Rethinking the 30-Year Mortgage

Introduction

Since the end of World War II, homeownership has characterized the American Dream. More than an economic or financial ideal, owning a home has been the tangible marker of prosperity, security, and family success. The reality of what Americans call homeownership, though, is something entirely different. Buying a home outright is impossible for all but the wealthiest families, so lenders and policymakers devised a system to make massive amounts of credit available to ordinary people to acquire home and land. It’s called a 30-year mortgage, and it is backed by the federal government through quasi-governmental banks that shield private lenders from the risk of making these loans.

In the current system, people who earn modest incomes can acquire real property valued well into six figures. It is normal for people to save money for a down payment on a house, to browse the internet for homes, apply for mortgage loans, and settle on a house based on aesthetics, location, and the affordability of the monthly mortgage payment. Politicians make their careers promising to make all this available to more Americans.

But what if all of this is just wrong? It turns out the system of homeownership has helped some at the expense of many others. The need for more and more land has driven sprawl and the need for publicly funded and financed infrastructure. The 30-year mortgage also has tied Americans down to jobs they don’t like, kept them in marriages that aren’t working, and generally living unhappy lives in the service of monthly mortgage payments. All this suggests some alternatives are needed that, with the right incentives and experimentation, might shift the country toward a better way for Americans to truly own a home.

History of the Mortgage

At the most basic level, a mortgage is a long-term consumer loan taken for the purpose of owning a home “free and clear.” This ownership entitles the successful borrower to the benefits of the full appreciated value of the asset. But the 30-year mortgage is a relatively new phenomenon and, though commonplace today, is not the best or only way to achieve homeownership.

Lending and borrowing are basic market interactions used over many centuries to acquire items of value even when one doesn’t have the money to purchase them outright. The Code of Hammurabi, chiseled into stone almost 4,000 years ago, is one of the oldest documents to show the use of land to borrow money. The Code outlines the rules around borrowing money using land and the crops they produce as collateral.

The Romans too understood the concept of using a fixed asset to borrow money without giving up ownership of the land, called hypothecation. Centuries later, the system of feudalism depended on land and service, complicating the conveyance of land. In 1536, to address tax evasion, Parliament under Henry VIII passed the Statute of Uses. This might seem arcane, but the terms many are most familiar with today, “fee simple,” the outright and indefinite ownership without condition, and “deed,” the public document showing who owns the property—emerged from this period. Conveyances had to be recorded to keep track of who owned what.

As feudalism faded, trade, money, and land practices became more transactional and freer from social and political obligations—e.g., having to join a lord’s army in exchange for use of land—and the term “mortgage” became more common. The term is of Anglo-French origin and means dead pledge or death pledge; when the promise to pay a loan is met, the obligation is dead or void. This notion, that loan terms would be set and paid over time, would be foundational for building societies in England and building and loan associations (B&Ls)  in the United States. In such systems, individuals buy shares in a B&L, which would then loan the shareholder the money for a home. Paying for the shares over time also meant getting a dividend as others paid their loans.

What’s compelling and worth noting here is that up to the 1930s in the United States, longer-term debt to acquire a home was a cooperative effort. People earning less money acquired homes gradually, but accomplished by pooling resources to create enough assets to support lending to people who otherwise couldn’t qualify for a loan. In other words, individuals in a community pooled their money and shared risk.

But with the passage of the National Housing Act of 1934 (the Act), part of the New Deal’s response to the Great Depression, and the creation of the Federal Housing Administration (FHA), homeownership became more of the individual enterprise familiar today. The National Housing Act is the root of the current assumption that housing needs to be subsidized to be affordable, an unfortunate cultural shift; after the passage of the Act, many Americans began to see housing as an entitlement not a commodity. The creation of the FHA moved the risk of lending for homeownership from local cooperative enterprises like B&Ls to banks and large-scale lenders by insuring them, guaranteeing that if the mortgage payer failed to pay, the banks would recuperate the loss.

