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

Homeowner Need for Alternative Financing

By Dylan Hall, PartnerOwn Team Member

PartnerOwn’s mission to provide alternative home financing should be motivated by an understanding of the problems, preferences and needs of homeowners and investors.  After a review of market research related to the homeownership decision, we believe that we need to create a financial and legal relationship that provides people with the benefits associated with homeownership but limits their dependency on large, long term debt commitments.

Below is a summary narrative about the homeownership decision followed by a collection of motivating statistics that have been drawn from a number of nationwide surveys and research articles.

The Housing Decision: A Narrative

Most Americans prefer to own a home as opposed to renting.  Homeownership is perceived to be superior to renting for considerations such as privacy, community engagement, safety, school selection and control of their living space.

Homeownership is also seen as a good investment, even though it is secondary in importance for most owners compared to the housing attributes described above.  In spite of the volatility of house prices over the past ten years, people believe housing is a great way to build wealth and is a safer investment than stocks, bonds, mutual funds or IRA/401K.  A majority also believe it has the most potential for return compared to stocks, bonds, mutual funds or IRA/401K.  Thus, homeownership has a dual, likely contradictory, perception of being a safe investment and having the most potential for return.

Most surveyed do not believe that they have enough personal savings built up.  Surprisingly, given their lack of savings and the fallout from the most recent recession, a majority of respondents are not very stressed about their ability to make payment on their debts, and are not very concerned about losing their job in the next 12 months.  Most feel comfortable about their ability to pay for their current monthly expenses.  This is notable as housing expenses have become a bigger portion of total expenses recently.  Housing represents the majority of wealth for most low-to-moderate income households

When it comes to purchasing a home, the median perception is that a 10% down payment should be sufficient to obtain a mortgage.  A significant majority of survey respondents believe that someone should continue paying their mortgage even if the mortgage is more expensive than the house or the person paying the mortgage is in financial distress.  Currently, a quarter of homes are worth less than their outstanding mortgage (in negative equity / underwater).  In some major metropolitan areas like Chicago, this number is closer to half.

Since 2007, renting has become more common.  As a result, rental prices have grown and the availability of rental units has decreased in many metropolitan areas.  Of those renters not renting to save money for homeownership, they cite affordability, flexibility and less stress in guiding their decisions to rent.

Generation Y (representing people born between the 1980s and 2000s) is often portrayed as being less interested on homeownership because they are less likely to own homes or have a mortgage.  However, when asked about their preferences, a significant majority want to own a home in the future and cite the same benefits of homeownership described above.  We do know that Generation Ys are  more worried and feel more constrained by their current debt levels.  As a result, they may not desire to incur additional debt to finance a home.  Meanwhile, baby boomers, confident in their ability to cover expenses and maintain employment, do not believe that they have enough savings.  This may stem from looking ahead to retirement.

Our conclusion from this initial market research is that people prefer ownership for a greater sense of control.  From an economic perspective, it is disconcerting that those surveyed may not have not realistic expectations when it comes to the investment aspects of housing, especially when we consider that a majority of people believe it is ok to use credit to finance 90% of the purchase.  In effect, these are risky bets that we encourage homeowners to take on a daily basis, even though they tend to view housing less as an investment and more as a consumption good.

Owning vs. Renting: Statistics

65.1% of households are owner occupied, while 34.9% are renter occupied (US Census, 2010)

65% of households would buy as opposed to rent (31%) if they were going to move (Fannie Mae, 2013)

The most common reason (28%) renters cite for renting is to become financially ready to own (Fannie Mae, 2013)

61% of households believe they are more likely to buy at some point in the future as opposed to rent (31%).  (Fannie Mae, 2013)

71% of households believe the number of homeowners will increase or stay the same (Fannie Mae, 2013)

The Role of Debt: Statistics

The median home buyer uses a mortgage loan to finance $91 of out of every $100 spent to purchase a house (NAR, 2013)

92% of homebuyers have mortgages that are fixed rate, meaning that they pay the same interest rate on the mortgage loan (NAR, 2013).

76% of mortgages have length of 30 years or longer (Fuster and Vickery, 2013).

