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Home Ownership - Meeting with Secretary Hills, September 9, 1976
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Home Ownership - Meeting with Secretary Hills, September 9, 1976
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The original documents are located in Box 17, folder "Home Ownership - Meeting with
Secretary Hills, September 9, 1976" of the James M. Cannon Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 17 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
MEETING WITH SECRETARY HILLS
Thursday, September 9, 1976
4:30 p.m.
Situation Room
Re: Housing Alternatives
FORD LIBRARY j GERALD
Several fundamental questions must be answered regarding a
Presidential homeownership initiative. Two important ones
are:
1. Are the cost of dowkpayment or the amount of monthly
interest payments the main impediments to expanded
homeownership?
states
-- Poll surveys in 2 sectors indicate the former
but additional data from other states will be
developed by the middle of next week.
2.
Should a new homeownership program benefit all
homeowners or people purchasing a home for the
first time? Current tax laws and government mortgage
insurance tend to aid more affluent homeowners.
Perhaps a new program should only aid those who
want entry into homeownership.
LIBRARY FORD BERALD
1.
FORMAT:
HOMEONNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)
BROCK-ASHLEY
GRADUATED PAYMENT/FIXED RATE MORTGAGE
TAX EXEMPT SAVINGS
DOWNPAYMENT VOUCHER/GRANT
FEDER
Both This program would provide a tax credit to purchasers of first homes.
new and existing homes would be eligible. There would be a maximum
GNMA would pay 2% interest on the mortgage initially, and any
Initial mortgage payments would be reduced and later payments
Contribution made to, and interest earned on, a savings account
$1,000 cash payment to buyer
Federa
mortgage lesser of limit of $38,000. The amount of the tax credit would be the
additional interest due to the variable rate provisions.
This
increased at set rate of increase. Increasing mortgage
would be deductible from taxable income if the savings in that
second
at the (1) the difference between payments to principal and interest
would accumulate with interest in the borrower's GNMA Loan
payments should better match rising incomes. This mitigates
account are used for downpayment by first time home purchasers.
principal current market rate (9% assumed in this analysis) and payments to
account which is to be repaid when the house is sold or by
initial income constraints on homeownership.
Limits would be $20,000 income, $10,000 total savings, $2,500
interest and interest at 60 or (2) the difference between principal and
arrangement with GNMA.
per year in addition to savings.
out at 9% and 20% of the family's income. This program would phase
at about the $18,000 income level.
2.
Number of
1.33 million
Families
1.7 million
1.5 million
Assisted:
1.5 million families
1.46 million
1.55
3.
Subsidy per
Family:
The average subsidy par family in the first year of about $500 and of
about $650 over the life of the loan.
There is no direct subsidy involved in the program. There
NONE
$1,000
NONE
are, however, indirect costs involved in all direct loan
$2,500
programs.
4.
Number of
230,000
Incremental
Purchaser
The GNMA loan would reduce monthly payments enough such that
80,000 (under constraint than loan to value ratio cannot
75 100,000
60,000
90,00
per Year:
250,000 to 300,000 additional families would be able to afford
exceed 100%)
a $35,000 house without spending more than 25% of their income
Raises loan-to-value from .86 to .89 Based on in-house
Lower
on housing. The GNMA loan would reduce current costs but
research, this would increase housing demand by 60,000
home
increase total costs because the GNMA loan must be repaid
units per year.
be
with accumulated interest. Thus, there may be market resistance
to this program, since it substantially reduces or eliminates
homeownership equity accumulation, one of the primary perceived
benefits of homeownership.
5.
First Year
About $665 million
Outlays:
The average GNMA loan would be about $500 after one year. If
NONE
$938 million
$1.4 billion
NONE
1.7 million loans were issued, total lending under the program
would reach $850 million.
6. Total Costs:
Assuming 7% growth rate in normal income, the $14,000 family would
$1.7 billion over the period of subsidy for each year's assisted families.
Total lending for the first year participants will reach about
NONE
Year 1:
$938M year
All costs are borne in the first year a family is a
NONE
phase out in years and higher income families would phase out sconer.
