An Idea to Accelerate Economic Mobility

Jobs lost due to the COVID-19 crisis can lead to a chain reaction of missed mortgage payments, increased stress and health problems, and loss of a stable home environment needed for children to grow and learn. One way to protect families is through the creation of an emergency line of credit program, as I advocate in my recently published Creating the Urban Dream. Even without the pandemic, having that safety net is crucial because unexpected things happen during a 30-year mortgage.

But an emergency line of credit is only half the answer to achieve the economic mobility that is vital to the future prosperity of our country. That line of credit is an important financial tool once people are in their homes. But what is the best way to get folks into homes?

Now is the opportune time to combine an emergency line of credit with down payment assistance to accelerate U.S. economic mobility.

I recently entered discussions with members of a national financial institution and a large municipality about the concept of a down payment assistance program. The idea is to help those who are struggling to come up with the necessary down payments for homeownership. Statistics from down payment assistance grant programs show the power home ownership can have on the future of a family.

The idea would be a loan equal to 7% of the purchase price of a home up to a maximum purchase price of $250,000 for families making below 120% of median income. This loan would provide the critical down payment that would be a real stretch to secure during a pandemic. It would be secured through a second mortgage on their home.

While this would be a great way to get families into homes, we know that homeownership can be expensive and there need to be reserves for emergencies. This is where the down payment assistance loan could become a revolving line of credit—an emergency line of credit—as opposed to a single loan or even a grant. It would be a more sustainable program than grants and if its payments are always on a much faster amortization. For instance, with a five-year amortization, 1/60^th of the principal would be paid each month, allowing the line of credit to be tapped again. This re-leveraging of the line of credit should be limited to emergencies, but that definition could be broad, encompassing setbacks such as hospitalization, the need for a new furnace, or complete job loss.

According to research by JP Morgan Chase’s report from June 2019, Trading Equity for Liquidity, “defaults closely followed a loss of liquidity regardless of the homeowner’s equity, income level, or payment burden.” The study highlighted that it was lack of access to liquidity that resulted in defaults, not lack of equity in their homes. The study determined that equity had little to do with defaults no matter how leveraged or unleveraged a home was during the 2008-09 crisis. So, if we can come up with a program that gives homeowners the access to liquidity for emergencies, first mortgages will be more secure and should result in lower defaults and eventually lower mortgage rate spreads.

I would encourage municipalities to backstop such programs for their lenders to fast track getting their most fragile families into homes at a time when mortgage payments are at historical lows. The average payment for a 30-year mortgage on a $200,000 home loan at 3% is just $840/month, versus the average apartment rent, which is now more than $1,400/month.

What better time to create a policy that puts more families into homes than when home prices are down, and interest rates are low?