A Nation of Renters? Promoting Homeownership Post-Crisis Roberto G. Quercia Kevin A. Park
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Outline of Presentation Why homeownership? The scale of the foreclosure crisis today (20112Q) Mississippi and Leflore county Dodd-Frank and unfinished business Unfinished business and homeownership Fixing the foreclosure mess Looking forward 3
Research says that homeowners are less stressed and more satisfied in general exhibit lower risks of mental health problems (mediated by sense of control are more likely to report good health report greater levels of social capital are more likely to vote in local elections and to be more civically engaged Are less likely to identify crime and disorder as biggest problems in the neighborhoods (mediated by collective efficacy) can sustain the demands of homeownership and build wealth when lending is done right 4
A Nation of Renters? Despite this evidence, as a result of the crisis, many believe today that more families should be renters" " Homeownership is not for everybody" It is not a remedy or antidote for social ills, including financial insecurity" Quality affordable rental housing is needed" A first strong step in their housing ladder over a life time" Lifetime housing for others" What would a balance policy look like? 5
The Scale of the Foreclosure Crisis
Disproportionate Impact among Borrowers of Color 30.0 25.0 Percent of Loans 20.0 15.0 10.0 5.0 0.0 All race/ ethnicity Non-Hispanic White Completed Foreclosures African American Axis Title Hispanic Asian American Others Seriously Delinquent
Differences Persist across Income Groups Percent of Loans Completed Foreclosures 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Non-Hispanic White Black Hispanic Asian
Borrowers of Color More Likely to Receive Loans with Risky Characteristics with Risky Product Features Ratio to non-hispanic Whites 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 High-Cost Prepayment Penalty Hybrid ARM Black Hispanic Asian
This Finding Persists, Even After Controlling for FICO Scores Ratio of Incidence of Risky Loan Terms 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FICO < 580 580 <= FICO < 660 FICO >= 660 Black Hispanic Asian
Disparities by Borrower Income Less Stark 18.0 16.0 14.0 Percent of Loans 12.0 10.0 8.0 6.0 8.6 8.7 8.5 8.2 4.0 2.0 7.3 6.6 6.2 6.4 0.0 Low-Income Moderate-Income Middle-Income Upper-Income Completed foreclosures Seriously Delinquent
But, Different Story Emerges When We Disaggregate by Regional Housing Markets Percent of Loans Foreclosed Upon 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Weak Market Stable Market Moderate Growth Boom Market Lowincome Moderateincome Middleincome Upperincome
Analysis of Borrower Income Suggests Link Between House Prices and the Marketing of Risky Products Percent of Loans 60.0 50.0 40.0 30.0 20.0 10.0 High Cost Loans Hybrid ARMs Low Moderate Middle Upper 0.0
Lower-Income Areas Disproportionately Affected 30.0 25.0 Percent of Loans 20.0 15.0 10.0 5.0 0.0 12.3 12.2 Low-Income Neighborhood 11.4 8.8 6.6 6.6 Moderate-Income Neighborhood Completed Foreclosures Middle-Income Neighborhood Seriously Delinquent 6.5 4.6 Upper-Income Neighborhood
Minority Areas Disproportionately Affected 25.0 Percent of Loans 20.0 15.0 10.0 10.8 8.3 7.5 7.1 5.0 8.7 6.5 5.6 5.0 0.0 Percent Minority - Highest Quartile Percent Minority - 3rd Quartile Percent Minority - 2nd Quartile Percent Minority - Lowest Quartile Completed Foreclosures Seriously Delinquent
Why important to Mississippi and Greenwood? Lenders tightened underwriting after bust Pre-crisis factors amplify crisis-related impacts Foreclosures are not randomly distributed Pre-existing conditions plus the concentration of foreclosures are likely to constrained what local communities such as Greenwood can do Disproportionate challenges in certain neighborhoods and areas 16
US - Miss Homeownership Fell Over the Past Decade. Increased in Greenwood Percent 80 70 60 50 40 30 20 10 0 Homeownership Rate 72.4 69.6 66.2 65.1 49.2 51.2 United States Mississippi Greenwood 2000 2010 Source: Census Bureau
Vacancy Rising as Homeownership Falls 80 Homeownership and Vacancy 3.0 Homeownership Rate 76 72 68 64 2.5 2.0 1.5 1.0 Vacancy Rate Homeownership United States Mississippi Vacancy United States Mississippi 60 0.5 Source: Census Bureau
Leflore Relatively Little Impact of Boom/Bust 250 Median Sales Price Thousands (Current Dollars) 200 150 100 50 United States Mississippi Leflore County 0 1990Q 1991Q1 1992Q 1993Q 1994Q 1995Q 1996Q 1997Q1 1998Q 1999Q 2000Q 2001Q 2002Q 2003Q 2004Q 2005Q 2006Q 2007Q1 2008Q 2009Q 2010Q1 2011Q1 Source: Moody s Analytics
Yet not the Most Affordable 5.0 Price-Income Ratio 4.5 4.0 3.5 3.0 2.5 2.0 1.5 United States Mississippi Leflore County 1990Q 1990Q 1991Q3 1992Q 1993Q 1993Q 1994Q 1995Q 1996Q 1996Q 1997Q3 1998Q 1999Q 1999Q 2000Q 2001Q 2002Q 2002Q 2003Q 2004Q 2005Q 2005Q 2006Q 2007Q2 2008Q 2008Q 2009Q Source: Moody s Analytics
Mississippi s Bubble Was Smaller than the Nation s Overall 130 Price-Rent Index 120 110 100 90 80 United States Mississippi 1991Q1 1991Q4 1992Q3 1993Q2 1994Q1 1994Q4 1995Q3 1996Q2 1997Q1 1997Q4 1998Q3 1999Q2 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 Source: Federal Housing Finance Agency; Bureau of Labor Statistics Notes: Purchase-Only House Price Index scaled by Owners Equivalent Rent of Residences and indexed to average since 1991. Mississippi price index scaled to rent index for South region.
