Plutocracy Talks, Democracy Walks

The highly divided Congress is providing futile ground for plutocracy, a country dominated and effectively ruled by a tiny wealthy elite. The bipartisan budget bill just passed significantly raises the contribution limits to political parties and weakens an important safety and soundness protection against recklessness in the financial industry.

The first harmful provision, the relaxation of campaign limits, is far easier to explain. A donor’s contribution to one of the political parties had been limited to $97,200. Under the bill, the donor can now contribute an incredible $777,600. This only increases the political influence of the rich and powerful, who will now be listened to even more intently when they call members of Congress and ask for a loosening of consumer protections and financial safeguards.

Phone calling brings us to the second harmful provision. Mr. Jamie Dimon, the head of JP Morgan Chase, reportedly called members of Congress urging them to relax an important safeguard in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Section 716 of the Dodd-Frank law requires banks that engage in complex and risky derivatives and swaps activities to place those activities in affiliates that do not have access to federal deposit insurance. This firewall ensures that U.S. taxpayers are not exposed to bailing out banks when derivatives and swaps result in large losses.

But Mr. Dimon and his big bank allies succeeded in getting this push-out of swaps and derivatives to be repealed. In other words, bank affiliates engaging in these activities can now be covered by federal deposit insurance. This is a profit maximizing strategy: the cost of raising funds for these risky and complex activities will be lowered since these activities are now covered by federal deposit insurance.

Simon Johnson, a MIT economist and big bank critic, says that the change would affect a small portion of derivatives and adds that, “I don’t want to make a mountain out of a molehill on this,” but added that “on a forward-looking basis this could become very big”.

The impact of this new rule depends on the riskiness of new swaps instruments invented by the financial industry. One type of swap that made large financial firms insolvent during the financial crisis was called the credit default swap. In particular, the giant financial firm, AIG, provided credit default swaps (CDS) to investors who purchased subprime mortgage-backed securities (as long as borrowers of subprime loans paid their loans on time, investors of mortgage-backed securities got paid). CDS was akin to insurance. In the event that borrowers of subprime loans defaulted en masse, AIG would reimburse the investors.

AIG made a horrendous bet, writing $79 billion of CDS protection. Because subprime loans were poorly underwritten, borrowers defaulted en masse. As the storm clouds were gathering and defaults were mounting, a senior AIG official maintained on an investor call, that “it is hard for us, without being flippant, to even imagine a scenario within any kind of realm or reason that would see us losing $1 in any of these transactions.”

Similarly one of bank regulatory agencies, the now defunct Office of Thrift Supervision (OTS), was just as clueless as some of AIG officials. Former OTS Director John Reich said the OTS was no match for AIG, could not understand AIG’s operations, and the OTS was like “a gnat on an elephant” when it came to controlling AIG.

The rest is history. AIG was so interconnected with the rest of the financial industry that the federal government bailed out AIG to the tune of $182 billion. The choice was a bailout or a depression worse than the Great Recession.

In order to prevent a repeat of the financial crisis, the Dodd-Frank law required new standards and safeguards to avoid the poor underwriting and tricks and traps of abusive subprime loans. In the short to medium term, it is unlikely that a predatory lending industry will use the banks to write CDS like AIG did since abusive loan terms and conditions are now outlawed. However, new tricks and traps can be invented by an industry ravenous for profits. And it is just too risky to place these risky activities in the reach of federal deposit insurance.

Leading the opposition to the budget bill, Senator Elizabeth Warren stated that “A vote for this bill is a vote for future taxpayer bailouts of Wall Street. When the next bailout comes, a lot of people will look back to this vote to see who was responsible.”

Reflecting on the relaxed contribution limits and the repeal of Section 716, Rep. Chris Van Hollen said, “Putting these two things in the same bill illustrates everything that is wrong with the political process right now: a giveaway to the special interests and then providing them with the ability to more easily finance the process.”

The plutocrats are now emboldened in the divisive atmosphere in Capital Hill. Wait until the 11th hour in difficult budget negotiation when there is no time for reflection and public hearings on complex, arcane, but important financial legal and regulatory issues. Then slip in a major change to financial and consumer protection laws. Today it was Section 716. Tomorrow it might be other parts of Dodd-Frank such as the Consumer Financial Protection Bureau.

