

The Corker-Warner bill proposes to replace Fannie Mae and Freddie Mac with an independent government agency called the Federal Mortgage Insurance Corporation, or FMIC. The FMIC will insure mortgage-backed securities issued by private financial institutions, similar to Fannie Mae and Freddie Mac. Under this proposed legislation, the federal government would provide catastrophic insurance for the mortgage market that would pay only after private investors absorbed the first 10 percent of losses.

The Corker-Warner bill would better protect taxpayers than the proposed PATH Act, yet it still fails to improve accessibility to mortgage credit. In fact, the bill, as introduced, would lead to an even more restrictive lending market than currently exists today.

The Corker-Warner bill establishes a minimum 5 percent down-payment requirement and fails to include an explicit duty to serve creditworthy borrowers protected by civil rights laws. And, as the National Community Reinvestment Coalition, or NCRC, has noted, the proposed law also inadequately funds the National Housing Trust and Capital Magnet Funds.

The proposed Corker-Warner bill’s recognition of the continuing and essential role of government in the mortgage market and its bipartisan sponsors are major reasons this bill is considered a more legitimate proposal than the proposed PATH Act. Yet revamping the housing finance system without meeting the needs of all creditworthy borrowers is a recipe for failure.

Finally, neither of these pieces of legislation adequately takes into account the critical role played by Fannie Mae and Freddie Mac in the financing of affordable rental properties. Since the onset of the great recession, Fannie Mae and Freddie Mac have backed a very substantial portion of the multifamily market. Analysis by the National Housing Trust shows that close to 70 percent of the rental units financed by Fannie Mae and Freddie Mac in 2012 were affordable to low-income renters. Any restructuring of Fannie and Freddie must simultaneously establish a reliable multifamily-housing financing mechanism.

In the absence of reform by Congress, FHFA is ‘reforming’ Fannie and Freddie

While the PATH and Corker-Warner proposals have initiated a fair amount of conversation about housing reform, most observers do not see housing reform occurring until possibly after the mid-term elections in 2014. Yet, while Congress fails to move forward on reform, Fannie Mae and Freddie Mac’s role in the market continues to change.

The Federal Housing Finance Agency, or FHFA, the current regulator of Fannie Mae and Freddie Mac, is already pursuing its own version of housing finance reform. FHFA’s actions are not likely to improve access. As Edward DeMarco, the interim director for FHFA, recently stated about his plans, borrowers who don’t fit neatly into Fannie and Freddie’s credit box should rely on depository lenders and the FHA.

But the overwhelming share of borrowers of color in the United States cannot fit neatly into a tight and rigid credit box, due to a history of discrimination and denial of economic opportunity. This history has resulted in those groups having very different credit profiles, as well as incomes and wealth, compared to non-Hispanic white households. As a result, disparate access to credit on the basis of race and ethnicity is literally designed into the new system.

Furthermore, FHFA, under its vision for the future, has already announced its intentions to begin scaling back on the backing of lending to support affordable rental-housing development, although there is no rationale for this curtailment. Fannie and Freddie’s multifamily businesses are both profitable and safe—with default rates of less than 1 percent. And the need for affordable rental housing is growing, not shrinking.

Five principles that should drive housing finance reform

Three years ago, the National Council of La Raza, along with The Opportunity Agenda, launched the Home for Good campaign. The goal of the initiative was to encourage policymakers to take assertive and positive actions to successfully address the continuing foreclosure crisis, rebuild communities traumatized by the housing crisis, and create a strong and vibrant housing market.

That effort was eventually joined by more than 20 major nonprofit and public policy organizations and university research centers, including the National Fair Housing Alliance, the National Coalition for Asian Pacific American Community Development, the National Urban League, the Kirwan Institute at The Ohio State University, the Center for Responsible Lending, the Center for American Progress, and the University of North Carolina at Chapel Hill Center for Community Capital.

Several principles were discussed that should be incorporated into any restructuring of the housing finance system. Those principles included the following:

  1. Ensure a liquid and reliable source of credit for housing in all geographies, including urban, suburban, and rural locations, and diverse products to accommodate a wide range of housing types, including co-ops, manufactured housing, senior housing, small rental structures, and energy-efficient dwellings.
  2. Guarantee the risks involved in housing finance are fully internalized and paid for by the system—and not potentially by the American taxpayer.
  3. Affirmatively further fair housing and equal credit access.
  4. Provide the ancillary support products, services, and outreach needed to expand homeownership to nontraditional borrower groups—including credit enhancement, down-payment assistance, and borrower counseling—as well as innovative programs such as home repair and property-maintenance insurance, and collect and share with the public data and information on the effective reach of loan products by borrower and community demographics characteristics.
  5. Finally, ensure an adequate availability of credit for the development of affordable rental housing for households at 80 percent or below area median incomes.

The remaking of the housing finance system is the perfect opportunity to structure funding to perpetually support a strong housing-counseling industry. The Center for American Progress has proposed the establishment of a Market Access Fund. This fund would support the Affordable Housing Trust Fund and the Capital Magnet Fund, credit enhancement and down-payment assistance, and other activities. Counseling should be a core function to support. 

The Consumer Financial Protection Bureau’s mission to purge fraudulent and otherwise reckless consumer financial products should open the door for borrower counselors to more effectively enable consumers to prepare a budget, improve their credit scores, safely save for a down payment, secure the proper loans, and deal with postpurchase financial strains.

If we get reform right, we can help create a new generation of homeowners whose potential for success overwhelms their likelihood for default. We can also help the housing industry rise from the debris of the foreclosure crisis in a manner that serves families, communities, and the nation.


In response to the housing crisis of the 1930s, federal policymakers aggressively launched numerous new institutions, including the Federal Home Loan Banks, the FHA, and Fannie Mae. The government’s role in home lending was further enhanced after World War II through the Veterans Administration and, in the 1960s, with the establishment of Freddie Mac.

Lifting the housing market from the rubble of the subprime debacle will require our secondary market to do far better than it did leading up to the bursting of the housing bubble. The damage to the housing market as a result of the current crisis is, on some indicators, worse than the housing-market collapse of the Great Depression. As a result, now is the time for policymakers to think with a bolder vision. Now is the time for housing proponents, particularly advocates for moderate-income families, people of color, young adults, and rural communities, to demand a solution that is up to the challenges presented.

The new secondary market must have the mandate, tools, and resources to firmly reinstate sustainable, affordable homeownership as a principal and achievable cornerstone of the American Dream. And it must serve the vast majority of families who seek it, while also ensuring an adequate supply of decent, safe, and affordable rental housing to working families who choose that housing option. Yet a major restructuring of the housing finance system, even under the most favorable circumstances, would take between three and five years.

In the meantime, therefore, action should and can occur at an administrative level—within FHFA—to jumpstart homeownership and promote greater economic mobility and financial security for the American public. The time to act is now.

Jim Carr is a Senior Fellow at the Center for American Progress and a distinguished scholar with The Opportunity Agenda.

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Jim Carr

Senior Fellow