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									                                                     The Challenge of Closing the
www.ccc.unc.edu




                                                        Homeownership Gap

                                                       Michael A. Stegman,
                                     MacRae Professor of Public Policy, Planning, and Business
                                                Center for Community Capitalism
                                            University of North Carolina at Chapel Hill
                                                           Presented at
                                        The Aspen Institute Initiative on Financial Security
                                                         Aspen, Colorado
                                                         August 12, 2005

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                                       Overview of presentation
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                  1. Setting the Stage: Housing Prices and
                     Affordability
                  2. The Convergence of Business Necessities &
                     National Policies to Expand Home Ownership
                  3. Policy and Market Innovations
                  4. Selected Findings from Evaluation of Self-
                     Help/Fannie Mae Community Advantage
                     Demonstration
                  5. Conclusions
                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                            1. Setting the Stage: Housing Prices and
                                          Affordability




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                  Five housing policy transitions over past thirty
                                    five years
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                        1. From a high Federal budget priority to a low Federal
                           priority
                        2. From production subsidies to demand subsidies
                        3. From deep production subsidies to shallow subsidies
                        4. From a focus on poverty/welfare, to a focus on
                           working families
                        5. From a historical focus on rental
                           housing to a fixation on homeownership

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                         Market ―froth‖ has been good for growing
                                       home equity
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                      Tax policy is social policy
                    Most federal housing subsidies are tax expenditures that go to
                         middle- and upper-income homeowners while annual
                                   appropriations benefit the poor
                  $180.0                 (billions of dollars)
                  $160.0
www.ccc.unc.edu




                  $140.0


                  $120.0


                  $100.0


                   $80.0


                   $60.0


                   $40.0


                   $20.0


                    $0.0
                                    1976                 1980                  1984                  1988                 1992          1996   2000   2004   2006

                                                                       Tax Expenditures                                Assisted Housing BA


                    CENTER FOR COMMUNITY CAPITALISM
                    THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                    The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                              Empirical basis for concluding there’s a
                                         housing bubble I
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                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                         Empirical basis for housing bubble II
                  national housing prices are rising faster than owner-
                                equivalent rental values
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                     As existing homeowners grow more wealth:
                         what’s happening to affordability?
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                             But national income gains and historically low
                               interest rates have increased affordability
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                      Do affordable home ownership incentives have to
                       work in those overheated markets which reflect
                                 bubble-like characteristics?
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                             Home ownership and wealth creation:
                        If households consume their equity, then homeownership
                                      can’t build [as much] wealth

                  • “…the extraction of equity from homes has been a
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                    significant support to consumption during a period when
                    other asset prices were declining sharply. Were it not for
                    this phenomenon, economic activity would have been
                    notably weaker in the wake of the decline in the value of
                    household financial assets.”
                                        Federal Reserve Chairman Alan Greenspan, Nov. 13, 2002


                  • New HUD study that finds that households typically save
                    at least 80 percent of their house price appreciation

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                   2. The Convergence of Business Necessities
                      & National Policies to Expand Home
                                  Ownership




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                  Demographic & market forces join to create business
                   opportunities for mortgage providers & household
                            wealth through homeownership
                   Access to Mortgages on the
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                                                                                                                           Home Equity is a Wealth Equalizer
                              Rise                                                                                        • Lowest income quintile of
                  • 1993-2003, mortgage loans to                                                                            homeowners, median net wealth in
                    Hispanics grew ~6x faster,                                                                              2001 of $68,000, compared to $500
                    Asians 4x, and blacks 2x faster                                                                         for renters;
                    than to whites;                                                                                       • Among those owners, home equity
                  • Loans doubled to LMI buyers                                                                             accounted for 80% of net wealth;
                    while rising 88% to higher                                                                            • From 1989 to 2001, ratio of median
                    income;                                                                                                 wealth of blacks to all U.S.
                  • Compelling business case:                                                                               households rose from about 9% to
                    minority share of population up                                                                         22%, as black homeownership rate
                    from 17% in 1980 to 26% in                                                                              rose from 42% to 48%;
                    2000, and will be 34% by 2020.                                                                        • But minority homeownership
                                                                                                                            rates still 25 percentage points
                                                                                                                            behind whites.
                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                            Why banks should care about increasing
                                      financial access
                  • Strong link between bank account ownership and use of bank credit
                             – Lower-income families with checking, savings, or money market
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                               accounts are six times as likely as to have credit cards and are more than
                               twice as likely to have a mortgage.

                  • Demographics shape the future housing market
                     – Up to 80 percent of all first-time buyers between now and 2010
                       will be young minority & immigrant families;
                             – These 12 million black & Hispanic households will account for
                               80% of all first-time homebuyers;
                             – But more than 40 percent of low- and moderate-income African
                               American and Hispanic renters are unbanked.
                                     .




