Responses to the Foreclosure Crisis University of Iowa October 2008

Transcription

1 Responses to the Foreclosure Crisis University of Iowa October 2008 National Community Reinvestment Coalition

2 What is Abusive Lending Prime lending market rate lending to creditworthy borrowers Subprime lending high-cost lending to borrowers with imperfect credit Predatory lending higher interest rates and fees beyond what is necessary to compensate for added risk of lending to borrowers with credit imperfections. Unfair and deceptive practices could be prime Option ARM loans with teaser rates that increase dramatically & borrower was not told. Also violate fair lending laws. National Community Reinvestment Coalition

3 Risk Layering MBA 39% of loans were interest only or option ARM in 2006; 2% in % of brokers using low-doc say borrowers could not qualify under standard debt-to-income ratios; Only 60% subprime ARM loans are full doc; 75% of ARM subprime have prepay penalties; 41% DTI. (Fed loan perf data, March 08). On fixed rate subprime loans, higher LTVs & prepayment penalties correlated with defaults. Low doc loans had higher foreclosure rates (GAO, Oct 07) Subprime ARMs issued in 2005 & 06 performed worse tend to be high CLTVs & low-doc (Bernanke, 9/07) National Community Reinvestment Coalition

4 Resets Almost 2 million ARM loans will have interest rates re-setting in 2007 and 08 Frequency: from 4 th quarter 2007 until end of 2008, 400,000 loans reset; 200,000 per quarter in 2007 (Kroszner, November 07) In 2007, first reset of subprime loan from 7% to 9.5%, caused 25% to 30% increase in monthly payment (Kroszner). 33% of subprime loans to reset 3 rd qtr 09 already delinquent by May 08 (State Foreclosure Working Group, Sept 08) National Community Reinvestment Coalition

5 Control for Creditworthiness: Still More High Cost Loans in Minority Neighborhoods From NCRC s Broken Credit System Report National Community Reinvestment Coalition

6 Delinquencies 15% of Subprime ARMs 90 days delinquent or in foreclosure in July; triple rate of in 2005 Fed s Bernanke (Sept 07). At the end of 2007, more than one in five of the 3.6 million outstanding subprime ARMs were seriously delinquent, meaning they were either in foreclosure or ninety days or more past due (Bernanke at NCRC conference March 08) About 2.3% of prime loans 60 days past due in Feb. 08, highest level in a decade according to First American Loan Performance. 1.4% prime delinquencies one year ago (USA Today May 9, 08) National Community Reinvestment Coalition

7 Foreclosure Rates Foreclosure starts an average of 320,000 per quarter in 2007; 240,000 per quarter last two years (Kroszner, Nov 07). From 2ndQtr 05 to 2 nd Qtr 07, defaults & foreclosures increased 43% & 73%, respectively (GAO, Oct 07). 9 million outstanding ALT A and subprime loans owneroccupants. CBO estimates 2.8 million will enter foreclosure (May 08) First Quarter of % hike in foreclosure filings from 1 st quarter 07; 649,917 filings in 1 st qtr in 08. (RealtyTrac April 08) FDIC foreclosures doubled between 05 & 07, reaching 1.5 million in 07. Possible 2 million in 08. National Community Reinvestment Coalition

8 Consequences of Foreclosure Joint Economic Committee estimates 2 million subprime foreclosures from (Oct 07) 2 nd half of 07 through 09, $71 billion in housing wealth lost in foreclosure $32 billion lost via reduction in value of neighboring properties; $917 million lost in tax revenue National Community Reinvestment Coalition

9 Workouts Seven out of ten seriously delinquent borrowers not on track for loss mitigation. Number of borrowers in loss mit. Increased but so did delinquency (State Foreclosure Prevention Working Group, April 08) Now eight out of ten not on track for loss mitigation (State Foreclosure Group, Sept 08) Short sales increased; 21% of delinquent borrowers in Oct 07 able to remain in homes after loss mit., 16% in May 08 in homes (State Group, Sept 08) 9

10 NCRC s NHSF NCRC s National Homeownership Sustainability Fund Foreclosure Prevention & Mediation 17 States for Refinance Program incl. IL, OH, IN, WI Mediation Anywhere in United States Started in 2001 New Save the Block model 10

11 Types of Loss Mitigation in NHSF Refinance eliminates abusive terms such as prepay penalty exceeding time period beyond initial reset Loan modifications to reduce interest rate and/or margin Reducing principal, particularly when appraisal fraud results in upside down loan Loan counseling before loss mit & early intervention to avoid re-defaults 11

