Fed Board governor speaks on today?s homeownership

|tab|

(Editor's Note: The following is ex-cerpted from a Nov. 8 speech on "Promoting and Sustaining Homeown-ership" by Federal Reserve Board Governor Edward M. Gramlich. This speech was presented at the Homeown-ership Summit of the Local Initiatives Support Corporation in Washington, D.C.)|ret||ret||tab|

Homeownership is often characterized as the "American Dream." Its achievement by households yields economic and social advantages for both individuals and communities. For a family, a home is generally its most significant asset and serves as its primary wealth-building ve-hicle. |ret||ret||tab|

Survey results consistently indicate that buying a home ranks among the top motivations for saving. For communities, studies have shown that higher levels of homeownership improve the stability of neighborhoods, resulting in higher levels of civic activities and tax revenues and lower crime rates. |ret||ret||tab|

Much public and private investment is devoted to increasing opportunities for families to buy a home. A long list of government agencies are involved, ranging from the Department of Housing and Urban Development and the Department of Agriculture's Rural Housing Services, to locally driven organizations like LISC and the various Neighborhood Housing Services affiliates of the Neighborhood Reinvestment Corporation. |ret||ret||tab|

These groups have created innovative funding programs and intensive financial counseling curricula to support homeownership objectives. In addition, secondary market institutions such as Fannie Mae and Freddie Mac have provided liquidity to mortgage lenders to facilitate expanded homeownership. |ret||ret||tab|

Much has been accomplished through this work and the partnerships with community organizations and mortgage lenders and securitizers. |ret||ret||tab|

|ret||ret||tab|

Homeownership rates|ret||ret||tab|

Statistics released by the U.S. Census Bureau show increased rates of homeownership. As of the second quarter of 2001, nearly 68 percent of the population owned their homes, up from 65 percent in 1995. |ret||ret||tab|

It is particularly encouraging that this growth was across racial categories, possible evidence of the success of initiatives designed to meet the needs of traditionally underserved markets. |ret||ret||tab|

In particular, homeownership rates among black households increased from 43 percent to 48 percent over this period; among Hispanics, from 42 percent to 46 percent; and among lower-income households, from 47 percent to 50 percent. |ret||ret||tab|

Various factors have contributed to these favorable trends. Among the most important were the expansion of the economy, low interest rates, market and product innovation within the mortgage industry, and regulatory changes. These events have provided the backdrop for both public and private sector organizations to fulfill their mission of promoting homeownership. |ret||ret||tab|

Before this year, the economy was expanding smartly. Generally, with more job security and higher incomes, families seemed to be in better financial positions to purchase a home. Concurrently, the affordability of mortgages increased as lenders employed automated underwriting tools that allowed them to reduce the costs of processing applications while more effectively measuring credit risk. |ret||ret||tab|

Further, the climate of low interest rates increased the affordability of mortgage loans, offering borrowers more financial leeway through lower monthly payments. Also, competition among lenders increased significantly as the set of mortgage originators expanded and opened up more credit options for consumers. |ret||ret||tab|

With increased competition and a continuing agenda of supporting homeownership, the mortgage industry redefined underwriting guidelines to accommodate more borrowers, lowering down-payment requirements and expanding criteria for assessing creditworthiness. |ret||ret||tab|

In addition, changes in the regulations that implement the Community Rein-vestment Act further encouraged financial institutions to increase mortgage lending to lower-income families and neighborhoods, while enforcement of fair-lending laws underscored the importance of ensuring that credit policies were nondiscriminatory. |ret||ret||tab|

All of these forces fueled mortgage lending and ignited activity in the subprime sector of the industry, which significantly increased access to credit for traditionally underserved groups, in particular, borrowers with lower incomes and blemished credit histories. |ret||ret||tab|

|ret||ret||tab|

Yesterday's loans, today's economy|ret||ret||tab|

With all of these positive developments, we are now concerned with the ability of marginal borrowers to meet their mortgage obligations in today's less ebullient economy. The sharp decline in equity values reduced the net worth of many households. |ret||ret||tab|