Not long after the passage, the government created the Federal National Mortgage Association (Fannie Mae), which began buying mortgages insured by the FHA. Fannie Mae dramatically reduced bank risk when making a loan to a person with limited income and few or no fixed assets that could be claimed for lack of payment. The buyer could use the home and land itself as collateral. The rapid growth in the mortgages common today is largely because of the amelioration of the risk because all the debt would be covered by the federal government. Banks are willing to loan money to consumers for the purchase of a house because they know that if that household fails to pay the mortgage, a government sponsored entity like Fannie Mae will cover the loss. 

In the Richmond Fed’s A Short History of Long-Term Mortgages, Stanford economist Daniel Fetter argued that “rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage” drove the homeownership rate up from 44 percent in 1940 to 62 percent 20 years later.

In the mortgage system that emerged over the last 60 years, Americans have become accustomed to bank originating mortgages, using federal standards to evaluate borrowers, and setting lending terms. The mortgage system allows for a small down payment and low monthly payments because the federal government promises that if the borrower can’t pay, it will cover the loss. But the lender is often simply a pass-through that makes the loan, then sells the loan to the federal government or its chartered enterprise who holds the debt on its books.

A first-time mortgage is frequently not even held by the bank that originated it, but only serviced by that bank, collecting payments. The further securitization of mortgage debt led to the 2008 financial crisis, when the allure of profitable transaction costs and government backing sparked “a no credit, no down payment, no problem” run on mortgages.

The concentration of risk at the federal level had some ironic results in 2008. In the preceding decade, many people that had not been able to qualify for a mortgage now were able to qualify and buy a home, sometimes with no money down. A substantial number of those households began to miss payments. Many of these mortgages were in bundles of mortgages that were sold to investors and the proceeds from the sale were used for more loans. These transactions were fueled by regular mortgage payments, incentivizing the creation of more and riskier mortgages. This practice eventually outpaced the ability of households to pay, and the whole thing came crashing down.

Before the crash, however, it seemed like a boom time: money was cheap and qualifying was easy. Housing wasn’t just a good idea to have as shelter and a home, but also as a quick-turnaround investment. Many people rode the upside of inflation, buying homes cheaply and “flipping” them—reselling them at a profit—in a few months. When lending slowed and overleveraged households couldn’t make payments, these arbitrage houses were now depreciating assets. All of these trends were worrisome, but with so much money to be made and quickly, investors and policymakers missed many warning signs.

The Financial Crisis Inquiry Commission found that “the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited” the 2008 crisis.

It is important to note how important the mortgage system has become in the American economy and to many households. According to CoreLogic, “The market cap of the Standard and Poor’s 500 sits at $36.7 trillion. The total value of all U.S. public companies is $40 trillion. The U.S. residential real estate market, on the other hand, is worth $43.5 trillion.” Those staggering numbers make homeownership “the biggest asset class in the country and likely the world. In a different analysis CoreLogic found that households with “mortgages (roughly 62 percent of all properties) have seen their equity increase by a total of $425 billion since the third quarter of 2023, a gain of 2.5 percent year over year, bringing the total net homeowner equity to over $17.5 trillion in the third quarter of 2024.”

Another analysis found that, as of the third quarter of 2024, “48.3 percent of mortgaged residences are ‘equity rich,’ meaning their outstanding loan balance is less than half the home’s value.” According to the National Association of Realtors, “between 2016 and 2021, the typical homeowner accumulated approximately $144,400 in home equity, primarily due to property value appreciation.” A conservative estimate of housing’s share of gross domestic product is about 3 to 5 percent and as much as 18 percent.

Mortgages are not necessarily the only way to borrow for the acquisition of a home, they are simply the most recent. To make a loan for the purchase of an expensive fixed asset like a house requires some very deep pockets to reduce the risks of such lending. But that backing can distort the market, which can fuel lending that can lead to even riskier lending. But it is also important to understand that shifting the risk away from community members and toward larger financial institutions has broad and pervasive effects.

Problems with the Mortgage System

A Bankrate survey from 2023 found that “fully 74 percent of Americans consider homeownership a key component of the American dream,” and people answering that survey “placed a higher value on it than on any other indicator of economic stability, including a comfortable retirement, a successful career and a college degree.” 

