Wealth-building home loans an alternative to mortgages
When I worked in poverty programs for Mayor Michael Bloomberg in New York City, one of the hottest anti-poverty ideas was something called “asset building and financial literacy.” The idea was to help low-income people who have trouble building up savings because they do not know how to budget their earnings and are unfamiliar with the practice of traditional banking. The mayor’s office expended great effort setting up financial counseling programs that offered low-income people an opportunity to receive guidance on how to budget, save, and bank.
These efforts were well-intentioned, but they were small and very labor intensive. As I watched these programs develop, I noticed that they did not help very many people. Scaling them up so they could help more people would be difficult. All told, a few thousand people received financial counseling and the savings they were able to put away did not amount to very much.
There is no question that asset building is good for low-income Americans and good for communities. New efforts aimed at encouraging it should be explored. But this discussion too often ignores government policies that have hurt the ability of low-income Americans to build wealth — namely, housing policy.
In the years leading up to the financial crisis, the easing of lending standards drew many low-income and working-class families into homes they would not be able to afford if they suffered a significant economic setback. While analysts place different emphasis on who is most to blame, virtually everyone agrees that weakened lending standards contributed to the housing bubble, the financial crisis, the recession and the resulting financial ruin of countless families.
Home ownership can be a very good thing. But it must be done in a way that recognizes it is far from risk-free. That is why two recent contributions to the public dialogue are important. The first is the National Mortgage Risk Index (NMRI), developed by Ed Pinto and Steve Oliner, two of my colleagues at the American Enterprise Institute. The NMRI tracks, in a comprehensive way, the extent to which government entities are backing solid loans — or falling back into the bad practices of the early 2000s.
The latest edition shows that the bad practices are coming back. The NMRI estimates that if these current mortgages were subjected to stressful market conditions, nearly 12 percent would default. That is not a recipe for building wealth.
It’s important to note that mortgage loans are not all the same. Some are much more risky than others. That’s why the other contribution of Pinto and Oliner, a new loan product designed to help people build equity more quickly and safely, is so important. Their Wealth Building Home Loan offers a 15-year term, allowing homeowners to build equity quickly. By directing down-payment funds toward paying down the loan’s interest rate, the product offers substantially the same buying power as a traditional (and much more risky) 30-year mortgage. Some borrowers may be forced to scale back the price they pay for a home in a small way, but in return, those borrowers will be in a much safer position should the economy slow, putting their job or salary at risk, or should home prices fall.
Like any good man with a good idea, Pinto has been traveling around the country to convince bankers and housing advocates to adopt the Wealth Building Home Loan as a standard alternative to the traditional 30-year mortgage offered by most banks and backed by federal mortgage programs. Several institutions and organizations have taken him up on the offer. The Neighborhood Assistance Corporation of America (NACA), a nonprofit organization working in partnership with Bank of America and Citi, debuted the product last September and reports strong demand from its clients. Androscoggin Bank in Maine is now offering a version of the product, and a large regional bank will be rolling out its version soon.
Helping Americans build assets and own a home are good things for the government to do — but only if it doesn’t expose borrowers to unneeded risks and costs that could destroy their financial security. Asset building and improving financial practices for the poor are trendy issues for the compassionate left. So too should monitoring lending standards for home mortgages and offering better, more affordable, and more dependable mortgages to Americans seeking to move up by buying a home.
Robert Doar is the Morgridge fellow in poverty studies at the American Enterprise Institute.