[Senate Hearing 113-577]
[From the U.S. Government Publishing Office]
S. Hrg. 113-577
INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING ONGOING CHALLENGES AND DISPARITIES IN THE HOUSING MARKET AND
HOUSING FINANCE SYSTEM
__________
DECEMBER 9, 2014
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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______
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Housing, Transportation, and Community Development
ROBERT MENENDEZ, New Jersey, Chairman
JERRY MORAN, Kansas, Ranking Republican Member
JACK REED, Rhode Island BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio MARK KIRK, Illinois
JEFF MERKLEY, Oregon TOM COBURN, Oklahoma
JOE MANCHIN III, West Virginia DEAN HELLER, Nevada
ELIZABETH WARREN, Massachusetts RICHARD C. SHELBY, Alabama
HEIDI HEITKAMP, North Dakota
Brian Chernoff, Subcommittee Staff Director
William Ruder, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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TUESDAY, DECEMBER 9, 2014
Page
Opening statement of Chairman Menendez........................... 1
WITNESSES
Wayne T. Meyer, President, New Jersey Community Capital.......... 2
Prepared statement........................................... 23
Responses to written questions of:
Chairman Menendez........................................ 78
Mabel Guzman, 2014 Chair, Conventional Finance and Policy
Committee, National Association of Realtors.................... 4
Prepared statement........................................... 27
Responses to written questions of:
Chairman Menendez........................................ 83
Julia Gordon, Director of Housing Finance and Policy, Center for
American Progress.............................................. 6
Prepared statement........................................... 53
Deborah Goldberg, Special Project Director, National Fair Housing
Alliance....................................................... 8
Prepared statement........................................... 69
Responses to written questions of:
Chairman Menendez........................................ 85
(iii)
INEQUALITY, OPPORTUNITY, AND THE HOUSING MARKET
----------
TUESDAY, DECEMBER 9, 2014
U.S. Senate,
Subcommittee on Housing, Transportation, and
Community Development,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 11:20 a.m., in room 538, Dirksen
Senate Office Building, Hon. Robert Menendez, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. This hearing will come to order. Let me
apologize to our witnesses and to our audience. We had votes
taking place, so we are starting a little later.
The housing market was at the epicenter of the financial
crisis and the Great Recession that followed. Lenders entered
into risky and unsafe mortgages with bars which were packaged
and sold to investors, all with a view that housing prices
would keep bubbling upward. When prices stopped rising and the
bubble popped, the devastation was broad for families,
businesses, communities, and our financial system and economy.
Today, the housing market, much like our economy, is
rebounding, but important challenges still remain. The number
of households in foreclosure has fallen from its peak, but it
still exceeds 600,000 nationwide. The number of homeowners in
negative equity is also falling as prices have rebounded, but
over five million homeowners across our country still owe more
on their mortgages than the value of their homes.
The national numbers, moreover, do not always tell the
complete story, as experiences vary considerably across
geographic areas, demographic groups, and market segments. In
my home State of New Jersey, for example, nearly 6 percent of
homeowners with a mortgage are in the foreclosure process, the
highest rate in the Nation.
In communities with high concentration of foreclosed
properties or distressed borrowers, the consequences can be
devastating and the economic recovery slow. Families looking to
become homeowners or move up in the market also face
challenges. During the boom years, lenders made and securitized
risky loans that borrowers could not afford. But now, it seems
that borrowers of more modest means, instead of receiving
modest, responsible loans, are having a hard time getting a
mortgage at all. First-time home buyers in underserved
communities, in particular, are feeling the impact.
Today's hearing will examine challenges such as these that
still face us in the housing market. I look forward to hearing
from our witnesses regarding the factors that may be
contributing to each as well as potential solutions.
Are there any other Senators who wish to offer an opening
statement? If not, then let me introduce our witnesses.
Wayne Meyer is the President of New Jersey Community
Capital, a community development financial institution based in
New Brunswick, New Jersey, whose work is well known in our
State, and I want to thank you for making the trip from New
Jersey for our hearing today.
Mabel Guzman is the 2014 Chair of the Conventional
Financing Committee of the National Association of Realtors and
former President of the Chicago Association of Realtors, and
she is testifying today on behalf of the National Association
of Realtors. We welcome you.
