Getting HARP’ed and the SRM

FHFA_Mel_Watt

PartnerOwn attended the Federal Housing Finance Agency’s Getting HARP’ed event in Chicago, Illinois on July 8th.  It included FHFA Director Mel Watt and representatives from The Treasury Department, Fannie Mae, Freddie Mac, Wells Fargo and Neighborhood Housing Services of Chicago.

FHFA_Panel

HARP is federal program that helps current borrowers lower their interest rates on the loans, even if their home is in negative equity.  For borrowers, their loans must meet the following criteria (note that this has changed from its initial roll-out):

  • Owned or guaranteed by Freddie Mac or Fannie
  • Originated on or before May 31, 2009
  • Have a loan to value of greater than 80%
  • Be current on your mortgage with no 30-day+ late payments in the last 6 months and no more than one late payment in the last 12 months

The event advertised the HARP program as free money.  This is because HARP takes an existing loan and lowers its interest rate.  Since programs like HARP have helped borrowers reduce their monthly payments, and we support the work of the federal government to help homeowners who can save money, we want to highlight the HARP program and are happy to see them engage with local communities as they did this week.  The FHFA says that 35,000 people alone in the Chicago metropolitan area could receive this support but still do not.  It is hard for anyone to beat the interest rates that the HARP program provides.  And we encourage people to consider HARP if they are looking to refinance their existing mortgage and want to take advantage of the historically low interest rates.

In spite of HARP’s benefits, HARP also provides an opportunity for us to reflect on the benefits of our product, the Shared Responsibility Mortgage.  Effectively, PartnerOwn believes that reduced monthly payments should be built into the mortgage contract from the beginning to protect homeowners in market downturns.  HARP is a federal program that came about after the crisis.  It required federal approval and has had changing standards as it has tried to impact more and more homeowners.  The need for a program like HARP speaks to the problems of the original mortgage contract itself, and that is why we want to make the SRM a standard so that one-off programs like HARP will not be needed in the future.

HARP does have its limitations.  It can provide borrowers with a lower interest rate, but there is no possibility of principal modification.  Basically, if you and your family bought at the height of the bubble, and the market subsequently went down through no fault of your own, you are still on the hook for all of that debt, albeit at a lower interest rate.  The Shared Responsibility Mortgage lowers a borrower’s monthly payment according to changing market conditions, however.  Our monthly form of principal modification has been cited to be  more effective in providing assistance to homeowners than interest rate reductions.  Further, we believe that the intervention used to help homeowners keep current on their mortgages should be the most effective, and investors should expect those modifications as well to keep their borrowers able to pay their obligations.

For more about the efficacy of principal modification, you can check out this article from the Woodstock Institute about its relevance for the Chicagoland area.

PartnerOwn in Bloomberg Magazine

PartnerOwn in Bloomberg

PartnerOwn’s work is covered in Bloomberg Magazine’s May 26th Opening Remarks column, “The Shared Responsibility Mortgage Could Help Bubbleproof the Housing Market.”  There was a typo since PartnerOwn is a joint venture for Shima Rayej and Dylan Hall.

So far, the shared-responsibility mortgage exists only in the minds of two ivory tower economists—Mian at Princeton University and Sufi at the University of Chicago Booth School of Business. A two-person startup called PartnerOwn plans to launch the first shared-responsibility mortgage on Chicago’s Northwest Side in cooperation with the Latin United Community Housing Association. “Our personal goal is by August,” says Dylan Hall, a former graduate student of Sufi’s…

 

Shared Responsibility Mortgage

Shared Responsibility MortgagePartnerOwn’s work to improve mortgage finance is based on the research of economists Amir Sufi and Atif Mian, who propose the Shared Responsibility Mortgage (SRM) in their new book, House of Debt.  Their research into the Great Recession has made them the experts on its underlying causes, and their down-to-earth approach makes their book (and blog) a great read.  With this post, we want to introduce a few key concepts that draw on their work and explain the basic need for their proposal, the SRM.

Buying a home is more than buying rooms, a roof, a garage and a backyard.  It is buying into a neighborhood, a school district, and a commute to work.  A homeowner may control the house but not the neighborhood, the local businesses, or the school district.  Things change.  And these changes can hurt or help the value of the home.  If a nearby employer leaves the neighborhood for example, the home and its neighborhood may be less desirable since there are fewer jobs.

