Presentation given by Edward Pinto at AEI's Third International Conference on Housing Risk, September 17, 2014.

1. A Straight, Broad Highway to Building
Wealth for Middle and Working Class
Families through Home Ownership
and Retirement Savings
Edward Pinto
Codirector and Chief Risk Officer
AEI International Center on Housing Risk
Edward.Pinto@AEI.org
HousingRisk.org
Third International Conference on Housing Risk:
New Risk Measures and their Applications
September 17, 2014
HousingRisk.org | 1

2. ‘Mortgage’ has become another word
for trouble
• Home price appreciation rates are modest and averages
mask volatility
– No diversification when one’s wealth is in a single asset
– “The housing market is a ‘crapshoot’”—Professor Karl Case1
• 30 year term and high debt ratios maximize debt and
trap families, especially those with low income, in a cycle
where they can’t build wealth
– From 1977-2012, 1 in 8 families with an FHA loan lost their
home
1 http://money.cnn.com/2014/07/07/investing/housing-market-case/ July 7, 2014
2

3. House Price Volatility, 50 Largest Metro Areas
House prices are highly and serially volatile in many metro areas, less so in others. But
even in the more stable metros, there can be substantial variation across neighborhoods
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
California metros
Other volatile metros
More stable metros
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Note: Each series shows the percent change from 20 quarters (5 years) earlier. Volatile metros are defined as those for which the difference
between the highest and lowest annual percent changes is more than 30 percentage points. All other metros are in “more stable” group.
Source: AEI International Center on Housing Risk, www.HousingRisk.org, using data from Zillow.com 3

4. 28 cities: nominal annual percentage increase in home
4
prices from Apr. 1996-May 2012 (source: Zillow)

5. City of Atlanta: cumulative price change for lowest price
tier and constituent zips from Apr. 1996-May 2012*
5
*Source: Zillow

6. Volatility at the Level of the Individual Home
• Averages are deceiving since one is buying a single home, not the index
average for the U.S., the MSA, the zip, or the neighborhood.
– To test the impact of home price volatility on wealth building at the house level, 2 different
pro forma loan transactions 1 were simulated using over 112,000 unique properties in
Prince George’s County, MD.2
– Individual home price index data for 1997-20133 was used to create 11 cohort time
periods4resulting in over 1.2 million 30-year fixed rate scenarios and over 1.2 million 15-
year fixed rate Wealth Building Home Loan scenarios
– The wealth building capacity of the two loan transactions was evaluated as follows:
» For each scenario, the loan was amortized according to its terms, the property
experienced the price gain or loss over 84 months as indicated by the index, the
owner was assumed to have sold the home at the value indicated by the index at the
end of the 84 month period, and the owner was assumed to have incurred a selling
transaction cost of 10%.
» The set of properties was divided into 3 price ties: low, medium, and high. The wealth
building capacity of the two loan transactions was evaluated using these tiers.
1Loan transaction 1: 30-year, fixed rate loan with 5% down, 1.75% upfront FHA mortgage insurance premium which is
financed, and an assigned interest rate based on Freddie Mac’s Primary Mortgage Market Survey.
Loan transaction 2: 15-year, fixed rate loan with 0% down (down payment repurposed to fund a 1.25% permanent rate
buy down) and an assigned interest rate based on Freddie Mac’s Mortgage Rates Survey (net of buy down).
2Prince George’s median household income is approximately 80% of that for the Washington, DC area.
3Source: Weiss Residential. Since Index is quarterly, values interpolated as necessary.
4For example, cohort time period 1 started in January 1997 and ended 84 months later. Cohort time period 2 started in
January 1998 and ended 84 months later. This process was continued for a total of 11 cohorts.
6

