An Endangered Dream
By SCOTT C. SYPHAX
April 18, 2007
What a difference a year makes. Just last spring newspapers and policy makers across the country were hugging the dream of homeownership closely to their collective breasts and touting what a marvel the financial-services market was for making homeownership possible for every black, Latino, female-headed family in the country.
Today the headlines scream about a "subprime crisis," bankruptcies and the discovery of loan products that are "predatory" and harming our citizens -- especially minorities. In response, Congress is holding hearings, regulators are investigating, and the press's righteous indignation is at full fury. Before our solons get too far down the path of making decisions that they believe are in the best interests of those low- and moderate-income (LMI) families, they should think about the consequences of their actions and please calm down.
The mortgage market is not in a meltdown. People continue to buy and sell homes and mortgages continue to be originated. What has changed is that people who should know better -- namely the financial services industry leadership and those who cover it in the press -- are in panic mode. Instead of directing a reasoned national conversation on fixing how America provides homeownership opportunities to minority and LMI families, they are running for the exits -- and in the process rewriting history and telling the world that America's homeownership experiment of the past 10 years was a failure for all but the rich.
Recently I heard the following statement: "These families would be better off just being renters. They were forced into homeownership and were set up for failure."
I can accept that some people will never be and do not want to be homeowners. However, the statement that LMI families are better off as renters astounds me. Many made the case that sharecroppers were much better off farming on some wealthy landowner's plantation rather than being set up for failure by owning 40 acres and a mule.
Last month, speaking to a reporter from this newspaper, Angelo Mozilo of Countrywide said that 81% of his subprime borrowers are making their payments on time and are successful homeowners. Think about that for a moment. In virtually any other context or industry, a four-out-of-five success ratio would be seen as a major victory. But in the context of lending to borrowers who would otherwise be shut out of the market, it's a meltdown?
My nonprofit's down-payment-assistance program, The Nehemiah Program, has given away over $880 million in grants to working families, resulting in the creation of more than 224,000 new homeowners since 1997. Most received mortgages insured by the Federal Housing Administration, the government agency formed during the Great Depression to regulate the mortgage industry and provide home loans to borrowers who might otherwise have little access to capital.
Nehemiah has been criticized for default rates equal to Countrywide's, even though our own analyses by Experian showed default rates lower than the FHA's. Nonetheless, the important statistic is a 2004 study by the Milken Institute, concluding that LMI homeowners who used Nehemiah assistance on average gained $19,000 in net equity wealth.
We have fallen into a dialogue of blame and paternalism. Imagine removing a cancer-fighting drug from the market because it had a success rate of 81%, or ending access to college for low-income students because only four out of five graduated with a degree. If government regulators proposed such a thing there would be an uproar so loud that they would be transferred to some lonely outpost before Congress could organize a hearing roasting the entire agency.
What strategies could support greater homeownership success for LMI families? First, we should reward the market for empowering and protecting LMI home buyers. Ratings agencies assign ratings for loans purchased by investors in the secondary market based on product and borrower characteristics. Lower the ratings for subprime loans that do not require completion of a standardized pre-homeownership education and counseling program. Studies show that there are clear linkages between education and lower incidence of default. Post-homeownership counseling and monitoring for 24 months would also help.
Second, we need to provide 24-month mortgage-payment-protection insurance. Divorce, job loss, illness and disability are among the biggest contributors to mortgage default. Quality mortgage-payment protection is a low-cost way of mitigating default associated with the above risks.
Third, we need to make the FHA competitive. Subprime needs strong competitors to keep the market honest. Under Commissioner Brian Montgomery, the FHA has taken several positive steps in reviving an agency that had nearly sunk into obscurity due to lack of leadership and neglect. The FHA has streamlined some of the processing burdens that made its financial products unattractive in the marketplace. Many families currently at risk of foreclosure because of bad products should have applied for and received an FHA loan. We can do better. In short, the following three obstacles must be addressed for the FHA to regain impact-player status in the LMI marketplace:
• Get rid of down payments. Down payments are unnecessary. Our success at Nehemiah has proven that. We exist only because there is no alternative. Currently, Nehemiah-type down-payment assistance represents almost 40% of FHA's single-family portfolio. Without a down-payment assistance answer, the FHA cannot fulfill its historic role and will continue to shrink.
