Home Builder Lures Millennials With Offer to Help Pay Their Student Loans

By Laura Kusisto 

Student loan debt has been an obstacle for many potential home buyers. Now Lennar Corp. is trying to do something about it.

A subsidiary called Eagle Home Mortgage plans to introduce on Tuesday a program under which it will pay off a significant chunk of the student loan of a borrower who purchases a home from Miami-based Lennar.

Housing experts said other builders are likely to look to mimic the program, which could help lure more of the critical first-time-buyer segment into home purchases.

Such programs come with the risk, however, that the incentive drives up the price of new homes.

"Obviously there's a benefit to bringing more people into the home buying market. We're trying to design something here that supports affordability and creates that path to homeownership," said Doug Cropsey, a senior vice president at Eagle.

Eagle will make a payment to a buyer's student loans of as much as 3% of the purchase price, up to $13,000. The contribution doesn't directly increase the purchase price of the home or add to the balance of the loan.

Christopher Oquendo and Jeri Coate are planning to use the program to virtually eliminate their student debt. The couple, who are in their mid-30s, wanted a bigger house but were reluctant to take on more debt. Ms. Coate, who works in a notary's office, still had outstanding student loans from training she had done to be a medical administrative assistant and the couple had other unpaid bills as well.

"We needed to get something bigger and upgrade but it was kind of a rough decision to make considering our status with bills and all," Mr. Oquendo said.

The couple are now in the process of closing on a Lennar home in the city of La Marque, Texas, about 50 miles south of Houston, with two more bedrooms than they had before.

The evidence is mixed as to whether student debt is acting as a meaningful barrier to homeownership. Most research suggests there is a much higher barrier for people who take out large loans and don't finish their degrees than there is for those with debt who earn a degree.

Housing experts say that at minimum Lennar's program could help eliminate the significant psychological barriers that many feel to buying a home and taking on hundreds of thousands of dollars of more debt if they are already deep in the hole after college.

A study to be released Tuesday by NeighborWorks America, a nonprofit that helps promote access to homeownership, found that one in four Millennials said they have had to delay buying a home because of student debt. Half of Millennials said they worry about their student loans all or most of the time.

Consumer advocates are wary the program sounds too good to be true. They point to builder incentive programs during the last boom that helped inflate the price of new homes. Those programs allowed sellers to pay a portion of the buyers' down payment, which in turn tended to drive up the price that people could afford to pay for their homes.

"We've had bad experiences when home sellers get involved in mortgages, particularly innovative mortgages," said Dan Immergluck, a professor at the Urban Studies Institute at Georgia State University, who studies the housing market, mortgage finance and foreclosures. Mr. Immergluck said if the program drives up home prices, buyers without student loans will end up sharing the burden with those who do.

Mortgage giant Fannie Mae has agreed to back the loans and will closely monitor the program to ensure that the value of student loan payment isn't included in appraisals of the home, which in turn can help drive up values.

"This is not without risk. Builders always want to provide more money and incentives for people to buy their homes. It has the potential to start distorting values," said Jonathan Lawless, vice president of customer solutions at Fannie Mae.

Mr. Lawless said Fannie is cautiously embracing new mortgage products that aim to make homeownership accessible for Millennials. Fannie is also backing loans with down payment assistance from Loftium, a Seattle-based company that will pay for up to $50,000 of the buyers' down payment if they agree to continuously rent out a room in their home on Airbnb for one to three years.

One other perk for borrowers: student-loan debt can't be discharged in bankruptcy, so getting rid of it early is preferable to paying it back slowly.

But Mr. Lawless cautioned that efforts to make credit more easily available to Millennials could end up exacerbating the shortage of homes if Fannie and others also can't come up with more ways to incentivize builders to build more starter homes.

"As we pivot to next year, I think the thing that the industry needs to be careful about is we can't increase access and demand without increasing supply," he said.

(END) Dow Jones Newswires

September 26, 2017 07:14 ET (11:14 GMT)

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