7. Prince George’s County: Volatility and Loan Type
Impact Wealth Building at the Individual Home Level
Loan/Tier # of
transactions
Average
cumulative
$ gain1
Average
cumulative
% gain
% of
transactions
with a loss
Median $ loss
for
transactions
with a loss
Worst cohort: 2006
median cumulative
% gain
30-
year2/Low
413,732 $19,756 29% 38% -$54,945 -33%
15-year
WBHL3/
Low
413,732 $54,604 54% 26% -$13,353 -8%
30-year2/
High
413,743 $53,541 32% 36% -$124,232 -31%
15-year
WBHL3/
High
413,743 $136,124 57% 21% -$29,835 -6%
1Average gains calculated for 11 home purchase year cohorts (1997-2007). Each cohort assumed a sale at
the end of an 84 month holding period. Net gain equaled house price appreciation over period (net of 10%
sales costs) plus scheduled loan amortization minus initial 5% investment.
230-year, fixed rate loan with 5% down and an assigned interest rate based on Freddie Mac’s Mortgage
Rates Survey. House price change based on Weiss Residential’s individual house index.
315-year, fixed rate loan with 0% down (down payment repurposed to fund a 1.25% permanent rate buy
down) and an assigned interest rate based on Freddie Mac’s Mortgage Rates Survey (net of buy down). 7

8. Prince George’s County: Leveraged 30-Year
Loans Perform Poorly Under Stress
• The 100% LTV WBHL protects against negative equity compared to a
95% 30-year loan even with extreme home price volatility of the
recent boom/bust
8

9. The Wealth Building Home LoanSM
What is the Wealth Building Home Loan—WBHLSM?
• 15-year, fixed rate loan
• Requires little or no down payment with broad credit box
• Monthly payment almost as low as on a 30-year, fixed rate loan
• Much lower foreclosure risk due to faster amortization and common-sense
underwriting
• Broad eligibility for prospective homebuyers
9
Unlike Most Loans, You Build Substantial Equity In Just A Few
Years And You Own Your Home Free And Clear In Just 15 Years

10. WBHL: Faster amortization = less interest
• In the first three years of a WBHL 77% of monthly mortgage payments pay off
principal, creating huge amounts of equity, while for a 30 year loan, 68% goes to
pay interest (Appendix 1).
• Own your home free and clear in 15 years
• In year 16, you have free cash flow for life cycle needs such as your children’s
education
• Greater market stability for all
Source: Calculated based on 1.875% bought-down interest rate on 15 year and 4% rate on 30 year (30 year includes upfront FHA premium of 1.75% financed in
mortgage. http://bretwhissel.net/cgi-bin/amortize 10

11. 70% lower foreclosure risk yields superior
borrower protection
• WBHL: an owner-occupied 15-year fixed rate, fully amortizing
loan
– Superior wealth building through principal repayment (Appendix 2)
– Lower interest rate due to reduced investor duration risk
• Foreclosure risk about 70% less than for a 30-year loan
– Faster amortization reduces default by about 50 ppt.
– Common sense underwriting reduces by another 20 ppt.
• Borrower ability to repay includes residual income analysis similar to that
used by the VA1
• Rigorous appraisal and appraiser standards similar to those used by the VA
• Enforceable restrictions on ability to take out second lien and convert to
rental
• Superior protection for borrowers with a FICO score below 660
• Allows for repurposing of down payment funds to buy down rate further
1The VA has applied the residual income method since its establishment. VA considers DTI
secondary to residual income as an underwriting factor. See Chapter 4: VA Credit
Underwriting. See also “VA Loans Outperform FHA Loans. Why? And What Can We
Learn?” http://www.urban.org/publications/413182.html
11

12. Why the Wealth Building Home Loan works
• Delivers more than 90% of the buying power of a 30-year FHA
loan from combined effect of four factors:
– Conventional 15-year loan rate 0.75% below FHA 30-year rate
– Lower annual credit risk expense1
– The strong savings component safely allows for a slightly higher housing DTI
ratio
– A maximum LTV of 100% allows for repurposing 5% down payment for a
1.25% permanent rate buy down
• The Low-Income2, First-Time Homebuyer3 (LIFT Home) WBHL
will provide about 100% of the buying power of a 30-year FHA
loan
• The Neighborhood Assistance Corp. of America (NACA) pilot underway
• Other LIFT Home pilots in the works
1Based on FHA premium on 30-year loan of 1.75% upfront and 1.30% annually vs. estimated WBHL annual credit risk expense of
0.50% annually
2First time homebuyer definition: has not owned a home in the three prior years.
3First-time homebuyers at <80% of the area median income (AMI) 12