$5 billion after 5 years. Lending to participants entering
Year 2:
$1.88B year
subsidy recipient.
in years 2-5 will be about $10 billion. As currently conceived,
Year 3:
$2.86B year
total lending under the program will increast at an exponential
Years 4-8:
$3.75B
rate. In theory, however, all of these outlays would be
recovered as recipients ultimately repaid their GNMA loans.
7. Cost per
Incremental
(First Year) $2,900 ($665 million divided by 230,000)
(First Year)
Purchaser:
(Total)
There are no direct costs to the government,
(First Year) NONE
(First Year) $37,500 to 50,000
(First Year) $23,000
(Firs
$7,391 ($1.7 billion divided by 230,000 incremental purchasers)
but in terms of budget impact, total lending
(Total)
would be about $2,800 per incremental purchaser
(Total)
NONE
(Total)
$37,500 to 50,000
(Total)
$23,000
(Tota
in the first year. After 25 years, GNMA would
have lent about $250,000 per incremental first
year purchaser.
8. Risk to the
Government:
Essentially no default risk since FHA insurance is not required.
There is a particularly high risk of default associated with
Increased FHA default risk
NONE
NONE
A sig
second mortgages such as the GNMA loan which may be higher
incre
than the original principal of the first mortgage, by the
rate
time it becomes due.
9. Ease of
Administration
If inexpensive assistance is provided as a tax credit, administration is extremely
but costs uncontrollable If the assistance is provided
GNMA would have to become a mortgage originator and servicer
FHA underwriting. FHA will finance some this year (Section 245)
Run through tax system; so minimal administrative cost
Would impose significant operational capacity to administer
Requi
hence direct subsidies, administration is complex, but the number of recipients, by
or would have to pay mortgage bankers to provide this service.
the program (e.g., would have to certify incomes of participants
the
costs, can be controlled.
($20,000 income limit), and if constraints such as requiring
purchase of decent safe and sanitary housing were imposed,
would have to verify that constraints were met.)
10. Other
Problems:
The homeowner's real equity in the home is substantially reduced
Lender resistance due to increased default risk and
Creation of new tax loophole with a large constituency.
Equal subsidy would be paid to families of different wealth.
Amor
by the GNMA second lien. His mobility also is reduced because
reduced cash flow.
Slow implementation, most recipients will take several years
8
he must repay the loan if he sells his home. Given the potential
to accumulate enough in their downpayment account to make
May have slight inflationary impact on price of housing since
high
exponential growth rate of total lending under the program, the
a purchase. Also, deduction amount need not correlate with
subsidy reduces purchase price.
indirect cost of additional interest on all Treasury borrowing
housing expenditures.
is likely to be substantial. Finally, GNMA could become large
holder of single family homes if default rates are as high as may
be reasonably expected.
IMPACT on Typical
$15,000 Income
Monthly reduced mortgage payment reduced by $36, from $286 to $250, in first year;
Family Buying a
by $15 in second year. No impact after second year.
Monthly mortgage payment reduced by $44, from $286 to $242, in
Monthly mortgage payment reduced by $75, from $286 to $211, in
Downpayment effectively reduced by $1,000, from $4,000 to
Lowers downpayment by $1,000 from $4,000 to $3,000.
Redu
$39,000 House with
each year. Total mortgage debt increases continually, by over
first year; payment rises by 3 percent per year over the mortgage
$3,000, through tax saving.
mont
$35,000 Mortgage:
$5,500 per year.
term.
SAVINGS
DOWNPAYMENT VOUCHER/GRANT
FEDERAL GUARANTEE OF DOWNPAYMENT
REDUCE FHA DOWNPAYMENT REQUIREMENT
made to, and interest earned on, a savings account
fuctible from taxable income if the savings in that
$1,000 cash payment to buyer
Federal guarantee of loan for one half of downpayment. This
Legislative change to reduce downpayment required for FHA insurance
used for a downpayment by first time home purchasers.
second loan would be secured by a second lien.
Current
Option
1
be $20,000 income, $10,000 total savings, $2,500
addition to savings.