In addition to neighborhood risk, homeowners face market risk.  To buy homes, people use a lot of debt (90% of the value of the home for the typical buyer).  This is dependent on someone or some institution being able to make those loans.  So, starting in 2007, when the housing market began to go through a major correction and banks needed to be bailed out by the government, lending became less common which hurt home values.  People who were using the value of their home to get by started to consume less because they lost wealth.  This in turn hurt businesses and caused layoffs.  More people defaulted on their debt.  And overall, nationwide home values dropped over 30% in the course of a single year.

Because most homeowners use debt to purchase their homes, they are not protected if the neighborhood or the housing market changes.  The debt is constant.  These risks would make any investor cringe, especially since most mortgages are thirty years in length, ample time for the risk to be realized.  However, as mortgages have grown in length and require lower down payments, our government and banks still encourage borrowers to take on this greater risk and hope things work out.

This is why PartnerOwn is working to implement Sufi and Mian’s SRM.  Its most fundamental innovation is to tie the homeowner’s debt to the local housing market.  If home prices go down because of the neighborhood and market risk, the homeowner’s monthly payment will go down as well.  So, if the neighborhood decreases by 10% in value, a homeowner’s monthly payments will also decrease by 10%.  Effectively, the risk is shared with the lender, who can better handle the risk through modern diversification strategies.  This will protect the homeowner who has a significant portion of her wealth tied up in her home and provide relief in case the local neighborhood or housing market experiences a downturn.  Additionally, the homeowner never has to make up those decreased payments. It is simply part of the original agreement between the homeowner and the lender.

To pay for this protection, the homeowner would pay a small portion of the increase in the home’s value at sale.  So, if a homeowner bought a home for $100,000 and sold it for $110,000, the homeowner would pay 5% of the $10,000 made, which is $500.  The homeowner essentially borrows from the future increase in the home’s value to receive protection.  If the home does not increase in value, no payment is made.  Sufi and Mian argue that this simple innovation would have helped limit the severity of the most recent crisis.

PartnerOwn is currently working to implement a version of Sufi and Mian’s SRM.  We have identified a first investor, a local housing agency in Chicago, to help us originate SRMs for its clients.  They believe the SRM to be a more responsible form of lending for their clients and a way to invest in their local neighborhood.  We look forward to keeping you updated about our progress.  And if you have any questions about the SRM, please do not hesitate to contact us along the way.

Team PartnerOwn
team@partnerown.com

LUCHA’s Homebuyer Seminar

Recently, PartnerOwn had the pleasure of taking part in a six-hour housing counseling seminar on a Saturday with twenty future home buyers.  The program was provided by LUCHA.  LUCHA is a nonprofit neighborhood housing agency serving the Humboldt Park, West Town and Logan Square neighborhoods in Chicago.  PartnerOwn wanted a glimpse at programs like these that have improved a borrower’s ability to stay current on her mortgage and are a great service to the local communities they support.

LUCHA home buyer seminar

LUCHA home buyer seminar

LUCHA’s seminar covered a wide array of homeownership: from financing the home purchase to monitoring energy usage.  We learned a great deal, and we also saw the need for better financing opportunities for borrowers since participants talked through issues of credit scores and down payment needs . We recognize that any new financing arrangement should be flexible enough to provide options for borrowers with different down payment thresholds or credit scores that do not reflect their financial situation.

The day began by enumerating the positive and negative aspects of homeownership.  The participants listed many “consumption” based benefits of homeownership, and the instructor suggested that purchasing the home is also an investment towards the end of the brainstorming session.

To acquire financing for their home purchase, all participants were interested in obtaining a mortgage.  The instructor provided tips for obtaining and maintaining a good credit score.  One participant was surprised that after paying off all of his credit card accounts and closing them, his score could be hurt because it lessened his credit history.  It made PartnerOwn wonder if there are better ways to determine a borrower’s ability to pay a mortgage, outside of using a credit score alone?  Research has demonstrated how the dependence on credit scores led to lax screening in the most recent housing crisis.

A mortgage lender spoke next about financing options that banks provided to borrowers.  It was a great opportunity for participants to learn more.  Many banks currently offer down payment assistance programs.  The banker also stressed that they did not want to “put borrowers in a position to fail” when making a loan given what has happened in these past five years.  Unfortunately, the banker did not discuss the risks that borrowers face, such as house prices decreasing in value or the possibility of being in negative equity.  This is surprising given that Zillow estimates that 30% of Chicago homes are still in negative equity.

