Strategic Interest Rate Buy-Down Programs Vital for Affordable Homeownership in the Present Market
by Ed Gorman
Managing Director, GROWTH by NCRC
There’s no way to sugarcoat it: the news on affordable homeownership midway through 2023 remains grim.
Mortgage rates continue to climb past 7% for a 30-year fixed loan, the exclusionary impact of which is the greatest in the history of the modern housing market. Despite the clear need, the housing industry has still not significantly increased production of entry-level homes, exacerbating the plight of Millennials and Gen Z-ers, while freezing out most people of color and leaving the country with a persistent, racial homeownership gap.
To underscore the role interest rates play in affordability, a 5% interest rate on a $426,000 house puts 42 million households within the necessary income range for homeownership. A shift of just 2% to a 7% interest rate prices 10 million of those households out of the market.
Some leaders in Congress have pushed, without success, to build more affordable housing at scale (Neighborhood Homes Investment Act) while others are focused on helping first-generation homebuyers. The latter bill, the Downpayment Toward Equity Act of 2021 (DTEA), was introduced to encourage affordable homeownership among disparate populations and help towards down payments and closing costs. It also includes a provision that allows grant funds to be used to reduce interest rates for eligible mortgage loans.
As important as DTEA is in helping with resources for those currently frozen out of the market, we don’t have to wait on Congress. We have the ability now to reduce interest rates.
GROWTH by NCRC, the African American Mayors Association (AAMA), and a handful of other stakeholders have begun advocating for and implementing aggressive interest rate buy-down programs to create pathways to affordable homeownership. This isn’t a new concept, but it has been vastly underutilized in the current marketplace despite its being one of the more robust and effective solutions available. It has been done effectively in Newark and Boston, and soon in Birmingham, Alabama.
GROWTH by NCRC is implementing an interest rate buy-down of 2% (dropping mortgage rates from 7 to 5%) first in Birmingham, Alabama through a successful partnership with participating banks, Mayor Randall Woodfin and his City’s Community Development department. While builders and mortgage lenders have had this capability, accomplished by paying down a portion of the interest rate at origination of a mortgage, CRA-regulated banks have been slow to adopt this tool, instead relying on downpayment assistance and closing costs to assist targeted consumers. But this interest rate environment demands a new approach and it’s time for banks and their regulators to recognize that buying down interest rates can benefit consumers far than more downpayment and closing cost assistance when educated consumers are given that choice.
For example, by reducing the interest rate 2%, buyers can reduce mortgage payments on a $250,000 home by more than $200 per month (to $1,342 from $1,663), making it far more feasible for individuals and families with limited financial resources to achieve their homeownership goals. This, in turn, helps families build equity faster, promotes social stability, and strengthens communities by fostering a sense of ownership and pride among residents.
But we can’t do it alone. This is where CRA-regulated banks (and even other mortgage lenders not covered by CRA) can and should step up, providing interest rate buy-down programs to give buyers a fighting chance despite the volatility of the current environment. There’s no reason for regulated banks not to do so – especially since they get CRA credit in the process – given where mortgage rates are likely to land once inflation is reduced. State and local governments also need to include interest-rate buy-down options as part of homebuyer assistance programs, since there is no other relief in sight.
Homeownership is the foundation of the American Dream. Buying down interest rates has the potential to be a game-changer in promoting homeownership among first-time homebuyers, communities of color, and low-to-moderate-income buyers.
Let’s give these generations a chance to build wealth of their own: Buy down rates now!