3% for up to $25,000
3% for up to $25,000
10% for $25,000 $35,000
5% for $25,000 $40,000
20% for $35,000 $45,000
10% for $40,000 $50,000
20% for $50,000 $60,000
families
1.46 million
1.55 million
275,000 (expected FHA volume plus incremental purchases)
$1,000
NONE
NONE
60,000
90,000 140,000
20,000
Raises loan-to-value from .86 to .89 Based on in-house
Lowers downpayment required at purchase but raises total price of
Reduces downpayment requirement for FHA only by an average of 3%.
research, this would increase housing demand by 60,000
home if the second lien is amortized at mortgage rate which will
units per year.
be in excess of rate of inflation.
$1.4 billion
NONE
NONE
$938M year
All costs are borne in the first year a family is a
NONE
NONE
$1.88B year
subsidy recipient.
$2.86B year
$3.75B
$37,500 to 50,000
(First Year) $23,000
(First Year) NONE
(First Year: ) MOME
$37,500 to 50,000
(Total)
$23,000
(Total)
NONE
(Total)
NONE
NONE
A significant increase in foreclosure rates. For example, by
An increase in foreclosure rate. Losses should be covered by the
increasing loan-value ratio by 8 percent (.86 to .93) foreclosure
.5% premium.
rate would be increased by 11 percent. (elasticity of 1.4).
system; SO minimal administrative cost
Would impose significant operational capacity to administer
Requires HUD processing at time of guarantee and management in
Simple change in FHA processing. Larger volume of FHA insurance
the program (e.g., would have to certify incomes of participants
the event of foreclosure.
would increase work load.
($20,000 income limit), and if constraints such as requiring
purchase of decent safe and sanitary housing were imposed,
would have to verify that constraints were met.)
new tax loophole with a large constituency.
Equal subsidy would be paid to families of different wealth.
Amortizing second lien will require a higher income
Requires legislative change. Has greatest effect on homes in excess
tation, most recipients will take several years
to support loan (e.g., a higher monthly payment because of the
of $30,000. Could result in FHA becoming more competitive with
enough in their downpayment account to make
May have slight inflationary impact on price of housing since
higher mortgage amount).
private mortgage insurance.
Also, deduction amount need not correlate with
litures.
subsidy reduces purchase price.
ffectively reduced by $1,000, from $4,000 to
Lowers downpayment by $1,000 from $4,000 to $3,000.
Reduces downpayment by $2,000, from $4,000 to $2,000; raises
Could lower downpayment by up to $2,500, from $4,000 to $1,500.
tax saving.
monthly payment by $20, from $286 to $306.
1. FORMAT:
HOMEOMNERSHIP OPPORTUNITIES FOR MIDDLE AMERICA (HOMA)
BROCK-ASHLEY
GRADUATED PAYMENT/FIXED RATE MORTGAGE
TAX EXEMPT SAVINGS
DOWNPAYMENT VOUCHER/GRANT
FEDEI
mortgage lesser of limit of $38,000. The amount of the tax credit would be the
Both new and existing homes would be eligible. There would be a maximum
This program would provide a tax credit to purchasers of first homes.
GNMA would pay 2% interest on the mortgage initially, and any
Initial mortgage payments would be reduced and later payments
Contribution made to, and interest earned on, a savings account
$1,000 cash payment to buyer
additional interest due to the variable rate provisions. This
would be deductible from taxable income if the savings in that
GERALD
Feder
increased at set rate of increase. Increasing mortgage
secor
at the (1) the difference between payments to principal and interest
would accumulate with interest in the borrower's GNMA loan
payments should better match rising incomes. This mitigates
account are used for downpayment by first time home purchasers.
principal current and market rate (9% assumed in this analysis) and payments to
account which is to be repaid when the house is sold OK by
initial income constraints on homeownership.
Limits would be $20,000 income, $10,000 total savings, $2,500
interest interest at 6% or (2) the difference between principal and
arrangement with GNMA.
per year in addition to savings.
out at 9% and 20% of the family's income. This program would phase
at about the $18,000 income level.
