The American Dream of homeownership will be under siege if we take seriously recent government proposals to reform the housing finance market. Government regulators have already taken steps to increase down payments for loans made through Fannie Mae, Freddie Mac and the Federal Housing Authority, and are also considering mandatory (and arbitrary) down payment requirements. These moves and other recent government proposals could further racialize our housing and credit markets by effectively disqualifying many lower-income borrowers, including a large share of borrowers of color. Together, the impact of these requirements would erase many of the advances in homeownership achieved over the past 40 years.
Homeownership has long enjoyed broad bipartisan support, but different families and communities have experienced homeownership differently. The lingering subprime and foreclosure crisis has brought this truth into stark relief: otherwise-qualified borrowers were steered into subprime loans. At the peak of the subprime lending boom, only 9% of subprime loans went to first-time homebuyers. The majority of subprime loans were equity re-financing loans, many of which ultimately stripped equity (reversed homeownership) in communities of color.
The fact that communities and borrowers of color were the prime targets was no accident; it was a strategic decision made by brokers who knew that these communities were ripe for exploitation after thirty-plus years of redlining, where whole communities were denied access to credit on the basis of race, especially inner urban communities of color. Subprime lenders stepped into this credit void with products that were confusing, unsustainable, and often more expensive than they needed to be. Rather than connecting low-income borrowers to fair and sustainable credit, brokers targeted vulnerable borrowers with higher-cost loans that had troublesome terms, like exploding ARMS and pre-payment penalties, and regulators failed to step in. These unsustainable loans and the subsequent foreclosure crisis have resulted in the loss of $6 trillion in home equity nationally. It will take families several generations to recover, if they ever can, from such a fallout.
Housing in the United States is inextricably linked with opportunity and the accumulation of wealth. The mortgage tax deduction is one benefit. So is life in a high-property-value neighborhood equipped with advantages like better services, more parks, and high-performing schools. Families leverage accumulated wealth to send their kids to college, open a new business, or give their adult children a down payment on their own home. In other words, home equity often provides the platform of opportunity for the next generation. Economists estimate that anywhere between 50-80% of wealth accumulation is in some way attributable to past generations.
Unfortunately, this intergenerational wealth transfer has largely been off limits to homeowners of color who face discrimination in the housing market on many fronts, including the location and value of their house, the terms of mortgage loans, and the benefits subsidized under tax policy. Such factors only reinforce the growth of wealth disparities over time. It is perplexing, to say the least, that the government reports acknowledge the role of the private market in causing the problem, yet their proposal suggests greater reliance on the private market. Relying on the operation of the private market to bring homeownership opportunity to all, as the government's proposals suggest, would perpetuate race-based redlining. Here's why.
America's residential neighborhoods are still largely racially segregated, although they are becoming less so over time. While many of us have stood together to fight racism and achieved significant victories, racism's historical footprint in asphalt and brick is hard to undo. And in fact, the private market exploits neighborhood differences, as we saw so clearly in the subprime lending crisis. Loan terms predict foreclosure rates more than borrower characteristics do, yet it was the borrower who was negatively scrutinized, not the loan terms. Studies have shown that subprime credit exists alongside ongoing market segregation in a dual credit delivery system that often disregards a borrower's creditworthiness. Lastly, due to historical discrimination, people of color do not have the intergenerational wealth they need to use for down payments. Arbitrary down payment requirements will disproportionately hurt the chances of families of color to sustain homeownership and help their children move up the ladder of opportunity.
A recent study by the Community Mortgage Banking Project says that a comprehensive set of quality underwriting standards would be a better means of preventing mortgage default than the mandatory substantial down payments being contemplated by U.S. banking regulators. The Administration needs to focus its restrictions on unsustainable lending terms rather than restricting first time home buyers' opportunity to invest in a home. Any policy should provide housing and credit on affordable terms to advance the opportunity for homeownership for all.
The government has a clear role to play in housing finance. But under the proposals currently being discussed, up to half the market could be cut out entirely, and families of color would face additional hurdles. A policy proposal that constricts opportunity is worrisome indeed. The American ideal of homeownership should not be relegated to an impossible dream. Surely there are allies within government who recognize this and will stand firm against those who wish to dismantle a critical path to wealth and opportunity.
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They dealt mostly with fixed rate mortgages and gave them to reasonably qualified buyers.
The banks made, kept, and serviced their own mortgages.
If they made bad loans, the bank would feel it immediately.
The vast majority of loans, except VA loans, were 20% down payment, fixed rate, and the buyer had to have plenty of documentation. The buyer had to have a decent job, tax returns, etc.
The banks WANTED good appraisers doing honest appraisals....an over-appraised house meant too high a mortgage which made default a higher risk.
AND years ago, for the most part, bankers were RESPECTED members of the community.
They lived in the community, worried about the community, and took good care of the bank and its customers. The bankers were usually considered good businessmen and good citizens.
NOW?
What the f--k happened?