Inflation and illusory financial stability

While qualifying for a mortgage is often called “homeownership,” it really isn’t. A 30-year mortgage for a $300,000 house under today’s interest rates will not see the monthly principal payment equal and then exceed interest until year 20 of the loan. The total interest on the loan of $369,574.31 will exceed the original purchase price. Over the same period, with appreciation of two percent, the balance on the loan would be about $150,000 and the market value of the home about $450,000. If the household sold at that point, it would get its $300,000 back without adjustment for inflation.

The thirst for wealth-building among politicians and consumers drives the market to meet the demand for mortgage-financed homes as an investment opportunity. But the only way that investment pays off is if appreciation reaches twice or three times as much as in this hypothetical case. In order for the government to risk trillions of taxpayer dollars on this bargain, it has to bet, on significant housing inflation on one hand while trying to address the problems of affordable housing with the other. The more it succeeds with one venture, the more it has to offset the problem created with spending on subsidies.

As demonstrated in a hypothetical example, one of the biggest problems with the 30-year mortgage is that the interest is frontloaded. A Harvard Magazine article lamented the rate of housing inflation in Boston over the last 40 years, noting that a home bought in 1995 for $165,000 now costs $714,000. The article points out that “For someone taking out a conventional fixed-rate 30-year mortgage, the monthly carrying costs (assuming a 10 percent down payment but excluding closing costs, taxes, and insurance) would have risen fourfold, from $1,029 to $4,181, leading to payments over the life of the loan totaling more than $1.5 million.” But this is a feature not a glitch of the mortgage. What might cause outrage for some is a boon for others. The purchased house in Boston in 1995 created a lot of wealth, in a sense.

Of course, working families want to gain some of this wealth. Many aspire to get mortgages and that acquisition is encouraged by dominant social norms. When they earn enough, save enough, and prices are right, more and more people enter the market not for homes at first, but affordable money, a mortgage with manageable monthly payments. If there are too few homes, all that money causes bidding wars and stokes inflation. It is the classic case of too many dollars chasing too few homes.

Land use and urban sprawl

An analysis from the Department of Housing and Urban Development found that 86 percent of mortgages were for detached, single-family homes. A more recent look found just 10 percent of mortgages were for condominiums or cooperatives. Detached single-family homes need lots of land for fewer people. The American Dream has not typically played out in a two-bedroom rented apartment in a densely populated city.

Density has become a catchphrase with both negative and positive valences, but the word is really about simple math. More people and uses per acre mean more efficiency, requiring less infrastructure to move people between home, work, school, shopping, and home again. It also means more people can divide up the costs of building and operating the housing they live in. 

The opposite land use pattern, sprawl, is inefficient. Sprawl leads to fewer people taking up more space. This kind of land use is still wildly popular, with 89 percent of respondents in a 2022 Cato Institute survey expressing a preference for single-family homes. But building homes this way consumes more land, spreading communities further and further into undeveloped areas.

Sprawl’s inefficiency imposes costs on infrastructure and transportation. A study of land use patterns found that

“Sprawl produces a 21 percent increase in the amount of undeveloped land converted to developed land (2.4 million acres) and approximately a 10 percent increase in local road lane-miles (188 300). Furthermore, sprawl causes about 10 percent more annual public service (fiscal) deficits ($4.2 billion) and 8 percent higher housing occupancy costs ($13 000 per dwelling unit).”

When units are farther apart, roads, water lines, electricity, and sewers have to be extended. Sprawl also puts significant demands on public transportation infrastructure, extending to suburbs and exurbs. This leads to more driving, more fuel consumption, and ever longer commutes. All of these require expenditures from the tax base for construction and maintenance, and that tax base is made up of more than just single-family homeowners.  While those homeowners are building equity, a fair share of that equity is subsidized by renters paying taxes.

And once such communities are built, incumbent homeowners resist other types of new housing. That resistance, combined with sclerotic permitting and land use policies that favor larger single-family homes fuels scarcity, ultimately leading to higher housing prices. There is a perverse incentive for people with mortgages to resist new housing: fewer units inflate prices and thus artificial appreciation of their asset. That policy-fueled inflation could mean a resale value that beats the interest payment on their 30-year mortgage.

