Financing multifamily rental housing: The changing role of lenders and investors

Abstract

A broad consensus exists that there are significant barriers to accessing capital markets for multifamily rental housing, particularly for housing targeted at low‐and moderate‐income households. While there is a growing secondary market for multifamily mortgages, the market is in the early stages of development and remains quite small. Expanding this market requires increasing standardization of mortgages, increasing credit quality with better underwriting and credit enhancement, and educating investors as to the risks and returns of multifamily investments. In addition, dramatically improved data collection on the performance of multifamily investments and analysis on the determinants of success are needed.     

Shared‐equity mortgages,housing affordability,and homeownership

Abstract

Although the homeownership rate rose from 65 percent in 1995 to 69 percent in 2005, this rise appears difficult to sustain. We argue that the development of new shared‐equity mortgages (SEMs) that blur the lines between debt and equity would propel further advances in homeownership. The rationale for these mortgages is that the broad financial markets would value shares in individual housing returns more highly than hard‐pressed prospective homeowners do.

We describe a new class of SEMs and provide survey evidence that most households would prefer them to interest‐only and other currently popular mortgages. Financial simulations confirm the value of the securitized SEMs to investors. We present computations suggesting that an increase in the overall U.S. homeownership rate of between 1% and 1.5% would likely result from the development of SEM markets.     

On the equity effects of taxing imputed rent: Evidence from Australia

Abstract

Taxation of net imputed rent from owner‐occupied housing (and mortgage interest deductibility) has been advocated in Australia on grounds of both efficiency and equity. The current tax system (no taxation or deductibility) favors owner‐occupied housing over business investments, and in the owner‐occupied sector it favors high‐income, low‐debt households over others. Nevertheless, imputed rent taxation has been criticized on the empirical grounds that its direct burden would fall more heavily on low‐income households than high‐income households.

Using micro‐level data from the 1986 Income Distribution Survey, we show that the burden does not fall more heavily on low‐income households when net imputed rent is included in owners’ incomes and when life cycle effects are controlled for. Moreover, for married couples aged 25 to 54, the taxation of imputed rental income would be not only progressive, but more progressive than the taxation of other household income.     

Emerging cohort trends in housing debt and home equity

Abstract

Financial and market conditions in the 1990s caused a sharp increase in the housing debt (in constant dollars) of households now approaching or just past normal retirement age. Households now in middle age have also set new records for housing debt and will likely continue to carry high housing debt when they reach old age in 10 or 20 years.

In the future, this housing debt burden is likely to lead to financial and housing adjustments that suggest a qualitative change in behavior when these households reach the later stages of their working life. Many will need to work longer to service housing debt. When facing a life‐cycle downturn in annual income, households will be increasingly motivated to tap into their home equity, both by borrowing, for those who stay in their homes, or by downsizing and liquidating some equity, for those who choose to move.     

Outlook: The subprime lending crisis: Focus on the problem: Subprime borrowers in trouble

Abstract

Public policy should be directed at serving the large number of borrowers who have recently taken out subprime loans and who are at serious risk of losing their homes when their mortgages reset. Practicing forbearance and providing counseling for defaulting homeowners, as well as allowing them to refinance into a Federal Housing Administration loan, can be particularly helpful. Broad changes in housing programs and in the structure of the mortgage market should be considered on their merits as good or bad public policy for the long term, not simply as solutions to the subprime problem.     

Comment on Elvin K. Wyly and Daniel J. Hammel's “Islands of Decay in Seas of Renewal: Housing Policy and the Resurgence of Gentrification"—Gentrification resurgent?

Abstract

Gentrification is a procyclical process by which certain inner‐city neighborhoods are revitalized to meet the demands of professional households. It is confined to cities with substantial central business district office growth and with housing markets characterized by substantial suburb‐to‐inner city filtering. The process remains limited in scale, and available data do not permit a judgment as to whether changes in mortgage lending have changed the nature of the process.     

The changing demography of multifamily rental housing

Abstract

The residents of multifamily rental housing are different from both homeowners and single‐family home renters, and these differences have implications for the housing market and for public policy. This article describes apartment residents today, discusses recent changes in their number and characteristics, projects their future growth and composition, and highlights business and policy implications of future changes.

