Print ArticleJust this week, as the implosion of the $1.3 trillion subprime mortgage crisis seem to threaten even government-sponsored Freddie Mac and Fannie Mae, lawmakers and housing advocates were already busy look for culprits, accusing mortgage companies and banks of "predatory lending" practices, usurious lending, and even outright fraud, often on the backs of vulnerable minority families in inner-city and working class neighborhoods. The irony of this particular aspect of the subprime collapse should not have escaped the notice of many in the nonprofit housing sector whose own efforts contributed, to a great extent, to a crisis that will potentially victimize thousands of the very borrowers affordable housing activists originally sought to help.
In fact, the subprime mortgage market, which represented just 5 percent of lending in 1994 and grew to 20 percent of all outstanding mortgages by 2005, became an effective tool by which community-based organizations were able to help many low- and moderate-income families, for whom access to credit had previously been limited, realize opportunities for home ownership.
Subprime lending was originally buoyed by changes in banking regulations, and particularly the 1977 Community Investment Act (CRA), which mandated that banks extend credit to low- and moderate-income customers in the communities where the banks did business. Understandably resisted by banks not wishing to take on risky loans, the CRA did, however, provide a stick which housing advocates effectively used to bludgeon banks into writing mortgages for what would have previously been considered unqualified borrowers, since CRA regulations gave community groups new opportunities to interfere with bank expansions, growth, acquisitions, and increased lending in prime markets if banks did not respond affirmatively to the CRA´s demands for lending largesse.
What is more, the Federal government was an unwitting accomplice in making a flood of these subprime loans more widely available when, in 1992, Freddie Mac and Fannie Mae addressed their own affordable housing objectives by starting to "bundle" subprime loans to ease their sale in secondary markets, thereby fueling the exponential rate at which such loans were written.
Bruce Marks, as one notable example, now CEO of the Neighborhood Assistance Corp. of America, in the 1990s browbeat local Boston banks like Fleet by calling them "unrepentant corporate criminals" for their lending practices, and was successful in extracting a $140 million loan pool from Fleet targeted to low-income home buyers, using the CRA as a key bargaining chip. "Every individual and community has the right to credit," Marks testified at the time to the Senate Banking Committee, "it's what allows communities to grow and prosper."
Homeownership, it was widely thought, was the principal and reliable way to strengthen communities by giving residents a stake in their property and helping create personal wealth through the potential building of equity in a home—even if many of those new homeowners, it now appears, were actually qualified for the mortgages that would make these social dreams a reality.
But despite its good intentions and the efforts of well-meaning housing advocates, the Community Investment Act may have had unintended negative consequences for the very people it was designed to help, according to Fed chairman Ben S. Bernanke, who questioned the soundness of a policy that enlarged lending to new groups of sub-par borrowers, observing that "recent problems in mortgage markets illustrate that an underlying assumption of the CRA—that more lending equals better outcomes for local communities may not always hold."
That view, of course, contradicts what had been the conventional wisdom of affordable housing advocates, like Marks, who pushed for first-time home buying opportunities for their constituents and generally believed that that rewriting the rules of lending was a necessary, and acceptable, price to pay for achieving the goal of a more equitable access of credit. But it also necessitated that a new mortgage product, a subprime loan, had to be created to meet the needs of the borrower with less than perfect credit or low income.
These nontraditional mortgage products were certainly imaginative, including a number of features to help facilitate the qualification process, such as no income verification for borrowers, loans of up to 100 percent of the property´s value, interest-only loans, low introductory teaser interest (with later adjustments to considerably higher rates), lax or unrealistic property appraisals, and other loosening of what had been rather well-regulated and rigid underwriting standards in the mortgage industry.
These developments were all good for unqualified borrowers, but they were fraught with potential calamity, to which the current meltdown in the subprime market clearly attests. First, borrowers who did not have to document their incomes—or who sometimes, in collusion with mortgage brokers, lied about their actual income—are clearly more likely to default when sickness, job loss, or other economic strife affects their ability to come up with monthly mortgage payments.
So while homeownership rates for white households only increased by seven percent between 1995 and 2006, for example, in that same timeframe blacks realized a 13 percent increase and Hispanics an 18 percent increase in ownership rates, evidence that the goals of housing advocates were seemingly being realized.
But tragically, too, it was precisely the property owner the housing advocates were trying most to help who were the first to feel the fallout of their bad choices and risky mortgage deals. The Center For Responsible Lending, an advocacy group that fights predatory lending, for instance, found in one of their reports "that, for most types of subprime home loans, African-American and Latino borrowers are at greater risk of receiving higher-rate loans than white borrowers, even after controlling for legitimate risk factors."
Also, low- and moderate income buyers are by their very economic state more likely to buy properties in "developing" or distressed communities, where appreciation is never guaranteed and in fact the value of homes frequently declined, providing a disincentive to continue making mortgage payments. Buyers who had paid little or nothing in the form of a down payment also felt less compunction about walking away from properties when they decline in value or the borrower runs into financial trouble.
