A Housing Policy for the 21 st Century Edward J. Pinto Codirector – International Center on Housing Risk American Enterprise Institute October 7, 2015 The views expressed are those of the author alone and do not necessarily represent those of the American Enterprise Institute. 1

Looser and looser mortgage lending standards Flawed: excessive leverage piles debt onto households Simple economics 2 Housing policy failure in the 20 th century

A 21st Century plan for reliable wealth building Three paths: Buy a home with a wealth-building mortgage, Invest in a defined contribution retirement plan (ideally with an employer match), and Invest in children’s education. Three steps to achieving: Housing finance refocused on the twin goals of sustainable lending and wealth building. A modest subsidy would aid low-income home buyers Modify the qualified mortgage rule to encourage wealth building. 3

Opportunity for HFAs to create a housing finance policy for the 21 st century HFAs exempt from Qualified Mortgage regulations, providing opportunity for safe, but more risk balanced underwriting [1] [1] Opportunity to achieve sustainable lending and reliable wealth building [1] [1] Housing Finance Agency (HFA) is defined as an agency empowered to provide housing and related facilities generally for low- and moderate-income (LMI) consumers. 4

Market rate, private lending Requires little or no down payment with broad credit box Monthly payment nearly or as low as on a 30-year, fixed rate FHA loan 15- or 20-year fully amortizing loan Much lower foreclosure risk 5 Step 1: the Wealth Building Home Loan

Step 1: WBHL uses the existing mortgage toolbox Somewhat higher monthly payment - a means of savings through scheduled amortization Components combine to increase buying power to 97% Modest targeted subsidy of 3 points increases 20-year term buying power to about 100% for low- and moderate-income borrowers 6

Step 1: Loan Comparison $100,000 home purchase price (for ease of comparison) FHA 30 year* 15 year 2-step** 20 year 2-step*** LTV96.5%100% Rate/P&I (+MIP for FHA)3.875%/$ %/$6323.0%/$555 Pre-tax annual income/ Buying power vs. FHA $27,247/ 100% $31,553/ 87% $28,233/ 97% Net equity after 7 years (10% selling expenses, 2% annual appreciation) $19,073$46,798$31,814 <97% LTV reached in month?9710 <90% LTV reached in month? <80% LTV reached in month? Payment shock (year 8)NA13.3% (1.9% per yr.)12.6% (1.8% per yr.) 7 * 96.5% LTV + upfront fee, with 0.80% annual MIP. Income based on 28% housing debt-to-income. ** 100% LTV plus 3 buydown points. Rate fixed for years 1-7, steps to 5% for years Income based on 28% housing debt-to-income. *** 100% LTV plus 3 buydown points. Rate fixed for years 1-7, steps to 5.0% for years Income based on 28% housing debt-to-income.

Step 1: Market rate WBHL Uses safe but more risk balanced underwriting Focus on 15 through 20-year terms Two-step rate option has limited payment shock Focus on wealth building with a unsubsidized portfolio product – broad income eligibility 8

Step 2: WBHL for low- and moderate-income households Focus on 15 through 20-year terms Opportunity for HFA financing Underwriting standards set by HFA Two-step rate option has limited payment shock Modest subsidies may be used to increase the buying power for low- income households 9

Step 3: Alternatives to qualified mortgage rule to encourage wealth building Integrate residual income method and ability-to-repay Take “forced savings” due to both shorter amortization term and retirement savings into account when setting debt-to-income limits Implement other safe, but risk balanced underwriting standards 10

WBHL Status Three market rate offerings to date Neighborhood Assistance Corporation of America offering CRA-eligible loans through Bank of America and Citibank About a dozen more financial institutions in 8 states preparing to launch Six private MI companies offering to insure with MGIC the most active Press coverage has been widespread and positive 11