Leflore has Long Term Problems - Markets will not Recover as Long as Unemployment Remains High 20 15 Unemployment Rate United States Mississippi Leflore County Percent 10 5 0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Delinquencies Peaked But Remain Elevated 35 Serious Delinquency Percent 30 25 20 15 10 5 0 United States All Prime Subprime Mississippi All Prime Subprime Source: Mortgage Bankers Association
Lending Shifted from Traditional to Exotic and Back Percent 60 50 40 30 20 10 0 FHA and Subprime Lending 2004 2005 2006 2007 2008 2009 2010 United States FHA Subprime Mississippi FHA Subprime Greenwood FHA Subprime Source: Home Mortgage Disclosure Act Notes: First lien mortgages for purchase of owner-occupied 1-to-4 unit properties.
Activity Around Major Cities During Boom Source: Home Mortgage Disclosure Act Notes: First lien mortgages for purchase of owner-occupied 1-to-4 unit properties.
And Relatively Fallen in Suburbs During Bust Source: Home Mortgage Disclosure Act Notes: First lien mortgages for purchase of owner-occupied 1-to-4 unit properties.
Subprime Lending Accounted for Over Half of Loans in Some Rural Areas During Boom Source: Home Mortgage Disclosure Act Notes: First lien mortgages for purchase of owner-occupied 1-to-4 unit properties.
FHA Has Filled in Mainly Near Cities During Bust Source: Home Mortgage Disclosure Act Notes: First lien mortgages for purchase of owner-occupied 1-to-4 unit properties.
Neighborhood Stabilization Program (NSP) Promotes Homeownership Source: Department of Housing and Urban Development
How to Promote Homeownership Responsibly? The good news is that we know how to do it We have done it for more than 30 years under the auspices of the Community Reinvestment Act (CRA) Unfortunately, critics confuse CRA with subprime lending: 30y FRM, even with low downs, are sustainable when appropriately underwritten, originated, serviced and with the needed secondary market functions in place 30
CRA Lending Done Right: The Community Advantage Program Participating Lenders Lower-Income Borrowers Lenders make conventional 30-year, fixed-rates to risky borrowers Loans sold to Fannie Mae, with Self-Help retaining credit risk Grant provided loan loss fund 25
The Community Advantage Program 46,453 loans Most (68%) put down less than 5% $30,972 median income ½ < 680 credit score 41% female-headed 40% minority 26
Serious Delinquency (90 days+ or in foreclosure) by Mortgage Type " Subprime ARM" " " " Subprime FRM" Prime ARM" CAP" FHA" Prime FRM" " " "
Similar Pattern for Comparable Borrowers Note: CRA delinquency rate taken from a portfolio of CRA loans managed by Self-Help Credit Union. Serious Delinquency defined as 90+ day delinquent or in foreclosure." Sources: Mortgage Bankers Association; Fannie Mae; Center for Community Capital 28
Risky Borrowers or Risky Mortgages Source: Lei Ding, Roberto G. Quercia, Wei Li, Janneke Ratcliffe (2009). Risky Borrowers or Risky Mortgages: Disaggregating Effects Using Propensity Score Models. Center for Community Capital. Exhibit 11. Estimation is based on a borrower with a FICO score between 580-620 with the mean value of other regressors. Broker indicates broker-originated loans, PPP indicates loans with prepayment penalties, and ARM indicates adjustable-rate mortgages. 29
Lending Done Right Leads to Wealth Building Median annualized CAP house price appreciation since origination stands at 1.4%, with annualized return-on-equity at 25%." This appreciation translates into median wealth gains of $17,000, or about 60% of borrower annual income at the median. Equity gains have been mostly retained, despite the financial crisis 30 Source: Self-Help; Fannie Mae Research Funded by the Ford Foundation
2010 DODD-FRANK FINANCIAL REFORM AND THE UNFINISHED BUSINESS 37
Dodd-Frank Financial Reform Act Requires assurance of borrower s ability to pay Bans financial incentives that promote risky lending Broadens definition of who is protected by Lowering interest rate, points, and fees for a high cost loans (HCL) Requiring escrow of taxes and insurance in HCL Requires ARM loans to be underwritten at full indexed rate Establishes penalty for non-compliance Requires death plans to deal with too big to fail Creates Consumer Financial Protection Bureau (CFPB) Defines qualified mortgages (QM) to ensure ability to pay Defines qualified residential mortgages (QRM) to promote skin in the game safe loans that require no risk retention when part of MBS
