Mortgage Trouble Clouds Homeownership Dream

Perhaps the American dream of homeownership is not for everyone.

That may sound at odds with a bedrock notion of society promoted by presidents for decades. But many experts say it is a message that can be drawn from the rising troubles with mortgages provided to home buyers with weak credit.

Several large mortgage companies have stopped making new loans, and others have tightened lending standards.

Hundreds of thousands of families who bought houses in the last two years — using loans with low teaser interest rates and no down payments — are now losing them.

Their short tenure as homeowners calls into question whether the nation’s long drive to increase homeownership — pushed by both public policy and financial innovations — has overstepped some boundary of demographic and economic sense.

“Clearly we went too far,” said Joseph E. Gyourko, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. “It’s not the case that high homeownership is always good.”

Consider Nathaniel Shields, who expects to lose his four-bedroom Cape Cod house in southwest Chicago to a foreclosure in May.

He cannot afford his mortgage payment, which jumped to $1,300 a month from about $1,000 after his loan reset to a higher interest rate last summer. A divorce and the loss of his county government clerical job, which paid $14.80 an hour, have also hurt.

In 2004, Mr. Shields took out a popular hybrid mortgage that carried a fixed interest rate for two years before becoming an adjustable-rate loan for the remaining 28 years. In August, his loan’s interest rate rose from 6.6 percent to 8.1 percent, and to 9.6 percent now. “I love the house,” said Mr. Shields, 47, who now works in a custodial job with the Chicago school district that pays $10.40 an hour. “I put a lot of money in the house — a deck and a new garage — and they are just going to take the house.”

Kathleen Van Tiem, a counselor at Neighborhood Housing Services of Chicago, has been trying to help him, but says that his weak credit and low income make him ineligible to refinance or modify his loan. Mr. Shields has put his house up for sale, but in a market with many homes available, he has found no takers.

There were surges in homeownership rates last century, but further gains have been slow going more recently, despite the hoopla of the housing bubble and the surge in home building.

The nation’s homeownership rate has increased by only about 1.4 percentage points since 2000, to almost 69 percent last year.

But subprime mortgages — granted to borrowers like Mr. Shields with weak, or subprime, credit histories — played a big role in achieving those levels.

This push, however, has meant intense financial strain for many families. Subprime borrowers will spend nearly 37 percent of their after-tax income on mortgage payments, insurance and property taxes this year, according to estimates by Mark Zandi, chief economist of Moody’s Economy.com, drawn from Federal Reserve data.

This is about 20 percentage points more than prime borrowers and 10 points more than what subprime borrowers paid in 2000.

And their payments will get higher, Mr. Zandi estimates, as low teaser rates used to lure them into the market adjust upward after a few years.

When the housing market started weakening, subprime borrowers were the first to feel the squeeze. Almost 8 percent of subprime mortgages — more than 450,000 loans — were either in foreclosure or in arrears of more than three months in the fourth quarter of last year, according to the mortgage bankers.

Their unraveling means not only a string of failed lenders. Homeownership rates have slipped, and many low-income families, who dedicated meager savings toward a stake in their first homes, are facing foreclosure.

“I worry that people are overexposed to risk,” said Stuart S. Rosenthal, an economics professor at Syracuse University. “We wouldn’t encourage people to buy risky stocks, so why do we encourage low-income families to invest in this risky asset, especially in tight markets?”

But politicians have long encouraged the idea of homeownership. “A nation of homeowners is unconquerable,” Franklin D. Roosevelt said. Promoting homeownership has been a cornerstone of President Bush’s “ownership society.” He has declared June to be National Homeownership Month.

And government has played a substantial role in fostering homeownership — including offering mortgage insurance and creating Fannie Mae and Freddie Mac to buy mortgages from lenders and repackage them for sale to investors.

Moreover, the government has provided an ever-growing pile of subsidies to the buyers of homes.

The mortgage interest deduction, the biggest single subsidy to homeowners, will cost the federal budget about $80 billion this year, according to the administration’s projections. Deductions for state and local property taxes will cost $15.5 billion.

Allowing homeowners to pocket tax-free much of the profit from selling their homes is expected to cost $37 billion more. Altogether, this amounts to almost 5 percent of the federal government’s total tax revenue, and almost three times HUD’s entire $42 billion budget. Now even some in Washington are questioning the soundness of pushing homeownership so broadly.

United States policies in recent years promoted the idea of homeownership too hard and at the expense of rental housing, said Representative Barney Frank, Democrat of Massachusetts. “I wish people could own more homes,” he said in an interview yesterday. “But I also wish I could eat and not gain weight.”

And the government’s efforts to promote homeownership are far from an unqualified success. From 2000 to 2005, homeownership rates increased significantly only among households in the top two-fifths of the income distribution, those earning more than $46,883, according to the Census Bureau’s American Community Survey.

Homeownership declined for families in the bottom two-fifths of the income scale. In the lowest fifth — where families make less than $20,180 — homeownership was only 42.4 percent in 2005, which was 3 percentage points less than it was 25 years earlier and 26 percentage points below the national average.

Part of the reason is the structure of government subsidies, which are worth very little to low-income families but quite a bit to families with big incomes. Those well-off families typically do not need government support to buy a home but use it to buy bigger places than they would otherwise purchase.

The mortgage interest deduction alone is worth about $21,000 to a taxpayer in the highest bracket of income with a $1 million mortgage. But for a typical family that bought, say, a $220,000 house with 20 percent down, the break is worth about $1,600.

Some economists question whether the government should be subsidizing homeownership in the first place.

Edward L. Glaeser, a professor of economics at Harvard, said he could understand government “giving a slight push to increase homeownership, but the current incentives are much more than a slight push.”

Economic studies do suggest that homeowners try to maintain the value of their properties — tending to their gardens and investing in their communities. But it is not clear that homeownership itself fosters these behaviors; it could be that people who invest in their communities prefer to own their own homes.

Homeownership also has a more problematic side: it locks people into an asset and ties them to a place. “Too much homeownership might restrict mobility, and that may not be a good thing,” Professor Gyourko said.

Take Adam Gardner, a 29-year-old appraiser who bought a three-bedroom, two-bath house 20 miles north of Reno, Nev., for about $255,000 two years ago. His wife is pining to move closer to town, but with housing prices falling all around him, Mr. Gardner doubts they can pull it off. “I’m not sure we can sell the place we are in,” Mr. Gardner said.

Some people can bear tying up much of their wealth in a house — those with a secure, well-paid job in a stable labor market, for instance. But others might need more freedom to move: the young in pursuit of love or careers, say, or workers in declining job markets.

The American dream of homeownership may continue to grow over coming decades, if only because the population is aging and older people are more likely to own their own home. But for now, even industry insiders acknowledge that, at the very least, it is going to take a breather.

Ted J. Grose, a mortgage broker in Los Angeles, said, “For the moment we may have plateaued.” For all the concerns about low-income families facing foreclosure, some economists believe that the development of the subprime credit market has, over all, been a boon for people with low income.

Harvey S. Rosen, a professor of economics at Princeton who was a former economic adviser to President Bush, put it this way: “Ultimately the public policy choice is going to be whether to make it harder for people to get these loans, and just shut people out, or let people make the choice and know that sometimes they will make mistakes.”