Term Paper: Low Income Home Loans

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[. . .] A combination of factors can affect whether a borrower qualifies for a loan, and if so, at what interest rate. Many of these factors are class related.

While lenders should consider a borrower's income and assets, an overemphasis on these factors may discriminate against low-income and minority borrowers (Kim, 2002). A low-income person under existing measures of creditworthiness is labeled a poor credit risk may, under different and less restrictive standards, prove to be a worthy borrower. Developing new measures of creditworthiness can correct lenders' perspectives on some low-income borrowers and open up access to credit for those worthy borrowers now being turned down for loans.

One undermined measure, for example, is rental history (Kim, 2002). Credit bureaus do not keep track of whether tenants pay their rent on time. Therefore, tenants who make timely payments are not rewarded in their credit rating, although it may be one of the only factors that could help them. Because low-income and minority households are more likely to rent, this gap in data collection is disproportionately negative to them. The fact that person pays his rent on time would seem to be an excellent indicator of whether he will pay a mortgage on time. However, in our current social structure, credit companies are more focused on wealth and assets.

Expanding credit to previously underserved groups does not necessarily mean greater risk for lenders (Kim, 2002). In recent years, analyses of borrowers' creditworthiness have become more and more sophisticated, in large part due to the advent of technology in home mortgage lending.

Home ownership is a major aspect of class structure in the United States, and homeowners have traditionally been highly regarded in society. The Founding Fathers believed that private property ownership, as defined under common law, pre-existed government (Pecquet, 1987). The state and federal governments were the mere contractual agents of the people, not sovereign lords over them. All rights, not specifically delegated to the government, remained with the people - including the common-law provisions of private property.

When drawing up the Constitution, America's Founding Fathers recognized that there would be times when an individual's right to hold property free from governmental intrusion must be balanced with the fact that a particular public improvement was important to the overall public good (Loop, 2000). In such instances, private property should be made available for such purpose in exchange for just compensation.

The Founding Fathers understood private property ownership to be the bedrock on which American freedom stands (Loop, 2000). They even inserted a clause into the Bill of Rights that says private land cannot be taken unless for a clear public use. These early leaders regarded property owners highly and much of the Constitution catered to their needs. This is still true today. Thus, low-income families could truly rise in the ranks by buying property.

However, as the U.S. has historically been a nation that focuses on individual achievements, low-income families have had few opportunities to buy homes. Social Darwinism was first coined by Herbert Spencer, an English philosopher in the 19th century (Bethell, 1999). This idea flourished in the United States, as is true of many ideologies, religions, and philosophies. A good summary of Social Darwinism is as follows: "In these years, when Darwin's Origin of Species, popularized by Herbert Spencer as "the survival of the fittest, " and applied to races as well as species in a vulgarized form, Social Darwinism, the coming Christian triumph was presented as an Anglo-Saxon Protestant one."

The idea relates to Charles Darwin's biological idea of "survival of the fittest (Bethell, 1999)." Many people believe that an identical process took place among human beings. They believed that white Protestant Europeans advanced much further and faster than other "races." Herbert Spencer took this concept one step further. Human society is always in a sort of evolutionary process in which the fittest- which today are those who can make the most money -- were chosen to dominate. Low-income people simply could not compete. And just as nature weeds out the unfit, Social Darwinism holds that it is acceptable to out its unfit. Thus, today, many people argue that it is undesirable to provide, as public policy, governmental support for any plan that would perpetuate weakness.

As related to home loans for low-income people, public policy is necessary because it gives low income people the opportunity to advance in society. These loans may help some families climb the ladder to middle class, rather than falling into poverty. Thus, the concept of Social Darwinism is unfair in this case.

The title of Arthur Okun's book, Equality and Efficiency: The Big Tradeoff captures the essence of this issue. Okun believed that government policies that reduced income inequality could reduce total production. If the government attempted to take from the rich to help the poor, the rich would react by changing the way in which they used their resources, and these new ways would not be productive. Thus, according to Okun, trying to divide the pie more equally could reduce the size of the pie.

In addition, economic growth depends in part on decisions that are risky. If there are only small potential rewards for those who take risks, people will stick to the tried and true and economic growth will slow. The problem for government policy in this view is to find the proper balance between income redistribution on one hand and production and economic growth on the other. Okun was willing to suffer a considerable reduction in efficiency in order to obtain greater equality.

The case for equality is based on the idea that more equal distribution will maximize utility. If income is subject to diminishing marginal utility, then people at the high end of the income scale receive less utility per dollar of income than people at the low end. The argument is that giving the low-income people more by taking it from the high-income groups would raise utility. The high-income earners would lose less utility than the low-income groups would gain.

The case for inequality is that inequality is an important determinant of the amount of income produced and available for distribution overall. Basically, inequality provides an incentive for people to work harder and more efficiently.

The equality-efficiency tradeoff is the belief that society sacrifices some efficiency when it tries to achieve more egalitarianism. The "leaky-bucket" analogy assumes that money must be transferred from the rich to the poor in a leaky bucket. The leak represents the efficiency loss due to the loss of incentives to work, to save and invest, and to accept risk. It also reflects the resources that must be diverted to bureaucracies that administer the tax-transfer system. How much of a leakage is there? And how much should society accept? The answers to these questions are not clear. Studies about the extent of tradeoff produce different conclusions, but the estimated loss ranges from a cost equal to the amount of the dollars given to the poor to as high as three times the amount of the dollars given to the poor.

Income inadequacy, or poverty, may be a greater problem than inequality. By providing home loans to low-income people, the government is simply giving them a break -- they are not paying for the entire of the loan and are required to help themselves, rather than depending entirely on public assistance.

In conclusion, public policies that promote home loans for low income families can lead the way in helping lenders give deserving borrowers the credit that is their due.

Basically, public policy is necessary to make homeownership possible for the low-wealth households eager to buy but only able to afford first mortgages significantly below the houses' selling prices. No-interest second mortgages enabled the affordability and risk problems to be overcome. Private lenders would not be as effective in providing this cushion.

Governments favor policies removing barriers to minority homeownership, but the competing objective of combating the perceived threat of urban sprawl by some of these governments is simultaneously restricting homeownership opportunities for minorities (Almasi, 2003).

Homeownership increases prosperity. "Homeownership provides wealth and economic security for families... One-half of all homeowners in the U.S. hold at least 50% of their net worth in home equity. For African-American families (specifically the elderly), other minorities and low-income, it is 60% (Congressional Black Caucus Foundation, 2002)."

The American dream is not available to everyone who works hard and wants to buy a home (Stein and Eakes, 2000). The majority of low-income renters cannot afford to buy a home that is half the median sales price in their area. Low-income households own homes at roughly half the rate of high-income households, and minorities own homes at less than two-thirds the rate of white households.

Increasing low-income homeownership needs public assistance to succeed. While the federal government already allocates billions of dollars to housing, this money does not successfully promote low-income homeownership. It is largely targeted through the tax code to high-income homeowners through $58 billion… [END OF PREVIEW]

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