Julia Gordon is the Director of Housing Finance and Policy
at the Center for American Progress, where she works on the
future of housing finance, foreclosure prevention, access to
sustainable mortgages and affordable rental housing, and other
housing-related policies. We thank you for coming.
And, finally, Deborah Goldberg is the Special Project
Director at the National Fair Housing Alliance, a national
organization dedicated to ending discrimination in the housing
market. She plays a lead role in the Alliance's public policy
work on foreclosure prevention, mortgage lending, and financial
regulatory and housing finance reform. We thank you for being
back to the Committee, as well.
So, let me just advise you all, your full statements will
be entered into the record, without objection. I would ask you
to summarize your statement for about 5 minutes or so, so that
we could enter into a dialogue at the end of your collective
testimony.
And with that, Mr. Meyer, we will start with you.
STATEMENT OF WAYNE T. MEYER, PRESIDENT, NEW JERSEY COMMUNITY
CAPITAL
Mr. Meyer. Thank you, Senator Menendez and Members of the
Subcommittee, for this opportunity to speak with you today. My
name is Wayne Meyer and I am the President of New Jersey
Community Capital, which is the largest nonprofit community
development financial institution, or CDFI, in the State of New
Jersey. I would like to share with you several approaches that
my organization has been taking to prevent and mitigate
foreclosures and to stabilize distressed housing markets in New
Jersey.
First, I would like to briefly discuss challenges facing
our State, because while the housing market has begun to turn
the corner in some places, New Jersey is still very much in a
housing crisis. The data bears this out. As of June 2014, 5.7
percent of homes in New Jersey were in foreclosure and 9.3
percent more were seriously delinquent, the highest rate in the
Nation. Twelve-point-eight percent of mortgaged homes in the
State had negative equity, comprising 240,000 homes threatened
by foreclosure and abandonment. Concurrently, mortgage credit
has been extremely inaccessible for even stable, moderate-
income New Jersey homebuyers.
Finally, New Jersey has the fourth-highest rental costs of
any State, and these costs are rising, even as wages for the
bottom 50 percent of New Jersey earners has declined by a
dollar an hour in the past year. As a result, many lower-income
families are spending half their income on rental housing,
which is simply unacceptable.
For New Jersey Community Capital, an equitable housing
market has been and remains a fundamental pillar for
stabilizing neighborhoods and increasing the well-being and
economic mobility of lower-income families. From our
perspective, without economic mobility, there is no progress.
In my written testimony, I have discussed four solutions
that New Jersey Community Capital has developed to combat New
Jersey's persistent housing crisis. They center around our
lending strategies, our Mortgage Loan Purchase Program, our
real estate development arm and strategies, as well as mortgage
lending. I believe that our holistic approach is one that, with
the right support and partnerships, could be effective in many
distressed communities around the country. In the interest of
time, I would like to really highlight two of those particular
programs that we believe are really important in addressing
ongoing housing obstacles and creating opportunities to jump-
start the housing market.
The first is around lending. In New Jersey, we have
witnessed an increasing shortage of capital from financial
institutions to lend to nonprofit community development
organizations and others who wish to acquire, redevelop, and
put back into productive use vacant and abandoned housing.
Every year, New Jersey Community Capital invests millions of
dollars into the creation and preservation of hundreds of for-
sell and rental affordable housing units in a very difficult
financial climate. Since the advent of the economic crisis, we
find that CDFIs like NJCC have taken on even a larger role in
lending in this certain area.
Furthermore, there has been a lack of access to mortgage
credit. So, in response, New Jersey Community Capital is
partnering with the State's largest credit union to create a
Credit Union Service Organization which will provide CRA-
qualifying mortgage credit and credit counseling to qualifying
prospective low- and moderate-income homebuyers that cannot
access mortgages in their traditional market.
Second, I would like to talk, if I may, about our ReStart
Mortgage Loan Purchase Program. Senator Menendez, at a field
hearing you held in New Jersey in 2012, when you held the field
hearing in New Jersey, I talked about the need for us to be
able to acquire mortgages while people were still in their
homes, to get ahead of the problem, to be in the front end to
make sure we can preserve home ownership. Over the last 2
years, New Jersey Community Capital has acquired 800 mortgages
through FHA's Distressed Asset Stabilization Program in New
Jersey, and our goal is simple. It is to keep families in their
homes through principal reduction, bringing the mortgage down
to the current value of the house and ensuring that the
borrower's monthly payment does not exceed 35 percent of their
income. We provide all of our homeowners with high-touch
financial counseling through partnerships with local approved
HUD organizations.
