Who should own a home? From the late 1960s to the mid-1990s, the answer in the U.S. was surprisingly consistent. Homeowners were savers who could muster significant down payments, with incomes solid enough to enable them to start repaying mortgages right away. During war, peace, boom times and recessions, the national rate of home ownership remained steady at 64 to 65 percent of households.
Starting in 1995, a home-ownership craze began. The belief took hold that rising home ownership meant a better society, no matter how fragile new buyers’ finances might be. Down payments started to matter much less; the same was true of income, which came to be ignored through no-documentation "liars’ loans." By late 2004, a record 69.2 percent of American households owned their homes.
The U.S. housing market’s subsequent collapse has shown ubiquitous ownership to be a costly delusion. In the past nine quarters, more than 2.1 million homes have been foreclosed on. Lenders have lost countless billions of dollars in mortgage defaults or modifications. Yesterday brought news that the S&P/Case-Shiller index of urban home prices fell 3.6 percent in March from a year earlier, to the lowest level since 2003. The American housing slump isn’t finished yet.
A decade ago, three of the European countries with the fastest-growing rates of home ownership were Spain, Ireland and Greece. All three had boosted their rates above 80 percent, compared with a European average of 64 percent. Since then, each of those countries has become ensnarled in defaults, recessions and struggles to manage national debt. By contrast, Germany, with a home-ownership rate below 50 percent, has come through the upheaval essentially unscathed.
Owning or Renting
In Europe and the U.S., the balance between owning and renting is making a painful return to healthier levels. The U.S. home-ownership rate has ebbed to 66.4 percent, a level last seen in the late 1990s. The next step is to fix the logjam of foreclosed homes. The best hope may be the current settlement talks among regulators, lenders and loan servicers regarding abuses. A streamlined foreclosure process would let the housing market stabilize more quickly, albeit at a lower level.
Are U.S. lenders ready to return to the stricter norms of past generations? Recent signals are ambiguous. This spring, financial regulators proposed that loans meeting a handful of tests, including down payments of 20 percent or more, be designated as qualified residential mortgages, or QRMs. Such loans would be treated as extra-safe instruments that original lenders could securitize in full, making them more appealing to investors.
Skin in the Game
This rule would also force mortgage lenders to keep “skin in the game,” meaning they would have to hold about 5 percent of any non-qualified loan on their books, presumably forcing them to more carefully evaluate borrowers’ ability to repay.
Mortgage lending groups hate this idea, naturally. They say most borrowers couldn’t meet such a strict standard. According to the Mortgage Bankers Association, difficulties in securitizing non-QRM loans could add to credit costs, causing such loans to carry interest rates as high as 8.8 percent next year. If so, the association warns, millions of Americans could be priced out of the market.
Such worries seem overblown. If strong incentives exist for borrowers to rustle up bigger down payments, more will do so. Loans that almost qualify for QRM status are likely to attract market support, quickly making them more affordable than mortgage bankers predict. As for risky non-QRM loans, if they end up carrying uncomfortably high interest rates, that is market discipline at work.
A sound mortgage market, in which it takes work and a demonstrated ability to save to qualify for favorable credit, can thrive for generations. Trying to revive the anything-goes attitude of bubble-era lending in an effort to funnel more than 65 percent of Americans into home ownership can only lead back to instability.
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