(A rhetorical question....we know the answer.)
Your post is corrrect, years ago banks did not make bad loans because doing so was bad business. Then the government stepped in and suddenly making bad loans was good business. It really is that simple.
They were really quite strict....people had to have steady jobs, documentation, money down, etc. They did get a break, but not much on the interest. They also had to buy what they could afford or no house.
The Clinton era loans were so different than the sh--t they did just before the economic meltdown.
Simply put, the banks went WAY further than anything the government had in mind.
And the government never stopped them.
The subprime and the prime mortgages became crazy, exotic, RIDICULOUS option ARM loans that were thrown at almost anybody who walked into the bank and asked for a loan.
No documentation, proof of income, down payment......
What worked well and had only a slightly higher default rate (sub prime Clinton era mortgages) were completely ruined by the 2000's.
Even loans to qualifying customers had interest rates that rose too fast and the people couldn't pay.
Ridiculous option adjustable rate mortgages (ARM's)
.....telling people they could sell or refinance easily
.....encouraging obviously unqualified people to take out mortgages
.... pushing high mortgages on people with lower incomes
.....not using documentation
.....paying (and sometimes forcing) appraisers to make higher appraisals than a house was worth
.....selling their outrageous mortgages to Wall Street to sell to investors......
Don't forget that the subprime loans went sour first....followed by many qualified buyers who couldn't pay the increasing mortgage payments and couldn't refinance.....followed by many qualified buyers who lost their jobs......
...........IN OTHER WORDS....the banks did everything possible to make money no matter what the future consequences......and the government allowed it.
I agree that the subsidies for upper income people should be eliminated or reduced (lots of lobbying to prevent that).
There is no magic bullet and the current proposals are actually the worst of all worlds - remove gov't backstops while further limiting credit options under the rubric of protecting consumers.
An economy that is sustained via paycheck to paycheck cost of living is unsustainable on the whole. Lower income and middle income wage earners are effectively frozen out of the housing market as they have no means to obtain a loan with limited income and lack of savings. Disposable income feeds the economy via the expenditure of funds for goods and services. It provides the vital savings opportunity to purchase into the system.
The erosion of wages for the past thirty years has removed discretionary spending from the average American income. Without bringing home prices into line with the incomes of the average American family, housing will continue to be out of reach and unsustainable; further eroding the housing market. Getting parity back into the market place and eliminating the bubble effect of speculation and investment would go a long way towards making home ownership possible for more Americans.
Lending is only about financing a home; it isn't about affordability and stabilizing the market. That only comes from a robust economy based on sustainable wages with access to cost of living parity.
The success of a program like the Soft Second Mortgage for first time home buyers is so successful and experiences far fewer defaults than any other type of loan program because they are required to use the traditional ratios of lending that kept the housing market stable for decades. A lowering or relaxing of these standards will just lead to additional defaults.
If a fight to get more people to be home owners is your goal, work towards getting people better jobs at better wages. That is the real battlefield not the banks or the mortgage lenders or the home prices or the government programs.
To obtain a conventional mortgage in Canada, home buyers are typically required to put down at least 20% of the purchase price or appraised value (whichever is less) as a down payment. And Canada did not suffer in a housing collapse on economic decline like the US. Coincidence?
In Mexico in the mid-'90s Wall Street engineered a currency coup that tripled the debt owed by small businesses and family farms and also allowed for them to be massively ratejacked on top of it. Mexicans consequently formed the "el Barzon" movement and pushed back Wall Street and deposed their ruling party of 60+ years. In this country YouTube phenom Ann Minch has already declared the debtors' revolt and begun going after them http://www.revoltstartsnow.com
If you've been pushed under, you can read every other page of my book for free: http://www.scribd.com/doc/25443175/Debt-Hope-Down-and-Dirty-Survival-Strategies-Evaluation-Version-Complete
For now Short Sales by lenders are scooping up the new buyers leabing occupied homes with a dearth of possible buyers. When the Bank Back log is gone, the market will moderate. However the new hogher guidlines concering down payments (20%) and strong credit score requirements will make it tough for most. (especially after the last few years)..
They should also be able to buy a home they can afford.
Zoning laws are a big part of the problem.
My wife and I would like to build a small retirement house on the lot next to where we live.
But Zoning laws requires it to be at least 1800 SF with a basement.
The answer for the problem is one of jobs and education, this is not a matter of race. Banks have historically less inclined to loan money in poor areas simpley because the liklihood of default is higher, unemployment is higher, crime rates are higher, low income homeowners are less likely to maintain a property which really belongs to the bank until the laon is paid off.
Poor neighborhoods regardless of ethnic makeup statistically have a history of lower homeowner rates because the education levels on average are much lower, incomes are much lower, long term employment prospects are lower regardless of skin color.
Making this a race issue is a diversion and a red herring...its about money, jobs and educations. Nothing more...find an exception if you can, I don;t know of any...whether its inner city or rural..