Last, we have found in these pools that approximately 45
percent of the properties are vacant or tenant-occupied. We
view these situations as opportunities to repurpose distressed
properties into new affordable housing opportunities. It is
especially valuable in today's housing market, in which
Government housing subsidies are so limited, that we can pass
on our savings on the mortgage purchases both to homeowners and
to new affordable housing. To date, we have kept 250 homeowners
in their homes and provided over $20 million in principal
reduction, and there has not been one redefault on any of those
mortgages.
Briefly, I would just like to talk about what we see as
several low- or no-cost approaches that can be taken to advance
the steps to recovery in New Jersey and elsewhere. The first is
increasing nonprofit access to nonperforming mortgages and REO
properties through the FHA Distressed Asset Stabilization
Program and the FHFA program. New Jersey Community Capital has
relied on the FHA program to acquire 800 mortgages, but more
and more for-profit entities are winning these pools. To date,
they have won 88 percent of what the FHA considers to be
Neighborhood Stabilization Outcome pools, and we believe that
this has to change.
Some of our solutions to this challenge include increasing
direct sales of mortgage pools from FHA to nonprofits in NSO
areas, awarding extra points to NSO bidders committed to social
outcomes, and allowing nonprofits the first option to bid on
NSO pools or other sets of targeted pools. We believe that FHFA
should follow the lead of the FHA DASP program and incorporate
the NSOs in their GSE auctions.
Finally, I would like to talk about the continuing support
of principal reductions as an effective foreclosure prevention
strategy. We believe that many of our homeowners are so
severely underwater that the only way to make sure that they
stay in their home is through principal reduction. So, we
advocate for increasing access to funding sources similar to
the hardest-hit funds, potentially including Department of
Justice settlement funds, a source that can carry a program
like ours to thousands more homeowners.
Thank you, Senator.
Chairman Menendez. Thank you.
Ms. Guzman.
STATEMENT OF MABEL GUZMAN, 2014 CHAIR, CONVENTIONAL FINANCE AND
POLICY COMMITTEE, NATIONAL ASSOCIATION OF REALTORS
Ms. Guzman. Thank you, Chairman Menendez and Members of the
Subcommittee, for the opportunity to testify on behalf of the
National Association of Realtors. My name is Mabel Guzman and I
am a broker at @properties in Chicago, Illinois, and I am the
2014 Chair of the National Association of Realtors Conventional
Finance and Policy Committee. I am very passionate about the
role of real estate in public policy, so much so that I took
time away from my business to be here today.
In my 17 years as a Realtor, this is thus far the most
difficult market for homebuyers I have seen. In many respects,
the U.S. housing market is headed down the wrong path. We
believe this is due to six major factors.
First, our economy is still recovering. Employment and
incomes are improving, but many earners still struggle with
cash for downpayments and many homes are quickly snagged by
investors paying cash, leaving little inventory for first-time
buyers.
Second, fees are hurting consumers. The overall cost of
loans are at historic highs. The guarantee fees and loan level
pricing adjustments charged by GSEs are hurting consumers.
These policies result in billions of dollars of profits for the
GSEs, but have had a significantly negative impact on mortgage
lending.
Third, despite a healthy portfolio, FHA premiums are very
high and they require borrowers to pay mortgage insurance for
the life of the loan with no opportunity to cancel. Quite
simply, this hamstrings consumer buying power.
I had the pleasure to work with the Vasquez family, first-
time homebuyers, and they wanted to use FHA as an option to
purchase and they could not because the fees were exorbitant
and too expensive. They had two options, either not to buy and
wait a year to do so and save more money, which was not an
option because the trends in our city are that prices would
have been 10 percent higher and they would have been priced out
of the market. The other option was to do a conventional
mortgage, which they ended up doing, but they pulled from their
reserves to be able to make that 5 percent downpayment. Then
there was the issue of the closing costs. By using those
reserves, they had less money to be able to pay for closing
costs. So, I was able to negotiate with a seller that was
willing to contribute 3 percent toward their closing costs, but
that took over five offers to make that happen. So, through the
6-month process, we were able to have success, and now they are
happy homeowners.
