Responsible Homeownership

As 2008 draws to a close, over 2 million families have already lost their homes or are facing foreclosure. A protracted homeownership crisis will harm both families and entire communities alike and threatens to weaken an already besieged national economy. Yet as policymakers agree to spend billions of dollars to shock the economy back to life, they seem less committed to searching for an effective policy response to address the foreclosure storm and resurrect a responsible housing finance system.

One policymaker has stood out in the search for creative policy solutions. FDIC Chairman Sheila Bair was kind enough to share her perspective from the front lines of the economic crisis and offer her vision of how to make responsible homeownership work in the future. Chairman Bair has been making a forceful case for a systematic and streamlined approach to loan modifications that will help keep millions of Americans from being displaced by loan defaults and foreclosure. Also featured were Roberto G. Quercia, Michal Grinstein-Weiss, and Janneke Ratcliffe from the Center for Community Capital (CCC) at the University of North Carolina – Chapel Hill, who presented groundbreaking research that provides a roadmap for making responsible homeownership work, even among lower-income families. Funded by the Ford Foundation, this research evaluates the experience of an innovative program of the Self-Help organization in North Carolina and highlights the potential of linking borrowers with safe and appropriate mortgage products.

Chairman Bair began her remarks by trying to “bury two myths” about the current foreclosure debacle: The oft-cited claim that the Community Reinvestment Act has caused the current crisis, and the assumption that helping troubled homeowners stay in their homes would amount to a fool’s errand. To counter the first “myth,” Bair stated that only about ¼ of higher-priced loans were made through CRA-covered entities. Also, Bair made explicit that the CRA has never mandated that banks make loans to people who could never afford to repay them.

As for the current crisis, the Chairwoman stressed her support for a sustainable modification program based on affordability. She cited FDIC’s current IndyMac loan modification program, where loan modifications are made available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac. A Federal approach, she said, must be systemic and streamlined in order to have the broadest and quickest effect, rather than attempting the grand task of re-negotiating each loan. Under the FDIC’s proposed plan, the number of foreclosures in 2009 could be reduced by as much as a third. As for getting troubled homeowners to participate in more loan modifications, Bair simply stated that the FDIC and others must keep stressing why they make good business and economic sense.

She also discussed a new problem that has been directly caused by a delay in federal action: scam artists have begun to prey on troubled homeowners by offering services that FDIC and servicers will do for free.

Finally, Chairman Bair, in response to questions from the audience, noted that some loans cannot be modified through a systemic program, and that other responses may be necessary – such as extending rental agreements programs with banks, FHA refinancing, or even custom modifications in order to stem the tide of foreclosures. She also clarified that the Treasury Department is “very supportive” of the IndyMac program, that there are some disagreements about whether or not to use TARP money to help distressed homeowners, but that FDIC continues to work with Treasury to find a feasible solution.

Click here to watch Chairman Bair's speech on responsible homeownership.

In the second portion of the program, researchers from the Center for Community Capital at UNC offered their findings from the Community Advantage Program (CAP), a partnership between CCC, Self-Help, the Ford Foundation, and Fannie Mae. Roberto Quercia, Director of CCC, stated two conclusions from their research: 1.) Homeownership provides the same benefits to low-income families as it does to high-income families, and 2.) that it is, in fact, good business to loan responsibly to low-income borrowers. Janneke Ratcliffe then offered some specifics about the program as well as its performance. The program offered a secondary market outlet for CRA/Affordable Housing loans, participants were offered a fixed rate, 30-year, prime mortgages, and the program funded 50,000 loans, in 48 states over 10 years. The average income of participants was $32,600, and the study also included owners as well as renters for comparison, and had the advantage of tracking people over a long period of time. The loans in the study drastically outperformed subprime loans as well as FHA loans.

Michal Grinstein-Weiss then gave a brief talk on the social impacts of homeownership as gleaned from the CCC research. The findings indicate that homeowners (relative to renters) are more likely to participate in their communities, more likely to be involved in their children’s schools, more likely to volunteer their time for the community, and more likely to vote in local and national elections.

Dr. Quercia returned to discuss the financial considerations of the program, the main conclusion being that subprime borrowers were four times more likely to face serious delinquency than Community Reinvestment loans. He also stressed the importance of financial education, echoing previous comments by Chairman Bair, and stated that the odds of curing are 2.2 times higher for borrowers who seek financial advice. Financial assistance, he said, is directly linked to a lower default probability.

Eric Stein, President of the Center for Community Self-Help, followed with some history of the housing mess as well as some advice going forward. When Self-Help and others were trying to blow the whistle on risky loans being peddled by non-CRA-covered entities, they were told, ironically given the current credit crisis, that the free-flow of credit should not be impeded. Stein also provided an alarming figure that more than half of loans given to African Americans were subprime. Stein echoed Chairman Bair’s call for systemic loan modifications and argued that the current TARP level is the best way to do so. He also called for a lifting of the ban on judicial loan modifications, offering a heart-wrenching case of a woman facing foreclosure who could not find respite in the courts.

Reid Cramer, Research Director of the Asset Building Program at New America, followed by saying that the market created the appetite for complicated and explosive products, and thus it should be reasonable for regulators to place more oversight and accountability, and to provide more safeguards so borrowers are not placed into unnecessary and dangerous loans. We need to find a way to connect people with products that mitigate risks.

Mark Willis, a scholar at the Ford Foundation, followed by asking some pressing questions to the CCC researchers, including: What happens to the 2/3 of borrowers who may not be able to be helped under a broad FDIC loan modification program?; and Why were delinquencies in 2006 higher than in 2004 in the CAP program?

A Q&A session followed that touched on the trouble that Fannie Mae (a partner in the CAP program) has found itself in, the possibility of non-profits leasing houses that homeowners could assume in the future (in order to take away some of the upfront costs from low-income borrowers), the feasibility of a safe, default, “opt-out” mortgage, among others.

Participants

Featured Speaker
Sheila Bair
Chairman
Federal Deposit Insurance Corporation

Welcome
Ray Boshara
Vice President, Domestic Policy Programs; Director, Asset Building Program
New America Foundation

Presenters
Roberto G. Quercia
Director
Center for Community Capital, The University of North Carolina at Chapel Hill

Michal Grinstein-Weiss
Center for Community Capital, The University of North Carolina at Chapel Hill

Janneke Ratcliff
Center for Community Capital, The University of North Carolina at Chapel Hill

Respondents
Eric Stein
President
Center for Community Self-Help

Mark Willis
Visiting Scholar
Ford Foundation

Ellen Seidman
Financial Services Policy Director, Asset Building Program
New America Foundation

Reid Cramer
Research Director, Asset Building Program
New America Foundation

Related Links

Modifying Troubled Mortgages Is Necessary to End Crisis | MarketWatch
UNC Professor to Debate Response to Housing Crisis | WRAL.com