The mortgage bust has inspired a big wave of rethinking about the value of home owning. The mantra of “the American dream of homeownership” has often been turned into a statement like “not everyone should be a homeowner.”
Now comes a provocative book that says, don't blame the borrower. Blame the awful loans such people were offered.
The authors of “Regaining the Dream: How to Renew the Promise of Homeownership for America's Working Families” draw a big bright line between community reinvestment lending, which they think can be sustainably done for working-class families, and subprime loans, which set these people up to fail.
The authors (Roberto G. Quercia, Allison Freeman and Janneke Ratcliffe) have a persuasive argument and a deep data bank of stats to back it up with.
The stats come from the Center for Community Capital, a North Carolina group that has tracked the performance of 46,000 mortgages made to people with a median income of $30,000 and who put less than 5% down on their homes through the Community Advantage Program done through Self Help Ventures Fund.
They compare the loans made to Eddie and Laura Taylor, a couple earning $37,800 between them, and Tonya Hinton, a nursing student earning $24,000 a year while working on her degree.
The Taylors (representing a composite based on the typical CAP borrower) put down $3,300 on a $111,000 home, for a 97% loan-to-value, and got a monthly payment of $717, or 23% of their income, on a 7% fixed-rate loan (the Taylors should refinance). They have been current on their payments for 10 years, and have seen their home value appreciate by an average of 1.37% a year. Their home equity has actually gone up, from the original $3,300 to $27,600.
Hinton, a composite based on studies of the subprime business, got a $96,000 loan for 100% of the value of her home in 2006. She was qualified at the teaser rate of 7%, resulting in a payment of $639, or 32% of her pretax income.
Hinton thought she could refinance when the intro rate expired, but found a hefty prepayment fee made that impossible. Her rate rose to 12% and her payments increased to nearly $1,000 a month, or half of her total income. She struggled to keep up and made a few of the higher payments, but eventually defaulted.
The authors of the book (published by the Brookings Institution) argue that “CRA-type” lending like the CAP works for working-class families while subprime loans, with their discount adjustable rates and prepayment penalties, are designed to disregard whether the borrower can pay, but were used to gin up originations with responsibility for defaults pushed up the line. And that any propensity to lump whole populations of borrowers as untouchable ignores the fact that CRA loans can work for them, while typical subprime loans cannot.
This analysis, if correct, is good news for those who still think American homeownership rates can be kept high by making loans to underserved borrowers who can demonstrate ability and willingness to repay. And it is good news for lenders who will make income from every one of this kind of loan.