Juan Linares, LUCHA’s Executive Director and a commercial real estate lawyer spoke next about legal considerations when going through the home purchase process.  He emphasized asking for more than the standard five day inspection period to make a decision because it can often be difficult to book an inspector and get the results in the contracted timeframe.  His insight was invaluable for all involved.

Juan Linares, Executive Director, LUCHA

Juan Linares, Executive Director, LUCHA

Next on the docket was a real estate agent.  The real estate agent spoke about the commitment one must sign and the small things agents can do to make sure that the purchase goes smoothly.  One anecdote was to specify the models of the appliances that would stay in the house since he once had a client end up with a rusty refrigerator that was switched into the home because the contract only specified a refrigerator.

A real estate appraiser and an electrical provider dug into the details of keeping up a home and ensuring that the home you buy is the right one.  LUCHA’s team then closed with advice for down payment grant opportunities available through state and federal agencies.  Most of the programs took the form of a loan at a higher interest rate than the mortgage itself.  While it is enviable to help borrowers overcome the down payment obstacle, it seems doing by encouraging more debt may not be ideal in the long run.

It was a great day for homeownership.  And we thank LUCHA for the opportunity to participate.  Stay tuned for more updates.  PartnerOwn is busy at work creating our financing solution for residential real estate and acquiring the resources to make it a reality.

The PartnerOwn Team

Missing the Point? Housing Industry vs. Housing Academics

By Dylan Hall, PartnerOwn Team Member

One fun debate to follow is the argument between housing industry and housing academics.  Most recently, the debate has centered on the mortgage interest tax deduction, which enables homeowners to deduct their mortgage interest expense as an itemized deduction on their tax returns.  This deduction typically helps out people with incomes greater than $100K and is not seen as a progressive tax policy generally speaking.

Housing debates tend to follow a common thread though.  Typically, academics encourage more renting and less government involvement.  People in the housing industry on the other hand “nobly” advocate for the person on Main Street who can benefit from tax breaks and subsidies and cite the benefits of ownership for communities.

We at PartnerOwn find these debates interesting, albeit sometimes confusing.  The academic viewpoint is one of telling consumers that homeownership does not make sense and to ultimately consider renting.  This ignores peoples’ stated desire to own though.  When PartnerOwn went to Chinatown in Chicago, we learned that people generally wanted to be homeowners.  They took out 15 year mortgages and paid them down as quickly as possible.  Housing was true wealth in their eyes.  They did not want to deal with the stock market, sure they owned their own businesses, but housing was something that was tangible and real, not a statement they receive in the mail every six months from Fidelity.  It is also in this neighborhood where PartnerOwn found the best community center that took care of people from children to senior citizens and was even awarding a cop for her commitment to the area for more than a decade.  Shouldn’t academics be advocating for better ways to finance ownership if they are worried about the financial risks associated with ownership, not just pushing people to forget about owning?

This is not meant to ridicule housing academics.  They are advocating a change of mind, taking on large businesses and the housing industry in favor of a better economic system that is less dependent on taxpayer involvement.   Most mortgages last 30 years and can be used for 97% of financing.  This contrasts with the Great Depression when mortgages were generally 50% of home value and lasted 3 to 5 years.  We have effectively stretched the limits of credit over the past eighty years.  Unfortunately, houses become more expensive when more people can get more credit to pay for and ultimately to compete for home purchases.  Housing industry advocates likely benefit from an increase in the money being made available.  Think of the nature of transactions and commissions at play for various stakeholders in the housing industry.  Less credit means lower prices.  Fewer deductions mean ownership becomes less lucrative.  Why wouldn’t any good business in the housing industry express a desire for federal money to be given to homeowners?

Now, as spectators of this dialogue, PartnerOwn’s conclusion from these debates is simply that we should be skeptical of the housing industry and its blind commitment to federal taxpayer support in the name of helping out the “little man,” but that we should not ignore consumer demand to own and the community benefits that come with it.  Finding a new way to finance ownership that is not dependent on deductions and debt may be just the ticket.

