Toward A New System For Financing Homeownership

Shifting away from the 30-year mortgage to acquire a home won’t be easy. Today, there really isn’t a groundswell of support for the change. To motivate exploring other options will involve some risk and innovation – or maybe trying some ideas with some uncertainty of success. It will likely seem counter to some of my criticisms of the 30-year mortgage backed by the federal government, but the creation of a National Cooperative Housing Finance Authority could stoke some ideas, provide resources to evaluate them, and perhaps provide some proof of concept for financing options that are more local and collaborative.

What would a National Cooperative Financing Authority (Authority) do?

The Authority would provide credit and security for financing of cooperatives, local rotating savings and credit associations (ROSCAs), and local buildings and loans. According to the Congressional Budget Office, the Housing Trust Fund (HTF) gets billions of dollars from “fees paid by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), on new mortgage guarantees that they make.” How much money. According to the same report from the CBO, “By the end of 2021, payments to the funds since their inception totaled $2.7 billion for the HTF.” According to the National Low Income Housing Coalition in 2024, the fund made $214 million available to states.

I’ve written about the mismanagement and inefficiency of the fund, so I would propose shifting those resources to fund the Authority. Those dollars could be used to support the development of cooperatives. I know, what I am preparing to suggest would violate one of the principles of better lending practices, local people taking risks and supporting opportunities on other local people. But I would suggest that the Authority would sunset in 10 years by which time we could learn how these alternative solutions work, what problems need to be ironed out, and whether people would begin to use them instead of bank mortgages. How would the real estate industry react? Would people see these vehicles as suspect and avoid them? We need to know.

Federally Financed Cooperatives

Under this scheme, the Authority would either lend to local entities at a very low interest rate to build housing. The loan would be paid back by homeowners over time just like a regular mortgage, but residents would form a cooperative, and the cooperative would service the debt which could have terms as low as 1.5% with a 12 year pay off 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. I suggested this concept using local revenue bonds from cannabis taxes in Albuquerque.

Financing a ROSCA and Building and Loan Hybrid

The Authority would capitalize a fund matching local household deposits three to one and provide backing for low interest loans made to depositors for housing. This would be an incentive for participation. As the fund grows, dividend payments would be applied to mortgage balances and retire them faster. This would not be much different from a small local bank, but the backing of loans by the Authority would keep the money cheap and the interest payments low. This system could be combined with cooperatives by financing turn over at cooperatives, paying out equity and providing loans for new residents to buy shares in a cooperative. Eventually, the fund would be self-sustaining and wouldn’t depend on the Authority.

Complicated and Risky? Yes, But So Is Our Current System?

We engage in bizarre and risky financial transactions every day. Try and explain to yourself how fiat currency works. I take a piece of paper and hand it to a clerk for an item and she hands me back change. The paper is worthless by itself. How about a check? A piece of paper with writing on it is endorsed, passed through a window, and then money in the right amount shows up in my account. Debit cards? Same thing. And certainly, Venmo and PayPal are in the same arena. People feel completely comfortable with today’s mortgage banking system even though they don’t understand it.

And that’s why the Authority would be needed, to bring these sorts of local options to scale. We’re already running a massive Ponzi scheme with our current system which depends on confidence in the taxpayers bailing out all the borrowers and financial institutions if something goes wrong. Of course, this proposal is no different – except that it is encouraging local people, governments, and institutions to take the first steps to do this themselves. Local governments can already do these moves with municipal and private activity bonds. In fact, state housing finance agencies do this all the time for wasteful Low Income Housing Tax (LIHTC) apartment buildings which create no equity for residents at all.

Would it Work or Just Become Another Complicated, Inefficient Federal Program?

Are we trading one bad scheme for another? I don’t think so. If we backed and financed thousands of housing projects that became owned by their residents who have modest incomes, it would be a vast improvement over our current system. And risk would eventually have to 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 buying down hundreds of thousands of dollars in interest with the far-off possibility of outright ownership. Offering many of those people a different option that results in some equity more quickly would be an improvement.

In the end, we have to create something that is point and click simple for consumers and that puts financing and ownership closer to home, literally. Going back to more cooperative solutions for ownership wouldn’t end the housing economy, just make it more accessible to regular people who could benefit from lower interest payments and faster financing. These schemes might not lead to fee simple owner ship of a detached single-family dwelling. But the tradeoff might just be worth it.