Whose Skin?

The implosion of the national housing market and the resulting financial meltdown that began in 2007 stripped American families of $11 trillion of wealth—including home equity, family savings, and retirement accounts. Millions, too, lost jobs. Now the solution Congress designed may soon be transformed into a major block to homeownership for creditworthy families.

 

Last year Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to reduce the risk of another such economic catastrophe. The legislation eliminates most prepayment penalties and places limits on certain fees homebuyers pay. It also aims to protect mortgage market investors by requiring those who package and sell mortgage loans to hold 5 percent of their value. This is known as risk retention, or ensuring that they keep “skin in the game.”

 

Dodd-Frank, however, exempts from this risk retention requirement “qualified residential mortgages” (QRMs), low-risk loans meeting high underwriting standards. Congress left it up to the Treasury Department and other federal agencies to devise those standards.

 

The agencies’ proposed QRM standards could have required private mortgage insurance, requirements for prudent underwriting, and prohibitions on balloon payments and other high-risk features. Instead, they focus on extreme and onerous financial burdens for potential homebuyers, such as requiring a borrower to make a down payment of one-fifth (20 percent) of a home’s purchase price.

 

We know that down payment requirements can prevent households of modest means from obtaining a mortgage. In Portland, for example, the current median price for a home is about $200,000. A purchaser using a QRM would have to make a down payment of $40,000 to purchase that home.

 

The proposed down payment requirement also would increase significantly the time necessary for families to become homeowners, and bar thousands of creditworthy homeowners from a mortgage with low rates and attractive terms. According to the Center for Responsible Lending, a typical family earning the median income would need 14 years to accumulate the 20% down payment on a median priced home.

 

We know, too, that first time homebuyers have driven much of the recent recovery in the residential real estate market. First time buyers (assisted by a federal tax credit) were the source of the 2009 increase in home sales, including the purchase of thousands of distressed properties, and were vital to the increase in 2010 of the purchases, as well (The State of the Nation’s Housing 2010). Many of those buyers, including PHC customers, purchased their homes via programs requiring mortgage insurance and down payments of one to five percent.

The median down payment amount Portland Housing Center customers paid in FY2010 was $7,652.85, or 4.29 percent of the purchase price. If QRM down payment requirements had been in place, thousands of first time homeowners would not have been able to contribute to the fragile revitalization of the housing market, and the nation’s economy. Those are some of the reasons the National Association of Home Builders, the Consumer Federation of America, and the Center for Responsible Lending oppose the QRM proposal.

 

There are a number of ways to structure QRMs to help borrowers and reduce risks for mortgage product investors, such as requiring borrowers to have income to support monthly mortgage payments for the life of the loan, and prohibiting risky underwriting features like balloon payments and negative amortization. Burdening borrowers with unreasonable down payment requirements is punitive, unnecessary, and will close the door to homeownership and wealth creation for millions of qualified and creditworthy Americans.

 

Over the last 20 years, the Portland Housing Center has done one thing very well: provided education, access to resources and support to more than 6,000 families purchasing their first home. We believe “homeownership done right”—intensive education, access to resources, and other support—and not more “skin in the game” helps our customers make good, long-term financial choices, and our mortgage delinquency rate of less than 1 percent bears that out.

 

This burdensome down payment requirement and other elements of the proposed QRM standards could undermine the 20 years of work the Portland Housing Center has done to assist first- time homebuyers find and use safe and affordable financial tools. If put into place, they will, I believe, also have long-range negative effects on our families and communities.

 

The proposal is now available for comment for the next six weeks; the agencies expect to adopt them by summer. We urge all of those who support the Portland Housing Center, and value the benefits of homeownership, to become educated about the issue, and express to members of Congress your alarm about the serious and very negative effects these standards, if adopted, will have. America’s families and neighborhoods deserve no less.

A Blast from the Past. A Return to Redlining?

We have been looking back lately at the Portland Housing Center. That’s what happens when you’re 20 years old and about to be an ‘adult’. In the course of it, I have reminisced about how people couldn’t get bank loans in inner NE Portland because a practice by banks was not to make loans for less than $50,000. The catch was house prices averaged about $35,000. So a lot of people said redlining and a lot of people were shamed and the Portland Housing Center was created.

In our early years, we spent our time telling people they could buy homes and here is how to do it. We worked with committed loan officers, who also had to explain these were good borrowers and good loans, these community loans. Then in our teen years, a hullabaloo of lending took off, so we started telling people that not all loans are good, even if you qualify. We wished for shame to happen again but the greed in the marketplace was stronger. A lot of people got loans that never should have been made.

Now the lenders who made some of those bad loans have flipped their practice. They make loans but only if there is very little risk by requiring the borrowers to have higher credit scores.

Most of us don’t spend time thinking about credit scores – unless you work here – and a lot of us are sure our credit score is pretty good. Why my guy Mike told me his credit score was 897 (the top FICO score is 850). But credit scores get affected by all sorts of things. Many of us pay our bills on time but once in awhile we send the check on the date due so it arrives late – ding on the score. Messy divorces – ding, ding. Or we close a credit card account – ding. Or we open a credit card account to get 10 percent off – ding. Or we have a lot of credit cards or we just have credit cards and not different types of debt such as installment loans and a mortgage – ding and ding. The exact formulation by FICO is secret. Remember Fair Issac is not ‘fair’. It is the last names of a couple of guys who came up with the calculation.

Well some lenders have set a minimum credit score requirement on FHA insured loans – those are the loans designed back in 1934 during the Depression to encourage lenders to make loans. FHA requires a minimum credit score of 580 to qualify for an FHA loan with a 3.5 percent down payment. The big lenders raised the minimum credit score on those FHA-insured loans to 640 – just a 60 point jump from what FHA requires. According to FICO, about 6.3 million people fall within that range. “Raising the minimum required credit scores to 640 may exclude as much as 15 percent of otherwise eligible FHA loan applicants. Minorities and borrowers in communities hardest hit by the recession are most likely to lose based on FICO scores”, says David H. Stevens FHA Commissioner.

So just when we have reduced home prices in Portland and record low interest rates, credit gets tightened. I understand risk assessment because the Portland Housing Center is a lender. We are proud of our 400 loans with a delinquency rate of 1 percent. It also makes me confident to say that the big lenders should use FHA’s credit guidelines and not add an additional hurdle to buying homes. Isn’t that how it all began – raising ‘something’ so that ‘some’ people couldn’t buy homes? I could have sworn that happened 20 years ago.