The worst effect of this dynamic raises land and housing costs and thus rents increase. As renting becomes more expensive, there is a real transfer of wealth from poorer people paying for the inflated value of single-family homes’ higher equity and home values.

Disparities

A report from the U.S. Treasury  reveals continuing housing disparities across racial lines: 

“The benefits from homeownership have not been shared equally. In the second quarter of 2022, the homeownership rate for white households was 75 percent compared to 45 percent for Black households, 48 percent for Hispanic households, and 57 percent for non-Hispanic households of any other race. Like the overall racial wealth gaps, these gaps in homeownership rates have changed little over the last three decades.”

Chart from the United States Department of the Treasury, Racial Differences in Economic Security: Housing

Black mortgage applicants, even those earning 120 percent of the area median income, qualify for mortgages at a lower rate than white households earning the same amount. And those black households are more likely to face higher cost mortgages, greater risks for foreclosure, and distressed sales. One analysis found that “African Americans and Latinos were much more likely to receive high cost, high-risk loans than white borrowers during the housing boom, even after controlling for credit scores, loan-to-value ratios, subordinate liens, income, assets, expense ratios, neighborhood characteristics, and other relevant variables.”

Persistent disparities in ownership contribute to concentrations of poverty among people of color, especially black households. Real equity building in true ownership of a home or business can end generational poverty; families have wealth to pass on to their children. But government backing of mortgages nor legislation specifically prohibiting discrimination hasn’t helped, and restrictive land use policies have kept households with less money from entering the housing market. Additionally, when lending to people with marginal credit was allowed, many families had failed mortgages, a serious weight on ever achieving ownership again. Moving beyond the 30-year mortgage and finding other solutions is important to changing this dynamic.

Risk

While individual, policy, and economic decisions by government are driven by trying to expand homeownership, lending for expensive fixed assets is risky. If underwriting standards are lowered, and later, family employment or composition changes, or broader economic problems like unemployment spread, loans won’t get paid. What follows is dislocation.

The concentration of risk at the federal level let to the catastrophic housing collapse of 2008. In the preceding decade, many people that had not been able to qualify for a mortgage now were able to qualify and buy a home sometimes with no money down. A substantial number of those households began to miss payments. Many of these mortgages were in bundles of mortgages that were sold to investors and the proceeds from the sale used for more loans. These transactions were fueled by regular mortgage payments, incentivizing creating more mortgages even riskier ones. This practice eventually outpaced the ability of households to pay, and the whole thing came crashing down. The bad policies and risk shifting inherent in the U.S mortgage system destroyed untold wealth, the opposite of what the policies intended to do.

The Important Non-Financial and Social Aspects of Homeownership

The drive toward homeownership is bigger than the financial benefits and significant share of economic activity in the country. The qualitative benefits of qualifying for a mortgage and using it to buy a house are a real driver behind the numbers. Since the end of World War II, many households have benefited from being part of the process and success of homeownership. Politically, the American Dream is now inextricably woven together with the concept of homeownership. Understanding this relationship requires thinking through these softer, cultural, and personal values associated with homeownership.

There is no doubt that if a household can qualify and successfully service the debt of mortgage financing, the financial benefits are real. But the concept of homeownership isn’t all about the money. A  Joint Center on Housing Studies (JCHS) review of studies found “strong and consistent evidence indicates that homeowners are more likely to: a) be satisfied with their homes and neighborhoods; b) participate in voluntary and political activities; and c) stay in their homes longer, contributing to neighborhood stability.”

Even though the JCHS finds that there is a “limited amount of evidence on the relationship between homeownership and life satisfaction,” that evidence “tends to support a positive relationship.” And there is a strong association between qualifying for a loan, being able to service debt consistently, and the term “homeownership,” even though it is illusory. Outright ownership while paying a mortgage is a far-off thing.