Median survey respondent believed 10% is sufficient for a downpayment for a home (Fannie Mae, 2013).

86% surveyed believe that it’s not ok for a person to stop paying the mortgage on the home if the mortgage is worth less than what they owe on it. (Fannie Mae, 2013).

77% surveyed believe that if a person is facing financial distress, it is not ok for them to stop paying the mortgage. (Fannie Mae, 2013).

Homeowners Tend to be More Consumption Focused: Statistics

65% would prefer to buy a home because of the broader security and lifestyle benefits of homeownership,such as providing a good and secure place for your family and children, where you have the control to make renovations and updates if you want, and in a place that’s in a community and location that you prefer (Fannie Mae, 2013)

35% would prefer to buy a home because the financial benefits of homeownership,such as its value as an investment (especially compared to paying rent), its value as a way to build up wealth for retirement or to pass on to your family, and the tax benefit (Fannie Mae, 2013)

Housing as an Investment: Statistics

To achieve building up wealth, households believe they are better off owning (82%) as opposed to renting (13%). (Fannie Mae, 2013)

84% of respondents believe owning makes more sense because you’re protected against rent increases and owning is a good investment over the long term.  13% believe renting makes more sense because it protects you against house price declines and is actually a better deal than owning. (Fannie Mae, 2013)

66% surveyed believe buying a home is safe investment compared to investing in bonds (48%), stocks (16%), mutual fund (47%), or IRA/401k (65%).  (Fannie Mae, 2013)

57% surveyed believe buying has a lot of potential compared to investing in bonds (25%), stocks (52%), mutual fund (34%), or IRA/401K (50%).  (Fannie Mae, 2013)

Lower income homeowners have a majority of their wealth tied into home equity

Housing as Consumption: Statistics

87% believe that to to achieve having a good place for your family or to raise your children, you are better off owning as opposed to renting (5%). (Fannie Mae, 2013)

81% believe that to feel engaged in their community, they are better off owning as opposed to renting (9%). (Fannie Mae, 2013)

83% believe that to achieve living in a place where they and their families they are better off owning as opposed to renting (7%). (Fannie Mae, 2013)

93% believe that to achieve having control over their living space, they are better off owning as opposed to renting (5%). (Fannie Mae, 2013)

90% believe that to achieve having a sense of privacy and security, they are better off owning than renting (6%). (Fannie Mae, 2013)

Growth in Rentals: Statistics

Household Fiscal Health: Statistics

68% surveyed said that they are not very stressed about their ability to make payments on their debt. (Fannie Mae, 2013)

55% surveyed said that they do not have sufficient savings. (Fannie Mae, 2013)

73% surveyed said that their current income is sufficient for the expenses that they have. (Fannie Mae, 2013)

77% surveyed said that they are not very concerned about losing their job in the next 12 months. (Fannie Mae, 2013)

35% said that their current household expenses have increased significantly over the past 12 months. (Fannie Mae, 2013)

50% believe to achieve having less stress, they are better off owning as opposed to renting (44%). (Fannie Mae, 2013)

A significant majority (85%) of homeowners said that the mortgage rate offered were at least somewhat important in their decision to own.  A majority (58%) said that mortgage rate offered was very important. (Fannie Mae, 2013)

25% of home are still in negative equity (Zillow, 2013).

Mortgage delinquency rates look to be steadying at rates that are above pre-2007 levels.

Both renters and homeowners have increased the proportion of their income being spent on housing.

Most lower income households have a majority of their wealth concentrated in their homes.

Generational Concerns: Statistics

More than half (54%) of millennials say debt is their “biggest financial concern currently,” according to a survey focused on Gen-Y attitudes toward savings and retirement. 42% say their debt is “overwhelming,” twice the rate of boomers who were also surveyed for comparison.  (Wells Fargo, 2013)

88% of Generation Y respondents said that in the future they are likely to “always own.” (Fannie Mae, 2013)

88% of Generation Y respondents said that they plan to  purchase a home in 3 years or more. (Fannie Mae, 2013)

63% of Baby Boomers believe they do not have sufficient savings (Fannie Mae, 2013)