Rapidly changing credit and housing market conditions of the past fifteen years have markedly impacted homeownership rates. Homeownership rates in the United States have increased steadily and significantly from 1995 to 2004, from 64 percent to 69 percent. No additional increase in homeownership, in the aggregate, occurred with the expansion of nonprime lending after 2004. By 2009, the overall U.S. homeownership rate had fallen to a level below that of 2002. As delinquencies and foreclosures mount, putting the nation’s homeowners and the economy at risk, homeownership rates continue to decline.
How does one explain this reversal of fortune? Recent research by the authors and others emphasizes the role of structural changes in mortgage markets, characterized by the extension of nonprime credit, the progressive weakening of layered credit standards, mispriced risk, and misaligned incentives, leading ultimately to the current mortgage meltdown. As Green and Wachter (2008) note, after decades in which securitization contributed to the stability of the mortgage system and increased access to mortgage lending in the U.S., there was a major shift in how secondary markets priced risk. Research by Pavlov and Wachter (2006, 2008), Courchane and Zorn (2008), Ashcraft and Schuermann (2008) and others indicate possible roles of incomplete markets, inefficient and mispriced risk, and moral hazard in triggering the current housing crisis.
Clearly, a long-term goal of policy makers in the U.S. has been the reduction of financial barriers to homeownership, for example, through implementation of the Community Reinvestment Act (CRA) and through the affordable housing goals set by the Department of Housing and Urban Development (HUD) for the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. The current policy focus should be on ‘sustainable’ homeownership—keeping borrowers in the homes they purchase. Lessons learned from the past decade will contribute to achieving that sustainability.
We review the evidence pertaining to homeownership rates, explore the possible role of financial institutions in increasing homeownership in sustainable and unsustainable ways, and address the role of regulation. We review evidence suggesting how flexible lending initiatives have expanded access to homeownership. We also examine the role of nonprime lending and the consequences of housing market price instability for homeownership. Fluctuations in the availability of credit for homeownership, and the global credit market collapse raise questions that we cannot answer here about the mistakes that have contributed to the current housing crisis. Nonetheless, evidence on market outcomes allows us at least to raise such questions, and explore the role of regulation in supporting responsible mortgage lending that encourages sustainable homeownership.
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