How the FHA Hurts Working- Class Families and Communities

Transcription

1 How the FHA Hurts Working- Class Families and Communities Edward Pinto, Resident Fellow American Enterprise Institute January 23, 2013 The views expressed here are those of the author alone and do not necessarily represent those of the American Enterprise Institute.

2 2 Selling Hope, Delivering Harm Market home ownership aggressively to borrowers with poor credit. Push families into homes they can t afford. Saddle them with loans that barely build equity. Provide no incentives for fiscal discipline. Tolerate high failure rate, leaving families in financial ruin and communities reeling.

3 3 Three Research Questions Which loans are most likely to suffer a foreclosure? Which zip codes and metro areas will bear the brunt of the foreclosures forecasted to result from 2009 and 2010 books? What should be FHA s acceptable maximum tolerance for failure?

4 4 9,000 Neighborhoods Thrown Under the FHA Bus Historically, prime loans have a foreclosure rate of less than 1 percent. But in 9,000 zip codes across America, where the median income is below the metro area rate The projected foreclosure rate exceeded 10 percent. And the average rate was 15 percent.

5 5 American Dreams FHA Nightmares By straying far from its mission, FHA is turning homeownership hope into financial hopelessness. It is setting up for failure the very families and neighborhoods its mission is to help.

6 6 This is not the first time We have been fighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families' dreams of homeownership for more than 25 years.the FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times. In addition, the FHA program is hemorrhaging money. Statement by the late-gale Cincotta (a long-time community activist) made before the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee, April 1, 1998

7 7 FHA, Fannie, and MGIC s 2010 Books: Compare Serious Delinquency Trends *Number of elapsed quarters since the beginning of FY There have only been 10 elapsed quarters for calendar year Sources: FHA Single-Family Mutual Mortgage Insurance Fund Programs Quarterly Report to Congress FY 2012 Q3, miscellaneous Fannie Mae Credit Supplements, and miscellaneous MGIC Portfolio Supplements

8 8 It Doesn t Have to Be This Way Republicans and Democrats alike can agree to support FHA s mission as The provider of responsible mortgage credit to low- and moderate-income Americans and first-time homebuyers.

9 9 4 Ways to Turn Hope Into Homes Stop lending to people who can t repay their loans. Help borrowers create real equity in their homes. Step back from markets served by the private sector. Concentrate on homebuyers who truly need help.

10 10 The Study: Big-Picture Findings Not a review of pre-crisis, sub-prime lending. Focus is on loans insured by FHA in FY 2009 and 2010 well after the market s collapse. Families are nudged onto a tightrope with no safety net. A car repair away from failure. FHA policies are backfiring in dramatic fashion, from Detroit and Atlanta to Chicago and DC.

11 11 Double Trouble: High Foreclosures Zip codes with less than median-incomes have a projected foreclosure rate averaging 10 percent, with half averaging 15 percent. 11

12 12 And Massive Wealth Destruction Home price declines and volatility hit workingclass neighborhoods the hardest. 12

13 13 Averages Mask Concentrated Pain Ginnie Mae s superior price execution provides a second layer of subsidy, allowing FHA to garner a large share of >675 FICO borrowers (Loans E and F). 13

14 14 Enabling FHA to Absorb Catastrophic Losses in Working Class Neighborhoods The five zip codes in Chicago with the highest projected failure rates had rates that ranged from 35 to 73 percent. The five zip codes in Chicago with the lowest projected failure rates had rates that ranged from 0 to 4 percent. The five zip codes in Atlanta with the highest projected failure rates had rates that ranged from 24 to 30 percent. The five zip codes in Atlanta with the lowest projected failure rates had rates that ranged from 2 to 4 percent.

15 15 Foreclosure s Lasting Damage 1 in 7 will lose their home and savings to foreclosure. Implications: Denied access to most forms of credit for 3-to-5 years and limits on the ability to rent a new place. Denied the opportunity to build equity, provide security for their family, and have the down payment for their next home as their family grows.