• Raise the loan limits for FHA to the conforming limit. Without this change, FHA is dead on arrival on both coasts and in other high-cost areas.
• Send the Inspector General of HUD to charm school. The market left FHA for the reasons above plus one -- the Office of Inspector General, the watchdog set up in 1978 to oversee Housing and Urban Development funds and projects. No one has the guts to say this publicly, but going to the FHA for financing too often means subjecting oneself to a famously public and potentially harmful investigation by the OIG. While the OIG has a duty to vigorously protect the public, this vigor should not be so strident that industry views its regulator as an oppressor. Ironically, I am told that internally the FHA feels equally oppressed by the OIG and knows it is harming them in the marketplace. If the OIG problem is not fixed, nothing Mr. Montgomery does will matter.
Finally, I believe both government and private industry have roles in improving the success of low-income home buyers. Government should act as convener and regulator in prodding industry to holistically support sustainable homeownership. Industry should continue innovating not only in new products, but with new support systems if only to keep government from legislating solutions that frustrate homeownership. However, if industry is not willing to face its own shortcomings, it deserves whatever government imposes.
Ultimately, everything comes back to risk. The risk I fear is the risk of deferring the dreams of another generation of Americans by cutting short their access to what I call the Great American Prosperity Race. Where you enter and when are important to where you end up. However, if we as a nation lock out low-income families from homeownership opportunity because we know better than they what is best for them, not only have they lost the race, but, more sadly, we never even let them on the track.
Mr. Syphax is president and CEO of the Nehemiah Corp. of America, a nonprofit group that provides assistance to low-income borrowers.
By SCOTT C. SYPHAX
April 18, 2007
What a difference a year makes. Just last spring newspapers and policy makers across the country were hugging the dream of homeownership closely to their collective breasts and touting what a marvel the financial-services market was for making homeownership possible for every black, Latino, female-headed family in the country.
Today the headlines scream about a "subprime crisis," bankruptcies and the discovery of loan products that are "predatory" and harming our citizens -- especially minorities. In response, Congress is holding hearings, regulators are investigating, and the press's righteous indignation is at full fury. Before our solons get too far down the path of making decisions that they believe are in the best interests of those low- and moderate-income (LMI) families, they should think about the consequences of their actions and please calm down.
The mortgage market is not in a meltdown. People continue to buy and sell homes and mortgages continue to be originated. What has changed is that people who should know better -- namely the financial services industry leadership and those who cover it in the press -- are in panic mode. Instead of directing a reasoned national conversation on fixing how America provides homeownership opportunities to minority and LMI families, they are running for the exits -- and in the process rewriting history and telling the world that America's homeownership experiment of the past 10 years was a failure for all but the rich.
Recently I heard the following statement: "These families would be better off just being renters. They were forced into homeownership and were set up for failure."
I can accept that some people will never be and do not want to be homeowners. However, the statement that LMI families are better off as renters astounds me. Many made the case that sharecroppers were much better off farming on some wealthy landowner's plantation rather than being set up for failure by owning 40 acres and a mule.
Last month, speaking to a reporter from this newspaper, Angelo Mozilo of Countrywide said that 81% of his subprime borrowers are making their payments on time and are successful homeowners. Think about that for a moment. In virtually any other context or industry, a four-out-of-five success ratio would be seen as a major victory. But in the context of lending to borrowers who would otherwise be shut out of the market, it's a meltdown?