13. Life Cycle: Savings and Spending1
• Age 25-29: $24,000 in accumulated wealth by age 29
– Participate in employer matched savings plan
• Age 30-51: $600,000 in accumulated wealth by age 51 (6.6 times annual income)
– Buy first home with a WBHL using savings for buy down, continue with savings plan
– After 7 years, buy move-up home with WBHL, continue with savings plan2
– At age 52, make final payment on move-up home purchased with a WBHL
• Age 52-56: $750,000 in accumulated wealth by age 56 (7.5 times annual income)
– Use freed up annual cash flow ($13,000 in 2014 dollars) for children’s post-high school
education, continue with savings plan
• Age 57-64: $1,100,000 in accumulated wealth by age 64 (9.5 times annual
income)
– Children complete post-high school education
– Use 50% of freed up annual cash flow ($6500+ in 2014 dollars) to increase retirement
savings
• Age 65:
– Enter a comfortable retirement
1llustrative only. Assumes household income of $53,000 (US median household income from Census Bureau) and that
wages increase at 2% annual inflation rate. If inflation rate higher, wage increases, house appreciation and stock market
return likely also higher. Based on a 4% employer contribution through age 56 plus 50% of freed-up cash flow for ages 57-
64 and a 4% employer match through age 64.
2Assumes move-up home costs 35% more than price of home being sold and with a 25% down payment.
13

14. Other benefits of the WBHL
• More stable housing market
– Prudent and sustainable expansion of credit availability
– Reduces leverage in housing finance market
– Reduces likelihood a housing downturn would spark a financial crisis
• Much smaller revenue loss for Treasury from tax deduction for
mortgage interest
• Less reliance on government
– Reduces burden of social safety net on Treasury
– Reduced need for mortgage guarantees means less taxpayer liability
• Less capital required by institutions bearing credit risk
• Reduced prepayment risk for mortgage investors
– Interest rate buy down reduces incentive to refinance
– Cuts socially wasteful costs associated with refinancing
• Promotes and leverages employer provided DC plans
14

15. Adverse regulatory impact on low risk WBHL
• The Consumer Financial Protection Bureau (CFPB) defines a
safe harbor Qualified Mortgage (QM) as one with a total DTI ≤
43% (unless approved by a Fannie/Freddie/FHA
automated underwriting engine)
• Consider two fixed-rate loans made to a household at the US
median income of $53,000:
– 30-year FHA 95% LTV loan (FHA95); principal pay down in 1st year
equals 6% of borrower’s income
– 15-year Middle-Income, 100% LTV WBHL (MI WB-100); principal pay
down in 1st year equals 18% of borrower’s income or 3 times the
FHA95
– Assume the FHA95 has a 42% total DTI and the MI WB-100 a 44% total
DTI. Both loans meet all other QM requirements.
– The MI WB-100 is underwritten using residual income; the FHA95 isn’t
– The FHA95 would qualify as a safe harbor prime QM
– But the MI WB-100 would not qualify as a QM since the DTI exceeds
43%
15

