addressing the foreclosure crisis mike calhoun

http://www.responsiblelending.org

Addressing the Foreclosure Crisis

Mike Calhoun

Housing Assistance CouncilWashington, DC December 3, 2008

http://www.responsiblelending.org 22

Center for Responsible Lending

Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Affiliated with Self-Help, one of the nation’s largest community development financial institutions. Over $5 billion of financing to 55,000 low-wealth

families, small businesses and non-profits.


CHRONOLOGY OF THE CRISIS

Unsustainable mortgage products and practices A lending bubble that inflated the housing bubble Securitization of these loans into AAA securities

and derivatives Leverage of investments that amplified gains and

risks Loss of market confidence Deleveraging as asset values fall Foreclosures creating more downward home

values


The Products That Got Us Into this Mess: Subprime Home Loan Traits

Typically hybrid ARMs with built-in payment shock Most carry large prepayment penalties for refi prior to first

interest rate adjustment No escrows for taxes or insurance – prompts further refis Typically refinance loans Typically broker-originated Up-front fees far higher than in prime market Debt-to-income ratios can rise as high as 55% Underwritten to introductory rate – no expectation that

borrower could afford the loan after rate adjustment


Unnecessary Losses: Most HomeownersSold SP Loans Qualified for Better Loans

A Wall Street Journal Study found that 60% of borrowers who received SP loans in 2006 had credit scores high enough to qualify for prime loans.

Even those who did not qualify for prime loans could have received 30 year fixed rate SP loans with payments similar to and often lower than the exotic arm loan they received.


Chairman Bernanke’s Conclusion

Fed. Reserve Chairman Ben Bernanke:

“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

(July 14, 2008 Statement) (www.federalreserve.gov/newsevents/press/bcreg/bernankeregz20080714.htm)


How did this happen?Market Incentives

“The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford.” (Alan Greenspan to Newsweek, “The Oracle Reveals All,” (9/24/2007) pp.32-3)

Yield Spread Premiums – paying brokers to put borrowers into loans with higher rates than they qualify for.

“The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans … What would you do?”(CEO of Ownit Mortgage to The New York Times (1/26/2007) pp. C1, C4.

Why would lenders make these loans? “Because investors continued to buy the loans.” (Mortgage Bankers Ass’n Chief Economist to CNN Money.com (2/20/2008))


WHAT’S COMING?Current Foreclosure Forecasts – Subprime

2 million homeowners with subprime mortgages will lose their homes to foreclosure, most by year-end 2009.

This is in addition to the 700,000 homes with subprime loans currently in foreclosure or REO.

(Source: Credit Suisse, Foreclosure Trends 4/23/08)


# of higher % of total loans cost loans to group

African American 388,471 52%

Latino 375,889 40%

White 1,214,003 19%

Higher cost (subprime) 1st lien loans: 2005 HMDA Data

Racial Impact of Subprime Loans


Troubles Move Beyond Subprime


Alt-A Loans

Made to credit-worthy borrowers with some element of added risk, e.g.:

Reduced borrower income and asset documentation

Debt-to-income ratios above Fannie/Freddie guidelines

Credit history with some problems (e.g., low scores or delinquencies, but no recent charge-offs or bankruptcy)

High loan-to-value ratios


Next Wave of Foreclosures: Payment Option ARMs

Affords low monthly payments by allowing borrowers several payment options each month

75% of POARM borrowers make lowest payment based on low teaser rate in effect for 1 month or 1 day includes no principal and less than all of interest owed

Interest shortfall is added to loan balance After 5 years, or when loan balance hits 115% of

original loan, payments sharply increase Eligibility often was based on initial low payment


2nd Wave – Alt-A and Option ARMs


Foreclosure Forecast – Total Market

6.5 million of all mortgage loans will fall into foreclosure over next 5 years (includes 1.2 million currently in foreclosure or REO).

For the market as a whole, 1 out of every 8 homeowners who currently has a mortgage will lose the home to foreclosure.

(Source: Credit Suisse, Foreclosure Trends 4/23/08)


Rural Patterns

5.2% of all lower-rate loans were rural (i.e., outside MSAs).

7.6% of all higher-rate loans were rural.

36% of all rural loans were higher-rate (contrasting with 27% of urban loans).


Within Rural Higher-Rate

64.9% of all higher-rate were for refinance or home improvement purposes (versus 59.1% in urban areas).


