Original Post: http://www.nytimes.com/2014/11/23/realestate/equity-building-mortgage-challenged.html | From The New York Times
A proposal by the American Enterprise Institute for a low-cost, 15-year mortgage intended to help low- and middle-income borrowers build equity has attracted considerable attention over the last two months, including in this column. But the concept is getting some pushback from the Urban Institute.
A Nov. 13 blog post by the Urban Institute’s Housing Finance Policy Center argues that, contrary to what its proponents suggest, the so-called Wealth Building Home Loan is “not a silver bullet” for lower-income borrowers. “Some people have made it sound like a solution to everybody’s problems,” said Ellen Seidman, a senior fellow at the center and an author of the post. “There are a lot of good things about it, but the payments are higher than on the 30-year. And if you try to get the payments down to the same level, it requires a big interest rate subsidy.”
One of the loan product’s developers, Edward Pinto, a resident fellow at the conservative-leaning American Enterprise Institute, has described the loan as a better alternative to the 30-year mortgages insured by the Federal Housing Administration, which are popular with lower-income buyers because they require little money down. F.H.A. loans, Mr. Pinto argues, are high-risk and build wealth too slowly.
The 15-year Wealth Building loans, currently available on a very limited basis, have a fixed interest rate about three-quarters of a percentage point lower than the F.H.A. 30-year rate, no mortgage insurance and the option of no down payment. Borrowers can instead use their cash or a subsidy to “buy down” their rate further in order to lower their monthly payments.
A borrower’s ability to repay the loan is evaluated by using a “residual income” calculation, which measures how much income is left over after a household pays the mortgage and other monthly expenses. Borrowers must show minimum levels of leftover income to qualify.
“This loan is not a high-risk loan when done with the residual income process and a robust appraisal process,” Mr. Pinto said.
The loans are currently being offered by the Neighborhood Assistance Corporation of America, a nonprofit housing organization. Bank of America is helping to subsidize that program. Mr. Pinto said he is talking with community and regional lenders about developing a market-rate version that would not require subsidies.
But Ms. Seidman argues that this is not a logical replacement for F.H.A. loans. For one thing, she said, borrowers are immediately deprived of an equity stake if they have to use their limited money to buy down their interest rate rather than make a down payment. And for another, she added, these loans, with zero down, no mortgage insurance and a low interest rate, will have to be kept on lenders’ books, rather than sold on the secondary market, which will limit their availability.
Even if the 15-year Wealth Building loans could be offered on a large scale, Ms. Seidman said, she would still question whether subsidizing the program would be a better use of government dollars than government support of F.H.A.
“Instead of a long-term insurance program where the payout is dependent on the level of defaults and losses,” she said, “we’re going to get an upfront subsidy and give it to the banks to buy down the interest rate? That’s taking a tried-and-true program that has been pretty good and turning it instead into a subsidy program for the banks as much as it is for the borrowers.”
Mr. Pinto allowed that the loan may not be a “total replacement” for F.H.A., but he said subsidizing this 15-year option makes more sense than the current “almost total reliance” on the 30-year mortgage.
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