Was the housing boom built on quicksand? Over the past decade, homeownership rates have grown for all Americans, but for low-income groups in particular. Subprime lending, which provides easy access to credit to those who may not qualify for traditional prime loans, has been an important reason for this growth—according to the Federal Reserve, the share of households in the lowest income quintile with mortgage debt rose 53 percent from 1995 to 2004. However, in the past couple of months, subprime mortgage delinquencies have skyrocketed, leading to the fear of a domino effect that will lead to, according to the Weekly Standard, “higher-than-expected foreclosures, job losses in construction and real estate, lower consumer spending, and possibly a recession.” In Colorado, which has the highest number of foreclosures than any other state (some counties have rates of more than three percent), foreclosures are depressing home values in many communities, and blighting entire neighborhoods.
Of course, the weakening housing market is cause for real concern, not just for the economy, but for economic opportunity as well. In general, there is evidence that Americans are taking on mortgage debt faster than their homes are appreciating in value. As homes are the main source of equity for many Americans, the future retirement savings of baby boomers may be at risk. And as the number of foreclosures rises, many low-income families will be left worse off than ever before.
There is a lot of debate about how to control the rising tide of foreclosures. Cracking down on unscrupulous lenders is critical, but only part of the solution. Borrowers need financial education on the risks associated with assuming zero-downpayment mortgages, and should have financial counseling available to them when they get into trouble. As for financial bailouts for homebuyers, this is a controversial issue that needs sustained attention.
The foreclosure crisis is as heartbreaking as it is frightening. It points to the hunger of millions of Americans to own their own homes, no matter what the financial risks. Sadly, many of these homeowners might not have needed to assume risky loans if they had had access to reasonable tax credits for downpayment assistance. Last year, as part of the Democratic Leadership Council’s American Dream Initiative, Hope Street Group recommended providing a $5,000 refundable tax credit for down payment assistance would make it possible for 7 million modest- to middle-income Americans to avoid slipping into the sub-prime mortgage market. Combined with incentives to developers to spur the construction of affordable housing, we could help grow our economy and give millions of families the chance to own this important part of the American Dream.
Amanda Levinson | Director of Policy Programs
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