16. Adverse regulatory impact on low risk WBHL
• Overreaching and excessively complex regulations are standing in the way of low
risk, consumer advantageous alternatives.
– Under CFPB rules WBHL with more than 2 bone fide buy down points a non-QM
• The CFPB could address this policy shortcoming by amending QM to:
– Designate all WBHLs using the residual income method1 as QM safe harbor compliant regardless
of total DTI2
– Allow all purchase discount points that meet IRS bone fide definition excluded from 3% point
limitation
– Exclude premium for any bone fide private mortgage insurance, whether paid upfront or on an
annual basis, from calculations relative to prime offer rate
– Provide on loans in excess of 80% and in lieu of private mortgage insurance, a 0.50% increase in
spread over prime offer rate
– Provide for a “no action request” process where the requestor analyzes the particular facts and
circumstances involved, discusses applicable laws and rules, and requests that CFPB staff grant
the request for no action. The CFPB staff will alternatively provide an interpretive letter clarifying
the applications of applicable rules and regulations.
• FHFA’s draft Private Mortgage Insurer Eligibility Requirements for capital don’t
differentiate:
– A 15-year from a 30-year loan—15-year should be weighted at 50%
– using the residual income or household budget method for determining a borrower’s ability to
pay– should be weighted at 80-85%
– Minimum capital requirement for 15 vs. 30-year, even though much less volatile
1The VA has required the use of residual income method since its establishment. It considers DTI secondary to residual income as an
underwriting factor. See Chapter 4: VA Credit Underwriting. See also “VA Loans Outperform FHA Loans. Why? And What Can We Learn?”
http://www.urban.org/publications/413182.html
2The combination of 15 year amortization and residual income method provides superior borrower protection 16

17. Demonstrated ability to gain broad support
• The WBHL opened to rave reviews at its September 8 debut at the
American Mortgage Conference (AMC)
– Lewis Ranieri, considered the "godfather" of mortgage finance, praised the
WBHL: “Fundamentally, what I find exciting is the wealth building nature of the
product. Anyone who knows me knows how concerned I am that too often the
mortgage has been utilized as an ATM for a boat or big screen TV, as opposed to
building equity; if we’re to meet the needs of Americans who desire a home, this
type of SAFE experimentation will be critical.”
– Carol Galante, FHA commissioner, David Stevens, Mortgage Bankers Association
CEO and former FHA commissioner, Joseph Smith, monitor of the National
Mortgage Settlement of the State Attorneys General and Lenders, and James
Lockhart, former director of the Federal Housing Finance Agency also noted the
WBHL’s innovative approach
– Long-time industry observer Tom LaMalfa observed: “In an industry in which
few agree on much, there was remarkable agreement on the value of the WBHL
among an array of industry leaders speaking at the AMC this week.”
– Bruce Marks, founder and CEO of the Neighborhood Assistance Corp. of America
(NACA) was at the AMC and is here today because we agree our current housing
finance policy fails to reliably build wealth (Appendix 3), results in frequent
defaults, fails to consider retirement savings (Appendix 4), and keeps families in
debt
17

18. Background Material:
Building Wealth for Middle and
Working Class Families
18

19. Appendix 1: Middle Income (MI) WBHL1
• MI WB-100 (middle income, 100% LTV): 92% of buying power
with FHA952
• More than doubles the home equity than with FHA95 loan5
Loan option
(interest rate)
Loan term/ LTV Housing
debt
ratio
Home price Monthly PITI
(inc. MIP)
Monthly
principal 1st
mo.)
Equity by
year 75
MI WB-100 (1.875%)3 15 yrs./100% 30% $169,091 $1325 $814 $75,314
FHA95 (4.00%) 30 yrs./96.75%4 28% $184,335 $1237 $252 $33,350
1For a household with $53,000 in income (US median household income from Census Bureau). The
MI WBHL-100 has an annual incremental credit risk expense of 0.5%. FHA95 is an average FHA loan:
5% down, 30 yr. term, 28% housing debt ratio, annual mortgage insurance premium (MIP) of 1.3%.
2Buying power is calculated by taking the home price for the WBHL (in this case the MI WBHL-100)
and dividing by the home price for the comparable FHA loan (in this case the FHA95).
3Base 15 year rate of 3.25% minus permanent interest rate buy down of 1.375 ppt., funded by an
amount equal to 5% down payment on FHA95 loan (which is 5.5% of MI WB-100 loan amount).
4Initial down payment of 5% plus financing of the 1.75% upfront MIP.
5Based on 2% annual home price appreciation and 10% seller transaction and repair costs. 2%
appreciation rate is net of 1% annual maintenance and repair expense during 7 year holding period.
19

