The potential and limitations of mortgage innovation in fostering homeownership in the United States

Abstract

This article presents an empirical analysis of mortgage innovation as a vehicle to enable renters, especially those from traditionally underserved populations, to realize home‐ownership. It examines the financial and underwriting criteria of a typology of mortgage products, from those adhering to historical standards to some of today's most liberal loans, and develops synthetic models to account for all direct purchase costs. These models are calibrated using 1995 data on renter demographic and financial characteristics from the Survey of Income and Program Participation. Compared with historical mortgages, today's more innovative loans increase the number of renters who could hypothetically qualify for homeownership by at least a million and expand potential home‐buying capacity by $300 billion. Certain policies could greatly expand the potential gains. Nevertheless, even the most aggressive innovations can play only a limited role in efforts to deliver the material benefits of homeownership to underserved populations.