Foreclosure Crises and the Effect on Affordable Housing - Research Paper Example

? Foreclosure Crises and the Effect on Affordable Housing Introduction The housing market collapse followed by foreclosure crisis had a significant impact on the availability of affordable housing in the USA. About 12 million homeowner households throughout USA pay more than half of their annual incomes for housing that deprives them off meeting their other essential needs such as healthcare, proper nutrition, education for their children. According to HUD (2010), affordable housing is restricted to households who make less than 80 percent of area median income. Further, housing units are considered affordable if they rent at less than 30 percent of household income for low-income households. The affordable housing crisis is due to gap between housing costs at one hand and household income at the other. Minimum wage does not provide enough income to a household so as to rent a two-bedroom home at the fair market rate. The gap is widening even more today. The paper explores the impact of mortgage crisis and subsequent foreclosures on the availability of affordable housing. Housing Affordability is a National Issue Bravve et al. (2012) argue that almost all states in US are facing affordable housing crisis. In 2012, the average extremely low-income (ELI) household cannot afford to spend more than $505 on rent, as on average they will earn nearly $20,210. They further argue that nationally one-bedroom fair market rent (FMR) is $797 going up at $949 for two-bedroom dwelling – much beyond the capacity of ELI households to pay. The gap has grown in the wake of the worst recession that US is facing currently. The crisis has caused most profound impact in certain areas where unemployment rate is high. In the aftermath of subprime crisis, ELI renter faces tough time for an affordable housing in a rental market. The supply of low-cost rental units is fast shrinking as more housing units are converted to serve higher income households. According to one estimate as Bravve et al. (2012) describes the stock of housing units renting for $500 or even less fell sharply by one million units during the period 2007 and 2010. Supplemental Security Income-Dependent Suffers Most Bravve et al. (2012) describe about the situation that has become grave for those who are dependent on Supplemental Security Income (SSI) as they have no other economic resources. About 8 million individuals fall in this category that cannot afford to pay rent above $209 because they receive monthly federal monthly payment of $698 in the current year. Ironically, 57% of all recipients have only a single source of income. Based on this criterion, not a single county in the US can supply affordable housing. Moreover, the number of Americans subsisting on low-income are on the rise and the need for affordable housing will continue to grow. Housing Policy and its Effect on Affordable Housing Wallison (2010) puts blame squarely on the government housing policy that led to the financial crisis and subsequent collapse of the housing market that finally resulted into the depleted supply of affordable housing throughout the US. The housing policies created subprime mortgages and finally when the market started collapsing in 2007, the defaults on loans started taking place in masses resulting into thousands of foreclosures within a short period of time. A subprime loan is defined as a credit to those who have less than 660 FICO credit score. Even Alt-A loan is not considered prime loan due to some deficiency associated with it. Usually, Alt-A loans have low down payments, or insufficient documentation with regard to income and employment details. In the current situation even Alt-A loans have the same default percentages as subprime loans. In the early 1990s, the government pressed the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae to lower the mortgage requirements so that more individuals could purchase homes. Under an affordable housing “mission” drive, Freddie Mac and Fannie Mae started purchasing loans from the original lenders such as mortgage banks, mortgage brokers and other banks creating a secondary market in such mortgages. Initial regulations required that in GSE portfolio 30 percent of all mortgages should be of the affordable housing loans. By 2007, the regulatory authority further tightened the noose making it compulsory that at least 55 percent of GSE's loan portfolio should be made up of the Affordable Housing. The mandate further required that at least 25 percent mortgages should be from a low and very-low income household. It is obvious that Freddie and Fannie led the industry by making home credit available to low and very-low income families. Wallison (2010) informs that though the community Reinvestment Act (CRA) was enacted in 1977, in early ‘90s the act was enforced upon banks to provide loans to all classes of communities and not only to the middle or higher income groups. In 1995, rules were made even more stringent for the banks so that they make available the loans to the low-income groups and mere intention to provide loans to lower income groups will not do. Initially banks could turn down the application but now not. Wallison (2010) argues that onus was on the banks to find a way to provide the loan even it did not meet lending criteria. Banks needed to be flexible and innovative by loosening their lending standards. By 2008, the US financial system carried 27 million subprime and Alt-A loans amounting to almost 50 percent of all mortgages. Of these more than two-thirds were guaranteed or held by GSEs (12 million), FHA (4.8 million) or US banks (2.2 million). Wallison (2010) sees the current financial crisis and market recession in the above stated government housing policy. The author stated that it was not the regulatory failure but government's own demand that created such large subprime credits that subsequently caused a collapse of the financial market. It is ironical that those who bought and held the securities sold by Freddie and Fannie were not affected at all, as the securities were backed by government guarantees but the homeowners (mostly low-income and very low-income