20. Appendix 2: the WBHL1 enables low-, moderate-,
and middle income families to build real wealth
Note: Median family net worth, by income percentile bracket, median values displayed in thousands of dollars, 1989–
2010 Survey of Consumer Finance. The 50th percentile of income equals median income. The 20-39.9th percentiles
roughly equate with low-income (50-80% of median income).
1LIFT Home WB-100 NACA w. 401(k): LIFT Home WBHL with 100% LTV, 4 points used for permanent rate buy down, and
homeowner participates in available 401(k). Does not assume home is sold at end of 7 years.
MI WB-100 w. 401(k): MI WBHL with 100% LTV, 5% down payment funds used for permanent rate buy down, and
homeowner participates in available 401(k). Does not assume home is sold at end of 7 years. 20

21. Appendix 3: Wealth Building
• Wealth is the antidote for poverty
• Wealth equals one’s accumulated savings
• Wealth building has been ignored for 50 years:
– “Policy makers often focus on income and overlook
wealth, but consider: the racial wealth gap is three times
larger than the racial income gap.1
• Fixed rate, high LTV 15-year loans accumulate
wealth quickly and perform well2
• Middle and working class families need a straight,
broad highway to wealth building
1The racial income gap is three to one, while the wealth gap is nine to one. Less than Equal:
Racial Disparities in Wealth Accumulation, Signe-Mary McKernan, Caroline Ratcliffe, Eugene
Stanley, and Sisi Zhang, Urban Institute, April 2013
2 http://blog.metrotrends.org/2014/01/fast-pay-off-payment-loans-perform/
21

22. Appendix 3: Adjust spending to savings needs
• Martin Luther King Jr. recognized the problem of living
beyond one’s means in his 1968 “The Drum Major Instinct”
sermon
– “Now the economists also say that your house shouldn’t cost—
if you’re buying a house, it shouldn’t cost more than twice your
income. That’s based on the economy and how you would
make ends meet. So, if you have an income of five thousand
dollars, it’s kind of difficult in this society. But say it’s a family
with an income of ten thousand dollars, the house shouldn’t
cost much more than twenty thousand. Well, I’ve seen folk
making ten thousand dollars, living in a forty- and fifty-thousand-
dollar house. And you know they just barely make it.
They get a check every month somewhere, and they owe all of
that out before it comes in. Never have anything to put away
for rainy days.”1
1Martin Luther King Jr. “The Drum Major Instinct” sermon, Atlanta, GA, February 4, 1968.
22

23. Appendix 3: Dramatic Changes in Pension Savings
• In the early 1970s defined benefit (DB) plans the norm
– With little or no employee contribution, the impact on the
employee’s budget was minimal
• Today, defined contribution (DC) plans the norm,
accounting for 78% of pension plans1
– $4.5 tril. in total assets (another $6.2 tril. held in IRA assets)2
– Most require a pre-tax employee contribution to trigger an
employer match2
– Employee and employer-match DC contributions average 6.8%
and 4.5% respectively2
– Quick vesting 401K plans are well-suited to a mobile workforce3
– Provides investment capital for job creating assets
1Source: http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5256
2Source: http://www.americanbenefitscouncil.org/newsroom/2014/pr14-08.cfm
3 Source: http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5256
23

24. Appendix 4: Stock market returns over the
same period were much higher than on homes
• Over 1996-2013 the S&P 500 had annual compound returns of:1
– 8.7%/5.9% (nominal/inflation adjusted $)
• This compares to national home price compound returns over
1996-2014 of:
– 3.5%/1.3% (all homes in nominal/inflation adjusted $)2
– 2.8%/0.2% (lowest price tier in nominal/inflation adjusted $)3
• Most home price appreciation due to inflation, not real growth
• Working class and middle income families would benefit from
taking advantage of the combined wealth building capabilities of
home ownership and retirement investments
1http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
2Based on unweighted average for all homes by state for 38 states with available data. Source:
Zillow
3Based on unweighted average for lowest price tier by state for 36 states with available data.
Source: Zillow
24