UNC Center for Community Capital
December 6, 2011
A capital idea: Turn foreclosure frustration into action
Occupy Your Home advocates across the country have good reason to demonstrate their frustration over mounting foreclosures and market excesses. They have called for a National Day of Action today (Dec. 6) to protest.
Homeownership, long the cornerstone of the American dream, is cracked and crumbling. The foreclosure crisis has created two Americas: one prosperous and hopeful, the other hopeless and debt-burdened.
We share their frustration. The crisis could have been avoided. We knew how to do lending right and we didn't.
Risky lending caused the crisis, decimated the wealth of minorities
Research on home lending over the past decade clearly shows that during the run up to the crisis, lenders originated millions of loans they knew could not be repaid based on a borrower's ability to pay.
In any other area of business, such behavior would be considered professional malpractice. Not on Wall Street. People involved in this risky business actually benefited greatly, and many firms received taxpayer support. Meanwhile, the families who played by the rules, their communities and taxpayers are paying the price. This is privatizing profits while socializing losses at its worst.
Further, many of these bad loans were made disproportionately to people of color. Though most high-risk mortgages were made to white and higher-income borrowers, a staggering one-quarter of Latino and African American families lost their homes to foreclosures or are delinquent - twice the already unacceptably high rate for white borrowers.
Four years into the crisis, policymakers still are considering misguided strategies, such as requiring higher down payments. Research clearly shows that a large down payment is not required to ensure borrowers will repay. So, larger down payments would only shut out a huge segment of the potential new housing market unnecessarily, further frustrating recovery.
Such proposals not only reflect a lack of understanding of the root causes of the crisis but, if implemented, will prolong the crisis and severely restrict homeownership opportunities for the next generation.
Shape policies based on facts
The best outcome for today's protest would be for the nation to affirm what really caused the crisis - shortsighted greed and lack of regulation, not lending to working families - and take action to restore a sound housing finance system that preserves what has worked to help generations of Americans take that first critical step into the financial mainstream.
Is the American dream of homeownership for America's working families obsolete, an aspiration of a bygone era? It is not. We know how to save homes, restore our communities, and promote economic opportunity through fair and sustainable lending.
The answer lies in the experience of thousands upon thousands of low-income, low-wealth families, many of them borrowers of color, who bought homes using traditional, fixed-rate mortgages, many with low down payments, originated under the auspices of the 30-year-old Community Reinvestment Act.
Despite the worst crisis in generations, these borrowers continue to make their mortgage payments and build wealth. Research by our center and others and the experience of responsible lenders across the nation clearly document their success.
A new book written by center researchers and published by Brookings Institute Press, Regaining the Dream: How to Renew the Promise of Homeownership for America's Working Families, describes how to lend to these non-traditional borrowers successfully, even in the face of today's economic headwinds.
It is not complicated. It never has been. It takes only the right mortgage product, appropriately underwritten, originated and serviced, backed by a well-functioning secondary market and responsible oversight. Is that too much to ask?
Fix foreclosures, then rebuild a sound system
Occupy protesters rightly call for policymakers, regulators and the financial industry to fix the foreclosure crisis.
Our research indicates clear ways to do that. Among them: continuing economic stimulus, reducing mortgage principal, restricting loan-level price adjustments, aiding state and local governments, and stopping servicer abuses (read more at Five Ways to Fix the Foreclosure Crisis
Ultimately, however, neither the housing market nor the economy will recover until we restore a safe, sound and sustainable housing finance system.
For that to occur, we must first acknowledge the true cause of the foreclosure crisis and then design public policy responses that respond to them.
Affordable lending program shows the way
Our research has documented the experience of thousands of low-income families across the country who obtained traditional 30-year, fixed-rate home loans during the decade leading up to the foreclosure crisis through a demonstration program, called the Community Advantage Program (CAP).
Ninety-five percent of those borrowers made their payments successfully, despite the Great Recession, and experienced median home equity growth of $23,000.
They had been unable to obtain home loans from traditional lenders because of their low incomes and assets.
Three key elements were responsible for their repayment success:
* Sound mortgage products - CAP borrowers obtained fixed-rate mortgages with fair terms.
* Sensible underwriting and servicing - Lenders carefully underwrote the loans to ensure they could be repaid and proactively worked with distressed borrowers to keep them in their homes when possible.
* Access to credit - A N.C.-based nonprofit community development lender, Self-Help Ventures Fund, teamed with Fannie Mae and banks across the country to provide a secondary market for the CAP loans. That enabled the supply of capital to be replenished so that banks could make more traditional, fixed-rate loans to low-wealth families.
The experience of CAP borrowers during the crisis clearly demonstrates the viability of sound affordable home lending. They show there is good business to be pursued in serving underserved markets. And they provide a model on which to base a sound and equitable lending policy.