For purposes of business and public policy, a segmentation of apartment residents into three submarkets is useful: the “affordable” market serving low‐ and moderate‐income households, some of which receive government housing assistance; the “lifestyle apartment market” serving higher‐income adult households; and the substantial “middle market.” The number of apartment renters is likely to grow moderately over time. The combination of multifamily structure type and rental tenure form offers unique opportunities not only for provision of affordable housing but also for revitalization of downtown areas and balanced “smart” growth in suburban areas.     

Dual‐indexed mortgages in reforming socialist economies: Evaluating the risks and institutional requirements

Abstract

Although housing finance systems in reforming socialist economies have attempted to increase their market orientation, the high inflation rates accompanying the reform process have introduced new distortions. Mortgage instruments designed for high‐inflation economies, such as the dual‐indexed mortgage (DIM), can reduce these distortions. However, the introduction of new financial instruments should not be undertaken lightly. Both the performance of the instruments under various macroeconomic conditions and the technical requirements for implementation must be examined carefully.

Such an analysis was performed for the hypothetical introduction of a DIM in Hungary. In the Hungarian example, the risks of losses on a DIM portfolio are minimal and are considerably less than the risk faced by traditional fixed‐rate mortgages. An examination of the institutional and technical issues associated with the DIM shows that reforming socialist economies face special difficulties. In the Hungarian case, as the structure of the economy changes, the accuracy of traditional methodologies for gathering government statistics, and therefore the accuracy of the indices, declines. Lenders have delayed implementation of the instrument for this reason. Lenders in other reforming socialist economies should take such risks into account and should, at the very least, adjust their underwriting standards to account for such risks. In the long run, reconstruction of the government statistical system should alleviate this problem.     

Who benefits from preservation: The people behind the numbers

Abstract

This paper summarizes available information about the characteristics of the 4.4 million renter households in federally assisted housing. Where possible, characteristics are summarized by housing program and include information on income levels and sources, elderly and family households, and minority households. The story of a below market interest rate housing complex in Burlington, Vermont, illustrates the people at risk and one approach to preserving their housing. Accounts by elderly persons displaced in conversions of buildings subsidized under Farmers Home Administration rental assistance bring home the reality of the hardships faced by households at risk. An appendix addresses threats to the continued provision of assisted housing, including owner options to convert properties to market purposes, default, and the much more general issue of continued federal support.     

Responding to the foreclosure crisis

Abstract

Regional economic downturns, speculation on skyrocketing home prices, and rampant unfair and deceptive mortgage lending practices have combined to create the perfect foreclosure storm in America. More than 2 million foreclosures are expected to occur during the next 12 to 18 months. Common to all three of these contributing factors is the reality that effective regulation of the mortgage market would have greatly limited damage from foreclosures.

This article traces the origins of the subprime market crisis and the resulting impact of foreclosures on the housing market, minority households, and the economy. The article also reviews the effectiveness of current interventions to mitigate or limit foreclosures and recommends broader solutions to help families maintain their homes.     

Elderly interest in home equity conversion

Abstract

Few elderly homeowners liquidate their home equity to fund consumption. This article examines whether attitudes about housing, independence, and finances affect a homeowner's interest in home equity conversion. The results of a nationwide survey of elderly homeowners were analyzed by logistic regression to ascertain the relationship between interest in home equity conversion and economic, demographic, and attitudinal characteristics.

The results indicate that elderly homeowners most interested in home equity conversion own houses valued at $50,000 or less, are concerned about maintaining independence but not homeownership, and are not very concerned about future medical expenses. Thus, societal norms for maintaining single‐family homeownership and medical assistance programs that exempt home equity from requirements that participants spend all their assets to be eligible may be inhibiting the growth of home equity conversion programs.     

