The Impacts of Housing Finance Reform on Borrowers and Communities of Color

8/12/2019 The Impacts of Housing Finance Reform on Borrowers and Communities of Color

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The Impacts of Housing

Finance Reform on Borrowersand Communities of Color

Remarks byJames H. Carr

Senior Fellow, Center for American Progress

Distinguished Scholar, The Opportunity Agenda

atThe Color of Wealth 2014 Policy Summit

Washington, DC

May 1, 2014


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Wealth Effects of the Great Recession


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Recovering from the Crisis

Source: Assessing the Impact of Housing Finance Reform: A Profile of Vulnerable Borrowers. Zillow. April 25,

2014.


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Problems Contributing

to the Housing Crisis

Inadequate availability and access to safe, affordable, and

sustainable conventional mortgage products that opened the door

for financially abusive and exploitive loans

Insufficient regulatory oversight that enabled reckless and fraudulent

loans to flourish

Inadequate capital levels by financial institutions that left taxpayers

to pick up the tab for the extraordinary losses that resulted

Short-term profit-maximizing housing finance business models to

support long-term mortgage products

Implicit federal guarantee of private profit


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Misaligned Goals of Housing Finance Legislation

relative to Pre-Crisis Housing Market Problems

Primary goal of housing finance legislation:

-Increase private capital in mortgage finance


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The Irony of Prioritizing

Increasing Private Capital

Lack of private capital did not contribute to

the housing market crisis

Between 2003-06, private label securities rose from

8% to 38% of the market

85% of subprime loans were financed with private

label securitization

Private label securities failed at a rate of 6 times

those for Fannie Mae and Freddie Mac

Source: David Min. Faulty Conclusions Based on Shoddy Foundations. Center for

American Progress. Washington, DC. February 2011.


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Protecting American Taxpayers

and Homeowners Act-Hensarling

Eliminates Fannie Mae and Freddie Mac in favor of a purelyprivate housing finance system

Reestablishes the implicit federal guarantee of private financial

firm profits Would eliminate the 30 year fixed rate mortgage as the

principal US loan product and eliminate the To Be Announced(TBA) market*

Downpayments of less than 20 percent would be rare

Fails to address loss of multifamily financing provided byFannie Mae and Freddie Mac

Provides inadequate countercyclical market support

* Source: Mark Zandi and Christian DeRitis. Evaluating PATH. Moodys Analytics. July 2013.


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Housing Finance/GSE Reform Bill

Johnson-Crapo

A market-based pricing incentive structure to encourage credit

to eligible borrowers in underserved markets

Greatly expanded funding for the National Housing Trust Fund

and Capital Magnet Fund;

Creation of a Market Access Fund to support research anddevelopment of products to serve more families

Multifamily provisions that support the financing of affordable

rental housing


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More Positives of Johnson-Crapo

Servicing standards that would require loss mitigation and

affordable loan modifications; and

An office to monitor access to credit in underserved markets and

provide technical assistance and best practices information


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Drawbacks to Johnson-Crapo

Further restricts lending by requiring all loans meet QM plus 3.5%or 5% downpayment

Would raise interest rates between 40bp to +200bp

Does not mandate actually lending to underserved

borrowers/within underserved communities-in fact, provide opt-

out from underserved provisions

Omits communities of color from the definition of underserved

communities

Lacks an explicit fair housing/fair lending obligation for lenders

accessing federal insurance


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Mortgage Rates Will Rise Depending on

Downpayment and Credit Score Assumptions


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Lack of Borrowers of Color

Contributing to Housing Market Woes

Home purchase loans to African Americans and Latinos are down 55 %

and 45% respectively between 2001-2012*

Total mortgage originations are at 17 year low**

Investment in residential property is a smaller share of the economy sinceWorld War II***

Since July 2013, existing single-family home sales have declined 15%****

Home prices have been artificially propped up by outsized investor

purchases

Sources: * Laurie Goodman, Jun Zhu, and Taz George. Where Have All the Loans Gone? The Impact of Credit

Availability on Mortgage Volume. Urban Institute. Washington, DC. 2014. **Lending Plunges to 17-Year Low

as Rates Curtail Borrowing. Bloomberg. April 13, 2013. Neil Irwin. ***Why the Housing Market Is Still

Stalling the Economy. The New York Times. April 24, 2014. Eye on the Economy: Existing Home Sales Down,

New Home Sales Flat. Eye on Housing. National Association of Homebuilders. April 2014.


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What Should be Essential Goals of

Housing Finance Reform A system that meets the American publics needs for affordable and

sustainable mortgage products across a broad spectrum of income,

wealth, and credit characteristics

Explicit and paid for federal guarantee of system

Adequate capital levels for financial institutions that access federal

insurance

A full exploration of the most appropriate manner to engage private

capital including utility or cooperative models

Explicit duty to serve borrowers and communities of color


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Housing Finance Reform via the

Federal Housing Finance Agency

Improve loan affordability by lowering G-fees and expanding credit

box of accepted loans

Aggressively enforce Fair Housing and Equal Credit Opportunity

Laws

Begin contributions to the National Housing Trust and Magnet

Funds.

Improve servicing standards, including improved loss mitigation

practices

Maintain support for multifamily housing production


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[email protected]

jameshcarr.com@jh_carr

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The Impacts of Housing Finance Reform on Borrowers and Communities of Color