12 NHSF: 2004 & 2005 Most Cases in Sample 12

13 Majority of NHSF borrowers were African- Americans 13

14 Majority of NHSF borrowers were LMI Distribution of Cases by Income of Borrower Income of Borrower Number Percent less than $15, % $15,001-25, % $25,001-35, % $35,001-45, % $45,001-55, % $55,001-65, % $65,001-75, % $75,001-85, % Total % 14

15 NHSF Equity Savings Decreased average mortgage rate by 3.8 percentage points (from 9.38% to 6%) Save on average, $276.5 a month, $3,318 yearly, $100,000 over life of loan 5,000 NHSF customers, $500 million in equity saved. No foreclosures associated with NHSF loans 15

16 CRA Antidote to Foreclosure Crisis CRA requires banks to serve credit needs consistent with safety and soundness Federal Reserve research documents that banks made fewer risky loans than non-cra covered mortgage companies In 05, 34.3% of mort. companies conventional home purchase loans were high-cost; only 5% of bank loans in areas on CRA exams Banks also issued a lower percentage of highcost and piggyback loans than mortgage companies. 16

17 CRA & Foreclosure Prevention Foreclosure prevention counseling as a CD service Lending test credit for loan programs that relieve LMI borrowers from imminent foreclosures such as lowering rate Investments in funds providing foreclosure relief Evidence of illegal, predatory, and illegal lending, if widespread, can result in lower CRA ratings 17

18 Local Strategies to Use CRA City of Philadelphia Linked Deposit program & evaluate bank performance Cleveland CRA agreements San Diego and San Francisco programs motivated by CRA, for example, basic bank accounts Collaborate for foreclosure prevention programs 18

19 Community Group use of CRA Comments on CRA exams Comments on mergers CRA agreements Collaboration for housing counseling & foreclosure prevention 19

20 Grandma with an ARM National Community Reinvestment Coalition

21 Policy Solutions Increase Foreclosure Prevention Programs Modernize CRA A Real Rescue Program for Homeowners, not Bailout for Wall Street Anti-Predatory Legislation 21

22 Federal Rescue Program Emergency Economic Stabilization Act of 2008 no real mandate or authority to purchase troubled mortgages & rework them Hope for Homeowners FHA program, helpful but 400,000 not at scale needed NCRC HELP Now Proposal Purchase mortgages at discount (current market value), modify them & sell them back to private sector McCain Plan Purchase all outstanding principle, which is above current market value in many cases, end up subsidizing lenders 22

23 Simple Math for Rescue Program Rescue 2 million homeowners Give them $150,000 to pay off their mortgages. Could be a low or no interest loan..or 2 nd mortgages of much less may suffice in many cases The program costs $300 billion, less than half the $700 billion Why rescue individual homeowners several were victims also neighborhood, community, and national wealth endangered if no intervention 23

24 Wanted: Federal Legislation Consumer Protections No steering Broker fiduciary relationship with borrower Ability to Pay: PITI, maximum possible rate Verification of Income required Escrows for high cost loans 24 National Community Reinvestment Coalition

25 Desired Elements for Legislation Prohibition on prepayment penalties for subprime and 90 days before resets for ARM loans No financing points and fees in high-cost loans Prohibit Appraisal Fraud and servicing abuse Assignee liability that is hold Wall Street accountable 25 National Community Reinvestment Coalition

26 Legislation Pending Senator Chris Dodd S. 2452, Home Ownership Preservation and Protection Act of 2007 Rep. Barney Frank H.R. 3915, Mortgage Reform & Anti-Predatory Lending Act of 2007 Both offer comprehensive protections but prefer S which holds Wall Street accountable and does not preempt state law 26

27 Regulators Action Federal banking agencies non-traditional and subprime guidance; establishes standards such as basing ability to pay on fully indexed rate; discourages risk-layering Federal Reserve HOEPA changes still incomplete, underwrite for first seven years, secondary market liability limited Problem not comprehensive, applies to lenders, not directly to appraisers, servicers, brokers, secondary market Helpful but need a comprehensive national bill 27 National Community Reinvestment Coalition

28 Conclusion Multifaceted approach needed Foreclosure prevention a real rescue program Modernize CRA Use CRA National Anti-Predatory Lending Bill 28

29 The National Community Reinvestment Coalition The National Community Reinvestment Coalition (NCRC) is an association of more than 600 community-based organizations that promote access to basic banking services including credit and savings, to create and sustain affordable housing, job development and vibrant communities for America's working families. Our members include community reinvestment organizations, community development corporations, local and state government agencies, faith-based institutions, community organizing and civil rights groups, minority and women-owned business associations, local and social service providers from across the nation 29

30 For more information: National Community Reinvestment Coalition th Street, Suite 900 Washington, DC P: (202) F: (202)

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