The politics of mortgage credit expansion in the small coordinated market economies

Abstract

Recent contributions to the comparative political economy literature claim that liberal market economies are vulnerable to asset booms and busts because of financial deregulation, shrinking welfare states and a political ideology emphasising financial self-sufficiency. This article examines the rapid expansion of mortgage lending in three coordinated market economies (CMEs): Denmark, Sweden and the Netherlands. This expansion is puzzling given that all three countries are CMEs with generous welfare states. Yet the pattern of mortgage lending resembles the Anglo-Saxon or liberal market economies (LMEs) more than other CMEs. The article argues that mortgage bubbles in the small CMEs emerged as the unintended outcome of pairing neoliberal programmes to expand home ownership with collectivist housing institutions. This resulted in supply restrictions and rising property values which saddled households with extraordinarily high mortgage debts. In short, mortgage credit bubbles are not unique to Anglo-liberal welfare states and may have different origins.     

The Low‐Income Housing Tax Credit An Analysis of the First Ten Years

Abstract

The Low‐Income Housing Tax Credit (LIHTC) has been the de facto federal rental housing production program since its creation in the Tax Reform Act of 1986. In this article, using a detailed database on 2,554 LIHTC projects, we analyze the costs of building these projects, where they are built, their financial viability, whom they serve, who finances them, and the size of the subsidies provided to them.

The LIHTC is a flexible program that has built different types of housing in various markets. While LIHTC projects serve low‐ and moderate‐income households, their rents are beyond the reach of many poor households without additional subsidy. Revenues just cover costs for many LIHTC projects. Over time, considerably more of each tax‐credit dollar has ended up in the projects, and returns to equity investors have dropped significantly, perhaps reflecting an increased understanding of project risks. We estimate that LIHTC projects developed by nonprofits are 20.3 percent more expensive than those developed by for‐profits.     

Long‐term care reform and the role of housing finance

Abstract

The Clinton administration's recently announced home and community‐based care proposals have potentially important implications not only for long‐term care policy, but also for housing policy in the United States. This article attempts to draw out some of those implications. The first section examines problems inherent in the current “medical/welfare” system of financing long‐term care, which constrains consumer choice by limiting the supply of providers to control costs and by increasing medical professionals’ control over the types of services provided in the name of quality control. The medical/welfare dominance of long‐term care policy has resulted in an overreliance on nursing homes as providers, resulting in both escalating costs and continued consumer dissatisfaction.

The second half of the article looks at recent market and policy developments in response to consumer demand for lower cost alternatives to nursing homes. These alternatives promote more consumer autonomy and control in supportive housing arrangements. A more comprehensive services and housing policy could promote these developments in an approach that combines the security of public financing of supportive services with the benefits of consumer choice, market competition, and legal protections that characterize housing markets. In such a scenario, housing finance institutions—including government agencies, lenders, developers, and investors—could play a pivotal role in the long‐term care debate not only by unlocking substantial financial resources but, equally important, by transforming the provision of long‐term care services to promote consumer choice and autonomy.     

Beneficiaries of federal housing programs: A data reconnaissance

Abstract

This article reports on a reconnaissance of information systems containing data on the beneficiaries of direct and indirect federal housing expenditures. It covers data in the U.S. Departments of Agriculture, Housing and Urban Development, Veterans Affairs, and the Treasury; the Resolution Trust Corporation; financial regulatory agencies; and secondary mortgage market actors.

Data varied widely across agencies in availability, accessibility, and quality. Data are more systematically collected for low‐income beneficiaries of housing programs than for the more affluent beneficiaries of indirect housing expenditures. The systems need improvements in data quality and coverage and database format, though they have improved recently. Many research topics can be explored with new and underused data systems: the characteristics of beneficiaries of rural housing programs, urban rental housing programs, low‐income homeownership programs, and mortgage guarantee and insurance programs. But the lack of information on the systems themselves makes data difficult to locate and access.     

Market segmentation and lender specialization in the primary and secondary mortgage markets

Abstract

This paper provides a comprehensive evaluation of market segmentation and lender/purchaser specialization in the primary and secondary mortgage markets. It describes and assesses the 1990 Home Mortgage Disclosure Act (HMDA) data, which for the first time provide detailed information on the borrower and neighborhood racial and income characteristics of mortgage loan originations and securitizations in the primary and secondary mortgage markets. Evidence presented in the paper indicates that home purchase loan origination rates for black applicants—and, to a lesser degree, Hispanic applicants—appear to be significantly lower than those of other racial or ethnic groups. Similarly, the HMDA data reveal that home purchase mortgage origination rates in predominantly minority census tracts are significantly lower than those in predominantly white neighborhoods. The HMDA data also indicate a striking reliance of black borrowers on government‐backed forms of mortgage credit.

