Home Loans for Low Income People

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 likely to have bank accounts. A combination of factors can affect whether a borrower qualifies for a loan, and if so, at what interest rate. Many of these factors are class related.

While lenders should consider a borrower's income and assets, an overemphasis on these factors may discriminate against low-income and minority borrowers (Kim, 2002). A low-income person under existing measures of creditworthiness is labeled a poor credit risk may, under different and less restrictive standards, prove to be a worthy borrower. Developing new measures of creditworthiness can correct lenders' perspectives on some low-income borrowers and open up access to credit for those worthy borrowers now being turned down for loans.

One undermined measure, for example, is rental history (Kim, 2002). Credit bureaus do not keep track of whether tenants pay their rent on time. Therefore, tenants who make timely payments are not rewarded in their credit rating, although it may be one of the only factors that could help them. Because low-income and minority households are more likely to rent, this gap in data collection is disproportionately negative to them. The fact that person pays his rent on time would seem to be an excellent indicator of whether he will pay a mortgage on time. However, in our current social structure, credit companies are more focused on wealth and assets.

Expanding credit to previously underserved groups does not necessarily mean greater risk for lenders (Kim, 2002). In recent years, analyses of borrowers' creditworthiness have become more and more sophisticated, in large part due to the advent of technology in home mortgage lending.

Home ownership is a major aspect of class structure in the United States, and homeowners have traditionally been highly regarded in society. The Founding Fathers believed that private property ownership, as defined under common law, pre-existed government (Pecquet, 1987). The state and federal governments were the mere contractual agents of the people, not sovereign lords over them. All rights, not specifically delegated to the government, remained with the people - including the common-law provisions of private property.

When drawing up the Constitution, America's Founding Fathers recognized that there would be times when an individual's right to hold property free from governmental intrusion must be balanced with the fact that a particular public improvement was important to the overall public good (Loop, 2000). In such instances, private property should be made available for such purpose in exchange for just compensation.

The Founding Fathers understood private property ownership to be the bedrock on which American freedom stands (Loop, 2000). They even inserted a clause into the Bill of Rights that says private land cannot be taken unless for a clear public use. These early leaders regarded property owners highly and much of the Constitution catered to their needs. This is still true today. Thus, low-income families could truly rise in the ranks by buying property.

However, as the U.S. has historically been a nation that focuses on individual achievements, low-income families have had few opportunities to buy homes. Social Darwinism was first coined by Herbert Spencer, an English philosopher in the 19th century (Bethell, 1999). This idea flourished in the United States, as is true of many ideologies, religions, and philosophies. A good summary of Social Darwinism is as follows: "In these years, when Darwin's Origin of Species, popularized by Herbert Spencer as "the survival of the fittest, " and applied to races as well as species in a vulgarized form, Social Darwinism, the coming Christian triumph was presented as an Anglo-Saxon Protestant one."

The idea relates to Charles Darwin's biological idea of "survival of the fittest (Bethell, 1999)." Many people believe that an identical process took place among human beings. They believed that white Protestant Europeans advanced much further and faster than other "races." Herbert Spencer took this concept one step further. Human society is always in a sort of evolutionary process in which the fittest- which today are those who can make the most money -- were chosen to dominate. Low-income people simply could not compete. And just as nature weeds out the unfit, Social Darwinism holds that it is acceptable to out its unfit. Thus, today, many people argue that it is undesirable to provide, as public policy, governmental support for any plan that would perpetuate weakness.

As related to home loans for low-income people, public policy is necessary because it gives low income people the opportunity to advance in society. These loans may help some families climb the ladder to middle class, rather than falling into poverty. Thus, the concept of Social Darwinism is unfair in this case.

The title of Arthur Okun's book, Equality and Efficiency: The Big Tradeoff captures the essence of this issue. Okun believed that government policies that reduced income inequality could reduce total production. If the government attempted to take from the rich to help the poor, the rich would react by changing the way in which they used their resources, and these new ways would not be productive. Thus, according to Okun, trying to divide the pie more equally could reduce the size of the pie.

In addition, economic growth depends in part on decisions that are risky. If there are only small potential rewards for those who take risks, people will stick to the tried and true and economic growth will slow. The problem for government policy in this view is to find the proper balance between income redistribution on one hand and production and economic growth on the other. Okun was willing to suffer a considerable reduction in efficiency in order to obtain greater equality.

The case for equality is based on the idea that more equal distribution will maximize utility. If income is subject to diminishing marginal utility, then people at the high end of the income scale receive less utility per dollar of income than people at the low end. The argument is that giving the low-income people more by taking it from the high-income groups would raise utility. The high-income earners would lose less utility than the low-income groups would gain.