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                                                  Policy and Market Innovations




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                        Expanding homeownership consistent
                            with growing national support
                         for more asset-based social policies
www.ccc.unc.edu




                               “…in a global economy, your economic health and
                               security is measured by what you own in addition to
                               what you earn. Despite the growing importance of
                               wealth, a stark gap has opened between those who
                               have it and those who don’t. The bottom 90 percent
                               of Americans earn 60 percent of all income, but own
                               less than 30 percent of net worth and less than 20
                               percent of financial assets. These Americans are
                               being left behind as the economy apportions more
                               and more of its rewards to owners of wealth.”
                                           Former Senator Bob Kerrey (D-NE)
                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                     Lowering wealth constraint to buying a
                           home is the new frontier
                  • Lower down payments made possible by improved credit
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                    scoring and underwriting;
                  • But, efforts to eliminate all borrower up front cash poses
                    serious risks—2 examples:
                            – Builder/developer-linked down payment gifts tied to FHA loans;
                            – Proposed FHA zero down payment loan
                  • So do newer loan products such as
                            – Interest-Only Adjustable Rate Mortgage (IO)
                            – Interest-Only Hybrid Mortgage
                            – The Pay Option Mortgage Loan

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                               The federal government should not create a
                              mortgage product expecting 17 of every 100
                                     borrowers to lose their homes
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                     • By design, the FHA zero down program
                       anticipates about twice the proportion of
                       home owners to go into foreclosure than
                       is the case under standard FHA mortgage
                       program;



                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                           Improved risk assessment technology expands
                         subprime lending, [while victimizing the unwary]

                  • In 2004, the record $530 billion in subprime
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                    originations represented a 60 percent increase over
                    the previous year, and a ten-fold increase in the past
                    decade.
                  • The surge in subprime lending partially accounts for
                    the significant rise in minority homeownership;
                  • But, UNC study finds that 20% of all subprime
                    refinance loans originated in 1999 were in foreclosure
                    in 2003;
                  • 60% of borrowers in foreclosure pipeline lose their
                    homes.
                    CENTER FOR COMMUNITY CAPITALISM
                    THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                    The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                    Not all subprime lending is abusive, but but
                   predatory lending has become a real problem
www.ccc.unc.edu




                  • Some recent headlines:

                  • Predatory Lending and Foreclosure Fraud Impacts Minorities Most,
                    Consumer Education, Feb. 18, 2005;
                  • Con Artists Play Troubling Game: Grand Theft Home, Washington
                    Post Saturday, June 4, 2005;
                  • Ehrlich Signs Bill Targeting Foreclosure Scams, Washington Post
                    Friday, May 27, 2005; Homeowners victimized by foreclosure resuce
                    scam, Minnesota Public Radio, Oct. 22, 2003;
                  • Predatory Lending in New Jersey: The Rising Threat to Low-Income
                    Homeowners, New Jersey Institute for Social Justice, Feb. 2002.
                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                                    Selected Findings from Evaluation of Self-
                                      Help/Fannie Mae Secondary Mortgage
                                                  Demonstration




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
www.ccc.unc.edu




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
            Self-Help LMI homeowners beat the market averages
                         (median annual change in home value 1998-2003)
www.ccc.unc.edu




                                                                                                                                         2.78%
                  Dow-Jones



             6-Month CD                                                                                                                             4.34%
            Average Rate


                                                                                                                                                            5.43%
                  CAP Homes


                                    0.0%                          1.0%                           2.0%                          3.0%          4.0%   5.0%     6.0%
                     CENTER FOR COMMUNITY CAPITALISM
                     THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                     The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                   Wealth gains made by minorities as well as whites
                                                      Median Annual Price & Equity Appreciation Rates,
                                                              by Race & Ethnicity, 1998-2003



            18.0%                                                                                                                                       100.0%
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                                                                                          89.3%
            16.0%                                                                                                                            80.6%      90.0%

                                                                                                                                                        80.0%
            14.0%
                                                                                                                         68.4%
                              65.9%                                                                                                                     70.0%    Median Price
            12.0%                                           57.1%                          13.7%
                                                                                                                                                                 Appreciation
                                                                                                                                                        60.0%    per Year
            10.0%                                                                                                         11.8%
                                                                                                                                                        50.0%    Median
                  8.0%                                                                                                                                           Equity
                                                                                                                                                        40.0%    Appreciation
                  6.0%                                                                                                                                           per Year
                                                                                                                                                        30.0%
                  4.0%
                                 4.6%                                                                                                                   20.0%
                                                               4.1%                                                                           4.1%
                  2.0%                                                                                                                                  10.0%

