Washington, D.C. – America’s housing finance system can successfully expand homeownership to low- and moderate-income people by using sound mortgage products and sensible servicing practices, UNC Center for Community Capital Director Roberto G. Quercia told members of a Federal Deposit Insurance Corp. advisory board at a March meeting.
Quercia discussed research findings and examples of sustainable lending approaches and results at the FDIC’s Restoring Responsible Low- and Moderate-Income Mortgage Lending Forum.
“Our research clearly shows that you can create a sustainable mortgage lending for low- and moderate-income families by offering good products, appropriate underwriting and servicing practices, and a secondary market that is supportive of this lending,” Quercia said.
For instance, research shows that the traditional 30-year fixed-rate mortgage works best for low- and moderate-income borrowers because it offers predictable payments and a longer time for repayment. Subprime loans and even prime adjustable-rate mortgages, by contrast, lead to much higher rates of default because of their unpredictable features, such as variable interest rates, and higher costs, such as repayment penalties.
Servicing also makes a significant difference in default rates, Quercia said. Odds that a late-paying borrower will catch up on payments can vary as much as 60 percent depending on who is servicing the mortgage. Early intervention and default management practices are important components to ensure repayment.
“Supportive secondary market functions also enhance the sustainability of this type of lending,” Quercia said. These functions include the promotion of equal access to capital, pooling of risks, enhancing transparency and standardization, and ensuring the availability of a portfolio capacity that allows secondary market institutions to keep the loans purchased in-house when needed.
Quercia’s findings come, in part, from the center’s long-term study of homeowners in a $4-billion Self-Help/Fannie Mae/Ford Foundation affordable loan program, the Community Advantage Program. The solid repayment history of borrowers in that program, even during the financial crisis, provides critical insight into the results that are possible when “homeownership is done right,” Quercia said.
“Expanding homeownership has always been important because it is a key pathway for low-income Americans to enter the middle class and strengthen the communities in which they live,” he said. “It is even more important now, in the aftermath of the crisis, because low-wealth households have been disproportionately affected by the crisis. The racial gap in wealth and other benefits associated with owning a home will widen and become more firmly entrenched if we do not get this right.”
View Quercia’s presentation.
Mortgage finance is a key area of study for the UNC Center for Community Capital, the leading center for research and policy analysis on the transformative power of capital on households and communities in the United States. Part of the College of Arts and Sciences at the University of North Carolina at Chapel Hill, the center offers data and analysis that helps policymakers, advocates and the private sector find sustainable ways to expand economic opportunity to more people more effectively. For more information, visit www.ccc.unc.edu or call (919) 843-2140.
Topics(s): Affordable Homeownership, Housing Policy, Impacts of Homeownership, Mortgage Finance