My nonprofit's down-payment-assistance program, The Nehemiah Program, has given away over $880 million in grants to working families, resulting in the creation of more than 224,000 new homeowners since 1997. Most received mortgages insured by the Federal Housing Administration, the government agency formed during the Great Depression to regulate the mortgage industry and provide home loans to borrowers who might otherwise have little access to capital.
Nehemiah has been criticized for default rates equal to Countrywide's, even though our own analyses by Experian showed default rates lower than the FHA's. Nonetheless, the important statistic is a 2004 study by the Milken Institute, concluding that LMI homeowners who used Nehemiah assistance on average gained $19,000 in net equity wealth.
We have fallen into a dialogue of blame and paternalism. Imagine removing a cancer-fighting drug from the market because it had a success rate of 81%, or ending access to college for low-income students because only four out of five graduated with a degree. If government regulators proposed such a thing there would be an uproar so loud that they would be transferred to some lonely outpost before Congress could organize a hearing roasting the entire agency.
What strategies could support greater homeownership success for LMI families? First, we should reward the market for empowering and protecting LMI home buyers. Ratings agencies assign ratings for loans purchased by investors in the secondary market based on product and borrower characteristics. Lower the ratings for subprime loans that do not require completion of a standardized pre-homeownership education and counseling program. Studies show that there are clear linkages between education and lower incidence of default. Post-homeownership counseling and monitoring for 24 months would also help.
Second, we need to provide 24-month mortgage-payment-protection insurance. Divorce, job loss, illness and disability are among the biggest contributors to mortgage default. Quality mortgage-payment protection is a low-cost way of mitigating default associated with the above risks.
Third, we need to make the FHA competitive. Subprime needs strong competitors to keep the market honest. Under Commissioner Brian Montgomery, the FHA has taken several positive steps in reviving an agency that had nearly sunk into obscurity due to lack of leadership and neglect. The FHA has streamlined some of the processing burdens that made its financial products unattractive in the marketplace. Many families currently at risk of foreclosure because of bad products should have applied for and received an FHA loan. We can do better. In short, the following three obstacles must be addressed for the FHA to regain impact-player status in the LMI marketplace:
• Get rid of down payments. Down payments are unnecessary. Our success at Nehemiah has proven that. We exist only because there is no alternative. Currently, Nehemiah-type down-payment assistance represents almost 40% of FHA's single-family portfolio. Without a down-payment assistance answer, the FHA cannot fulfill its historic role and will continue to shrink.
• Raise the loan limits for FHA to the conforming limit. Without this change, FHA is dead on arrival on both coasts and in other high-cost areas.
• Send the Inspector General of HUD to charm school. The market left FHA for the reasons above plus one -- the Office of Inspector General, the watchdog set up in 1978 to oversee Housing and Urban Development funds and projects. No one has the guts to say this publicly, but going to the FHA for financing too often means subjecting oneself to a famously public and potentially harmful investigation by the OIG. While the OIG has a duty to vigorously protect the public, this vigor should not be so strident that industry views its regulator as an oppressor. Ironically, I am told that internally the FHA feels equally oppressed by the OIG and knows it is harming them in the marketplace. If the OIG problem is not fixed, nothing Mr. Montgomery does will matter.
Finally, I believe both government and private industry have roles in improving the success of low-income home buyers. Government should act as convener and regulator in prodding industry to holistically support sustainable homeownership. Industry should continue innovating not only in new products, but with new support systems if only to keep government from legislating solutions that frustrate homeownership. However, if industry is not willing to face its own shortcomings, it deserves whatever government imposes.
Ultimately, everything comes back to risk. The risk I fear is the risk of deferring the dreams of another generation of Americans by cutting short their access to what I call the Great American Prosperity Race. Where you enter and when are important to where you end up. However, if we as a nation lock out low-income families from homeownership opportunity because we know better than they what is best for them, not only have they lost the race, but, more sadly, we never even let them on the track.
Mr. Syphax is president and CEO of the Nehemiah Corp. of America, a nonprofit group that provides assistance to low-income borrowers.
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