The plutocrats are resurgent. To prevent them from laughing all the way to the bank while the common folk pay the bill, a re-energized grassroots holding the elected officials accountable is our only hope.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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Data Drives The Movement

So now that we have thoroughly demolished HelloWallet’s assertion that homeownership does not pay off for most families, how do we document who is becoming a homeowner? It is the publicly available data on lending that enables us to figure out whether the American Dream is reaching traditionally underserved communities including modest income and minority households.

In 1975, Congress passed the Home Mortgage Disclosure Act (HMDA). The purposes of HMDA are to determine whether lending institutions are meeting community credit needs, to enforce the nation’s anti-discrimination laws, and to direct public sector investment to areas in need. Using publicly available data, stakeholders can work together to help banks make loans in areas experiencing credit shortages.

Two quotes can help further explain the power of data:

John Taylor, President and CEO of the National Community Reinvestment Coalition (http://www.ncrc.org) and my former employer, is fond of saying, “Data drives the movement for economic justice.”

Former Supreme Court Justice Louis Brandeis stated that “sunlight can be the best disinfectant and the electric light, the best policeman.”

As these quotes indicate, data sheds lights on disparities, injustices, and credit gaps and thus enables actors whether through litigation or voluntary action to address the disparities and credit gaps. Department of Justice settlements over discrimination in lending have used HMDA data to document disparities in lending or price discrimination. In other cases, lending institutions want to do the right thing but need help from nonprofit homeownership counseling agencies and other community based organizations to make loans to neighborhoods experiencing shortages in credit.

To provide a taste of the power of the data, a recent Federal Reserve analysis reveals that African-American borrowers in 2013 received just 4.8 percent of all home purchase loans, down from 8.7 percent in 2006. Just this one statistic can prompt several public conversations about the causes for this decline and possible remedies.

In the wake of the financial crisis, sympathetic members of Congress understood that the veil of secrecy during the bubble years hid scores of traps and tricks by predatory lenders. Simply put, unscrupulous lenders will engage in unfair and deceptive lending practices if they think that these practices will remain undetected by the public or the regulatory agencies.

During Congressional hearings in 2007, I was astonished when witnessing regulatory officials testifying that the “contagion” would be “contained within subprime lending” and would not infect the marketplace as a whole. They were either lying or did not have the data on how many loans were “liar” loans in which borrower income was not documented or how many loans had low “teaser” rates that would rapidly adjust upwards in a few years. I will engage in naïve optimism and assert that the agencies lacked the data to detect the widespread nature of these harmful lending practices.

This shortfall in data prompted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to mandate several improvements to HMDA data. The new Consumer Financial Protection Bureau (CFPB) is to collect information on prices for all loans, information on whether the loans were fixed or had adjustable rates, the home value (so data users could calculate loan to value ratios), and creditworthiness information. While it took the CFPB longer than advocates wanted, the CFPB proposed HMDA improvements this fall that were not only true to Dodd-Frank but that exceeded Dodd-Frank requirements in important ways. For example, the CFPB proposed collecting information on additional types of loans such as reverse mortgages and home equity lines of credit – two types of loan products that lenders abused during the crisis. In addition, the CFPB is proposing additional information on loan terms and conditions such as debt-to-income ratios.

Put all of this together, and the public will have much better data on whether lending is safe and sound and is effectively reaching traditionally underserved communities. There is the predicted outcry from some lending institutions that this data collection is burdensome and that they will cease mortgage lending if forced to collect the new data. Other lenders understand the value of this data in helping them figure out how to be more competitive in the marketplace.

Indeed, a marketplace will only be efficient and equitable if it is transparent. Instead of bankrupting lenders, better data bolsters the competiveness of responsible lenders and ultimately roots out the unscrupulous ones. Indeed, the “electric light or sunlight” of data empowers community organizations, regulatory agencies, and other actors to make the lending marketplace fairer. We will keep you updated of the CFPB’s progress in implementing the new data requirements and opportunities for weighing in with the agency.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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The Banks Are Back At It