                  0.0%                                                                                                                                  0.0%
                                 White                         Black                     Hispanic                         Asian              American
                                                                                                                                              Indian
                         CENTER FOR COMMUNITY CAPITALISM
                         THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                         The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                                                         Distribution of credit scores
                                                 Self-Help loans purchased before January 2004

                                                                                                                     16%
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                       23%
                                                                                                                                            No Credit Score

                                                                                                                                            <= 620

                                                                                                                                            621-660
                                                                                                                                      18%
                                                                                                                                            661-720

                  25%                                                                                                                       > 720

                                                                                                     18%
                                        38,573 Self-Help loans

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                                              Most loans never missed a payment
                                                                      worst delinquency
                                                     Self-Help loans purchased before January 2004
                                                                                                           as of Dec 31, 2004
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                               11.4%
                                                       3.1%                   6.7%                                                          Never
                                                                                                                                            Delinquent

                                                                                                                                            Never >30
                                                                                                                                            days late

                                                                                                                                            Never >60
                                                                                                                                            days late

                                                                                                                                            90+ days late


                                                                                                                                      79%
                                  N = 27,766 Self-Help loans

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                                            Most serious delinquencies cure
                                                                              Self-Help loans purchased before January 2004
                                                                                            as of Dec 31, 2004



                                                                  7%                     2%
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                                                                                                                                       Cured before 90 days
                                                3%                                                                                     delinquent
                                   5%
                                                                                                                                       Cured after 90 days
                                                                                                                                       delinq.

                                                                                                                                       Currently <=60 days
                                                                                                                                       delinq.

                                                                                                                                       Currently delinq. 90+ days


                                                                                                                                       Foreclosed



                                                                                                                                 83%
                                  N = 27,766 Self-Help loans

                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                                                                      Modeling default
                     having no health insurance ~ more than a 40 point lower FICO
                                               proportional hazards regression, time to first 90-day delinquency, post-interview
                                                    source: CA Panel Survey, 2174 borrowers; Self-Help loans database

                                                                                                           Hazard                                             Hazard
                                  Loan Variables                                                           Ratio                      Panel Variables         Ratio
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                                  • No FICO                                                                 5.2**                     • No Health Insurance    2.0**
                                  • FICO  620                                                              5.3**
                                  • FICO 621-660                                                            4.8**                     •   Any Post-Purchase
                                  • LTV  97%                                                               1.1                           Unemployment         1.8**
                                  • 2000 Origination                                                        2.8**
                                                                                                                                      •   Single Parent        1.9**
                                  • 2001 Origination                                                        2.4**
                                                                                                                                      •   Hispanic              .5*

                                  χ2 = 126.7**, 21 df
                                  χ2 difference = 45.5**, 13 df


                              * -- significant p<.05; ** -- significant p<.01
                              Other panel variables in the model, not significant, include household income, gender, number of wage
                              earners, African-American, new debt>$500, previous mortgage rejection, whether parents owned home
                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                                          Conclusion
                      Vast changes in homeownership environment over
                            last decade but more progress possible
                                           Glass is Half Full                                                                             But More Needs to be Done
www.ccc.unc.edu




                  •      Strong business case for serving LMI &                                                           •           Some of the newer mortgage products are
                         minority first time homeownership                                                                            ticking time bombs;
                         market segment                                                                                   •           Eliminating down payments wrong way to
                                                                                                                                      address wealth constraints;
                  •      Demonstrated profitability of CRA                                                                •           Federal tax policy is out of whack—
                         lending;                                                                                                     encourages consumption of more housing by
                                                                                                                                      those in the market but doesn’t expand
                  •      Innovations in foreclosure prevention &                                                                      homeownership opportunities for those
                         loss mitigation;                                                                                             locked out;
                  •      Innovations in securitization &                                                                  •           Need savings incentives, and more creative
                                                                                                                                      use of tax system to bring more households
                         secondary markets;                                                                                           into the market;
                  •      Big increase in subprime lending makes                                                           •           One possibility is to convert mortgage
                         home ownership possible for those with                                                                       interest deduction to a tax credit to equalize
                         imperfect credit;                                                                                            each dollar’s impact across income groups;
                                                                                                                          •           Another option is matched savings down
                  •      Progress on lending to undocumented                                                                          payment accounts; or,
                         Latinos;                                                                                         •           a low-income homebuyer’s tax credit to
                  •      Secondary market innovations;                                                                                loosen down payment constraint


                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu
                  For more information on today’s presentation
www.ccc.unc.edu




                  • Center for Community Capitalism web
                    site – www.ccc.unc.edu.




                  CENTER FOR COMMUNITY CAPITALISM
                  THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISE
                  The Kenan-Flagler Business School at The University of North Carolina at Chapel Hill   www.kenaninstitute.unc.edu

								
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