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Low Income Home Loans as Public Policy
Since World War II, the United States government has developed public policies that aim to increase opportunities for home ownership through direct housing grants, loan guarantees, and targeted tax breaks (Dye, 2001). For many low-income families, these policies enabled them to purchase a home.
Many of these policies were focused on providing assistance to low-income people. The Housing Act of 1959 expanded the Federal Housing Association's (FHA) aggregate loan-granting authority and raised the limits on individual mortgages (Dye, 2001). The FHA now had the power to assume defaulted mortgages on family homes to prevent foreclosure. Congress extended FHA coverage to new or rehabilitated buildings in which low-income, elderly residents occupied half the units. Low-interest loans and community renewal programs also rose in priority. Congress created the cabinet-level Department of Housing and Urban Development (HUD) in 1965.
The Housing and Urban Development Act of 1968 authorized $5.3 billion over three years for housing aid to low-income families (Dye, 2001). The bill's home ownership plan offered low-income families a monthly home mortgage subsidy. Families combined the higher of 20% of their income or the amount that their mortgage payments would be if the lender had charged one percent interest; the government would make up the difference between this amount and monthly mortgage payments. Congress made families with income between $3,000 and $6,500 eligible and set the maximum permissible mortgage at $15,000. The bill's second main feature was a program that provided equivalent aid to low-income families for rental assistance. The bill also provided for a wide range of new urban renewal and redevelopment programs.
The 1990s brought a new set of challenges to the government, much of which related to the cost of expiring Section 8 contracts and deteriorating properties (Dye, 2001). Several new policies were implemented to ensure the survival of affordable units and the viability of subsidized housing programs. The Low-Income Housing Preservation and Resident Homeownership Act of 1990 aimed to maintain the supply of affordable housing by offering project incentives not to prepay mortgages and to continue the low-income rental use of their properties.
HUD was also faced with the high cost of renewing expiring Section 8 contracts (Dye, 2001). At the peak of the problem was the high cost of FHA-insured mortgages, which demanded higher that market-rate rents, thereby making HUD Section 8 subsidies very expensive. The Multifamily Assisted Housing Reform and Affordability Act of 1997 created a strategy to restructure the mortgages in order to maintain affordable Section 8 subsidies.
The main goal of HUD, to "promote adequate and affordable housing, economic opportunity, and a suitable living environment free from discrimination" continues to lead the department's initiatives (Dye, 2001). Over the past few years, the national homeownership rate for all Americans has reached a record of 68%, but low-income and minority homeownership rates lag far behind. The Department is committed to President Bush's goal of creating 5.5 million new minority homeowners by the end of the decade. The government plays a key role in helping to reach this goal, with its policies that include FHA mortgage insurance, an important source of financing, especially for minority and lower income homebuyers; homeownership vouchers; the HOME program; CDBG; housing counseling; and other efforts.
Homeownership has been a key part of the American dream for a long time, but it has eluded many low- and moderate-income people who currently rent but would prefer to own (Stein and Eakes, 2000). This should not be so. An effective public policy program that extends loans to low-income people can make the dream of homeownership a reality for America's low-income families.
Homeownership is the main path to the middle class for many families (Stein and Eakes, 2000). It represents the best possible opportunity for disadvantaged groups to build family wealth and economic security. Home equity gives people a cushion that allows a family to borrow to start a small business, send their children to college, and handle unexpected events such as job loss or medical bills. Homeownership provides working families the opportunity to accumulate economic resources that create stability and expand opportunities for future generations while simultaneously improving the social stability of low-wealth communities.
Reduced crime, greater school retention, reduced teenage pregnancies, higher life- satisfaction, greater civic engagement, and improved property upkeep are just some of the positive effects of homeownership (Stein and Eakes, 2000). According to a recent University of Tennessee study, children of homeowners are 25% more likely to graduate from high school and 115% more likely to graduate from college than similar children of renters. As a result, according to the study, children of homeowners earn $150,000 more over a lifetime.
However, homeownership remains out of reach for millions of Americans. Rates among low-income families, minorities, and central city residents lag far behind other groups (Stein and Eakes, 2000). Only 45% of low-income households live in owner-occupied homes, as opposed to 86% of high- income households. Minority homeownership rates are also well below the rest of the country: 45% for minorities versus 72% for white households. Among households with incomes 20% to 50% higher than the area median, nearly 80% of white households are homeowners compared to less than 65% of black households. And central city homeownership rates are 23% behind suburban rates.
Unequal homeownership rates result in disparities in wealth since renters have significantly less wealth than homeowners at similar income levels (Stein and Eakes, 2000). In fact, the median wealth of non-elderly low-income homeowners is 12 times greater than the median wealth of non-elderly renters of the same income.
To address wealth disparities in the United States and therefore make opportunities more widespread, the homeownership rates of low-income groups must rise (Stein and Eakes, 2000). Since the largest expense for most low-income families is housing, homeownership provides the greatest opportunity for a family's resources to be dedicated both to current needs and future goals. The family home acts as a savings account that increases each month as the mortgage is paid down and the dwelling appreciates in value. As a form of savings, housing appreciation has historically been an excellent investment. In fact, 63% of all the wealth owned by minority families and 67% of the wealth owned by non-elderly low-income families consists of the equity in their home.
Public policies that provide home loans to low-income people tend to the promotion of individual good and public good (DiNitto, 1999). Public policy is necessary in the arena of home loans for low-income people because this domain is deeply embedded in our economic and democratic institutions. By providing low-income home loans, the government helps hard-working, low-income people take a crucial step into the middle class by buying homes. The new homeowners pay the mortgages they obtained through the program and invest in their homes and communities.
Once the government has done its part, the contract enforces itself: homeowners who do not keep up their end of the bargain lose their homes, and any home equity built up along the way, through foreclosure. It is a fair and practical arrangement. This domain promotes individual good, as it provides a means for low-income people to rise to the middle classes; it promotes public good because it eventually reduces public assistance, which is funded by tax dollars, and improves communities.
There are many reasons that the public sector should be responsible for this domain. Most importantly, if the private sector assumes a primary role, its demand for profit will take away from the programs. For instance, it would be difficult to find an effective way for private lenders to provide no-interest second mortgages, which enable people with no other options to become homeowners.
The New York City Housing Partnership has successfully revitalized areas of New York that many thought were beyond reclaiming (DiNitto, 1999). More than 15,000 families have invested in these communities by buying their own homes through the Partnership -- a public agency. This activity represents private investment of more than $1.5 billion in 50 low-income communities across the five boroughs of New York City.
The themes of class and status play a major role in this area of public policy. Fundamentally, for home loans, "creditworthiness" is an educated guess about a particular borrower's likelihood to pay their mortgage (Kim, 2002). While lenders rely upon a variety of objective factors in making their lending decisions, these criteria shape the way lenders view applicants. In many cases, distortions in this view put low-income and minority borrowers at a great disadvantage, due to social barriers, relating to class structure.
Due to the fact that many of the factors on which creditworthiness is judged depend on a borrower's income and assets, lower-income and minority borrowers usually have a harder time obtaining credit, especially for home mortgage loans (Kim, 2002). Lower-income and minority loan applicants generally have less savings than middle and upper class borrowers, for example, and are less likely to be able to afford a substantial down payment (Wessel, 2001). Lower-income and minority applicants are also less…[continue]
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