Any alternative to home buying, single-family or otherwise, must address the sense of accomplishment. One financial counselor sums it up well: 

“[Homeownership] provides a sense of pride and accomplishment and represents hard work and perseverance. Owning a home offers a sanctuary for personal expression and family growth, fostering a deeper connection to community and place. It’s not just about owning property, it’s also about building a foundation for future generations and creating lasting memories in a space that is yours.”

This sentiment is completely untenable when considering the earlier example of a standard $300,000 mortgage at 6.8 percent over 30 years. After making monthly payments of $2,000 for 15 years, the balance on the loan will still be over $150,000 and if the house sells for $450,000, about two percent appreciation over the period, the net would be about $300,000. Yet the notion that this sales price is “wealth” is persistent. Because the other homes in the area would have appreciated at roughly the same rate, any upgrade would likely require another 30-year mortgage.

The social status achieved by getting and paying that mortgage each month, mowing the lawn, hanging pictures, marking the progressive height of children on a doorway near the garage, is often more powerful than prospective financial data. These perceived benefits are more powerful than a dry policy analysis lamenting the deleterious economic effects of the 30-year mortgage on public policy. But alternatives must address the personal and cultural sense of home and hearth that has pushed generations of Americans to form their lives around a financial instrument that does not necessarily benefit their long-term aspirations.

Alternatives to the Mortgage

Some models of cooperative financing and fractionalized ownership could offer an exit from the 30-year mortgage strategy for lower-income households struggling to achieve transferable generational wealth. Here are some options, including some big ideas that require some experimentation and evaluation over time.

Fractional ownership

Investopedia defines fractional ownership as “when an investor purchases a percentage or share of an asset instead of paying the full price.” This allows people with less money to own part of a real estate asset, such as an apartment building. In a cooperative, owning a share of a building entitles the owner to use the asset, like a living in a unit, as well as part of the total value of the asset.

Fractionalized ownership also describes the idea that individuals can acquire ownership of real estate by pooling resources with each owning a share. That share could be in the denomination of a unit of housing. The term could also apply to the fractional ownership of a unit. Fractional ownership could also apply to ownership of debt, like many people taking out a loan, or making a loan to individuals or groups. Breaking the spell of the 30-year mortgage will require managing investment and risk in a different way, including more collaborative and localized options rather than from a remote federal government. Some examples follow.

Housing cooperatives

In a housing cooperative, residents own a property as members of a corporation. As an example, if a building is worth $1,000,000, and there are five residents with five shares, each share is worth $200,000. Unlike outright or fee-simple ownership, if there are five units, the resident living in a unit doesn’t own it the way they would owning a piece of property with a house on it. Instead, the shareholder has a legal agreement entitling them to use of the unit and common areas. Members can cover operating costs through dues.

The advantage of this model is that monthly housing payments can be financed through a loan from a bank or from the cooperative itself, as a resident purchases shares, which will lead to full vesting in a particular unit. Other models require a larger up-front investment. Cooperative structures vary depending on how they are organized. An advantage of a co-op is that as a property appreciates, so do individual shares, so equity will build. If the cooperative provides financing rather than a bank, residents can create more flexible terms rather than more rigid ones set by a bank. That is, cooperative members might be willing to extend more favorable terms or allow a probationary period for someone with bad credit but a good income.

Publicly financed cooperatives could replace mortgage financing as a new model.

A local jurisdiction would borrow money to build a housing project—ideally through low-interest revenue-backed bonds—and then allow residents to pay down all the debt or part of it over time and own the project outright. The local government would absorb the initial risk providing low-cost financing leading to real ownership with shares that could appreciate, be transferred, or sold.

Real estate investment trusts

In today’s financial markets, real estate investment trusts (REITs), are traded just like shares of stock. Instead of owning a share of a company, the investor owns a share of a real estate investment. Tax rules require that appreciation and funds earned from the operation of the real estate be returned as dividends to shareholders. A benefit of this kind of ownership is that shares can be sold almost on a whim, requiring no real estate agents, inspections, or negotiating. The REIT model allows a fixed asset to become more like a liquid asset.