In addition, unemployment rates have increased by 1.5 percentage points from this time last year (as of Nov. 8), and consumer debt service burdens have shown a steady rise over the past three years, from about 13 percent in the second quarter of 1998 to 14 percent at the same time in 2001. |ret||ret||tab|

During the second quarter of this year, data reported by the Mortgage Bankers Association indicated an increase of 1/4 percentage point in the number of delinquent mortgage loans and a slight rise in credits on which foreclosure had begun. |ret||ret||tab|

In addition, HUD data note an increase in the rate of delinquencies for FHA-insured housing loans from just under 6.5 percent in 1998 to nearly 11 percent in the second quarter of 2001. |ret||ret||tab|

Meanwhile, the Mortgage Information Corporation reports that 6.6 percent of subprime mortgages were seriously delinquent in June, up a percentage point from the end of last year. |ret||ret||tab|

While the full economic implications of the 2001 slowdown and tragic events of Sept. 11 are not yet known, these debt statistics may increase further as households struggle to meet their obligations in the face of significant layoffs. |ret||ret||tab|

With these data, we might focus more attention, at least temporarily, on sustaining gains rather than on developing incentives to create new homeowners. |ret||ret||tab|

But not all housing statistics are bleak. Underlying housing values have re-mained relatively strong even as other economic measurements have softened. |ret||ret||tab|

Moreover, home equity levels for lower-income families and black homeowners are still rising according to the most recent data. Such indicators represent encouragement for organizations like yours to keep up the fight. |ret||ret||tab|

|ret||ret||tab|

New opportunities, challenges|ret||ret||tab|

One of my ex officio duties at the Federal Reserve is to serve on the board of the Neighborhood Reinvestment Corporation. There I have personally ob-served that a prominent characteristic of affordable-housing developers is their creativity, a trait that has contributed greatly to the record levels of homeownership for lower-income and minority households. |ret||ret||tab|

Through the creation of strategic partnerships with financial institutions, government agencies, and secondary market institutions, community-based organizations have created eligible borrowers through homeownership and credit counseling, generated innovative new financing structures to leverage funding, and devised programs to prevent delinquencies and foreclosures. |ret||ret||tab|

With these fundamental elements in place, the affordable-housing field is well positioned to deal with the challenges presented by the new economic environment. |ret||ret||tab|

Education is a very important theme. Affordable-housing groups have recognized the value of training in assisting families in their quest for homeownership, and they have also seen its importance in helping families keep their homes. |ret||ret||tab|

A recent study released by Freddie Mac confirms the effectiveness of counseling, finding a reduction in delinquency rates of as much as 34 percent among borrowers who participated in homeownership training. |ret||ret||tab|

Post-purchase counseling is an integral component of loss-mitigation programs designed to help families work out budgets that will help them meet their mortgage obligations and other housing expenses. |ret||ret||tab|

These programs also help borrowers understand options and resources available to them in the event that they fall behind in their payments because of fi-nancial emergencies. |ret||ret||tab|

Just as homeownership counseling has value, so also do financial literacy efforts have broader benefits. Educating individuals about the fundamentals of budgeting and saving serves as the foundation for building wealth. |ret||ret||tab|

To that end, compelling evidence that financial education matters was revealed in a recent article in the Journal of Public Economics, which found that high-school students who received instruction on financial decision-making including budgeting, credit management, and saving and investing had significantly higher levels of wealth in adulthood than others. |ret||ret||tab|

With a working understanding of and a comfort with financial matters also comes the ability to consume banking services more knowledgeably from checking and savings accounts to car loans and mortgages. |ret||ret||tab|

A familiarity with basic terms enables individuals to shop for the right product at the best price and possibly to save money, results that are especially important for lower-income households. |ret||ret||tab|

Saving provides some measure of financial security in case of a lost job or unexpected necessary expenditures, such as for uninsured medical treatment. Saving is important in sustaining homeownership among lower-income families. [[In-content Ad]]