Fourth, there are significant barriers to condominium
ownership. We need changes to rules regarding owner occupancy
ratios, project approval processes, and commercial space.
Condominiums often represent the most affordable options for
first-time homebuyers.
I worked with a young man named Andrew Wikell [phonetic].
It took 3 years to find him a condominium under $200,000 in the
city of Chicago, and we kept expanding our search. For him, it
was the owner occupancy ratio. If a building had 55 percent
tenants or nonowner occupied, it would not--he would not be
able to get any financing on it. Though it was 55 percent
nonowner occupied, within those units, anywhere from 5 percent
to 15 and at times 20 percent had no mortgage, so they had no
risk of default. We felt that it really should have been moved
out of that ratio and put into owner-occupied status because
the risk of default did not exist.
Second, on commercial spaces, only allowing 20 percent is
very onerous. Developers are creating transient-friendly
buildings, additionally lifestyle centers, where the owner can
come down, get a cup of coffee, do their dry cleaning, make a
copy, even sit down and have a glass of wine. By reducing that
to 20 percent, it has a double-negative. Number one, they have
no potion to buy into that building which gives them so many
amenities outside their other properties that they could
choose, but second, it reduces commercial space, which creates
small businesses an opportunity to open in that building and
create jobs. So, it is a job killer at the same time.
Fifth, the underwriting process needs to be improved. FHA
and GSEs have made concessions with respect to lender
liability. Now, lenders need to improve the quality of their
underwriting and halt preventable mistakes. In addition,
Congress and the Administration can improve current credit
conditions by addressing the 3 percent cap on fees and points.
And, finally, foreclosure and short sales remain
problematic for thousands of American families. The GSE and FHA
alternative asset disposition programs actually reduce home
purchase opportunities for owner occupants. Foreclosure
prevention efforts need to be increased before loans are sold
off to investors. In addition, NAR urges Congress to extend
mortgage debt forgiveness to distressed homeowners who should
not have to pay phantom income tax after enduring the stress
and loss of their home in a short sale. Therefore, we need to
provide more certainty in the short sale process, as well. We
support Senator Brown's bill, S. 361, to provide a certain
answer to distressed homeowners.
I worked with a client. We started the short sale process
and we waited 1 year for an approval so that she can realize
that short sale, and it never happened. Her loan was sold. The
new investor who purchased that did not want to realize a short
sale and foreclosed on the client, now adding another unit of
foreclosure into the market as well as destabilizing a
condominium property.
Until we address these issues, our national return to
prosperity will be jeopardized. Out of the nine previous
recessions, seven of the recoveries were led by housing.
On behalf of the one million members of the National
Association of Realtors, thank you for this opportunity to
testify and I look forward to your questions.
Chairman Menendez. Thank you.
Ms. Gordon.
STATEMENT OF JULIA GORDON, DIRECTOR OF HOUSING FINANCE AND
POLICY, CENTER FOR AMERICAN PROGRESS
Ms. Gordon. Good morning, Chairman Menendez and Senator
Warren. My name is Julia Gordon and I direct the Housing
Finance Team at the Center for American Progress. Thank you so
much for convening this hearing on the critical topic of
inequality of opportunity in the housing market.
Today, our Nation's housing recovery is neither strong nor
equitably distributed, as Ms. Guzman has described. Not only
has the mortgage market shrunk nationally, but many
communities, and especially communities of color, lag far
behind other parts of the country, with hard-hit neighborhoods
continuing to suffer the ongoing effects of multiple
foreclosures, negative equity, vacant homes, and blight. And,
as more families become renters rather than owners, rents have
risen to the point where more than half of all renters spend
more than 30 percent of their gross income on rent, which is
considered the upper limit of rental affordability.
Most people of color remain shut out of the conventional
mortgage market, with more than 70 percent of African Americans
and about two-thirds of all Latinos having FHA and other
Government programs as their only option. And, while less than
20 percent of all homeowners nationally still owe more on their
mortgage than it is worth--than their home is worth, in the
hardest-hit zip codes in the Nation, as many as three-quarters
of all homeowners are still underwater, and in two-thirds of
these zip codes, African Americans and Latinos account for at
least half the population.
Ironically, even as home prices experienced historic
declines over the past 6 years, the tightness in the credit
market meant that for too many households, especially families
of color and lower-wealth families, they miss what could
otherwise have been an ideal opportunity to access affordable
and sustainable home ownership, and in many of these
communities that already lost significant wealth due to the
foreclosures, wealth continues to be exported outside the
community as it flows to landlords who do not live there.