16 16 Delinquency s Harm to Families At a projected foreclosure rate averaging 10 percent, nearly 1 in 5 FHA loans is delinquent 30 days or more at least once in a two year period. In a working class neighborhood with a projected foreclosure rate averaging 17 percent*, nearly 1 in 3 FHA loans is delinquent 30 days or more at least once in a two year period. Mortgage delinquencies negatively impact credit scores, access, and cost. *Foreclosure rate for FHA borrowers with a FICO score of

17 17 Impact of Financial Distress on FICO Score

18 18 How Communities Suffer Reduction in neighboring property values. Blight and higher levels of crime. Poorer health. Disproportionate impact on children, seniors, and minorities. Stress on community services. Reduced property tax receipts.

19 19 Chicago: Projected Foreclosure Rate Highest foreclosure rates and greatest loan volumes are concentrated in working-class zips.

20 20 Quadrant of Doom, Part I: Chicago

21 21 Quadrant of Doom, Part II- Chicago

22 22 Quadrant of Doom, Part II- Atlanta

23 23 Quadrant of Doom, Part II- Baltimore

24 24 Quadrant of Doom, Part II- Cleveland

25 25 Quadrant of Doom, Part II- Detroit

26 26 Quadrant of Doom, Part II- Miami

27 27 Quadrant of Doom, Part II- Nassau/Suffolk

28 28 Quadrant of Doom, Part II- Newark

29 29 Quadrant of Doom, Part II- New York City

30 30 Quadrant of Doom, Part II- Washington, DC

31 31 Financing Failure, Zip by Zip This is Chicago zip code With a 23% projected foreclosure rate for , one in four families may well lose their homes. In 2009, the FHA or VA guaranteed two-thirds of home purchase loans in that zip code. Image Source:

32 32 Credit Score Distribution by Demographic Groups Source: Federal Reserve, Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit, May 2007,

33 33 Needy Families Need FHA s Full Attention Step back from markets that can be better served by the private sector. Concentrate on homebuyers who truly need help purchasing their first home.

34 34 15 and 20 Year Terms Perform Well 7.0% 6.0% 5.0% 4.0% 3.0% 15 year term 60 day+ delinquency 20 year term 60 day+ delinquency 30 year term 60 day+ delinquency 2.0% 1.0% 0.0%

35 35 Better Performance for 15 Year Loan Term across All FICO Bands

36 36 FHA Claims and Claim Rate by Book Year 35.00% 30.00% 25.00% 20.00% 15.00% 400, , , , , ,000 Number of FHA claims (right axis) FHA projected cumulative claim rate (left axis) Weighted average claim rate: Over 36 years ( ): 10.83% Over 30 years ( ): 8.89% 10.00% 5.00% 0.00% 100,000 50,000 0 Source s: FHA loan count: HUD PD &R historical data FHA projected cumulative claim rate: Annual FHA Actuarial Studies Number of FHA claims: Loan count x claim rate

37 37 Return to FHA s Traditional Mission Stop knowingly lending to people who cannot afford to repay their loans. Help homeowners establish meaningful equity in their homes.

38 38 VA and FHA Serious Delinquency Rates 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% VA serious delinquency FHA serious delinquency 3.00% 2.00% 1.00% 0.00%

39 39 The VA s Experience Helps Illuminate the Road to FHA Reform 25% (VA) vs. 100% (FHA guarantee) Residual income plus DTI (VA) vs. DTI (FHA) Clientele Auto debit Appraisal panel (VA) vs. licensed or certified (FHA)

40 40 A Deeper Look at the VA s Appraisal Panel Experience and geographical competence # of appraisers: 4500 (VA) vs. 55,000 (FHA) Reopening of local panel based on need Additions made based on competence Rotation (VA) vs. lender assignment (FHA) Independence Repairs VA standard: repair obvious and root cause Quality control (VA) By VA staff appraisers or designated lenders Minimum of 10% of work is field reviewed Tidewater initiative (VA)

41 41 Conclusion Replace irresponsible with responsible lending. Return to its low- and moderate-income mission. Reduce the crowding out of the private sector from the prime loan market (FICO scores >675), thereby utilizing private capital to help revive that market segment.