A neighborhood REIT could allow ordinary people to contribute in smaller increments to a fund that could buy, own, and operate real estate assets. Such a model could be done with housing as well. If 50 people pooled their resources, built new housing or purchased existing units, they could own it for themselves or rent it to their neighbors for affordable rents. Residents could buy shares and become owners and, like a cooperative, have agreements in place to live in a unit. The REIT model allows is the aggregation of local capital to buy and own housing without involving the federal government or even a large financial institution.

Building and loan associations

Before they were displaced by the mortgage during and after the Great Depression, building and loan associations (B&Ls) were a common way of buying detached single-family homes. Community members would pool their money and savings in an institution that would then, in turn, loan that money out to others in the community for the purchase of homes. As interest payments accumulated from the loans, share values would increase and could be applied to remaining balances. Depending on the success of loans and healthy dividends, households could fully own a fee-simple asset in as little as 15 years.

A family, for example, would become a member of a building and loan through buying shares. Their money would be loaned out to other families and as those loans matured and were paid back, the value of the family’s shares would increase, allowing them to make a down payment and get a loan based on the value of their shares.

Among the advantages of B&Ls are that both risks and benefits are localized, meaning decisions are driven by local market factors rather than national or global ones. If a loan fails, the institution and the community have an interest in rescuing it. If the local economy begins to fluctuate, growing or shrinking, constituents will have interests that follow those trends. If housing demands increase, shareholders are likely to benefit from expanding the pool of loans rather than suppressing new construction to push appreciation. If the economy suffers a downturn, dividends might fall and payment times might lengthen, but there would be fewer foreclosures.

Rotating savings and credit associations

The “keh” is an example of a rotating savings and credit association (ROSCA). Korean and other Asian immigrant communities have used such ROSCAs to great benefit. A group of individuals or families pool money and then contribute to the fund regularly. Once the fund is sufficiently capitalized, lots are drawn and winners are given access to the fund for an investment—like buying a house or business—and that individual or household pays back the fund. When the fund is recapitalized, the next individual or household in line gets access to the fund. The system relies on risks and benefits that are highly localized.

The ROSCA model typically doesn’t charge interest. But if the local government created a fund and partially capitalized it and allowed local families to contribute to it, the fund could be used just like a ROSCA. The advantages of this method of financing would be that the local government could absorb the risk, modifying the process and standards of lending based on local needs. It would also allow families to put limited resources to work with the maximum benefit. There are iterations of formal ROSCAs that have been successful. Car dealers in Argentina, for example, have used government-regulated ROSCAs to successfully make car loans.

Commonalities among mortgage alternatives

The preceding are ways of lending money for the acquisition of property that a person doesn’t have the cash to pay for right away. The challenge is finding the capital to make the loan, managing the risk effectively, and creating returns for people making the loans that are commensurate with the risk. Scaling these relationships is hard, which is why the 30-year mortgage backed by the federal government has been the dominant model for decades; the backing of the government of the largest economy in the world lowers risk substantially enough to make millions of six figure loans. Policymakers can transition away from the 30-year mortgage and toward better solutions for the following reasons:

• Local risk, local benefit – The problem is pooling small amounts for enough people at scale to lend effectively for housing. These models could do that.
• Faster real ownership – In each of these models, the possibility of real ownership in a shorter time frame is increased. The mortgage pushes the risk back on the borrower by piling up all the interest on the front end, meaning real ownership is in a far-flung future or only possible with hyper appreciation caused by artificial scarcity.
• Cheaper money – With local instead of federal government backing, community lenders and borrowers can benefit from government backing that is closer to home. While all lending and borrowing is risky, local government financial troubles from capitalizing these kinds of schemes is unlikely to create a global recession.
  

None of these options will end the mortgage and, like any financial instrument that has popular appeal, regulatory guardrails that balance risk and opportunity will be needed. Mortgages will continue to work for many people. But exploring alternatives could create better paths to ownership that may address persistent disparities and negative consequences of 30-year mortgages.

Shifting away from the 30-year mortgage won’t be easy. Today, there really isn’t a popular movement to replace the mortgage; if anything, homeownership through a mortgage remains the traditional path to family success. Exploring other options will involve some risk and innovation, opening the door for new institutions.

