Home ownership is not a dirty word

At Economist’s View, Mark Thoma brings up a subject no one seems to want to talk about anymore — helping people with modest incomes buy homes.

In the housing crisis, poor people — of all the likely suspects — are playing the role of scapegoats. Conservatives support the idea that the Community Reinvestment Act, an anti-redlining law, caused the subprime mortgage meltdown. They contend government regulations forced lenders to make bad loans to low-income borrowers.

Thoma quickly dismisses this. Instead, he raises an important question. If someone has good credit, and pays their rent month after month, year after year, shouldn’t there be some way to help them buy a house?

From Thoma:

We are about to start passing rules and regulations to try to prevent another financial crisis from happening, and I don’t want to see people excluded from home ownership unnecessarily. I know it’s unfashionable to stick up for the poor right now, to advocate for increased home ownership, and in particular to say that it was not a mistake to try to increase home ownership rates at lower income levels, but (1) poor households didn’t cause the financial crisis, though in many cases they were victims of it, and (2) it’s the right thing to do in any case.

He’s on the mark, here — it is the right thing to do.

And, as Thoma points out, there are right ways to do it. The correct lesson from the housing crisis isn’t to keep poor people from buying homes — it’s to help them afford to maintain home ownership once they do buy. Oftentimes, pricey home repairs, like a new roof, can send people who live close to the edge over that edge, and they default. Also, low-income borrowers are the least likely to have enough money for a substantial downpayment, which either excludes them from buying entirely, or puts them into a home for which they have little stake – another risk factor for default.

Thoma has some great proposals for this, which I haven’t heard talked about before:

If your household income is in the qualifying range, the government will grant you an equity stake in the house of, say, $5,000 (or pick an amount you like better). If you stay in the house for seven years or more, then the $5,000 is yours if you ever sell the house (perhaps as a tax credit)….

A big problem would be repairs – roofs, plumbing, that sort of thing. Big expenditures like that could cause problems and lead to default. Some sort of insurance against this could be made available and required as part of the house payment (along with co-pays to create better incentives but still keep the cost reasonable).

Thoma says his ideas aren’t refined, but they are a beginning.

Whatever solutions policymakers can come up with, the goal is the same – something ought to be done. In this atmosphere of rescuing banks and shoring up the credit markets, it could be easy to overlook supporting home ownership for low-income borrowers.

In the long run, doing so would be yet another mistake.

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