Here we go again! Banks are back at it, crying foul to new regulations, in return telling some of their largest clients to take their money elsewhere, or be slapped with huge fees. The large financial institutions, including J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp, have stated that the new regulations have made some of these deposits less profitable. For most banks, deposits have been the usual catalyst for driving growth: more deposits allow banks to loan out more money and bring in more profits. However, with tighter regulations and a smaller amount of loans being generated, banks are beginning to see large deposits as dead weight. This mindset has led to these decisions, decisions that have taken a turn away from some of the fundamental principles and actions typically associated with banking. First and foremost, deposits have usually been seen as the key driver for banks since there is a lower interest rate on money kept in-house and then loans can be made at a higher interest rate. The new rules given by regulators to make our financial systems safer require more cash on-hand so that banks are more resistant to shocks like those seen during the financial crisis of 2008. Many banks feel as if these regulations carry too much liability.

Historically, banks’ fundamental purpose was to serve the credit and banking needs of local communities. While things have changed such as the services offered or the speed of these services, the principle responsibility still remains. Banks put a community’s surplus funds (deposits and investments) to work by lending to people to buy homes and cars, to start and expand businesses, to put their children through college, and for countless other purposes. While times have changed, the central focus shouldn’t. We must develop comprehensive strategies that allow maximum community development, while ensuring our communities are safe guarded from predatory practices or financial crises.

Last week, the Community Development Amendment Act of 2013 passed the District Council; this bill encourages banks who do business with the District to make plans to meet the banking needs of all District residents. There will be a chance for the public to weigh in on banks’ plans and progress once implementation begins in early 2016. We hope for good faith banking partners in the District and a chance to champion improved banking services and products for District residents and neighborhoods that need it the most.

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Hellowallet vs. Homeownership: Part 2

The week before Thanksgiving, we critiqued a recent study from HelloWallet which asserted that the benefits of homeownership were dubious at best for about half of the current homeowners in the country. Better to rent and invest in the stock market, advised HelloWallet. We reviewed a series of studies concluding that homeowners accumulated more wealth than renters, directly contrary to HelloWallet’s major thesis. HelloWallet’s assertions wilt even further when considering the community-wide benefits of homeownership.

If you want to examine the community benefits of homeownership, a good place to start is Rohe and Lindblad’s Reexamining the Social Benefits of Homeownership after the Housing Crisis. In economic terms, a house will have a “positive externality” if actions of a homeowner benefit others in a neighborhood. A homeowner has a big stake in his or her success and will work hard to maintain and improve his or her property. Rohe and Linblad cite studies finding that homeowner units are of higher quality and physical condition than rental units. Homeowners’ maintenance efforts not only benefit themselves but their neighbors as well through property value increases.

In addition, the commitment of a homeowner results in owners living longer in their current housing units than renters. Rohe and Linblad finds that this helps their children do better in school because their schooling is not being disrupted as often by switches to new schools. Again, this not only benefits the individual homeowners but neighbors as well since the schools will have more motivated and successful learners. Finally, Rohe and Linblad find that homeowners are more engaged in neighborhood organizations than renters and have a higher level of trust and cohesion with their neighbors.

These benefits accrue to low- and moderate-income neighborhoods as well as middle-income ones. A 2003 study by two researchers with the University of Maryland examine the impacts of new homes constructed or rehabilitated by community development corporations (CDCs) in Cleveland.  After controlling for economic, demographic, and housing characteristics, the researchers find that the housing developed by the CDCs increased surrounding home values at the zip code level. Likewise, Higgins finds that homes developed by nonprofit developers increased home values in formerly distressed neighborhoods in cities like Seattle.

Manna is committed to providing homeownership opportunities to low- and moderate-income households and using homeownership as a neighborhood development strategy. Rohe and Linblad state that many of the most recent studies were nevertheless conducted before the worst years of the foreclosure crisis so that updated work is needed to assess whether the benefits of homeownership remain in the years after the crisis.

