To read the recent coverage of homeownership, one would think that this lynchpin of the nation’s housing market has moved from Jimmy Stewart’s Main Street to Freddie Krueger’s Elm Street; that what was once the cornerstone of the American dream has become a nightmare. But this is simply not the case. Homeownership can and does work—when done right. And for most Americans and communities, homeownership is a blessing.
According to the Joint Center for Housing Studies of Harvard University’s “2011 State of the Nation’s Housing” report, the national homeownership rate dipped below 67% in 2010, down from 6% in 2004. The report also notes a Fannie Mae survey that states that significantly fewer renters see buying a home as a safe investment now than in 2003. Still, that same survey found that 74% of renters, and 87% of the overall population, believe that owning a home makes more financial sense than renting. In another recent survey, the National Association of Realtors’ 2011 National Housing Pulse Survey, 72% of renters considered homeownership to be a top priority for their future, an increase from 63% in 2010. As Ron Phipps, president of the National Association of Realtors stated, “Despite the economic setbacks Americans have experienced in today’s current climate, it is clear that a strong majority still believe in homeownership and aspire to own a home.”
Regardless of current uncertainty over pricing and affordability concerns, there is an appetite for homeownership, and lenders will want to satisfy that desire. But it must be done responsibly. Responsible homeownership means lenders put people in homes and keep them there, not lead them into a foreclosure trap. At the Federal Home Loan Bank of New York, we have two tactics that help prevent foreclosures: counseling and strong underwriting.
In 1995, we started our First Home Club, which is a program in which the Home Loan Bank and our members assist low-income first-time homebuyers with grants to help offset downpayment and closing costs when purchasing a home. A key component of this program is the mandatory homeownership counseling participants must complete prior to purchase. This counseling helps buyers learn about the responsibilities and expenses of homeownership, and provides them with a better understanding of the type of home suitable to them. Since its inception, the First Home Club has seen a default rate of just 0.54%. The counseling has worked.
We also need vigorous underwriting. Strong underwriting is not bad for homeownership—it is a good thing. It lets people successfully manage their homes. As we have seen throughout the foreclosure crisis, lax underwriting and excessive credit do not make homes more affordable; they just give the illusion of affordability.
Of course, strong underwriting does not need to mean restrictive underwriting. In the 2011 National Housing Pulse Survey, 77% of renters said they would be less likely to buy a home if a 20% downpayment on the home was required prior to purchase. Seven out of 10 renters went so far as to state that such a requirement could have a negative impact on the housing market. The same survey found that 51% of current working-class homeowners stated that such a requirement would have prevented them from purchasing their home. These are responsible and capable homeowners who would have been denied a piece of the American dream because of indiscriminate restrictions.
Strong underwriting is the bread and butter of the community lender. This is because the local lender is a committed member of the community it serves, and is willing and able to take the time to know each borrower and their lending needs. Households should work with these responsible lenders when purchasing a home. According to a recent report from the NAR, home sales dropped in May. But in that same report, the organization stated that it expects the pace of sales activity to be strong in the second half of the year. In this buyer’s market, smart shoppers would do well to prequalify for a mortgage at their local community bank first, and then look for a home that fits their price range. Taking this step will allow homebuyers to understand the lending options available to them, and help them find a suitable mortgage tailored to each individual borrower.
When we understand this, we can get back on the road to responsible lending. It is a path from which the local lender never strayed. When mortgages are created with care and effort at the bank around the corner—and not churned out by a call center—foreclosures can be reduced and the entire community benefits. Then we ensure that the homeownership part of the American dream regains its fabled luster.
Alfred DelliBovi is the president and CEO of the Federal Home Loan Bank of New York.
