Sustainability versus Affordability

Mortgage insurance companies are tightening their criteria for insuring mortgages. According to Tuesday's Mortgage Market Turmoil section of the Wall Street Journal in recent years, the overall focus on the industry was to provide housing affordability versus sustainability. Now that the housing market and mortgage industry are in tourmoil, lenders for mortgages and insurances are reining in their underwriting standards to make the industry sustainable in the long-term. Insurers are requiring down payments of at least 10% versus 3% or 5% in the years past. Certainly this is a more prudent investment on behalf of mortgage insurers to insure only the households who make a more secure financial investment in the property. However this makes purchasing a home extraordinarily difficult for first-time buyers.

Sustainability is the word of the millennium. We use the word when we talk about green, environmentally friendly construction. Although it is a word not commonly used when speaking about mortgages, there was a number of references to sustainability in the mortgage insurance industry in Tuesday's WSJ article. This made me think of the additional hurdles households will have to jump through when looking to buy a home for the sake of mortgage industry sustainability. I agree that the industry needs to tighten its belt with regards to who it lends to and who it insures but we need not overlook the fact that providing housing to a variety of income levels is sustainable and essential for a local economy. It has more than social benefits for the particular household but benefits to the regional economy as well. Without providing housing to service sector employees, municipal employees and tradesmen, the labor demands placed on the regional service sector by market-rate households will be unmet. Providing housing for a variety of income levels provides housing for all employment sectors and creates a sustainable regional economy. The question is, does tightening your belt too much regarding mortgage approvals inhibit regional economic sustainability by making it difficult for low- and moderate-income households to qualify for a mortgage?

What is affordable?

People often have difficulty when thinking about what it means to be considered "affordable". Many people believe it's only housing for the poorest of the poor not realizing it's also housing for some members of the workforce. This can be tradesman, government workers, office workers, service sector employees. Essentially, it is those whose jobs are critical to a city or municipality.

A home that is affordable is attainable to a household where household expenditures (mortgage, insurance and taxes) do not exceed 30% of household income . A household who spends greater than 30% is considered cost-burdened. To be eligible for State or Federal housing subsidies, households are subject to certain income limitations. They are very low-income, low-income, and moderate-income and are defined as:

Moderate-income is between 50% and 80% of the area median income.
Low-income is between 30% and 50% of the area median income.
Very low-income is below 30% of the area median income.