2. Number: of
1.33 million
Families
1.7 million
Assisted:
1.5 million
1.5 million families
1.46 million
1.55
3.
Subsidy par
Family:
about $650 over the life of the loan.
The average subsidy par family in the first year of about $500 and of
There is no direct subsidy involved in the program. There
NONE
$1,000
NONE
are, however, indirect costs involved in all direct loan
$2,500
programs.
4. Number of
230,000
Incremental
Purchaser
The GNMA loan would reduce monthly payments enough such that
80,000 (under constraint than loan to value ratio cannot
75 100,000
60,000
90,00
par Year:
250,000 to 300,000 additional families would be able to afford
exceed 100%)
a $35,000 house without spending more than 25% of their income
Raises loan-to-valus from .86 to .89 Based on in-house
Lower:
on housing. The GNMA loan would reduce current costs but
research, this would increase housing demand by 60,000
home
increase total costs because the GNMA loan must be repaid
units per year.
be in
with accumulated interest. Thus, there may be market resistance
to this program, since it substantially reduces OK eliminates
equity accumulation, one of the primary perceived
benefits of homeownership.
5.
First Year
About $665 million
Outlays:
The average GNMA loan would be about $500 after one year. If
NONE
$938 million
$1.4 billion
NONE
1.7 million loans ware issued, total lending under the program
would reach $850 million.
6. Total Costs:
Assuming $1.7 billion over the period of subsidy for each year's assisted families.
70 growth rate in normal income, the $14,000 family would
Total lending for the first year participants will reach about
NONE
Year 1:
$938M year
All costs are borne in the first year a family is a
NONE
phase out in 5 years and higher income families would phase out sconer.
$5 billion after 5 years. Lending to participants entering
Year 2:
$1.88B year
subsidy recipient.
in years 2-5 will be about $10 billion. As currently conceived,
Year 3:
$2.86B year
total lending under the program will increast at an exponential
Years 4-8:
$3.75B
rate. In theory, however, all of these outlays would be
recovered as recipients ultimately repaid their GNMA loans.
7.
Cost per
Incremental
(First Year) $2,900 ($665 million divided by 230,000)
(First Year)
Purchaser:
There are no direct costs to the government,
(First Year) NONE
(First Year) $37,500 to 50,000
(First Year) $23,000
(First
(Total)
$7,391 ($1.7 billion divided by 230,000 incremental purchasers)
but in terms of budget impact, total lending
(Total)
would be about $2,800 per incremental purchaser
(Total)
NONE
(Total)
$37,500 to 50,000
(Total)
$23,000
(Total
in the first year. After 25 years, GNMA would
have lent about $250,000 per incremental first
year purchaser.
8. Risk to the
Government:
Essentially no default risk since FHA insurance is not required.
There is a particularly high risk of default associated with
Increased FHA default risk
NONE
NONE
A sign
second mortgages such as the GNMA loan which may be higher
increa
than the original principal of the first mortgage, by the
rate
time it becomes due.
9. Ease of
Administration:
direct but costs uncontrollable. If the assistance is provided
inexpensive If assistance is provided as a tax credit, administration is extremely
GNMA would have to become a mortgage originator and servicer
FHA underwriting. FHA will finance some this year (Section 245)
Run through tax system; so minimal administrative cost
Would impose significant operational capacity to administer
Requir
hence subsidies, administration is complex, but the number of recipients, by
or would have to pay mortgage bankers to provide this service.
the program (e.g., would have to certify incomes of participants
the
costs, can be controlled.
($20,000 income limit), and if constraints such as requiring
purchase of decent safe and sanitary housing were imposed,
would have to verify that constraints were met.)
10. Other
Problems:
The homeowner's real equity in the home is substantially reduced
Lender resistance due to increased default risk and
Creation of a new tax loophole with a large constituency.
Equal subsidy would be paid to families of different wealth.
Amort:
by the GNMA second lien. His mobility also is reduced because
reduced cash flow.
