CAP Action’s Janneke Ratcliffe testifies before the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. Read the testimony (CAP Action)
Private mortgage insurance has long played an important role in facilitating home ownership, and has recently provided an element of stability to the market. An examination of this particular industry holds lessons that can inform the overall mortgage finance system.
A discussion about the role of mortgage insurance must begin by stressing the importance of giving families the opportunity to buy homes when they do not have enough accumulated wealth to make a big down payment, which is what primary mortgage insurance exists to do. This is not about speculative, “no money down” schemes; this is about the first step to building family economic security and realizing the long-term benefits of homeownership. Surely many of us and our family members have started up the homeownership ladder with a modest down payment and a loan made possible because of some form of mortgage insurance: be it private mortgage insurance, Federal Housing Administration (FHA) insurance, or the Veteran Affairs program for servicemen and women. I, for one, relied on private mortgage insurance to buy my first home.
Access to this type of financing is critically important because home ownership continues to be the cornerstone of household wealth in the United States. At a macro level, real estate holdings comprise the largest element of household assets in the United States. Its value to individual families is equally profound, and increases as you go down the income spectrum, with home equity comprising more than three quarters of the wealth of low-income families. Among families earning between $20,000 and $50,000, those who own homes have 19 times the wealth of those who rent.
Homeownership continues to be one of the best potential answers to the persistent racial wealth gap. The median wealth of black families is a fraction of that of the median white family ($5,000 vs. $100,000, respectively as of 2007). This gap is echoed in homeownership rates: As of the end of 2009, roughly 72 percent of white households owned their own homes, less than half of African-American and Hispanic households owned theirs. Among Hispanic and Black households, owners have 39 and 85 times the wealth of renters, respectively.
Historically, and even today, as a leveraged investment, (with even modest appreciation and a built-in savings mechanism), homeownership represents the best way for households to build wealth and long-term assets. However, this requires access to responsible financing, which can be barred by income, credit, and asset requirements that either lock people out of the market, or leave them open to higher-cost lenders. We have long recognized that among those three primary constraints, reducing the down payment barrier is the best way to increase ownership opportunity for more low-income or minority households. The median sales price of a single-family home in the US in 2009 was $172,100; making a 20 percent down payment required $34,420 in assets, greater than the entire annual income of roughly a third of all U.S. households.
In the average year, of all the home mortgages made, nearly one-third are to families with less than 20 percent equity, and among these are families who will later buy another house, perhaps yours or mine.
CAP Action’s Janneke Ratcliffe testifies before the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. Read the testimony (CAP Action)