While Manna believes that homeownership remains beneficial, we will be rigorously testing this proposition in the months ahead to see if homeownership remained beneficial during and after the crisis for owners of units Manna developed. In the meantime, the large body of evidence appears arrayed against the glib conclusions of HelloWallet which wants most of us to rent and invest. To which I answer, take two scenarios – a block in which the homes are owned by families or a block in which the homes were foreclosures and scooped up by hedge fund investors that are renting them out. Which block will have homes that are in better condition and neighbors that are more committed to their community? I know which neighborhood I would live in.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

 

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Giving Rapid Re-housing A Boost

Just a few years ago, McDowell and her young son had no choice but to sleep squeezed together in an easy chair at a friend’s apartment. A recent Washington Post story tells the story of Belle McDowell, a former recieptient of District rapid rehousing benefits. She had lost her job, then her apartment. She found a new two-bedroom apartment through the city’s rapid rehousing program, which heavily subsidized her rent for a year before forcing her to make it on her own. She found a job as a staff assistant that paid enough for her to afford the rent. The program places families in apartments and subsidizes their rents for up to a year, at which point they are expected to pay the market rate. The day after McDowell’s subsidy was cut off, she remembered walking to the bus to pick her son up from school when her phone rang. She had applied to over 500 jobs but they either did not pay enough or were too far away. The call was from another city agency that was looking for a staff assistant. She didn’t apply for the job, but a friend of her case manager passed along her résumé. At $37,000, her paycheck was less than what she made before but was enough to start footing the rent. Still, she felt unsafe raising a son alone in that chaotic apartment complex. Desperate, she tried to come up with a solution. She needed to pay off the debt she had from the three months she was unemployed and not paying rent. She searched the newspapers and Craigslist but found no other affordable option in the city. It took two months for someone to agree, but eventually the owner of a three-bedroom home on a quiet street in Congress Heights agreed to charge her $1,000 each month. In her new home, McDowell has finally paid off the $1,900 she owed her previous landlord. She still owes her old landlord $5,000, but she said her budget is so strapped that she tries not to think about it. They are still struggling, but her self-motivation and faith makes her believe that she can do it if she just keeps trying. While McDowell was fortunate enough to overcome many of her circumstances, many at-risk District residents aren’t as lucky. One of the major issues is the abrupt end many recipients face concerning their subsidies. McDowell states that she would be in a much better place if the program would have lasted a little longer so she could at least dig herself out of the $5000 debt she owed her previous landlord. The city must continue to support all its housing support options to truly put together comprehensive housing strategies. Programs like Rapid Rehousing, Local Rent Supplement Program, or even the Home Purchase Assistance Program, take great steps towards building stable individuals and families.

 

 

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Successes for Affordable

It’s a rough time to be a young adult. Many people in their late 20s and early 30s are a bit behind earlier generations when it comes to buying their first home. Many are in debt, unemployed, and living in the basement of their parent’s house. They are taking their time and trying to find some sort of financial footing before they are settling into a new home. Renting a home is about 40% more expensive than purchasing a home which means that buying a home in many areas is relatively affordable, especially in the post-recession market. Moreover, many programs help people find lower down payments which in turn allows for first time homeowners to be able to take advantage of the lower market by making a reasonable down payment. Sadly, not everyone has access to these programs, which is causing many first timers to stay away from homeownership. With affordable housing supply in the District being very limited, this has created a perfect storm of turmoil for District millennials; these problems need to be fixed quickly.

While there is no quick fix to the many systemic issues fueling this problem, the District has several programs in place to help combat these inequities and in recent weeks several pieces of legislation have been passed to strengthen these efforts. Two of those bills being the Affordable Homeownership Preservation and Equity Accumulation Act of 2013 and The Housing Production Baseline Funding Act.

The District has a pot of money called the Housing Production Trust Fund which it uses to help develop affordable housing, including ownership housing. With this assistance come covenants and resale restrictions that often hamper more affordable ownership development and trap homeowners in financially unsustainable situations. The Affordable Homeownership Preservation & Equity Accumulation Act of 2013 reduces these covenants in distressed parts of the city, while providing a recycle and recapture model to return all city subsidies to the Housing Production Trust fund for more affordable development. The Trust Fund Baseline Funding Act simply realizes that the Trust Fund services a great need, and funding it annually with at least $100 million dollars is needed to keep addressing these needs. In addition to these efforts, there are other amazing programs like HPAP (Home Purchase Assistance Program) and LRSP (Local Rent Supplement Program) that are there to assist District residents reduce their monthly housing costs.

With assistance from the Housing Production Trust Fund and similar subsidy/loan programs, Manna has been able to build over 1,200 units of affordability, generating over $60 million in equity for District families – steps being taken in the right direction.

