Expanding Homeownership Through Education

 
A few months ago, I wrote in an article entitled Expanding Homeownership: What Went Wrong. I stated that homeownership was a laudable goal because I believe that communities with a large percentage of homes occupied by owners are more stable and healthier communities. 

People who have an opportunity to own their own homes some day by paying off their mortgage over time have a good shot at creating wealth. If they succeed, they also have a lower cost of homeownership in their retirement years when their income drops. There are other reasons too; I am sure you can think of them.

There have been numerous efforts for the past two generations to use the power of the government to increase homeownership. Every law regarding housing that has been passed in the last 30 years has contained language about expanding homeownership opportunities. 

These programs have worked, and the percentage of minority citizens who own their own homes is at its highest level except for the period before the foreclosures started. Those foreclosures ended the dreams of many families who were sucked into the housing market during the era of profligate lending, the subprime and Alt-A mortgage era.

What went wrong was that many lenders found ways to avoid regulation. They loosened lending practices and stepped up lending to people who were not qualified under traditional mortgage underwriting criteria. They got away with this for a while because loose standards at the rating agencies and an outrageous compensation structure on Wall Street fostered foisting bad loans onto investors who were not wary enough. That fostered the housing bubble that we have now seen pop.

The good news is that as homes that were previously beyond the reach of buyers are now much lower in value. Coupled with low interest rates that have made them more affordable, there are now more opportunities than in recent memory for minority and other homebuyers from lower-income segments of our society to afford a home.

Another factor that helps is that many homes that are either for sale today or that will be for sale in the next year or two are those that are owned by lenders who acquired them through foreclosure. These “sellers” are a lot less demanding than the original owners would have been in a normal market. Lenders are a lot keener on selling homes and less fussy about the price they get for them. So there is a significant supply of homes available.

The problem, then, comes down to financing the homes. How does the marginally qualified borrower get a mortgage?

The answer is that we do not go back to the crazy world of lending to people with no down payment, poor credit scores, and unverifiable income. That stupid practice is what got us into this mess. What we need to do is be smarter about creating homebuyers, and when I say create, I mean empowering homeowners by facilitating their buying opportunities.

This is not an overnight process as it was in the subprime era where greedy real estate people sold a home to anyone who would sign the loan documents. They did everything but go down to skid row and find “buyers” among the homeless, and maybe they even did that.

The keys are simple and have been well-known for generations. This is back-to-basics, blocking and tackling preparation for homeownership. And it requires education and progress monitoring on a massive scale.

First, we need to teach people that they have to save money for a down payment, say 5 percent of the purchase price. Bluntly, if they are 30 or 40 years old (or whatever) and have spent every nickel they have earned, they do not have the constitution to become homeowners. Homeowners need to have what used to be referred to as “demonstrated habits of thrift.”  

Second, people who buy things they cannot afford, who charge purchases that they cannot pay for quickly, or who do not make payments as they promised to do, have not demonstrated the maturity to assume an obligation for making substantial mortgage payments every month. They will not make good homeowners.

Finally, they need to have steady income because they will have steady payment obligations. Seasonal variations are okay as long as annual income is steady. A pattern of making enough over a couple of years’ period is required.

At this point, I need to inject one note of realism into the equation. If you spend any time talking with residential landlords, you will hear lots of horror stories about bad tenants. These include people who are just plain irresponsible to those who abuse substances and members of their families. It includes career criminals who happen to be out of jail, at least for the moment.

There are a number of people who just are bad human beings. They are bad family members, bad employees, and bad tenants, and if you sell them a home, it won’t be long before they demonstrate that they are bad homeowners headed for a foreclosure. We simply need to acknowledge that these people are out there and that we can’t include them in the mix.

Now, back to the task. You can easily see that we are talking about three concepts that you will recognize as important: Discipline, responsibility, and sacrifice.

I believe that those concepts can be taught. They can be taught by homebuilders with prospects who enroll in classes to improve their opportunities. They can be taught by community action groups or housing industry factors that will ultimately benefit from more buyers. That includes real estate agencies, lenders, title companies, and the like.

They also include outfits that are dedicated to improving financial literacy. Organizations like the National Council on Economic Education (funded in part by Citi Foundation) are a step in the right direction. This is directed at high school students, but the concept could easily be expanded to include a market of people a generation older, the one that includes potential homebuyers.

Finally, these concepts include an outfit like this one, Credit.com, which can do outreach with a Homebuyer Education Course like the one we have developed. But the first step in all of these programs is that the buyer has to make the first step. He has to step up to the plate and say, “I am ready; help me.”

For more information about Credit.com’s online mortgage education course, please visit “A Step-by-Step Guide To Buying A Home in Any Market”.