The paper further reveals that secondary market loan purchase distributions arrayed by borrower and neighborhood characteristics generally reflect those of home mortgage originations. The borrower and locational characteristics of home purchase loans acquired by the Government National Mortgage Association (GNMA) directly reflect that agency's legislated specialization in government‐backed loans, whereas the characteristics of loans acquired by Fannie Mae and Freddie Mac for the most part derive from the borrower and geographic composition of conventional home purchase loan originations. Findings of analyses of HMDA data raise concern regarding the access of minority and low‐income households and neighborhoods to mortgage finance. Those results also raise some question as to whether the federally chartered agencies in the secondary market are adequately promoting the availability of mortgage credit to low‐ and moderate‐income and minority households.     

The role of limited‐equity cooperatives in providing affordable housing

Abstract

This article develops an economic analysis of the role of limited‐equity cooperatives (LECs) in providing affordable housing. Using a model of the user costs of housing that focuses on housing externalities, it examines methods for overcoming externalities in multiunit rental dwellings.

Investment in management can reduce these externalities and thereby improve the quality of the housing environment, but the added cost excludes low‐income households from housing with a high level of management. LECs can reduce housing externalities without imposing the dollar costs of management on residents. They do this principally by attempting to attract a favorable resident population and by substituting self‐management for traditional hierarchical management. Given these findings, the article makes recommendations regarding the structure of a federally sponsored LEC program and draws implications for affordable housing policies in general. Finally, it calls for further empirical research into the desirable (and undesirable) features of self‐managed affordable housing.     

The potential and limitations of mortgage innovation in fostering homeownership in the United States

Abstract

This article presents an empirical analysis of mortgage innovation as a vehicle to enable renters, especially those from traditionally underserved populations, to realize home‐ownership. It examines the financial and underwriting criteria of a typology of mortgage products, from those adhering to historical standards to some of today's most liberal loans, and develops synthetic models to account for all direct purchase costs. These models are calibrated using 1995 data on renter demographic and financial characteristics from the Survey of Income and Program Participation.

Compared with historical mortgages, today's more innovative loans increase the number of renters who could hypothetically qualify for homeownership by at least a million and expand potential home‐buying capacity by $300 billion. Certain policies could greatly expand the potential gains. Nevertheless, even the most aggressive innovations can play only a limited role in efforts to deliver the material benefits of homeownership to underserved populations.     

Innovation and the cost of mortgage credit: A historical perspective

Abstract

Since the inception of U.S. institutional mortgage lending in the 1830s there have been major changes in mortgage instruments, the delivery system, and funding sources. Some of these changes qualify as innovations that have lowered the cost of credit and increased its availability. This article divides the history of U.S. mortgage finance into three periods and identifies the source and type of major innovations.

The “Origins” period, from 1831 to 1931, included the development of many mortgage lending institutions and instruments. The second era, “A Wonderful Life,” featured a government‐supported special circuit that dominated mortgage finance from 1932 to 1981 and witnessed development of mortgage‐backed securities. The current era, “A Brave New World,” features a new system of credit delivery dominated by specialized institutions and technology. In it, application of automated underwriting and artificial intelligence may have far‐reaching effects on the market and the accessibility of low‐income households to mortgage credit.     

Homeowner Behavior,Health Status,and Medicaid Payment Eligibility: Evidence from the Deficit Reduction Act of 2005

This paper analyzes the effect of a change in the status of housing equity as a protected asset for Medicaid long‐term care payment eligibility. A difference‐in‐difference‐in‐differences strategy is employed to estimate the effect of the policy on the housing equity holdings of potentially treated individuals. Using a panel of unmarried homeowners, the policy induced treated individuals who were likely to require long‐term care to hold less housing equity by values of $82,000 to $193,000 relative to control individuals. This equates to relative reductions of 12 to 29 percent for treated individuals after the policy change. Similar effects are not observed when considering health measures less predictive of long‐term care services and for a sample of married households who were unlikely affected by the policy. These estimates confirm the importance of the housing asset as a shelter for Medicaid eligibility.