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Hellowallet vs. Homeownership

Homeownership has been knocked around lately. Mutterings have been heard suggesting that low- and moderate-income people would be better off renting. A more outlandish claim uttered by some is that the reckless lending of the mid 2000s was not really reckless but “predatory borrowing” or consumers irresponsibly stretching their budgets and buying homes that were too large and extravagant.

Now comes along a new study by HelloWallet called a “House of Cards: The Misunderstood Consumer Finance of Homeownership”. HelloWallet describes its mission as democratizing financial advice and claims that 80 percent of Americans lack access to financial advice. According to its website, HelloWallet makes software that helps employers and employees work together to make financial decisions for employees.

HelloWallet’s study finds that more than one half of current homeowners, or 40 million homeowners, would have been better off financially by renting and investing. And the investing should include 401 (k) or Individual Retirement Accounts (IRAs).  Hmm…if these millions of homeowners would rent, who would be their financial advisor?

HelloWallet runs a simulation for consumers across the country. For households, would they be better off renting or home owning? In the simulation, the net benefit of buying is the value of the home plus the tax advantage of owning minus mortgage debt and property taxes. If the monthly payments of owning a home is cheaper than renting, the savings is invested according to HelloWallet’s model. For renting, the net benefit is savings invested if cases where the monthly rent is cheaper than mortgage costs.

The methodology makes some sense in the abstract but then the reader does not see actual numbers for each variable but rather several assumptions about each variable. In addition, the assumptions likely add up to a model with poor predictive power. For example, the report assumes a down payment of 20 percent. However, several Manna home purchasers benefited from low down payment programs. Since down payments are a major cost, the prevalence of low down payments for borrowers in nonprofit programs means that HelloWallet’s down payment assumption will often produce incorrect conclusions for borrowers in nonprofit programs.

Another significant shortcoming with HelloWallet’s model is that it operates at a highly aggregated or national level and cannot account for localized variables. The duration of homeownership, the timing of home purchase, the particular neighborhood in which the home is located, and the terms of financing (responsible or abusive high interest rate loans) are all key factors determining the net benefits of homeownership. Some of these variables are talked about in a general way in HelloWallet’s paper but other variables are missed completely such as the terms of financing.

For Manna and other nonprofits, two key variables are the duration of homeownership and terms of financing. The longer a household remains a homeowner, the more likely the homeowner will benefit from homeownership. Nonprofits offering post purchase counseling are able to assist owners experiencing temporary crisis and help them maintain homeownership. Nonprofits can also guide borrowers through the lending process, making sure that they receive responsible and affordable loans.

Christopher Herbert and his colleagues at the Joint Center for Housing Studies at Harvard released a paper in September of 2013 that reviewed several studies concerning the benefits of homeownership. An informative discussion in the paper focusses on the difference between simulations like HelloWallet’s study and research based on survey data. Simulations often conclude that renting is better than homeownership because of the assumption that renters will invest every last drop of their savings in astute investment vehicles. In reality, however, most renters will not save and invest like crazy; instead, it is the chance to own a home that induces savings for a down payment.

Herbert and colleagues review several survey studies concluding that homeownership is beneficial for minorities and low- and moderate-income people. They then conduct their own econometric research, finding that even during the crisis from 1999 through 2009, homeownership enabled owners, including minorities and modest income owners, to accumulate equity.

It is true that homeownership is not for everyone and that is why Manna develops rental housing. And it is also true that homeownership’s tax benefits and the mortgage interest deduction is skewed to wealthy homeowners as HelloWallet asserts. Tax reform is in order. I would also agree with HelloWallet that people need to be careful using mortgage calculators when deciding whether to buy a home makes sense. These calculators often operate with incomplete data. Better to consult with a trusted advisor or reputable counselor. But the overall thrust of HelloWallet’s study was bombastic and self-serving. If done correctly, homeownership provides enormous benefits for minorities and modest income households.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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Another ViewPoint for sound underwriting

To quote the folksy President Ronald Reagan, “here we go again.” Conservative critics will never give up insisting that big government and Fannie Mae and Freddie Mac caused the housing crisis. The latest salvo was issued by Peter Wallison of the American Enterprise Institute in a recent column appearing in the New York Times entitled “Underwriting the Next Housing Crisis”[1]

These attacks must not be underestimated. What is at stake is whether low- and moderate-income people will be able to buy homes. An attack on Fannie Mae and Freddie Mac is an attack on housing finance as it has been practiced since the Great Depression. Neither Fannie Mae nor Freddie Mac make loans but buy loans from banks and enable banks to make more loans. By buying loans and selling loans to investors, Fannie Mae and Freddie Mac have played an essential role in increasing lending to modest income people by decreasing the risk held by banks and diversifying risk across the financial industry. In 1992, Congress insisted that Fannie Mae and Freddie Mac must have affordable housing goals or specific targets for financing loans made to low- and moderate-income people.

