Without question, the real estate industry is in a transitional period. Just a few short years ago – eight to be exact – home prices were on the verge of reaching record highs. However, the bubble burst and home values recorded our worst fears. Housing prices took an extreme hit. Fast-forward to today, and homes are nearly where they were prior to the recession. The current rebound has enabled many homeowners to rebuild equity in their properties. Of particular concern, however, is how unaffordable housing remains for low- and moderate-income families. Millennials, in particular, have found it incredibly difficult to participate in the housing sector. Stagnant wages and strict lending practices have made it all but impossible for them to afford a home of their own.
Fortunately, there may be an answer on the horizon. An unlikely partnership may be the answer that most of America has been waiting for. Edward Pinto, a scholar at the conservative think tank American Enterprise Institute, and Bruce Marks, a longtime consumer advocate who founded and runs the Neighborhood Assistance Corporation of America, have launched a new program to help low- and moderate-income families. The new program, which is currently being tested for Bank of America, should create mortgages that are both affordable and less risky for borrowers and lenders.
The relatively unexpected duo of Pinto and Marks came to fruition after the two previously clashed on opposing views on a panel. Pinto was skeptical of the typical way to help lower-income borrowers—reducing the amount of down payment on a 30-year mortgage. He says the housing crash showed that people who aren’t “well-off” can’t build equity fast enough in a typical 30-year loan, which makes them more vulnerable if the economy and home prices slump. “The volatility around one house in any given locality can be huge,” Pinto says. “We have put the people who can least afford the volatility into a house.”
The two inevitably decided to meet, as their goal was the same, but the method varied considerably. In what Pinto acknowledged as a ”very loooong, detailed conversation,” the two collaborated on a plan to help people afford homes while enabling them to build equity in a reasonable period of time. After the initial session, Pinto says, they “spent hours and hours and hours meeting and talking and outlining how this can done.” Eventually, they came up with a mortgage they call the Wealth Building Home Loan.
Upon engaging in conversation, the two understood one key principal: the loan needed to be 15-years, as to allow borrowers to pay down their principal and build equity in a shorter amount of time. Obviously, such a task has proven to be monumental. While a shorter loan period is preferred, it will ultimately result in higher monthly payments. Pinto and Marks’s solution: start with a lower interest rate.
In addition to lower rates, which are obvious, the proposed Wealth Building loan will require borrowers to invest in private mortgage insurance. Moreover, they will not be permitted to take out a home equity loan. To enable borrowers to afford to pay “points”—an upfront fee that lowers the interest rate—the mortgage program allows loans to cover up to 100 percent of the value of the home, as opposed to the 96.5 percent cap in Federal Housing Administration mortgages.
This, of course, is all dependent on the idea that banks will cover the costs of points for some low-income borrowers. Pinto suggests this may occur under their community development programs.
Creditworthiness is typically determined by several factors, the most prominent of which is the percentage of income a respective loan takes out of a borrower’s income. Some may be more familiar with the debt-to-income ratio. The Wealth Building Home Loan, however, borrows from the “residual income” theory already put in place by the Veterans Administration. The VA’s approach currently adds up what a family spends on necessities such as transportation and childcare and then looks at what’s left for housing. The most encouraging aspect of this approach is the risk mitigation. Subsequently, less risk may account for a lower interest rate.
While the Wealth Building Home Loan is already being tested, Pinto has acknowledged that he intends to initiate additional pilot programs. “In order to be a game-changer, you need to have a lot of people doing it,” Pinto says. As it stands, the program has already received high praise. Joseph Smith, monitor of the $25 billion National Mortgage Settlement over faulty foreclosure practices, has already tipped his hat to both Marks and Pinto. Already a believer that a lack of equity is the leading cause of our fragile market, Smith is an advocate of the Wealth Building Home Loan proposal.
Should the program gain traction; the entire housing sector may receive a boon from millennial participation. Many believe that it is their participation, or lack there of, that has prevented the recovery from moving forward. Seeing as how this program is geared towards younger populations, we may be witnessing a large step in the right direction.