A Home for Every Family: Making Home Ownership Affordable

The Problem

The federal and state governments have taken various steps over the years to try to make homeownership affordable. Their patchwork approach toward achieving that goal has often included things like means tested welfare programs, providing homeowners with mortgage insurance, and, in some cases, providing mortgage loans.

However, despite the involvement of the federal government and the states in the housing market, owning a home has continued to be a challenge, particularly for young families. One factor that has contributed significantly to making homeownership difficult has been wild fluctuations in interest rates and home prices. Such fluctuations have not only contributed to making buying a home difficult but also have, from time to time, led to financial crises that have depressed the entire economy.

But the federal government has the power to permanently stabilize interest rates and home prices and make homeownership significantly less challenging. It merely needs public pressure to make it happen.

The Solution

The solution to the housing affordability problem is actually rather simple.

The federal government should provide first mortgages for the purchase of owner-occupied residential properties under 1/2 acre that will serve as the borrower's primary residence. The loans should be amortized over 30 year and offer a fixed interest rate of 3 percent. The amount of the loans should be capped at 95% of the median price of a four-bedroom home. The loans should be originated by the states, who should be required to repay the remaining balance of a loan back to the federal government in the event that the borrower defaults. Additionally, the loans should allow for the temporary suspension of both payments and interest charges in the event of a qualifying emergency declared by the federal government.

The only additional requirement imposed by the federal government on the borrower should be that a borrower cannot have been convicted of (1) any violent crime involving a weapon (e.g., armed robbery) or (2) fraud in connection with the federal mortgage loan program. However, the states should be generally free to establish any and all other requirements for a borrower to qualify for the federal loan provided that such requirements are deemed necessary by the state to ensure repayment of a loan and/or that the loan does not exceed the actual market value of the home being purchased.

Note that states should not be allowed to piggyback interest and/or other charges on the federal loans. Nor should the states be allowed to impose a maximum limit on a borrower's income (i.e., no income cutoff) or limit the loans to first time home buyers. And while states should generally be given wide latitude with respect to how they originate the federal loans, they should still be required to certify their loan origination program with the federal government to prevent any abuse, intended or otherwise, of the program.

The Benefit

The proposed federal mortgage loan program would guarantee that money would continually be available at an affordable, predictable, fixed interest rate for home buyers. Because the repayment of the loans would be guaranteed by the states that originate them, the loans would pose virtually no risk at all to the federal government and any subsequent purchaser(s) of the loans. And because states would have significant control over the qualifications required for the loans they originate, they could regulate the impact that the loans would have on their housing markets and economies.

Homeowners would also benefit from a well-regulated housing market. After all, a sudden, sharp decline in the price of your home can potentially make it impossible for you and your family to move without facing extreme financial hardship. And hyperinflated home prices typically lead to hyperinflated taxes and insurance costs.

The Cost

The only real cost associated with the proposed federal mortgage loan program is the opportunity cost of not implementing it. Homebuyers, homeowners, state and local governments, the federal government, and holders of mortgage-backed securities would all benefit. The only ones who would not benefit are those that would not be able to continue to extract unwarranted, extreme profits from the current chaos.

So, it is about time for the government to put an end to the shenanigans. The housing market does not have to be a casino. And there is absolutely nothing to gain by allowing profiteers to continue to profit at our expense. Tell your representatives in Congress and the White House, and let's make this change happen.