Those figures suggest that darker days may well be ahead for housing advocates´ key constituents—those for whom credit and ownership had previously been unavailable—and that perhaps more than 1.5 million households nationwide will face delinquencies and foreclosures as rates readjust, property values continue to decline, and hard economic times make keeping one´s home difficult even with all the best intentions.
In fact, the subprime mortgage market, which represented just 5 percent of lending in 1994 and grew to 20 percent of all outstanding mortgages by 2005, became an effective tool by which community-based organizations were able to help many low- and moderate-income families, for whom access to credit had previously been limited, realize opportunities for home ownership.
Subprime lending was originally buoyed by changes in banking regulations, and particularly the 1977 Community Investment Act (CRA), which mandated that banks extend credit to low- and moderate-income customers in the communities where the banks did business. Understandably resisted by banks not wishing to take on risky loans, the CRA did, however, provide a stick which housing advocates effectively used to bludgeon banks into writing mortgages for what would have previously been considered unqualified borrowers, since CRA regulations gave community groups new opportunities to interfere with bank expansions, growth, acquisitions, and increased lending in prime markets if banks did not respond affirmatively to the CRA´s demands for lending largesse.
What is more, the Federal government was an unwitting accomplice in making a flood of these subprime loans more widely available when, in 1992, Freddie Mac and Fannie Mae addressed their own affordable housing objectives by starting to "bundle" subprime loans to ease their sale in secondary markets, thereby fueling the exponential rate at which such loans were written.
Bruce Marks, as one notable example, now CEO of the Neighborhood Assistance Corp. of America, in the 1990s browbeat local Boston banks like Fleet by calling them "unrepentant corporate criminals" for their lending practices, and was successful in extracting a $140 million loan pool from Fleet targeted to low-income home buyers, using the CRA as a key bargaining chip. "Every individual and community has the right to credit," Marks testified at the time to the Senate Banking Committee, "it's what allows communities to grow and prosper."
Homeownership, it was widely thought, was the principal and reliable way to strengthen communities by giving residents a stake in their property and helping create personal wealth through the potential building of equity in a home—even if many of those new homeowners, it now appears, were actually qualified for the mortgages that would make these social dreams a reality.
But despite its good intentions and the efforts of well-meaning housing advocates, the Community Investment Act may have had unintended negative consequences for the very people it was designed to help, according to Fed chairman Ben S. Bernanke, who questioned the soundness of a policy that enlarged lending to new groups of sub-par borrowers, observing that "recent problems in mortgage markets illustrate that an underlying assumption of the CRA—that more lending equals better outcomes for local communities may not always hold."
That view, of course, contradicts what had been the conventional wisdom of affordable housing advocates, like Marks, who pushed for first-time home buying opportunities for their constituents and generally believed that that rewriting the rules of lending was a necessary, and acceptable, price to pay for achieving the goal of a more equitable access of credit. But it also necessitated that a new mortgage product, a subprime loan, had to be created to meet the needs of the borrower with less than perfect credit or low income.
These nontraditional mortgage products were certainly imaginative, including a number of features to help facilitate the qualification process, such as no income verification for borrowers, loans of up to 100 percent of the property´s value, interest-only loans, low introductory teaser interest (with later adjustments to considerably higher rates), lax or unrealistic property appraisals, and other loosening of what had been rather well-regulated and rigid underwriting standards in the mortgage industry.
These developments were all good for unqualified borrowers, but they were fraught with potential calamity, to which the current meltdown in the subprime market clearly attests. First, borrowers who did not have to document their incomes—or who sometimes, in collusion with mortgage brokers, lied about their actual income—are clearly more likely to default when sickness, job loss, or other economic strife affects their ability to come up with monthly mortgage payments.
So while homeownership rates for white households only increased by seven percent between 1995 and 2006, for example, in that same timeframe blacks realized a 13 percent increase and Hispanics an 18 percent increase in ownership rates, evidence that the goals of housing advocates were seemingly being realized.
But tragically, too, it was precisely the property owner the housing advocates were trying most to help who were the first to feel the fallout of their bad choices and risky mortgage deals. The Center For Responsible Lending, an advocacy group that fights predatory lending, for instance, found in one of their reports "that, for most types of subprime home loans, African-American and Latino borrowers are at greater risk of receiving higher-rate loans than white borrowers, even after controlling for legitimate risk factors."
Also, low- and moderate income buyers are by their very economic state more likely to buy properties in "developing" or distressed communities, where appreciation is never guaranteed and in fact the value of homes frequently declined, providing a disincentive to continue making mortgage payments. Buyers who had paid little or nothing in the form of a down payment also felt less compunction about walking away from properties when they decline in value or the borrower runs into financial trouble.
Those figures suggest that darker days may well be ahead for housing advocates´ key constituents—those for whom credit and ownership had previously been unavailable—and that perhaps more than 1.5 million households nationwide will face delinquencies and foreclosures as rates readjust, property values continue to decline, and hard economic times make keeping one´s home difficult even with all the best intentions.
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