It is not too late to turn this situation around, but we
must focus our efforts on enabling more families to join the
ranks of home ownership. At the same time, we must ensure that
expansion of access not lead to any of the predatory and
abusive market practices that led to the crisis. So, I do urge
you as you hear calls to exempt more market participants from
the Dodd-Frank mortgage protections, that we think very
carefully about that. We believe that access can be increased
significantly under the current rules.
So, while there is no one silver bullet, there are many
dials and levers we think we can move to increase access
without opening the door to predatory or unsafe lending. First
and foremost, Congress should complete comprehensive reform of
the housing finance system. Uncertainty concerning the fate of
Fannie and Freddie continues to weigh heavily on the market. S.
1217, the legislation passed by this Committee, provided a very
useful framework, but did not sufficiently place the goal of
access to affordable, sustainable credit at the center of the
new system's purpose.
Until that effort is completed, FHFA and FHA have a great
deal of power to make positive change. Just yesterday, FHFA
released the news that Fannie and Freddie will offer a low-
downpayment product for first-time homebuyers, a sorely needed
first step in opening the conventional market to lower-wealth
borrowers.
We further recommend that companies update the credit score
model used by their automated underwriting systems to improve
the reliability of scores and the availability of scores for
tens of millions of consumers, especially consumers of color.
Additionally, FHFA should set strong housing goals and duty
to serve requirements that push the enterprises to lead the
primary market instead of lagging it, as they have been doing.
They should pool for risk and set pricing based on what is
needed to cover expected losses rather than continuing what has
been a failed attempt to revive the private label market using
unnecessarily high fees.
To help struggling communities, FHFA should provide
troubled borrowers with principal reduction modifications,
which are the most successful form of assistance. It should
also instruct Fannie and Freddie to consider direct purchase of
forced place hazard insurance to protect both consumers and
taxpayers from the kickbacks and inflated costs associated with
mortgage servicers purchasing that insurance.
FHFA should direct Fannie and Freddie to begin contributing
immediately to the Housing Trust Fund and Capital Magnet Fund,
which will help provide affordable rental housing for extremely
low-income families.
As for FHA, which is now on track to fully replenish its
reserves by 2016, we recommend revisiting the impact that
premiums are having on access to credit and considering whether
some reductions could provide sufficient additional volume to
offset any cost to the fund.
Both FHFA and FHA should ensure that any bulk sales of
distressed mortgages promote both home retention and
neighborhood stability. If designed responsibly, we believe
these sales can offer better loan modifications, support
neighborhood revitalization, and limit losses to taxpayers.
But, if loans are simply passed off to the highest bidder
without any protections, we will have missed an extraordinary
opportunity.
To further the work of fixing the broken mortgage servicing
system, FHFA and FHA should join with CFPB and other prudential
regulators to improve servicing rules further, revisit soon the
issue of servicer compensation, and find a way to require
sustainable modifications to homeowners after HAMP expires.
Finally, as Ms. Guzman mentioned, Congress must extend the
Mortgage Debt Relief Act, at least through the end of 2015.
Thank you again for inviting me to talk today. Together, we
can work to create a more robust, fairer housing market that
drives economic growth and promotes opportunities for America's
families.
Chairman Menendez. Thank you.
Ms. Goldberg.
STATEMENT OF DEBORAH GOLDBERG, SPECIAL PROJECT DIRECTOR,
NATIONAL FAIR HOUSING ALLIANCE
Ms. Goldberg. Thank you, Mr. Chairman. Good morning. Good
morning, Members of the Subcommittee. Thank you for the
opportunity to testify here today. My name is Debby Goldberg. I
am a Special Project Director at the National Fair Housing
Alliance, or NFHA. NFHA works with its 220 members in 37 States
and the District to provide equal access to housing for
millions of people.
My written testimony touches on a number of topics, but my
testimony here this morning will focus on the broken system for
maintaining and marketing foreclosed properties, particularly
in communities of color, and the long-term impact of these
problems.