Wallison asserts that the government applied so much pressure on Fannie Mae and Freddie Mac to buy loans made to modest income people that “underwriting standards declined.”

Well, let us examine the evidence. The Office of the Comptroller of the Currency (OCC) conducts a quarterly survey of at least half of the mortgages outstanding in the United States and consistently finds lower delinquency rates for mortgages financed by Fannie Mae and Freddie Mac. The most recent survey looking at performance in March 2014 finds that the seriously delinquency rate was 1.3 percent for mortgages financed by Fannie Mae and Freddie Mac in contrast to an overall rate of 3.1 percent. High-interest rate subprime mortgages had a delinquency rate of 13 percent!

In a study published by the Federal Reserve Board, Avery and Brevoort conclude, “We find little evidence to support the view that either the Community Reinvestment Act (CRA) or the GSE goals (for Fannie Mae and Freddie Mac) caused excessive or less prudent lending than otherwise would have taken place.”[2]

When the Federal government imposes mandates on Fannie Mae, Freddie Mac, and the banks to serve modest income homebuyers, the government accompanies these requirements with safety and soundness regulation. The part of the industry that engaged in the reckless, high interest rate, subprime loans were mortgage companies and Wall Street investment firms that were not subjected to safety and soundness regulation. That is why the OCC consistently finds that loans, particularly high cost ones, not financed by Fannie Mae and Freddie Mac, have higher delinquency rates. And that is why the most sophisticated statistical analysis done by mainstream and reputable economists like Avery and Brevoort confirm the superior performance of Fannie, Freddie, and CRA-covered loans.

Finally, Wallison goes after low down payment lending as excessively risky, including such lending financed by Fannie Mae and Freddie Mac. Recent data analysis by the Urban Institute, however, finds little risk in low down payment lending.[3]

Contrary to Wallison’s assertions, new government regulations involving “qualified mortgages” and “risk retention” will not promote risky lending by permitting lower down payments. These new rules prohibit the worst practices of reckless subprime lending such as not documenting borrower incomes.

Before we listen to Wallison and needlessly curtail wealth building opportunities for modest income Americans, a little look at the data would be wise. And all the serious data analysis reveals that Wallison is an ideologue whose ideas would make it much harder for organizations like Manna to provide homeownership opportunities. But Wallison won’t quit: a book he wrote is coming out soon. When the book is released, use this blog as evidence for refuting it.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

 

 

 

 

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Sound Underwriting Please?

In Peter Wallison’s recent New York Times op-ed “Underwriting the Next Housing Crisis”, he makes broad and unsupported statements about the role of government in hurting the real estate and mortgage finance sector, including the assertion that “If the government got out of the way, would sound underwriting standards come back? History suggests yes.”

This opinion piece uses the issue of government enterprise support for lower down payments as a starting point for advocating fundamental restructuring of the mortgage industry.  The ‘free market’ advocates label all government involvement as market destroying, but fail to understand, or even to mention, the facts related to the well documented drivers of mortgage default risk and the strong history of government involvement providing superior management of those risks relative to ‘private sector’ management. There are significant factual examples of what mortgage lending and homeownership would look like without government ‘getting in the way’. Pre-FHA and Fannie Mae, the mortgage lending models required 20-30% down payment, used biased judgments on what constituted responsible credit, and ensured homeownership was only available to a select segment of the reasonably wealthy.  Those lenders did not fair very well in the Great Depression, and that led to government stepping in to provide backstop guaranty.

