In D.C., an Innovative Tool to Boost Homeownership

A Virginia family shops for a house in Gainesville in 2007.
A Virginia family shops for a house in Gainesville in 2007. (By Dayna Smith For The Washington Post)
By Rourke O'Brien and David Newville
Sunday, January 11, 2009

As foreclosure rates continue to reach record highs here in the Washington region and across the country and the global economy reels, many Americans have begun to question whether expanding homeownership is a wise strategy. While there is plenty of blame to go around for this mess, the goal of expanding homeownership is still an important one and should not be sacrificed.

It can be done responsibly and should remain a priority. In fact, one of the best examples of how it can be done is right here in the District. An innovative housing program here is the largest of its kind in the country and will create 1,000 new units of permanently affordable housing. More important, it provides an excellent model for responsibly expanding homeownership to low- and moderate-income families across the country in the post-subprime-loans era.

Studies have shown that families who own their own homes are more likely to be involved in their communities, to report higher satisfaction with their lives, and to vote. Homeownership also has positive impacts on children, such as increased high school graduation rates, fewer behavioral problems and better job outcomes after school, and these effects have been found to be strongest among low-income homeowners.

What's more, homeownership has been and will continue to be the single biggest source of wealth for low- and moderate-income families. Even if housing prices don't rise much, the forced saving that comes from paying down a mortgage can help families build equity that can then be leveraged to finance a child's education, provide financial security in retirement or pass wealth on to the next generation.

Some argue that we should get back to basics with fixed-rate 30-year mortgages and 20 percent down payments. But many low- and moderate-income families that live in high-cost areas such as Washington would probably need decades to save the traditional 20 percent down payment. Even after months of plummeting real estate prices, the median single-family home price in the Washington area is still over $330,000, which would mean a down payment of $66,000. This would deny millions of these families the many transformative benefits of homeownership that can improve their lives and expand their assets and that can be achieved in a responsible manner.

One of the most promising solutions to this problem is shared-equity homeownership -- an approach used in high-cost communities across the country, including in the District. City First Enterprises (CFE), a nonprofit affiliate of City First Bank of D.C., a local financial institution devoted to community development, is aiming to secure 1,000 units of affordable housing in the District using the shared-equity model. Here's how it works: When a qualified family purchases a City First home, they will receive a low-cost "silent" second 40-year mortgage on the home of up to $75,000, which reduces the size of the first or primary mortgage. In exchange for this subsidy, the homeowner must agree to share part of the appreciation with City First, which will use the funds to extend this subsidy to the next qualified buyer. This guarantees that every unit stays in the hands of working families who are otherwise shut out of homeownership in the District. It also keeps the program from requiring large amounts of new public and private funding each year. Research in other cities has shown that many of these families go on to purchase their next home on the open market, thus moving up the housing ladder.

City First is not the only shared-equity homeownership program in the Washington area. Arlington and Columbia are using similar approaches on a smaller scale to help low-income families become homeowners in a responsible way. These local examples, along with others, demonstrate that the shared-equity approach holds real promise as a tool that communities across the country can use to make homeownership affordable for working families. While policymakers are reluctant to talk about expanding homeownership in the midst of a foreclosure crisis, it's important to identify promising new approaches to pursuing this agenda.

The end of the subprime era should not spell the end of the American dream.

-- Rourke O'Brien

-- David Newville

Washington

The writers are, respectively, a research fellow and a policy analyst with the Asset Building Program at the New America Foundation.


© 2009 The Washington Post Company