groups) who failed to meet their mortgage obligations got severely affected. Moreover, all losses went to the taxpayer’s account. The huge default rates triggered downward movement of the real estate prices unsettling the health of large commercial banks as in their loan portfolio the share of commercial and residential real estate lending prevailed over 55 percent. Obama administration’s current initiative with regard to ‘Affordable Housing’ should be seen in the above light as the basic objective of providing Affordable Housing by the previous government got totally defeated. Making Home Affordable Making Home Affordable (MHA) is the initiative of Obama Administration helping home seekers to locate a right dwelling unit through deferred payment scheme, interest rate reductions, refinancing or mortgage modifications while avoiding foreclosure. MHA (2012) aims at stabilizing the US housing market and helping homeowners by providing mortgage relief. The program helps by 1. Reducing monthly mortgage payments; 2. Getting mortgage relief during re-employment search; 3. Refinancing taking advantage of low mortgage interest rates; 4. Getting help when home is worth less than total home liability and 5. Avoiding foreclosure when unable to afford home ownership. MHA (2012) facilitates lower mortgage payments. That entails significant monthly savings to the homeowner giving them a significant relief. Even in a situation when a homeowner is employed but finds it difficult to pay mortgage payments, he or she still can take advantage of Home Affordable Modification Program (HAMP). Under HAMP, monthly mortgage payment is reduced to 31 percent of one's verified monthly gross, pre-tax income and clears the way for huge monthly savings. Further, homeowner can take advantage of today's low mortgage interest rates through MHA's refinance program. This is possible even if the homeowner owes more than current worth of home. MHA also assists unemployed homeowners who find it hard to keep up with their payments. Either MHA’s Home Affordable Unemployment Program reduces the homeowner's mortgage payments or it can be suspended altogether for 12 months period or more. Moreover, the US treasury's Hardest Hit Fund has made the provision of $7.6 billion for those who have been hit hardest by the economic crisis. State housing finance agencies use the fund for the development of local housing markets and help homeowners to avoid foreclosure. Hardest Hit Programs vary statewide but they mostly include: 1. Reduction in principal payments so that homeowners can get into affordable housings 2. Providing fund to eliminate the second lien of homeowners 3. Those who are unemployed or underemployed may get mortgage payment assistance. HAMP earmarks following criteria to become eligible and take advantage of the scheme. a. The homeowner should occupy the house as primary residence. b. The homeowner should have obtained mortgage on or before January 1, 2009. c. Current mortgage payment is above 31 percent of monthly gross (pre-tax) income. d. Homeowner's mortgage liability does not exceed $729,750. e. The homeowner is on the verge of delinquency. f. Need to have enough income to make modified payment. g. Homeowner has not been convicted in the last 10 years of any theft, fraud, money laundering, forgery, felony larceny, or tax evasion in connection with any real estate transaction. Neighborworks America (2012) provides support to homeowners when they have difficulty in paying their mortgage payments and likely to fall in trap of foreclosure. The organization also provides legal counseling free and gives tips on foreclosure issues. New Jersey Residential Foreclosure Transformation Act O'Dea (2012) informs about the New Jersey Residential Foreclosure Transformation Act that will come into force soon. The act aims at creating a new state agency that will focus on buying foreclosed properties turning them into affordable housing units. The State Affordable Housing Trust Fund will provide $500 million for the purpose. The bill will turn 10,000 foreclosed properties into affordable housing. There are thousands of foreclosed homes in New Jersey with new additions every day. The bill will not only help create affordable housing in New Jersey but also stabilize the housing market raising consumer confidence. The bill will boost the economy of the region with fresh purchases of appliances, furniture and other home items. O'Dea (2012) further emphasizes that the New Jersey is in critical need of affordable housing units. Based on the 2011 report of the National Low Income Housing Coalition, almost 6 in 10 renters are unable to afford the average fair market rent for two-bed room dwelling unit in the state. Conclusion It is a fact that recent economic downturn took away the jobs of millions of individuals. The extremely low-income and low-income homeowners suffered the most due to their inability to pay mortgage payments in time resulting into series of foreclosures. Affordable housing was the need of time for these groups of people. Understanding the woes of low-income and ELI families, the federal and some state administrations have taken effective corrective measures which will go a long way to meet the crisis on the front of affordable housing. References Bravve, E.; Bolton, M.; Couch, L.; Crowley, S. (2012), Out of Reach, National Low Income Housing Coalition, Retrieved April 24, 2012 from http://nlihc.org/sites/default/files/oor/2012-OOR.pdf HUD (2010), US Department of Housing and Urban Development, Avoiding Foreclosure, Retrieved April 24, 2012 from http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure MHA (2012), Making home affordable, Retrieved April 24, 2012 from http://www.makinghomeaffordable.gov/about-mha/Pages/default.aspx Neighborworks America (2012), Foreclosure Resources, Retrieved April 24, 2012 from http://www.nw.org/network/foreclosure/default.asp O'Dea, C. (2012), NJ Spotlight, Transforming Foreclosed Houses into Affordable Housing, Retrieved April 24, 2012 from http://www.njspotlight.com/stories/12/0215/0128/ Wallison P. (2010), Government Housing Policy and the Financial Crisis, Retrieved April 24, 2012 from http://www.cato.org/pubs/journal/cj30n2/cj30n2-12.pdf Read More