Concerns of Proposed Definitions on Homeownership Concerns that proposed restrictive QRM guidelines will disproportionally restrict access to credit for low-income, low-wealth, and minority households We estimate the relative changes in mortgage access and default for different groups that would occur under different QRM guidelines, assuming that the QM guidelines are in place We use a unique nationally representative database on loan performance with borrower and neighborhood demographics information
Definitions QM proposal Full documentation, no negative amortization, no interest only, no balloon, no adjustable interest rates with fixed terms under 5 years, fee restrictions QRM proposals Downpayment= 3, 10, and 20% Debt to Income ratio (front-end)=28 and 30% FICO=660 and 690 Default 90+ days delinquent, in foreclosure or foreclosed - 2/11
Loan Performance for Different Loan Market Segments Market Segment Number of Loans Percent Foreclosed Subprime conventional 1,988,800 29.7 Alt-A conventional 589,024 25.7 All loans 26,679,477 14.9 FHA/VA 2,126,801 13.0 Prime conventional 15,488,531 9.9 QM loans 5,213,617 8.9
Loans Foreclosed by Proposed QRM Guidelines Percent 90+ Days Delinquent or Foreclosed Upon (February 2011) 16 14 12 10 8 6 4 2 0 42
Exclusion from the QRM Market Disproportionately Impacts Minority Borrowers Percent of Loans Excluded 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 All White Black Hispanic Asian 43
Impacts on Access to Credit: Exclusion from the QRM Market by Income Percent of Loans Excluded 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 All Low Moderate Middle Upper 44
Marginal Reduction in the Number of Foreclosures Diminishing Returns from More Restrictive QRM LTV Requirements Marginal Percentage Point Reduction in Foreclosures 6 5 4 3 2 1 0 All White Black Hispanic Asian 3% Downpayment 10% Downpayment 20% Downpayment 45
Definition of Benefit - Cost Benefit= Percent reduction in the number of foreclosures ( benefit of more stringent QRM standards) Cost= Percent reduction in the number of borrowers who would have access to QRM mortgages ( cost of excluding borrowers) Benefit/Cost ratio A larger ratio would suggest that the proposed change provides greater marginal benefit than one with a smaller value.
Benefits and Costs of Different QRM LTV Guidelines by Race/Ethnicity 3 Ratio of Percent of Foreclosures Prevented Over Percent of Borrowers Excluded 2.5 2 1.5 1 0.5 0 All White Black Hispanic Asian 3% Downpayment 10% Downpayment 20% Downpayment
Benefits and Costs of Different QRM DTI Guidelines by Race/Ethnicity 1.100 1.080 Benefit Cost Ratio 1.060 1.040 1.020 1.000 0.980 All White Black Hispanic Asian QRM Product Loans < 30% DTI < 28% DTI
Benefits and Costs of Different QRM FICO Guidelines by Race/Ethnicity and Income 2.50 2.00 Benefit Cost Ratio 1.50 1.00 0.50 0.00 White Black Hispanic Asian Low Moderate Middle Upper Race/Ethnicity Borrow er Income FICO > 660 FICO > 690
Implications: Fixing the Foreclosure Mess Unfortunately, there is no silver bullet. " More than one foreclosure problem local differences matter" Do nothing. Let the market do what it does Green shoots " 15 million homeowners underwater nationally " House prices boomed because of subprime lending, without it, prices are unlikely to recover for many years" Short sales and principal reduction modifications are needed. Investors are already getting 50 cents per $1 when they foreclosed, why not reduce principal instead?" People continue to pay anyway" Moral hazard problem" Lease/purchase, shared appreciation option, other" Mortgage solution cannot fix unemployment (short/long term) " "
Implications: Looking to the Future More renters in the future. More quality affordable housing in viable neighborhoods will be needed" Homeownership is not for everybody; it is not a remedy or antidote for social ills, including financial insecurity" When done right, it can be a long term means of wealth creation " Done right means a fixed rate 30 year mortgage, appropriately underwritten, and serviced, and backed by secondary market " " We urge caution when defining QRM, disproportionate impacts of too restrictive guidelines may create dual markets which are not desirable. " Real solution to too big to fail problem still needed. GSE reform"
http://ccc.unc.edu 52