Barriers to entry.

Author:Hewitt, Janet Reilley

Problems with access to credit have sent America's homeownership rate into territory last seen in 1995. Can a new housing policy team right the ship?

America ranks 34th in the world in homeownership. We don't even crack the top 20. [paragraph] With a 65.2 percent homeownership rate, we are a full 22.2 percentage points behind Bulgaria--and 11 percentage points behind Slovenia. [paragraph] I Both China and India are ahead of us, in sixth place (China) and ninth place (India). [paragraph] Even Latvia, at 81.2 percent, puts us to shame. [paragraph] And that 65.2 percent homeownership rate for the United States--that's the 2013 full-year number--it's slipped even further since then. For the second quarter of 2014, the rate actually dropped to 64.7 percent, according to the Census Bureau. [paragraph] That was the lowest level in 19 years, matching the rate last seen in second-quarter 1995. [paragraph] It kind of makes you wonder: Is that really the best we can do? [paragraph] Does the largest economy in the world really want to sit in 34th place for homeownership? And what's the problem, anyway? [paragraph] As many recent news reports clearly show, it's complicated. There are real problems on the delivery side, where lenders face severe financial consequences for making loans that are even remotely risky. Lenders have had to buy back so many defaulted loans in recent years, they are now avoiding loans with even a whiff of risk.

But then again, some Americans (especially younger ones) have their own reservations about buying a home. And many others are convinced you can't get a loan, anyway, unless you have perfect credit and are wealthy--so why bother?

Not only has buying gotten out of reach for many Americans, but finding affordable housing remains a problem for renters, too. The State of the Nation's Housing 2014 report said, "The share of cost-burdened renters increased in all but one year from 2001 to 2011, to just above 50 percent."

The report from the Joint Center for Housing Studies (JCHS) of Harvard University concludes: "For renters, this is indeed a crisis of affordability."

So even if rising generations were to decide at some future point they want to buy, they are finding it difficult for a whole host of reasons. For those dealing with climbing rents, saving for a down payment, paying off debt (student loans and credit cards) and preserving good credit seems increasingly like a dream for another day.

So any way you cut it, Americans face tough conditions out there in the housing market.

There is a powerful mix of credit-access barriers and buyer-side barriers that are holding back home buying. And that means the brakes are on on both the demand side and the delivery side.

On top of it all, the whole notion of owning took a powerful beating in the media during the foreclosure crisis.

People have now fully internalized that if you own before you can afford to, you can lose your house, lose any equity you put into it (sweat and otherwise), suffer trauma and displacement, plus get a huge lingering stain on your credit record--which will make you wait years for the next opportunity to buy. And your credit costs for other financed purchases, like cars, will go way up, too. Not a happy outcome.

Yet all that coverage about the bad stuff now associated with owning before you're ready captures only a small part of what's dragging down the nation's homeownership rate. Just as glib commentary about younger people preferring not to own doesn't really capture it all, either.

The current climate

New survey results show that another part of the problem is a deep lack of knowledge about what it takes to qualify for a mortgage. (A few folks who actually could are convinced they can't, so they don't even try.)

People have read that lenders have tightened up their terms dramatically in the wake of the crisis and concluded that means the window has closed for anyone who doesn't have a personal banker on speed dial.

A national survey done in early June by Wells Fargo & Co., San Francisco, shows people are overwhelmingly convinced it takes perfect credit and a 20 percent down payment to even start the conversation. That's not entirely true, of course, but it shows how much the restricted-access-to-credit message has penetrated the public's consciousness.

The survey findings released in September show the full extent of the average consumer's gloomy sense of how tight credit has gotten. And that--no doubt--has fed the "why bother" mindset of the average American.

Franklin Codel, head of Wells Fargo Home Mortgage Production, Des Moines, Iowa, in an interview with Mortgage Banking, said this about the findings: "There are a lot of myths out there." He adds, "The industry does, and Wells Fargo does, a lot of lending with less than 20 percent down payments." Even so, the survey found that 44 percent believed that a 20 percent down payment "is required."

The Federal Housing Administration (FHA) still offers loans at 3.5 percent down to creditworthy borrowers. In 2012,77 percent of FHA purchase endorsements were to first-time buyers. So FHA has long been the go-to loan program for first-time buyers who lack a big down payment.

Yet in the wake of the housing crisis, even the FHA program had to tighten its rules to help shore up its insurance fund. Those tighter rules remain in effect.

FHA increased down-payment requirements from 3.5 percent to 10 percent for borrowers with credit scores below 580. It established new underwriting requirements for borrowers with credit scores under 620 and debt-to-income (DTI) ratios exceeding 43 percent. And it substantially raised premiums.

For first-time buyers putting down 3.5 percent on a home valued at 85 percent of the median, the new FHA premiums "raised annual insurance costs from only $808 in 2007 to $1,699 in 2013," according to the Joint Center (see Figure 1).

All the tightening moves to protect the FHA insurance fund helped nudge the door a little bit more shut for would-be first-time buyers hoping to use the FHA program. But even so, FHA remains an option for those with solid credit who cannot afford a 20 percent down payment.

Another low-down-payment option for first-time buyers is the Department of Veterans Affairs (VA) home loan...

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