Many American have lost faith in "The American Dream" because of the seemingly insurmountable challenges they face. The Minogroff index, which indicates the nation's 'social health" by measuring 16 social factors1 that affect its lives, has been declining since the mid-'70s. For the inner cities, the situation is the most desperate. Readers are all too familiar with the bleak statistics of urban Americans face: low graduation rates, high crime rates, poor health statistics, few economic opportunities and little hope for the future. It is at the urban center that the United State's greatest economic and humanitarian challenge lays.

Surprisingly, America has not yet given up on its most bleak neighborhoods. Government and non-profit organizations have a plethora of programs designed to both ease the emergency situation and build a foundation for a better future. These programs range from youth programs to inner city development projects. In general, the premise of these organizations has been to provide subsidized money to the disadvantaged communities. However, I would like to argue that solving market inefficiencies, that create a lack of home ownership, might be the most important step that social engineers could make.

It is generally accepted that home ownership is the bedrock of America's financial and social stability. As such, it is clear that the lack of such individual ownership of homes in inner cities is a destabilizing force that must be targeted as a priority. Reverend Leon Finney, Jr., chairman of The Woodlawn Organization in Chicago says, "Nothing spells turnaround in a more profound way... than saying, 'I want to make my home here. I want to buy a home here and raise my family here."' Homeowners are special because they invest thousands of dollars of their own cash and assume a large debt in an act of commitment to their families and community. Renters are fine people, too, who may also contribute to stable communities; but they do not, literally, buy into a neighborhood's future to the same degree as owners. 2

The challenge to improve our inner cities would appear remarkably simple: inner city residents need to own their communities. However, low incomes have lead to a lack of access to cheap capital, preventing investments necessary to lift the yoke of poverty. So, urban dwellers are forced to pay rents that far outstrip the actual cost of owning the property. In the end, this paper strives to provide solutions for the democratization of capital, unleasing the powerful force of home ownership in the America's urban centers.

The home is the most important investment that most US residents will ever have. In fact, it represents over 90% of the average American's savings. Therefore, investment in a home is critical to developing a strong financial foundation. Unfortunately, both housing prices and credit availability have conspired to put home ownership out of the reach of most inner-city dwellers. Central cities have had since the early 1980s a homeownership rate that has held at about 49 percent; while the suburban homeownership rate is about 70 percent and the nonmetropolitan rate about 72 percent. 3

The availability of affordable housing is getting worse each year across the United States. Current estimates peg the nation's supply of affordable housing units at 9.4 million, down from 10.3 million in the last decade, according to the U.S. Housing & Urban Development Department (HUD). Yet, HUD estimated that 12.5 million renter households were in need of affordable rentals, 5.4 million of these paying 50 percent or more of their annual income for rent.4

This problem is particularly acute in the Western United States and San Francisco in particular. With 20 of the 25 least affordable metro areas, the West continues to be the least affordable region in the country. Specifically, California dominated this list, claiming 11 of the 25 least affordable metro areas, including the least affordable metro area of all, San Francisco. Families in San Francisco who earned the median family income of $68,600 could only afford 19.9 percent of the homes sold in the final quarter of 1998. San Francisco has continually reigned as the least affordable metro area since the HOI survey began in 1991. This is due, in part, to the median home price, which was $350,000. 5

While prices are high, the real problem with the lack of ownership has been that banks are unwilling to loan to inner-city residents. The combination of low incomes, low savings, and lack of appreciation potential for the property itself, have lead underwriters to steer clear from the regions. Amazingly, most institutions are even in violation of federal laws requiring broader lending practices.

Given the magnitude of the inner-city-housing problem, many programs have been developed to create greater ownership. Among the best known is the Shorebank Corp of Chicago, an organization based on the principals of the Gremaine bank. It is believed that lenders with local market knowledge were capable of making "safe" and profitable loans to even the poorest of communities.

Shorebank Corp. of Chicago has gotten plenty of deserved attention for its 25-year record of pioneering work in community development. Creating its own nonprofit arms, it has reached far into tattered neighborhoods in Chicago and cities like Cleveland and Detroit, counseling and helping poorer borrowers get loans to rebuild deteriorating housing. Since 1973, Shorebank has invested more than $7 10 million in its target neighborhoods, helping rehabilitate more than

17,000 units of affordable housing. 6

While the shorebank has done a lot, their efforts pale in comparison to the potential. More than two-thirds of all renter households intend to buy at some time in the future. More important to inner-city development, Harvard's Joint Center for Housing Studies estimates that an additional 855,000 black households in the nation's forty largest metropolitan areas could become owners if blacks attained the same rate of homeownership as whites in comparable circumstances. Other research focuses on the homeownership potential among Hispanic, Asian, and other immigrant groups. A 1995 survey commissioned by Fannie Mae found that "immigrants are strongly committed to achieving homeownership as a symbol of their integration into American life," and that "immigrants who rent are almost three times more likely than all adult renters to list owning a home as their "number one priority."' Because of the scale of immigration ten million immigrants in the 1980s alone this drive to own translates into some very big numbers as it hits the housing market.

Given the magnitude of the opportunity in developing housing opportunities in the inner city, the successes of the South Shore Corporation seem inadequate. Although it is touted as a success and has always been profitable, it is evident that they have not created a truly compelling vision that hundreds of other organizations would imitate. Therefore, there is still room for innovative thinking in the area of affordable housing.

In my mind, other projects have failed to have dramatic effects because they never really engaged our system's profit motive. So, I asked how do you democratize access to capital within today's lending environment? Looking for a profitable model, I came across the idea of creating an investment/gurantor organization which I call Community Ventures. This new entity would buy rental buildings at market rates, turn them into condos, selling them to the current occupants at similar monthly payments. The loans could be held by the Community Ventures or sold off to banks (improved with a guarantee from the selling organization).

While prices are high on average in the San Francisco and Los Angeles markets, there is a stockpile of properties that could be available for local ownership. Renters, in almost every case, are paying enough money each month to cover the cost of ownership. This is axiomatically true because owners are incurring all the same costs a renter would as an owner, while still generating more than a 15% return!

The only reason that the majority of inner-city renters do not become owners is because banks simply will not lend to them. These low-income earners are perceived to be a poor credit risk. Yet, the South Shore Bank has shone that only 1.29% of their loans are non-current loans, not too dissimilar to the national average. Too alleviate the unwarranted fears of banks, Community Ventures would guarantee to purchase any property that fell into default. Upon such a rare occurrence, Community Ventures would simply rent out the project until another buyer could be found.

Banks should love the Community Ventures program because they are now targeting minorities with attractive mortgage products partly as a result of CRA pressures, but also because they sense the profit potential of a historically underserved market. Their problem has been an inability to underwrite the risk, a problem that Community Ventures will eliminate. Moreover, the decision by Fannie Mae, announced in 1994, to commit $1 trillion in mortgage financing for ten million homes by the year 2000, will help maintain the momentum behind the minority homebuying surge. Bank of America said that they need to give out $10 million a day for the next few years to meet their CRA requirements. And, the South Shore bank would also be willing to invest outside its Chicago base, if other banks did not step into the markets that Community Ventures would develop across the country.

Investors love it because it is a profitable business model. By converting renters into buyers at their current rent levels, it is possible to book a 15%- return today. The windfall profits are enormous. Needless to say, if Community Ventures proves its model, thousands of imitators will follow creating opportunities for current buyers and guaranteeing a market for the vanguard who will one day will be selling.

The renter to condo owner model succeeds on several levels. It makes people owners in their communities, it generates savings, and it is market driven. Although some further development must been done refining this concept, it could indubitably be a powerful force for societal change.