Just Walk Away?

How does the non-profit community account for the new state of home ownership, where “underwater” homeowners are increasingly prepared to walk away from the mortgage debt on their homes.

Here’s the problem: from policy leaders to on-the-ground community organizations, non-profits were telling their clients to buy a home for the last ten or fifteen years.  Now, many of those households are in homes that are underwater. Poor America, and in particular female black America, own less now than they have at any time in the last decade.

No one, from investors in mortgage-backed securities down to municipalities and neighbors, are happy when someone walks away. It creates all kinds of problems.

Do not confuse walking away with seeking a loan modification. The latter group are struggling to remain rooted to the American dream. The “walkers,” though, are rejecting the very concept that drove so many non-profit groups to support any effort at stimulating home ownership.

Home-ownership is still very popular, of course. Walking away is an option taken up by only a small minority. Fannie and Freddie articulate their mission as “the American Dream” business. Still, “walking away” is less rare than it used to be, and in some markets, it is an alternative that makes financial sense for some people. Gauging how much a shift in attitudes towards this reaction is hard, but the scale of owners in trouble is large. First American CoreLogic estimates that one in four mortgages is “under water.”

Home-ownership increased under every US President since LBJ, save for Ronald Reagan and Bush 1. President Clinton achieved the most success, adding almost four percentage points to the national home-ownership rate. Now, economists are suggesting that America is on its way to becoming a nation of renters.

Coupled with historically low interest rates, the 2000s witnessed a great boom in housing construction. Among different subsectors, no category observed the same growth in new construction as owner-occupied units.  By 2005, new construction for owner-occupied housing increased more than 40 percent from its rates in 2000. Those rates began to exceed the growth in the rate of rental housing.  This paper shows that the rate of non-residential construction actually declined. Perhaps it was a case of complementary uses of capital.  Maybe that says something about the impact of the mortgage interest deduction during boom year.

I think that the non-profit community, if it holds itself accountable, should examine their part of this situation. Non-profits fueled the hunger for for housing.  A leading non-profit made this statement in 2005:

Home-ownership — a key source of asset-building — is a true success story and is at an all-time high. Yet the growth of home-ownership has slowed substantially, and there is wide variance across states and regions…Home-ownership offers the opportunity to build wealth in the form of home equity, and contributes to household stability and long-term commitment to a community.

Homeownership was the center piece of the assets agenda. That agenda remains a platform of many policy groups. It’s logic – that assets protect household stability and foster community development in ways that go beyond the value of improving income among poor families does not, continues to make a lot of sense.

Now, though, home-ownership deserves reconsideration.

Investors have applied Modern Portfolio Theory to their asset building for almost 50 years. This is the underlying principle of index funds.  John Bogle, retired from his position at the top of Vanguard, continues to emphasize how diversification makes a difference.

Our emphasis on home-ownership for low-income households ignored that wisdom.

Going forward, non-profits should be comfortable with focusing on low-income rental housing. To the extent that families of modest means can save, there are plenty of valid vehicles for those dollars. Foreclosures to multi-family properties may remove many low-cost units from the marketplace. Building high-quality affordable apartments, particularly in high-cost housing markets, may be the new emphasis for non-profits for years to come.