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
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
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.
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