In the last 30 years we have cycles of melt downs driven by private, non-government involved or encouraged lending, each of which required substantial government bailouts:

-       The original “no doc” cycle of late 1980s, driven by deregulation of the savings and loan industry and aggressive market share pushes which led Citibank and others to relax quality controls and allow no-income verification on a broad basis, leading to significant losses and federal bailouts (at one point Citibank was effectively insolvent);

-       The ‘oil patch’ recession in the 1980s when the collapse in oil prices led to regional recession and to private lending evaporating in entire regions of the country due to the herd mentality of fear, where only Fannie Mae, Freddie Mac and FHA provided mortgage lending kept entire states’ economies from crashing – just like they provided to the country during the most recent crisis.

-       The credit risk underpricing of the late 1990s, when Wall Street derivative transactions for mortgage loans undercut the risk pricing of Fannie Mae and Freddie Mac, and then blew up along with the Long Term Capital Management and other risk pricing hedge funds, requiring Federal Reserve intervention to prevent market collapses.

-       The 2005-2008 subprime/alternative mortgage debacle has been documented as led by rating agencies and Wall Street mortgage structures that underestimated mortgage risk, and failed to perform any due diligence or quality control.

While nothing is perfect, history has shown that expanding opportunities for fully documented, lower income, lower down payment borrowers has never caused a systemic failure. Irresponsible and predatory lending outside of government involvement has consistently created the biggest failures and bailouts. Good underwriting and comprehensive education are the tools proven to work, even in the financial collapse, and represent the needed foundation for a sound housing market which supports average wealth home buyers. Following the housing crisis of 2008, instead of increasing community engagement and development, private and public players have reduced efforts to support responsible low down payment lending.  Playing the blame game serves political and ideological interests, but distracts from learning from the successful models and delays the housing and general economic recovery which so badly needs sustainable low down payment lending.

-Frank Demarais
General Manager, Manna Mortgage Co.

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An Absence of Community Development

Do you have a bank branch in your neighborhood? Do you use it to make deposits and shop for bank products? Do you talk to branch personnel about loans?

In Manna’s immediate neighborhood, we see a Bank of America and TD Bank branch on or near Rhode Island Avenue as we walk to and from work.

Bank branches are important anchors of commerce and business activity. Small businesses place thousands of dollars of deposits in branches on a weekly basis. Neighbors place deposits and take out money at ATMs and work with tellers on more complex transactions. When a bank closes a branch and pulls out, this sends a devastating message to a neighborhood. It says the bank has lost confidence in the neighborhood as a place to do profitable business. Without bank branches, a neighborhood will decay and deteriorate…businesses will find it harder to do business and residents will find it harder to get loans.

That’s why we must tell federal agencies that bank branches are important. The federal agencies oversee a law called the Community Reinvestment Act (CRA). CRA requires banks to serve the credit and banking needs of communities, particularly low- and moderate-income communities. Under CRA, three federal agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) evaluate bank performance in serving communities and give them a “grade” or rating in a publicly available report card called a CRA exam. You can look up a CRA exam on the internet for any bank in the country – go to http://www.ffiec.gov.

The three federal agencies are proposing changes to a document called the interagency CRA Question and Answer (Q&A) document that would diminish the importance of bank branches on CRA exams. Their idea is that alternative means of delivering bank services such as through the internet has become more prevalent. We at Manna believe that this elevation of alternative service delivery and the demotion of bank branches pose a big problem for low- and moderate-income communities. On a daily basis, we see many hard-working clients trying to get home purchase loans and understand banks. We provide hundreds of hours of counseling to clients. It is naïve to think that hard-working people who are not familiar with banking will use the internet to shop for bank products. They need in-person assistance…whether that is at nonprofits or at bank branches. It is hard enough for anyone to understand the plethora of loans and bank products – and that includes staff at Manna who have been doing this work for years!

Tell the regulators that bank branches are important and that the agencies should not diminish the weight of bank branches as a factor on CRA exams! You can comment by sending an email to: comments@fdic.gov and using the subject line CRA exam Q&A. And you can read Manna’s comments and others via https://www.fdic.gov/regulations/laws/federal/2014/2014-community_reinvestment.html. If you can, comment by Monday, November 10 – the official end date for comments.

Finally, the agencies are doing one good thing: they are saying that community input on CRA exams will receive more weight. Congratulate them on that! And tell us your stories about the importance of bank branches and what happens when they are not in neighborhoods.

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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