PartnerOwn’s Shared Responsibility Mortgage℠ has been highlighted by the Federal Reserve Bank of Chicago’s ProfitWisepublication as an innovative tool to help banks fulfill their Community Reinvestment Act (CRA) guidelines.
The article broadly speaks about new product innovations like the SRM that are responsive to local market conditions as strengthening an institution’s CRA examination performance:
“Community development, lending, qualified investments, and services that are responsive to local needs and have not been routinely provided by other private institutions can be heavily weighted – both positively and negatively during examinations. The products and strategies discussed in this article, while not (yet) marketed or proven at scale (with one exception), may represent opportunities for banks to meet CRA obligations in the communities they serve, as well as important innovations to reduce defaults.
ProfitWise then introduces the SRM℠ specifically and highlights its relevance for lenders:
SRMs℠ would also provide benefits to the bank or institution that holds the mortgage, such as helping expand lending to new potential borrowers who are concerned about house price volatility, and potentially helping lenders earn CRA credit for serving LMI [low-to-moderate income] communities.
PartnerOwn is currently establishing a fund to help banks use the SRM℠ as a tool for CRA innovation. If your institution is interested in using the SRM℠ for CRA, please contact us at email@example.com
Consideration must given to shifting away from inherently inflexible debt contracts to shared-equity contracts. It is possible to imagine that some finance would be supplied in the form of risk-sharing contracts of the following form: the finance supplied would carry a running yield for investors but their value would be linked to some index of house prices. This would cushion borrowers during a crash in house prices. It would also give savers the ability to invest in the housing market other than by actually buying lumpy (and expensive) houses.
For investors, these new instruments could prove to be attractive assets. More important, the investors would automatically share the risks in the market. That would make the borrowers less exposed to the risks of extreme leverage and the financial system as a whole more robust. This is one of the recommendations of House of Debt, an important book by American economists Atif Mian and Amir Sufi.
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.
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.
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…
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’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.
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.
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.
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.