Myths Hamper the Housing RecoveryGeneral Posts
By Alejandro Becerra
Over a year ago, the nation’s housing sector and economy nearly collapsed. Since then, the Administration and Congress have taken significant steps to avert a deeper recession, stabilize home prices, and ignite the nation’s economic recovery. Record-low interest rates, rock-bottom home prices and a large housing inventory put homeownership well within the reach of thousands of home buyers. A new wave of foreclosures, boarded-up homes and blighted communities, however, threatens to reverse recent economic gains and increased home sales.
The recent decline in home values has already cost American homeowners $4 trillion in equity. The high loss of jobs, heavy household debt, and low income growth among millions of Americans has stalled significant economic progress. At the same time, reluctance to effectively help many troubled mortgage borrowers who are erroneously believed to have acted irresponsibly continues to hamper government efforts to fully resolve the housing crisis. We won’t revitalize the housing sector successfully until we dispel the myths about what created this crisis.
Myth #1: The bulk of subprime loans were made to irresponsible borrowers who knew they could not afford the homes they bought.
This statement is substantially incorrect. The Wall Street Journal has reported that 55% or more of all borrowers who obtained subprime loans in recent years could have qualified for less expensive conventional loans. Some reports have also shown that minority borrowers were more likely to get risky and higher-cost loans even if many of them qualified for prime mortgages.
According to a Washington Post article, for example, a newly released report by the National Community Reinvestment Coalition found that Latinos were 70% and African Americans were 80% more likely than their White counterparts to receive a subprime loan. This disparity was reported to exist even if the groups compared had similar credit scores, incomes, and loan sizes.
Certainly, many subprime borrowers acted irresponsibly, including affluent and more experienced homeowners who stripped away the equity in their existing homes. Many borrowers were mostly ill informed, however, and ill prepared to handle the risks and high costs involved in paying off their loans.
These new and unregulated exotic “subprime” loans were presumably offered in good faith to borrowers who were told they could legitimately pay them off. Far from true, these loans generally lacked transparency, featured misleading low “teaser rates” that rose dramatically over time and contained deceitful loan terms and conditions.
In fact, many borrowers who normally considered themselves well-informed were victimized by predatory lenders. For example, a recent study by the Federal Trade Commission found that 20 percent of borrowers who were shown mortgage disclosure forms could not identify the interest rate they would be paying, 44 percent could not tell if there was a prepayment penalty for refinancing, and 24 percent could not tell which loan was less expensive when looking at two different loan applications.
Millions of consumers have been fortunate and savvy enough to make sound decisions when financing a home mortgage. Federal Reserve Chairman Ben Bernanke has emphasized that unfair or deceitful practices by lenders caused the extension of many costly “loans that were inappropriate for or misled thousands of borrowers.” Until this is well understood, garnering the vigorous support needed to successfully implement streamlined loan modifications that can include reduction of principal will be difficult. Such loan modifications are essential to the recovery of housing and the overall economy.
Myth #2: A recent obsession with homeownership fostered subprime lending to “weak” borrowers who were likely to default.
Since 1934, our national housing policy has been “to reaffirm the long-established commitment to decent, safe, and sanitary housing for every American.” Although rental housing remains a top policy priority for meeting the shelter needs of the poor, homeownership itself has long been considered the cornerstone of the American dream and the first step towards the creation of long-term wealth.
Critics of homeownership fail to point out that the highest rate of homeownership for the entire US population was achieved six years ago, especially for minority members whose income gains were enabling them to achieve middle-class status. This singular achievement occurred long before millions of borrowers — regardless of race, ethnicity, or income — were cajoled into defective loans, which typically required little or no income documentation, and contained hidden fees and excessive interest rates.
According to Federal Deposit Insurance Chairman Sheila Bair, “a complex interplay of risky behaviors by lenders, borrowers, and investors led to the current financial storm. To be sure there’s plenty of blame to go around.” The federal government, for example, should not be faulted for promoting homeownership as a national goal but rather for failing to lay out well-defined policies for increasing homeownership appropriately.
Let’s not throw the baby out with the bath water. We need to eliminate predatory loans but not the benefits of owning a home. Homeownership builds equity and wealth, fuels economic growth, and creates jobs in the home construction and remodeling sectors, representing about 10 percent of US gross domestic product (GDP). The housing sector alone was responsible for over 75 percent of all job growth between 2004 and 2007. Studies have shown that benefits for children of homeowners include their likelihood of achieving higher levels of education and earnings, and a diminished probability of experiencing teen pregnancy and welfare dependence. Other benefits include improved maintenance of homes and enhanced neighborhood stability.
Myth #3: Because low-income homebuyers are riskier borrowers and in recent years had access to too much credit, they were bound to default on their loans.
According to this myth, low-income households are generally assumed to possess “less than stellar” credit. However, data on many low-income borrowers show that they are not riskier borrowers than those with higher incomes, especially when their actual credit worthiness is appropriately measured. Rather, when these borrowers do have access to credit and well-designed affordable homeownership programs, they pay their mortgages diligently, maintain their loans longer, and their mortgages often turn out to be fairly profitable and stable for lenders.
Over the past four decades, the US Department of Agriculture has successfully carried out the Section 502 Single Family Homeownership Loan Program, which has benefited hundreds of thousands of rural low-income families and experienced low default rates. Other examples confirming that lower income borrowers who are well-prepared and pre-approved for mortgage loans can achieve sustainable homeownership include:
- In 2007, Neighborhood Housing Services reported that of nearly 3,000 loans it funded to borrowers averaging only two-thirds of the national median income, the delinquency rate was only 3 percent, considerably below the 15 percent subprime default rate at the time.
- The Massachusetts Affordable Alliance program has enabled more than 13,000 families with below median incomes to become first-time homeowners over the past 18 years. A recent review shows that the delinquency rate in the first nine months of 2008 was 2 percent, compared to 4 percent for all prime mortgage loans statewide, and considerably below the subprime default rate.
- In 2009, the overall default rate for nearly 9,000 low-income families who purchased homes through the use of affordable housing programs in Boston, Chicago, Los Angeles, New York, and San Francisco was less than 1 percent. In 2010, a report on New York City’s affordable homeownership program showed only 13 foreclosures out of more than 20,000 homes sold to low-income families.
- Housing our Communities (HOC), a nonprofit housing organization based in Arizona and Nevada, has used various homeownership assistance programs successfully. Despite high rates of foreclosure in those two states, HOC has produced 384 first-time home buyers between October 1, 2007 and September 30, 2009. It has experienced only four foreclosures since 1988 and none over the last five years. HOC is currently helping someone become a first-time homeowner every three days by providing one-on-one counseling and fully preparing the home buyer to obtain the right affordable loan product.
In spite of the foreclosure debacle, a great number of mortgage-ready Americans should now be able to achieve sustainable homeownership. At a time of historically low interest rates and home prices, mortgage loans can and must be made the right way by providing home buyer education and counseling, reasonable loan terms, affordable down payments, and homeownership assistance to qualified home buyers.
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