Reducing Risk and Incentivizing Innovation at the Federal Level

The Housing Trust Fund is currently mismanaged and inefficient, spending over $388 million on just 4,000 units nationwide over six years. That isn’t much housing, and the projects built averaged $1 million dollars per unit. The problem is too much bureaucracy but also too many sources of capital being combined in each project. Too many sources mean more requirements from each and that bogs down production and adds costs. Shifting those resources to funding start up cooperatives and other lending vehicles makes a lot of sense.

Financing cooperatives using the housing trust fund

As already discussed, a key feature of lending is risk. The Housing Trust Fund could either lend to local entities at very low interest rates to build housing or just make loans directly. Homeowners would pay back the loan over time just like a regular mortgage, but residents could form a cooperative, and the cooperative would service the debt which could, for example, have terms as low as 1.5 percent with a 12-year payoff period. After that period, the cooperative would own the project outright, and the funds would have returned over time to be used for other projects. Another option would be to offer local entities security to issue low-interest tax-exempt bonds themselves.

Financing a ROSCA and B&L hybrid

The Housing Trust Fund could capitalize a fund that matches local household deposits at a three-to-one ratio and backs low-interest housing loans for depositors, creating an incentive to participate. As the fund grows, the Trust could apply dividend payments to mortgage balances to help retire them faster.

This system would work much like a small local bank, but the backing of loans would keep money cheap and interest payments low. This system could be combined with cooperatives by financing turnover; when residents decide to leave, the fund could pay out equity and provide loans for new residents to buy shares in a cooperative. Eventually, the fund could be self-sustaining, raising private capital and having enough of a history of success to issue its own debt without federal support.

All borrowing carries risk

Starting any new system would carry a great deal of risk, and that’s why some federal investment would be needed to bring local options to scale. The current 30-year-mortgage system depends on the taxpayers bailing out borrowers and financial institutions if something goes wrong. The Housing Trust Fund already exists, connected to the existing mortgage system. Putting to use to pilot and test alternatives to the mortgage could establish a parallel and more sustainable lending system for equity.

Better use of the Housing Trust Fund would encourage local people, governments, and institutions to take the first steps to take responsibility for housing. Local governments can already accomplish these steps with municipal and private activity bonds. In fact, state housing finance agencies use these financing tools all the time for wasteful Low Income Housing Tax Credit apartment buildings that create no equity for residents at all.

If governments backed and financed thousands of housing projects that are owned by their residents who have modest incomes, it would be a vast improvement over the current system. Risk would eventually be absorbed locally and speculation in mortgage securities would become a thing of the past. Money, risk, and opportunity would be tied to an actual home rather than its financing. Today, most people are either paying rent or paying down hundreds of thousands of dollars in interest with the far-off possibility of outright ownership. Offering people a different option that provides some equity more quickly would be an improvement.

In the end, policymakers have to create something that is point-and-click simple for consumers and that puts financing and ownership closer to home, literally. Returning to more cooperative solutions would make homeownership more accessible to regular people who could benefit from lower interest payments and faster financing. These schemes might not lead to fee simple ownership of a detached single-family dwelling, but the tradeoff might just be worth it.

Going Forward

Buying a home using a long-term mortgage has worked for many Americans, but for many others, qualifying for and servicing a mortgage is difficult or impossible. Once a household has a mortgage, the need for shelter and maintenance of effort on debt service can profoundly shape their lives, their political persuasions, and the positions they take on public policy. Owning a home with a mortgage depends on appreciation, and housing inflation that harms people with less money benefits those with mortgages.

The 30-year mortgage was not always the only way to own a home. Other fractional, cooperative, and collaborative forms of financing existed before the rise of the mortgage and continue to this day. However, these other forms of financing have fallen out of favor and remain limited. There is enough existing money and resources at the federal government; the funds just aren’t used well.

One way to encourage more local forms of lending would be for the federal government to incentivize other options by offsetting risk and capitalizing them. Backing cooperatives and local lending, for example, could lead to more investment and eventually sustainability for these options. The Congress and president should consider using Housing Trust Fund to reduce the risk of more innovative solutions that could create a better and more sustainable system for lending to create ownership.