Slow implementation, most recipients will take several years
to sup
he must repay the loan if he sells his home. Given the potential
to accumulate enough in their downpayment account to make
May have slight inflationary impact on price of housing since
higher
exponential growth rate of total lending under the program, the
a purchase. Also, deduction amount need not correlate with
subsidy reduces purchase price.
indirect cost of additional interest on all Treasury borrowing
housing expenditures.
is likely to be substantial. Finally, GNMA could become a large
holder of single family homes if default rates are as high as may
be reasonably expected.
IMPACT on Typical
$15,000 Income
Monthly reduced mortgage payment reduced by $36, from $286 to $250, in first year;
Family Buying a
by $15 in second year. No impact after second year.
Monthly mortgage payment reduced by $44, from $286 to $242, in
Monthly mortgage payment reduced by $75, from $286 to $211, in
Downpayment effectively reduced by $1,000, from $4,000 to
Lowers downpayment by $1,000 from $4,000 to $3,000.
Reduc
$39,000 House with
each year. Total mortgage debt increases continually, by over
first year; payment rises by 3 percent per year over the mortgage
$3,000, through tax saving.
month
$35,000 Mortgage:
$5,500 per year.
term.
LIBRARY
FORD
DOWNPAYMENT VOUCHER/GRANT
FEDERAL GUARANTEE OF DOWNPAYMENT
REDUCE FHA DOWNPAYMENT REQUIREMENT
est earned on, a savings account
e income if the savings in that
$1,000 cash payment to buyer
9ERALD
Federal guarantee of loan for one half of downpayment. This
Legislative change to reduce downpayment required for FHA insurance
ent by first time home purchasers.
second loan would be secured by a second lien.
Current
Option
$10,000 total savings, $2,500
3% for up to $25,000
3% for up to $25,000
10% for $25,000 $35,000
5% for $25,000 $40,000
20% for $35,000 $45,000
10% for $40,000 $50,000
20% for $50,000 $60,000
1.46 million
1.55 million
275,000 (expected FML volume plus incremental purchases)
$1,000
NONE
NONE
60,000
90,000 - 140,000
20,000
Raises loan-to-value from .86 to .89 Based on in-house
Lowers downpayment. required at purchase but raises total price of
Reduces downpayment requirement for FHA only by an average of 3%.
research, this would increase housing demand by 60,000
home if the second lien is amortized at mortgage rate which will
units per year.
be in excess of rate of inflation.
$1.4 billion
NONE
NONE
All costs are borne in the first year a family is a
NONE
NONE
subsidy recipient.
(First Year) $23,000
(First Year) NONE
(Pirst Year ) MOME
(Total)
$23,000
(Total)
NONE
(Total)
NONE
NONE
A significant increase in foreclosure rates. For example, by
An increase in foreolosure rate. Losses should be covered by the
increasing loan-value ratio by 8 percent (.86 to .93) foreclosure
.5% premium.
rate would be increased by 11 percent. (elasticity of 1.4).
administrative cost
Would impose significant operational capacity to administer
Requires HUD processing at time of guarantee and management in
Simple change in FMA processing. Larger molume of PHA insurance
the program (e.g., would have to certify incomes of participants
the event of foreclosure.
would increase work load.
($20,000 income limit), and if constraints such as requiring
purchase of docunt once and samitary housing vace imposed,
would have to verify that constraints were met.)
a large constituency.
Equal subsidy would be paid to families of different wealth.
Amortizing second lien will require a higher income
Requires legislative change. Has greatest effect on homes in encase
will take several years
to support loan (e.g., a higher monthly payment because of the
of $30,000. Could result in FHA becomting more competitive with
mpayment account to make
need
May have slight inflationary impact on price of housing since
higher mortgage amount).
private mortgage insurance.
not
correlate
with
subsidy reduces purchase price.
$1,000,
from
$4,000
to
Lowers downpayment by $1,000 from $4,000 to $3,000.
Reduces downpayment by $2,000, from $4,000 to $2,000; raises
Could lower dompayment by up to $2,500, from $4,000 to $1,500.
monthly payment by $20, from $286 to $306.