You don’t have to work long in the field of affordable housing to find out how strong the desire is among many low income families to own a home. “How to I get a loan to buy a house,” is one of the most frequent questions I get asked.
Often the question comes from people who have extremely low incomes, virtually no savings and no established credit record. These folks often know someone in a similar economic circumstance to theirs who got a subprime mortgage loan, seen ads posted on telephone poles or watched infomercials telling them that anyone can qualify to get a loan to buy a home.
Of course, the right answer to the question, “how do I get a loan to buy a home,” is to get a dependable source of income, save up some money for down payment and build up your credit rating so you can qualify for a conventional loan. Yet for a period of time from about 1995 until the financial crisis hit hard in 2008 the answer a lot of low income people got to their question from the financial services industry was, ” we can get you a (subprime or predatory) mortgage loan.”
It isn’t just only subprime lenders who were offering low income families a perilous shortcut to homeownership. Sometimes it is city and state housing agencies and nonprofit organizations. I’m sad to say that some, in particular government housing agencies at the local level, still don’t seem to appreciate that they aren’t doing low income families any favors by helping them to circumvent prudent qualifying criteria to get a home loan. They offer “rent to own” plans, huge down payment assistance grants and advice on circumventing conventional loan underwriting standards. I blogged about these practices by the City of Houston a few weeks back.
We’ve seen that the consequences of getting people into a loan they can’t afford are disastrous for both the family and also for our financial system.
The federal government spent trillions of dollars of public money to bail out our financial system when it got drunk on the profits of junk home mortgage loans. This week the White House proposed a plan to reform the home mortgage industry.
The blueprint for reform, announced by President Obama, is entitled Financial Regulatory Reform: A New Foundation. I’ve been spending a little time reading the 89 page report. [ I’ll post my analysis of the plan soon].
The Obama plan is cautious and restrained regulatory reform. It is not radical reform. It’s a set of more efficient ways to enforce existing laws and regulations. So far as the protections for consumers go there’s nothing wrong with the administration’s proposal so far as I can see.
Yet, the reforms in the Obama plan will do little to address or rein in the proliferation of highly complex financial credit offerings that got us in this mess. While subprime lending has temporarily been shut down, I’m worried that the reforms in the president’s plan do not sufficiently curb risky home mortgage products and as a result they will resurface and wreak havoc in the future.
The financial services industry has proven to be very aggressive in creating new types of risky credit for which it can charge high fees and high interest. The premise behind the Obama plan seems to be that the financial services industry should be able to offer risky types of credit to borrowers so long as the borrowers understand the risks involved. Implicit in this is a belief that all consumers will act in an informed and rational manner if they are presented with the facts. Self-restraint on the part of consumers, the plan implies, will limit the exposure of our financial system to risky lending.
That’s not a safe assumption about many low income borrowers.
We have so overhyped homeownership in this country that most people believe homeownership is an indication of their worth as an individual. They will risk anything to achieve it. They are told by the real estate And financial services industries that homeownership is the “American Dream.” For a significant number of lower income borrowers, and for borrowers as a whole for that matter, no amount of government warnings or loan disclosure documents will dissuade them from taking out any loan, no matter how onerous the terms, to fulfill that dream.
If we are truly going to create a “foundation” of regulatory reform as the Obama administration promises were going to have to create some more realistic expectations and desirable housing alternatives for lower income families. That includes creating rental housing in desirable communities, at affordable rents that families actually want to live in. It also must include what I’ve been describing as “safe, clearly marked pathways to homeownership.” By this I mean setting out clear expectations for low income would-be homebuyers to meet such as demonstrating an ability to save a modest amount of money, achieve a reasonable, if modest level of income and demonstrate responsible credit behavior. If a family can meet these standards then a “foreclosure resistant mortgage loan” should be made available to them.
Texas Representative Yvonne Davis and Senator Eddie Lucio proposed an initiative we developed in the last session of the Texas Legislature that the Texas Department of Housing and Community Affairs undertake a pilot program to develop and test this approach to making homeownership affordable, achievable and secure to lower income working Texas families through a new mortgage loan product. These would be families that followed the “safe, clearly marked pathways to homeownership” of achieving a reasonable income, saving a modest amount of money and maintaining decent credit. This “Texas Secure Loan” would allow for interest rate and long-term adjustments to be made based on the changing economic circumstances of the borrower. A temporary job loss or illness would not leave the family facing foreclosure.
While the bill did not pass, TDHCA has indicated that they are still interested in exploring the idea.
Lets hope they do. It does not look like we are going to get a solution like this from Washington anytime soon. The best that the Obama administration’s plan offers is a requirement that lenders offer borrowers “plain vanilla mortgages” in addition to exotic subprime mortgages. But that does nothing to address the problem of the many families who cannot qualify for a plain vanilla mortgage and who are going to opt for a subprime mortgage as a shortcut to homeownership.
Buying a home used to be pretty straightforward. There was no alternative to the plain-vanilla mortgage. The loan offerings were limited to an FHA loan, a VA loan or a conventional loan with a fixed interest rate and term but varied little from institution to institution.
The Obama administration’s reforms do not simplify the home mortgage process. There is no housing policy behind the administration’s reforms. No new safe form of mortgage lending for families of limited income, such as that put in place with the establishment of FHA many decades ago is offered by this administration. Highly complex mortgage instruments will continue to be allowed under the administration’s plan, with a goal of holding highly risky loans in check through restrictions placed on a handful of the most egregious lending practices and through more intense enforcement of existing laws.
There is reason to hope that the administration understands the need for broader housing reform. Treasury Secretary Geithner told Congress Wednesday that policymakers had to “fundamentally re-think” the government’s role in the housing market. He implied that the vehicle for implementation of the new housing policy would be the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The Obama administration’s financial reform plan states it is not yet ready to make a recommendation on the restructuring and future of the GSEs. According to the Wall Street Journal, Geithner testified that the Treasury Department and the Obama administration “couldn’t do it carefully enough, thoughtfully enough in this timeframe.”
If we don’t do something to address the understandable aspirations and legitimate needs of lower income Americans for housing they will remain a ready market for exotic financial products developed by our highly innovative and greedy financial services sector. A new housing policy for low income Americans must go hand-in-hand with financial reform.
Otherwise, sooner or later we’re going to wind up back at the same spot where we are today, with teetering financial markets, huge outlays by the taxpayers, widespread home foreclosures and plenty of suffering all around.