Rural Refinance Lending by Race, Ethnicity, & Income

0

10

20

30

40

50

60

70

80

Low Moderate Middle Upper

Relative Income

Hig

he

r R

ate

Sh

are

(%

)

African American Latino White


Rural Purchase Lending by Race, Ethnicity, & Income

0

10

20

30

40

50

60

Low Moderate Middle Upper

Relative Income

Hig

he

r R

ate

Sh

are

(%

)

African American Latino White


Foreclosures

HUD delinquency estimates show a 4.8% foreclosure rate for both rural and urban homes between 1/07 and 7/08.


Ever Increasing Leverage

Mortgage Backed Securities (MBS) are securities backed by pools of mortgages.

Collateralized Mortgage Obligations (CMOs) are securities backed by pools of MBS, and are often highly leveraged.

Some CMOs are backed by pools of CMOs.


Foreclosure’s Vicious Cycle

Home price declines lead to foreclosures

Foreclosures flood already oversaturated home market with more inventory, depressing home prices further, and leading to even more foreclosures

21


Impact On Consumer Finances


Current Policy Responses

Voluntary Loan Modifications

Hope for Homeowners Program

Emergency Economic Stabilization Act of 2008

Funds for recycling of foreclosed properties


Existing Obstacles to Voluntary Modifications

Insufficient Servicer Staffing Misaligned Financial Incentives for

Servicers Fear of Investor Lawsuits Pooling and Servicing Agreement

Limitations Second Mortgages


Additional Policy Responses

Foreclosure Deferment Required Loss-mitigation efforts Court-supervised Loan

Modifications Additional Consumer Protections


3% downpayment with 3% HPA gives annual return of 100% on LMI family investment.

Only leveraged asset strategy for many LMI families. As of 12/31/07, median equity growth of $30,897 per

family -- current market could eliminate completely. LMI families seeking new homeownership should be

encouraged to rent and save for next two years in areas where price declines are likely.

Family Wealth Creation


Lease-Purchase Program Goals

Neighborhood Goals Minimize cost of foreclosures and vacant homes

Turn foreclosures into wealth building assets for low-income families and communities

Household Goals Provide path to homeownership for first-time

homebuyers and credit-impaired homeowners

Program Path Test multiple pilots (Charlotte & Chicago initially),

then pursue scalability


Financing Structure

Local Bank

Self-HelpFannie

MaeSell mortgage

w/ credit

enhancement

SECM

Purchase

Lease to buy

mortgage

Purchase

Mortgage

Funding Strategy

Acquisition

Rehab

CRA/PRI

5% Loss

Reserve

Capital

Funding

Local

Non-profit

Developer

Neighborhood

Redevelopment

Lease to buy

Long-term

Affordable

rentals

Resale

Loan

Servicers

Foreclosed

Properties

Bulk

Purchase

REOs

Open Marke

t

Purchase

s

Lease-Purchase Pilot Structure


Lease-Purchase Mortgage Program

Variation on Self-Help/Fannie Program (30-yr fixed) Initial borrower is local nonprofit partner Self-Help recourse in place of individual qualification Target for tenant to purchase home and assume loan within

5 years Tenant lease payments cover mortgage and operating expense

during rental period (and will not exceed FMR) Tenants screened for affordability at origination Affordability and credit capacity evaluated at assumption Credit and homeownership counseling required


Lease-Purchase Critical Issues

Vacant REOWealth-Building Asset

• Find location where economics work (or subsidy is there) and capacity exists

• Price/market stability• Volume/efficiency• Selectivity

• Acquisition strategy (bulk vs. retail)

• Capacity• Financing• Costs

• Broad skill set (counseling, asset & prop mgmt.)

• Value proposition for nonprofit

• Counterparty risk

• Is assumption a value proposition for tenant?

• Qualifying tenants• Turnover capacity of

nonprofit• L-P loan performance

unknown – 5% risk capital for SHVF

Neighborhood &

Property SelectionAcquisition/Rehab Program/Asset

ManagementTenant Assumption & Beyond


Peachtree Hills – Foreclosure Distribution


Supportive Services

• Homebuyer counseling services• Neighborhood liaison/organizing and work with HOA• Community policing• Code enforcement• Infrastructure improvements• Landscaping upgrades• Attention to solid waste and general clean up• Funds to support rehab of homes and future homebuyer

down payment assistance


Conclusion

2 to 6 million completed foreclosures will occur from 2007 through 2012.

$400 billion minimum of vacant properties to be redeployed or torn down.

One option is to match vacant properties with families that can lease-purchase, but are not qualified to purchase today.

$10 billion investment could leverage $100 billion of lease-purchase redeployment (500,000 units).

Public sector investment will occur because the spillover neighborhood costs will be devastating.

addressing the foreclosure crisis mike calhoun

Documents