Home Mortgage Lending Reforms Needed to Spark Construction
The government’s announcement that housing starts were disappointing for the second month in a row is not only a substantial economic problem, it’s also a significant environmental one.
Let me explain:
- This is an economic problem because, as the New York Times has argued, “Until the [housing] market recovers, the entire recovery is imperiled.” ( NY Times Lead Editorial “As Housing Goes, So Goes the Economy,” 25 May 2011).
- And it is an environmental problem because if energy-efficient new housing is constructed in location-efficient neighborhoods (those that are in walkable, transit-friendly areas), we can reduce climate emissions from buildings and housing by more than half.
What will it take to reignite the housing market?
As I have pointed out in previous blogs (here, and here), reforming how mortgages are underwritten is essentially the only way anyone has proposed to allow more people to qualify for home ownership while improving the security of the mortgage loans. And how doing this accommodates changing demographics and preferences that are increasing the demand for location efficient and energy efficiency homes.
Other approaches just don’t look like they could work. In my blog of last September, I predicted that the current Federal Reserve policy of buying mortgage-backed bonds won’t accomplish much. Now we are now seeing that this prediction is validated; we see how short and inconsequential the period of partial effectiveness of the Fed policy’s was in getting the housing industry going again.
Broad-brush solutions to fixing the economy have been tried ever since the panic of 2008 occurred, and nowhere in the world have they been a crashing success. Instead we need more targeted policies to reignite housing starts.
The frustrating thing for those of us who try to promote policies such as mortgage underwriting reform that reduce climate pollution and create jobs and economic growth is that it would be so easy to initiate these policies. NRDC announced just last month an agreement with builders responsible for almost half of new construction that we are jointly supporting an energy code enhancement that would cut energy use and emissions by 20 percent compared to its predecessor -- and by a whopping 40 percent compared to typical code practice in the states. We noted that the major builders supporting this agreement also join NRDC in wanting mortgage lending reform that would allow homebuyers more latitude in qualifying for a loan on an energy-efficient home.
The best way to reform mortgage lending is breathtakingly simple: allow the buyer to qualify for a loan based on the sum of energy and transportation and loan payments rather than ignoring the first two costs. (These costs are too large and variable to ignore: together they are larger than housing itself.) So if a homebuyer saves $500 a month in energy and transportation, they could qualify for a loan whose monthly payments are $500 higher.
Some might argue that this is a subsidy, but the reverse is true. Current practice subsidizes bad houses. Homeowners with loans on energy-efficient homes are much less likely to default on their mortgages. This same result is seen for location efficient homes. Since most mortgages are in practice guaranteed by the federal government, the subsidy has been occurring for the past 50 years --where home buyers whose high energy costs increases the risk of default are being subsidized by taxpayers when those loans default.
There is no opposition to this idea that we have identified. While some stakeholders have been concerned with the risks that might attend this proposal, they seem to be ignoring the immense and realized risk of sticking with 50-year-old underwriting methods. Not only did the methods we are still using lead directly to the global economic collapse of 2008 by allowing widespread defaults, they also encourage the construction of homes with unaffordable transportation and utility expenses. It is hard to see how we can get a recovery if lenders only allow consumers to qualify for houses that they don’t want and can’t afford to operate.
And without a sustainable economic recovery, all loans are at greater risk of default.
Just as we can enable greater energy efficiency in a house by crediting the value of energy savings, which can easily exceed $30,000 over the life of a mortgage, we can enable greater location efficiency even more by also crediting savings in transportation costs, which can exceed $200,000 over 30 years.
Again, there is no serious opposition to this proposal to count energy and transportation savings—it benefits everyone: home builders, home buyers (especially those in the Millennial generation who prefer location-efficient neighborhoods), investors in mortgage-backed securities, and the taxpayers who currently subsidize defaults in suburban sprawl developments.
These reforms not only will enable more efficiency, but they are the only way I can see to get housing markets off the floor sustainably. Even for those who believe, despite all evidence to the contrary so far, that reforming mortgage underwriting will increase risks in the securities markets, the benefits to sustainable economic recovery and job creation clearly outweigh them.
After all, a key factor in increasing new construction is the ability of the economy to generate jobs. We seem to be stuck in a vicious circle in which hiring and job growth are needed to generate a housing recovery, but a housing recovery is needed, as the Times opines, to create hiring and jobs.
We need to see some leadership from President Obama here. Congress is not needed for these reforms, although the bipartisan SAVE Act shows that it could initiate the reforms. They could be implemented tomorrow by the Administration once it understands how the costs and risks of sticking with outdated loan policies are much larger--and more damaging--than the uncertainties of fine tuning the loan process to account accurately for energy and transportation expenses.
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