Need to Bridge Between Owning and Renting

By Dylan Hall, PartnerOwn Team Member

The Housing Partnership Network released a white paper in March about opportunities for reform in the housing market.  In the report, they cite the need for new models for “Homebuyer Readiness and Sustainable Ownership.”  They cite the damage to credit scores and the tightening of lending standards in response to the most recent economic downturn as reasons why.

One need they address are “Hybrid Tenure Products to Bridge Between Owning and Renting.”

“Policy efforts should focus on the challenge of creating new pathways to homeownership for young families and low-income households in this new market environment.  One particularly important consideration is the embrace of hybrid housing tenure models that help families move between renting and owning their homes.  Hybrid tenure products include lease purchase, shared equity, shared appreciation, community land trusts and earned homeownership approaches.  Many communities and providers around the country have experimented successfully with these models but we have so far failed to make these interventions widely available.”

Purchasing a Home: Prospective homeowner considerations

By Dylan Hall, PartnerOwn Team Member

These past two weeks, PartnerOwn has continued researching how homeowners pay for housing and the issues that they come across.   Needing to speak to a lot of homeowners, we decided to speak with people who speak with a lot of homeowners.   The United States Department of Housing and Urban Development  has certified counselors who provide free counseling services to prospective and current homeowners.  We met with counselors throughout the city of Chicago.

Our takeaways from the interviews are that there are populations who could benefit from a “high touch” partnership in owning a home that deals with both financial and maintenance concerns.  Also, providing financing alternatives for people who meet income thresholds but have low credit scores from a lack of credit history or use can be valuable as well.  Finally, creating a network of homeowners can be a valuable way to address issues that are common to all, such as property tax changes.

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All housing counselors offer workshops in purchasing a home.  They described the problems their clients face in the following order:

1) Education – understanding what it means to own a home, setting realistic affordability expectations, establishing a budget

2) Credit scores – need to build up a better credit history or cover past due bills.

3) Down payment/Earnest money – having saved enough money to purchase

4) Employment history – need to establish longer employment history even though they have sufficient income

Most of these agencies tend to work with low middle-income and immigrant populations.  Yet, there is variation within these communities.  For example, in Chinatown, foreclosures are fairly rare and most work is done around translation and understanding the home purchase process.  People use a strong family support network to help in meeting their obligations, prefer to take out 15 year mortgages due to lower interest payments and prepay as soon as possible.  They view housing as an investment, one that is the most trustworthy.  As soon as they pay off their first house, they look for their second to begin renting out.

Other immigrant populations and lower middle-income have a different perception.  The consumption aspects of housing play a bigger role and the 30 year mortgages are more common.  Month to month affordability is a bigger concern, and the American Dream of homeownership, of being in control and creating their own living space, and passing down something to their children motivates the purchase.

Lower middle-income populations may need budget counseling and to acquire a better understanding of the costs associated with homeownership.  Most counselors cite a need of consistency, of not just getting someone into the home but working with them on their budget and the other aspects of homeownership once they move into their house.  As a result, a more “high touch” service that provides financial and maintenance consultation could be valuable instead of letting people go on their own once they receive their mortgage.

Immigrant populations are also subject to realities of a lack of history in the United States.  While monthly income may be high, their shorter employment and credit history create difficulty in accessing mortgage financing.  Counselors can usually recommend processes to build up their credit score.  Employment history is more difficult to establish, and can be a problem even if someone has a good paying, stable job currently.  Thus, providing financing options for people who find themselves in this situation is important.

Downpayment assistance programs are fairly common and require the completion of HUD counseling.  This can reduce the downpayment burdens for some.  These may not be permanent though going forward, as many were created from the government settlements against mortgage providers or make use of taxpayer funding.

Property taxes can be a hidden aspect of homeownership for many in the Chicagoland area.  Recently, property taxes  increased, and most homeowners were caught off guard by their increase in monthly payments, especially since these taxes are built in as payments.  Particularly in Chinatown, people sought out advice on getting their home reappraised.

A homeownership partnership should be able to provide information on all costs related to homeownership and act as an adviser for homeowners.  Also, homeowners frequently find themselves subject to considerations like these, and as independent homeowners, may not be able to tap into any sort of collective voice if their local housing counseling agency is not as strong as those that we were able to meet with.  There could be value in creating a network of homeowners due to the complexity of homeownership in America.