Recently, television commentators, pundits and bloggers have started to blame low-income homebuyers for the problems the mortgage and financial markets face today. These same folks are suggesting that the Community Reinvestment Act (CRA) also played a hand in creating the problem.
Nothing could be further from the truth; not in the nation and especially not in Montana, where thousands of low-income families are responsible homeowners who make their house payment in full and on time every single month. To see the recent financial turmoil laid at their feet is unfair to the homeowners and distressing for those of us who work in the field of homeownership.
In Montana, NeighborWorks organizations have made nearly 4,000 loans to low- and moderate-income families. These loans, which are second mortgages for down payment assistance, are the only possible way for families to become homeowners. Across the nation, a sample of NeighborWorks network-originated mortgages shows that these loans have foreclosure rates significantly lower than other types of lending. According to the Mortgage Bankers Association (MBA), 4.26 percent of subprime loans began the foreclosure process in the second quarter this year. In contrast, the foreclosure start rate for loans within the NeighborWorks network was just 0.21 percent! In fact, the NeighborWorks performance is better than the conventional market, which was reported by the MBA at 0.61 percent for the same period.
Why are these low-income homebuyers successful in sustainable homeownership? To begin with, homeowners who go through homeownership planning and homebuyer education classes offered by the local and statewide NeighborWorks organizations are far more likely to succeed as homeowners. An organization in northwest Montana that offers housing development, counseling and education aimed at low-income families is Northwest Montana Human Resources.
Clients learn to make smart homebuying decisions, work within a budget, make timely payments and make needed repairs so their home will appreciate. Secondly, in order to qualify for a second mortgage from the GR8 HOPE program through Rocky Mountain Development Council or the NeighborWorks Montana programs, the first mortgage has to be a prime, fixed rate mortgage. The double effect of good education and a good first mortgage spells success for these homebuyers.
The Community Reinvestment Act (CRA) of 1977 cannot be blamed for the problems the mortgage and financial markets face today. CRA simply requires that the same rules apply to people seeking mortgages in poor neighborhoods as those buying in other neighborhoods. According to the Federal Reserve’s CRA Web site, “the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.”
CRA only applies to federally regulated banks and thrifts whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Mortgage brokers, mortgage companies and cheapmortgage.com-type operations that provided the overwhelming majority of subprime mortgages were not federally regulated — and were not covered by CRA. In fact, research shows that predatory lenders, which fall outside the CRA structure, targeted low-income and minority neighborhoods for subprime lending. Many of the loans originated were packaged into “private label securities” sold through Wall Street conduits and were not required to meet conventional Fannie Mae and Freddie Mac loan standards either.
Finally, the lenders covered by the CRA are vigorous supporters of homebuyer education; they contribute financially to the homebuyer education programs and they supply speakers for our homebuyer education classes. It is clear that the current financial distress is a recent phenomenon created largely by institutions that are not subject to CRA requirements, not by 30 years of careful lending to low-income borrowers.
Did low-income people take on bigger mortgages than they could handle? Yes, some did. We daily see individuals who, like other purchasers, were preyed upon by demanding and often unscrupulous lenders and got into mortgage products without understanding the consequences. Were they driven by greed? No. They were simply driven by their desire to own a home. Greed is what drove mortgage brokers, Wall Street managers, investors and untold others who got caught up in the dark side of the housing bubble.
Northwest Montana human Resources in partnership with NeighborWorks offers foreclosure prevention services to families of any income. The folks we see, mostly NOT low-income, are generally in pre-foreclosure because of a loss – an income, a spouse, or their health – or because they have an adjustable-rate loan that a lender sold them in order to make more money.
Please remember this when you hear that low-income and minority homebuyers and CRA have wrought the financial destruction we are experiencing: They are a very small part of a very, very big problem..
Low-income families live closer to the edge, so they absolutely are feeling the economic turmoil: job losses, employer layoffs, business shutdowns. That in turn may cost some of them their homes, but that simply makes them victims of an economic downturn, like so many of the rest of us. Borrowers who have access to traditional mortgage products combined with quality pre-purchase homeownership planning and education do just fine.
Let’s not blame the victims.
Any homeowner facing possible foreclosure should contact the counselors at NeighborWorks Montana or Northwest Montana Human Resources, 406-752-6565. Douglas Rauthe is executive director of Northwest Montana Human Resources