LOS ANGELES—Stephen Oliner, a senior fellow at the UCLA Ziman Center for Real Estate and resident scholar at American Enterprise Institute wants low- and middle-income families to find a pathway to homeownership, but he doesn't believe that it is through FHA. In an earlier story, he criticized the mortgage insurance premium cut, pushed through in the final days of the Obama Administration and then suspended on day one of the Trump administration, for being ineffective at helping people achieve homeownership. It turns out, his firm American Enterprise Institute has developed a loan product that he says is far superior to the FHA program. In this exclusive interview, we ask him about his loan product and how it is a solution to putting families in houses.
GlobeSt.com: You believe that FHA borrowers are underwater on day one of their loan. For that reason, should FHA increase the minimum equity investment above 3.5%?
Stephen Oliner: For people who are just getting into the market for the first time, the median down payment is 3.5%. There isn't much equity going into first-time buyer purchases in the market as a whole I don't think the solution is to make large down payments, because that is really the speed bump for households that would like to become homeowners. Most of them are relatively young, and they don't have a lot of accumulated savings. If we require large down payments, that is going to be another impediment.
GlobeSt.com: What is the solution, then, to providing homeownership options to lower- and middle-income families?
Oliner: We are going in a different direction with a loan product that we call a wealth-building home loan. The loan has actually no down payment, but it is underwritten in a more rigorous way than an FHA loan. It requires the borrower real right size the purchase so that home price isn't too high relative to their income. It also requires that the borrower take a maximum charge of only 20 years, so that they can pay down the principal and build equity.
GlobeSt.com: Won't a 20-year loan make monthly payments significantly higher?
Oliner: The knock of a 20-year loan is that you are paying down so much of the principal every month that your monthly payments are high. That is true, so we have designed the loan so that it has low default risk, low mortgage insurance premiums, and has seven-year arms. The benefit of that is that you have lower monthly payments early on because the interest rate on early arms is lower than a fixed rate loan. We have done calculations that, compared to taking out a 30-year FHA loan, using that as the benchmark, if you take the loan out as an arm, you can just about as much house. You aren't really sacrificing much of anything, and the arm rate that you start with is lower than a fixed rate.
GlobeSt.com: Isn't there a danger to increasing interest rates gradually?
Oliner: Usually people think of arms as having payment shock risk. That is definitely true on a 30-year loan, but on a 15 to 20 year loan that doesn't reset for at least seven years, by the time you get to the first reset point, you have paid down enough of the principal that under standard reset contracts, your monthly payment goes up very little because you are applying a somewhat higher interest rate to a substantially lower loan balance. That doesn't work with a 30-loan because the loan balance has hardly gone down.
LOS ANGELES—Stephen Oliner, a senior fellow at the UCLA Ziman Center for Real Estate and resident scholar at American Enterprise Institute wants low- and middle-income families to find a pathway to homeownership, but he doesn't believe that it is through FHA. In an earlier story, he criticized the mortgage insurance premium cut, pushed through in the final days of the Obama Administration and then suspended on day one of the Trump administration, for being ineffective at helping people achieve homeownership. It turns out, his firm American Enterprise Institute has developed a loan product that he says is far superior to the FHA program. In this exclusive interview, we ask him about his loan product and how it is a solution to putting families in houses.
GlobeSt.com: You believe that FHA borrowers are underwater on day one of their loan. For that reason, should FHA increase the minimum equity investment above 3.5%?
Stephen Oliner: For people who are just getting into the market for the first time, the median down payment is 3.5%. There isn't much equity going into first-time buyer purchases in the market as a whole I don't think the solution is to make large down payments, because that is really the speed bump for households that would like to become homeowners. Most of them are relatively young, and they don't have a lot of accumulated savings. If we require large down payments, that is going to be another impediment.
GlobeSt.com: What is the solution, then, to providing homeownership options to lower- and middle-income families?
Oliner: We are going in a different direction with a loan product that we call a wealth-building home loan. The loan has actually no down payment, but it is underwritten in a more rigorous way than an FHA loan. It requires the borrower real right size the purchase so that home price isn't too high relative to their income. It also requires that the borrower take a maximum charge of only 20 years, so that they can pay down the principal and build equity.
GlobeSt.com: Won't a 20-year loan make monthly payments significantly higher?
Oliner: The knock of a 20-year loan is that you are paying down so much of the principal every month that your monthly payments are high. That is true, so we have designed the loan so that it has low default risk, low mortgage insurance premiums, and has seven-year arms. The benefit of that is that you have lower monthly payments early on because the interest rate on early arms is lower than a fixed rate loan. We have done calculations that, compared to taking out a 30-year FHA loan, using that as the benchmark, if you take the loan out as an arm, you can just about as much house. You aren't really sacrificing much of anything, and the arm rate that you start with is lower than a fixed rate.
GlobeSt.com: Isn't there a danger to increasing interest rates gradually?
Oliner: Usually people think of arms as having payment shock risk. That is definitely true on a 30-year loan, but on a 15 to 20 year loan that doesn't reset for at least seven years, by the time you get to the first reset point, you have paid down enough of the principal that under standard reset contracts, your monthly payment goes up very little because you are applying a somewhat higher interest rate to a substantially lower loan balance. That doesn't work with a 30-loan because the loan balance has hardly gone down.
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