Ocotber 6, 2008
Low-Income Market Not to Blame for Mortgage Crisis
by NeighborWorks CEO Kenneth D. Wade
Published Oct. 6, 2008, The Patriot Ledger
Recently television commentators, pundits and bloggers have started to blame lending under the Community Reinvestment Act (CRA) in part for the problems the mortgage and financial markets face today.
Nothing could be further from the truth and I’m surprised that anyone who has studied the good that has come to families and communities from the 31-year-old act would conclude differently.
The current financial crisis is not the result of the extension of credit to low-income and highly concentrated minority communities as urged by the CRA. The CRA was established in 1977 and “is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.”
Those markets can be served responsibly, without creating extraordinary risk for lenders. In fact, for 30 years, NeighborWorks organizations have helped provide mortgage credit to low-income communities with stellar results.
What some observers appear to have overlooked is that the current financial distress is a recent phenomenon created largely by institutions that are not subject to CRA requirements. Over the last several years, lending by mortgage bankers and other non-depository intermediaries has eclipsed the production of depository lenders, accounting for more than half of the mortgage loans originated over the past five years.
Additionally, a review of data provided by mortgage lenders pursuant to the Home Mortgage Disclosure Act reveals that lenders that are not subject to oversight by a federal banking agency (i.e. not subject to CRA) originated over half of the higher-priced conventional mortgage loans reported in 2005.
CRA did not push banks and other institutions to make loans to unqualified borrowers nor did it encourage them to relax underwriting criteria to the point where they failed consider a borrower’s capacity to repay the loan.
For more than three decades, CRA has encouraged the extension of credit to those with less than perfect credit histories. We know these borrowers can be successful homeowners.
A sample of NeighborWorks network-originated mortgages shows that these loans made primarily to lower income households, with average to below-average credit scores, have foreclosure rates significantly better than subprime. For example, according to the Mortgage Bankers Association, 4.26 percent of subprime loans began the foreclosure process in the second quarter this year.
In contrast, the foreclosure start rate for loans within the NeighborWorks network was just 0.21 percent! In fact, the NeighborWorks performance is better than the conventional market, which was reported by the MBA at 0.61 percent for the same period.
There are 13 NeighborWorks organizations in Massachusetts that have a tremendous track record of successfully serving the mortgage needs of low- and moderate income homebuyers – six are based in the Boston-metro area.
Borrowers who have access to traditional mortgage products combined with quality pre-purchase homeownership counseling and financial education, in fact, do just fine.
