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The Impacts Of Affordable Lending Efforts On Homeownership Rates

Working paper #405
Roberto G. Quercia, George W. McCarthy and Susan M. Wachter

In this study, we develop and test a methodology to assess the impact of affordable lending efforts on homeownership rates. More narrowly, we examine the impact of using flexible underwriting guidelines, primarily changes in the downpayment and housing burden requirements, on the affordability and homeownership propensities of targeted populations and geographic areas. The impacts of changing these underwriting guidelines are compared with those resulting from lower borrowing costs (interest rates). A variation of the methodology first proposed by Wachter et al. (1995) is used in the analysis. We use the 1995 American Housing Survey (AHS) national core in the analysis.
The findings indicate that affordable lending efforts are likely to increase homeownership opportunities for underserved populations, but that impacts may not be felt equally by all groups. Under most affordable products, the impacts on all households, recent movers and central city households are smaller than for other households. The recently introduced affordable products which permit the 3 percent downpayment to come from non-borrower sources, e.g., Freddie Mac’s Alt 97, has the largest impact on the homeownership propensities of all underserved groups, including a 27.1 percent increase in the relative probability of homeownership for young households, a 21.0 percent increase for blacks, and a 15.0 percent increase for central city residents. Consistently, changes in underwriting guidelines are found to have greater impacts than changes in the costs of borrowing for all groups.

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