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Special Report Contents

Few stand-alone public policy goals have consumed as much consistent attention as the drive to increase homeownership. Homeownership is, after all, considered a critical facet of the American Dream. It has also been, historically, the chief way in which families build generational wealth. Homeownership has also long been viewed as good for communities, because homeowners are theoretically more likely to keep up their properties and participate in neighborhood-building activities. Finally, as the current housing crisis shows, homeownership is a big driver of the national and local economies.

The growth of the American middle class has long been linked to the growth in homeownership that began in the 1940s. In the 1930s, Congress created the first in a series of entities to stabilize housing markets and foster homeownership. Among them was the Federal Housing Administration, created in 1934 as part of President Roosevelt's New Deal. By insuring home mortgages against default, the FHA helped lure skittish lenders back into the market. By introducing low down-payment, long-term mortgages with fixed payments, the FHA opened homeownership to a much broader population. The model for buying a home held sway until recent years, which saw an increase in variable rate, interest-only, and no down-payment loans.

Another big boost to homeownership came with enactment of the 1944 GI Bill, which created a program insuring home mortgages for returning servicemen. As homeownership grew, the federal mortgage interest deduction, which had been in the federal tax code since 1913, began to kick in as a serious incentive for homeownership.

Legislation enacted in the late 1960s sought to increase homeownership further by creating or repurposing entities such as Fannie Mae, Freddie Mac, and Ginnie Mae, which buy mortgages from lenders so that lenders can go on to make more loans. At the same time, the federal government sought to extend the benefits of homeownership to more low-income households and neighborhoods by authorizing the FHA to extend subsidies to low-income home buyers. In subsequent years a whole range of low-income home-buyer programs came on line. They include Mortgage Revenue Bonds, bonds exempted from income taxes that finance single-family home purchases for low-income home buyers; the CDBG program mentioned above; and the HOME program, a more housing specific version of the CDBG program that serves renters and homeowners making up to 80 percent of AMI. Supporting the growth in low-income homeownership were a wealth of community-based organizations not only building such housing but offering housing counseling, such as the members of the NeighborWorks America network.

Beginning in the 1980s, many people who could not otherwise have bought homes, due to poor credit, high debt levels, or other risk factors, obtained loans from the burgeoning subprime lending industry. Subprime lenders charged higher rates and fees to offset the risks. Advocates and regulators began to conclude that some lenders were charging unnecessarily high rates and fees in what seemed to be a deliberate effort to strip home equity from unsuspecting borrowers -- often lower-income, minority and elderly homeowners in gentrifying neighborhoods. While federal limits on such loans were enacted, many advocates felt they didn't go far enough. Further, they did not address the explosion of alternative or nontraditional mortgages, such as interest-only loans and payment-option adjustable-rate mortgages, which were structured so that borrowers may never pay down principal.

As a result of all these factors, the national homeownership rate, which stood at 43.6 percent in 1940, reached 69.2 percent in 2004. In the second quarter of 2008, it was just off its peak, at 68.1 percent, according to the Census Bureau. But concerns are growing that the current foreclosure crisis will widen the racial and income homeownership gap and create blight in many of same low-income urban neighborhoods that were rejuvenating from community development efforts. While black and Hispanic homeownership rates have greatly increased over the years, the gap between their homeownership rates (47.8 and 49.6 respectively) and that of whites (75.2) still exceeds 25 percent. The homeownership rate among households at or above the median family income is 83.5 percent, compared with 51.8 percent for households earning less than the median family income. Studies have shown a concentration of subprime loans in low-income minority neighborhoods. An article in a recent issue of Cityscape: A Journal of Policy Development and Research warns that even before the current foreclosure crisis, low-income and minority homeowners were at greater risk of being unable to sustain homeownership. Efforts are under way at the Urban Institute to track concentrations of subprime loans. There are also state and regional research endeavors to see where delinquencies are rising fastest and prices are falling fastest, and target aid to those neighborhoods. For example, the Greater Minnesota Housing Fund is tapping available data sources on loan performance and past delinquencies to identify potential hot spots of foreclosures. On a broader level, the affordable housing and community development industry, led by organizations such as NeighborWorks America, has shifted more attention in recent years to sustaining homeownership rather than just growing it.

As efforts expand to preserve homeownership in low-income and minority communities, researchers are noting with alarm the rising affordability problems facing middle-income homeowners. This groups has not traditionally been served by local nonprofit development and counseling organizations. According to the Joint Center for Housing Studies' "State of the Nation's Housing 2008," the number of middle-income homeowners paying more than half their incomes for housing ballooned by 1.2 million between 2001 and 2006. The foreclosure crisis has not brought home prices down enough to offset rising energy costs and monthly mortgage payments. Thus these homeowners too may have a precarious hold on homeownership, reinforcing the need for policy to focus on sustaining homeownership.

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