Addressing the Foreclosure Crisis
Mike Calhoun
Housing Assistance Council
Washington, DC December 3, 2008
http://www.responsiblelending.org
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.
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Unnecessary Losses: Most Homeowners
Sold 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.
http://www.responsiblelending.org
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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)
http://www.responsiblelending.org
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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))
http://www.responsiblelending.org
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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)
http://www.responsiblelending.org
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Racial Impact of Subprime Loans
Higher cost (subprime) 1st lien loans: 2005 HMDA Data
# of higher
cost loans
% of total loans
to group
African American
388,471
52%
Latino
375,889
40%
White
1,214,003
19%
http://www.responsiblelending.org
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Troubles Move Beyond Subprime
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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2nd Wave – Alt-A and Option ARMs
http://www.responsiblelending.org
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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)
http://www.responsiblelending.org
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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).
http://www.responsiblelending.org
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Within Rural Higher-Rate
 64.9% of all higher-rate were for refinance or
home improvement purposes (versus 59.1% in
urban areas).
http://www.responsiblelending.org
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Rural Refinance Lending
by Race, Ethnicity, & Income
80
Higher Rate Share (%)
70
60
50
40
30
20
10
0
Low
Moderate
Middle
Upper
Relative Income
African American
Latino
http://www.responsiblelending.org
White
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Rural Purchase Lending
by Race, Ethnicity, & Income
Higher Rate Share (%)
60
50
40
30
20
10
0
Low
Moderate
Middle
Upper
Relative Income
African American
Latino
White
http://www.responsiblelending.org
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Foreclosures
 HUD delinquency estimates show a 4.8%
foreclosure rate for both rural and urban homes
between 1/07 and 7/08.
http://www.responsiblelending.org
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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.
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Impact On Consumer Finances
http://www.responsiblelending.org
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http://www.responsiblelending.org
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Current Policy Responses
 Voluntary Loan Modifications
 Hope for Homeowners Program
 Emergency Economic Stabilization Act of 2008
 Funds for recycling of foreclosed properties
http://www.responsiblelending.org
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Existing Obstacles to Voluntary Modifications
 Insufficient Servicer Staffing
 Misaligned Financial Incentives for
Servicers
 Fear of Investor Lawsuits
 Pooling and Servicing Agreement
Limitations
 Second Mortgages
http://www.responsiblelending.org
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Additional Policy Responses
 Foreclosure Deferment
 Required Loss-mitigation efforts
 Court-supervised Loan
Modifications
 Additional Consumer Protections
http://www.responsiblelending.org
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Family Wealth Creation
 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.
http://www.responsiblelending.org
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Lease-Purchase Program
Goals
 Neighborhood Goals
 Minimize cost of foreclosures and vacant homes
 Turn foreclosures into wealth building assets for lowincome 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
http://www.responsiblelending.org
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Lease-Purchase Pilot Structure
Funding Strategy
Neighborhood
Redevelopment
Loan
Servicers
Bulk
Purchase
REOs
Local
Non-profit
Developer
Acquisition
Rehab
CRA/PRI
Lease to buy
mortgage
5% Loss
Reserve
Capital
Funding
SECM
Purchase
Financing Structure
Self-Help
Sell mortgage
w/ credit
enhancement
Fannie
Mae
Local Bank
Foreclosed
Properties
Purchase
Mortgage
Long-term
Resale
Affordable Lease to buy
rentals
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Lease-Purchase Critical Issues
WealthBuilding Asset
Vacant REO
Neighborhood &
Property Selection
• Find location where
economics work (or
subsidy is there) and
capacity exists
• Price/market stability
• Volume/efficiency
• Selectivity
Acquisition/Rehab
• Acquisition
strategy (bulk
vs. retail)
• Capacity
• Financing
• Costs
Program/Asset
Management
• Broad skill set
(counseling,
asset & prop
mgmt.)
• Value proposition
for nonprofit
• Counterparty risk
http://www.responsiblelending.org
Tenant
Assumption &
Beyond
• Is assumption a value
proposition for tenant?
• Qualifying tenants
• Turnover capacity of
nonprofit
• L-P loan performance
unknown – 5% risk
capital for SHVF
31
Peachtree Hills –
Foreclosure Distribution
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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.
http://www.responsiblelending.org
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