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A Solution to the Housing Crisis
November 6, 2008
The US housing market has witnessed a mortgage collapse unlike anything we’ve seen since the Great Depression. With housing foreclosures affecting neighborhoods around the country, many people are left wondering what went wrong, and how they can help support affordable housing solutions for people hardest hit by the crisis. The Center for Responsible Lending predicts that 2.2 million borrowers could lose homes through the end of 2009, with a loss of $164 billion in wealth.
Unfortunately, many pundits have adopted a “blame the victim” strategy, saying that low-income borrowers are to blame for getting in over their heads. These pundits ignore that many low-income borrowers have been victims of predatory lending, with unscrupulous lenders offering sub-prime mortgages, intentionally being unclear about the terms and potential for changes in fees and rates. Borrowers start out with low “teaser” interest rates, but then their loans shift to high interest rates after the introductory period, in addition to other costly hidden fees, prepayment penalties, and more.
The demographic hardest hit by predatory lending in the sub-prime market includes the elderly, women, and low- and moderate-income borrowers: the people who can least afford it. People of color in particular are receiving a disproportionately higher number of high-cost loans and in turn stand to lose substantial equity as a result of high debt payments. The Center for Responsible Lending reports that 53% of African-Americans and 42% of Latinos who bought homes in 2006 received a high-cost sub-prime loan, compared to only 22% of white borrowers.
The current crisis is not a consequence of bad borrowing, but of bad lending.
There are lenders such as Community Development Financial Institutions (CDFIs) who understand the right way to engage with underserved, low-income communities – and as a result their portfolios have remained strong, so far avoiding the crash that has harmed more conventional lenders. CDFIs lend to the same group of low- and moderate-income individuals who have suffered from predatory lending, but with some very important differences in their practices.
Lenders at CDFIs develop personal relationships with their borrowers and are familiar with the details of the local economy. They work to provide additional services to borrowers to ensure the success of those loans, such as foreclosure prevention counseling, financial training programs that educate borrowers on abusive lending practices, and legal advice. Their core mission is to build wealth in low-income communities, not strip wealth out.
If all lenders followed such guidelines; we would not be facing the crisis we have today.
For example, Self-Help Credit Union in Durham, North Carolina engages in direct home lending to qualified low-income borrowers and has a track record of 3,000 successful direct loans totaling more than $228 million. And Self-Help financed over $4 billion in loans through its secondary mortgage market programs—in which Self-Help purchases loans from partner banks and credit unions, and sells them to Fannie Mae, helping give liquidity to these partner institutions. (This program has not been affected by the recent government takeover of Fannie Mae.) To be eligible for this program, loans must meet responsible lending standards—meaning that no high-cost loans are included. This results in preserving home ownership opportunities for working-class Americans, particularly people of color.
People who choose to invest in institutions like Self- Help that offer fair and affordable alternatives to abusive predatory lending are promoting a positive solution to the growing foreclosure and mortgage crisis. Promoting affordable housing, and educating borrowers on how to manage their loans, allows low- and moderate-income populations an opportunity to build equity and eventually fuel the economy.
What’s more, community investors are doing well and doing good. Investors in CDFIs can expect a steady and reasonable return, running at about 3 – 5 percent per year. Community investing’s consistent success means that it is outperforming today's rollercoaster stock market (as it previously did during the dot.com collapse).
While our nation is in need of a sound regulatory framework to combat the crisis, it is clear that community investing is making positive impacts in low-income communities affected by the sub-prime mortgage crisis. You can become a community investor by opening a federally insured account at a community development bank or credit union. (To find a CDFI, visit www.communityinvest.org.)
Please contact Todd Larsen by email