Is “Affordable Housing” An Oxymoron?



Oxymoron: A figure of speech that combines contradictory terms.

Earlier this year, the Obama administration came out in favor of getting rid of Fannie Mae and Freddie Mac. There was and is widespread disagreement over this idea, because Fannie and Freddie along with HUD are supposedly the purveyors of “affordable housing”.

Fannie Mae, supposedly with a mandate to provide affordable housing... Image courtesy of futureatlas.com

At Fanniemae.com, they explain their purpose as follows: “Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.” Freddie Mac also has a similar mandate.

Since the market melt-down in 2008, and the take over of Fannie and Freddie by the U.S. Government, one could argue that Fannie and Freddie may have provided liquidity, but the housing market was not stabilized, and it collapsed largely because housing became unaffordable, after a record run up in housing prices. Some contend that Fannie and Freddie actually helped facilitate the housing market run-up by providing too much liquidity for reckless mortgage lenders who were making “affordable home loans” to buyers who couldn’t afford those loans.

While “affordable housing” is a noble idea, the term is a bit misleading where the average low income home buyer is concerned. In return for only having to pay a 3.5% down payment, a buyer will have to pay an up front mortgage insurance premium of 1% of the loan amount. An additional insurance premium of 0.9% of the loan amount is calculated into the mortgage payment. It will be paid until the loan has been paid down to 78% of the appraised value of the home. These calculations are difficult for the average buyer to understand, so they usually have no idea what the actual cost of this mortgage insurance premium will be.

Mortgage insurance, interest rates and other expense means that homeowners often pay back double what they borrowed for their "affordable" homes. Image courtesy of Freefoto

The typical $100,000 home, bought with an FHA loan, at 3.5% down will cost the borrower over $15,000 in mortgage insurance premiums alone! Since most FHA borrowers do not qualify for the lowest advertised interest rates, their loan is more likely to be around 5.5 to 6% or even more. At 6% interest on a 30 year term, a buyer will pay more than $110,000 in interest. So this means that “affordable homes” actually cost the buyer more than $220,000! And we haven’t even factored in property taxes, or insurance, which are also added to the monthly payment. Taxes and insurance vary from place to place, but on average they will increase the monthly mortgage payment by roughly 25%.

The argument over whether it’s a good idea to get rid of Fannie and Freddie will continue for some time, but there is not much to argue when it comes to the idea that there is really no such thing as “affordable housing”, when you consider the fact that a home will cost you about three times the amount that is actually borrowed. Low income buyers should be educated before purchasing a home, so that they can understand what the real costs of home ownership are, and that low down payments do not equate to “affordable housing”.