Home ownership has long been a key to opportunity in this
country, a path into the middle class. It has provided millions
of families the means to create economic stability and build
wealth. But, households of color have not experienced the
benefits of home ownership to the same degree as their White
counterparts, and for many households of color, home ownership
is a thing of the past. Since 2008, five million families who
were homeowners have lost their homes to foreclosure, and
communities of color have been particularly hard hit.
In April 2009, NFHA began an investigation into the
marketing and maintenance of foreclosed properties, or REOs. In
partnership with 17 of our members, we have inspected 3,726
foreclosed properties in 29 metro areas and 22 States. Some of
these are in predominately White neighborhoods, others in
predominately Black and/or Hispanic neighborhoods. Many of
these are stable communities where the rate of home ownership
is high. At each house, our investigators evaluate more than 30
aspects of maintenance and marketing, including curb appeal,
structural integrity, signage, indications of water damage, and
the condition of the paint, siding, gutters, and downspouts.
We have found that REOs in White neighborhoods were well
cared for and well maintained, well marketed. They were more
likely to have neatly manicured lawns, securely locked doors,
and attractive professional ``for sale'' signs out front.
Someone driving down the street would be unlikely ever to know
that the property was for sale because of a foreclosure.
In contrast, REOs in communities of color were more likely
to have overgrown yards, trash on the premises, unsecured
doors, and broken or boarded windows. They appeared abandoned,
blighted, and unappealing to potential homebuyers, even though
they were located in stable neighborhoods where the surrounding
homes were well maintained.
Further, these maintenance deficiencies were cumulative.
That is, REOs in communities of color were more likely to have
a greater number of deficiencies than those in White
communities. These cumulative deficiencies lead to a host of
problems. They can cause health problems, both physical and
mental. They attract vagrants and criminal activity and may be
fire and safety hazards. They also contribute to violent crime
in a community. Research shows that for every 1 percent
increase in the foreclosure rate in a census tract, violent
crimes increase by 2.33 percent. All of these problems place an
increased burden on municipal fire, police, health care, and
other resources.
At the same time, these poorly maintained REOs bring down
property values, resulting in lower tax revenues for
municipalities, even as they must expend more resources to cope
with the problems created by the REOs. We have also found that
poorly maintained REOs linger on the market longer before being
sold and are more likely to be sold to investors, transferring
wealth out of the community.
Managing REOs differently based on the racial composition
of the neighborhood in which they are located is a violation of
the Federal Fair Housing Act. The Federal agencies responsible
for overseeing the activities of banks, the GSEs, and other
investors have both the authority and the obligation to ensure
that they do not violate the Fair Housing Act in their
maintenance and marketing of REO properties. Effective
oversight can help stem the kind of problems our investigations
uncovered. To date, only the Federal Reserve Board has taken
action in this area.
In our report, we outline a series of recommendations for
addressing these problems and ensuring that communities of
color have an opportunity to share in the economic recovery.
One of these is for Congress to play an active role in
oversight, both to shine a spotlight on the problems where they
exist and to hold accountable Federal agencies with the
responsibility to help prevent and solve these problems.
Further, we believe it is critical to create a path back to
home ownership for families harmed by the foreclosure crisis
and have described some of the steps necessary to do this. So
many of these families are families of color, and they will
constitute half of the potential homebuyers over the next
decade. Helping them exercise that potential is not only the
right thing to do, it is an economic imperative for our Nation.
Thank you for the opportunity to testify here today. I look
forward to your questions.
Chairman Menendez. Thank you all for your testimony. There
is a lot of ground to cover here, so let me start.
Several of you have discussed how mortgage borrowers'
credit scores have tightened sharply in recent years, and not
only compared to the precrisis boom years, but also tighter
than the more normal period before the boom. During the run-up
to the crisis, we saw many instances of homeowners who once
would have received modest, affordable loans instead receiving
much riskier loans than they could possibly afford. And now it
seems the response has been, instead of going back to matching
the creditworthy borrower at the lower end of the distribution
with affordable loans, these borrowers are being cut out of the
market entirely.
So, my question for any or all of you is what factors do
you think are driving that trend? To what extent are the
broader economic factors as opposed to tighter mortgage lending
standards affecting this? And, to the extent that creditworthy
borrowers are having a tougher time right now getting a
mortgage, how has the impact differed across different
populations or segments of the market? Who has felt it the
most? So, one is why is it happening? Two, what are the
factors? Are there factors beyond just having the pendulum
swing the opposite way, and who is getting the worst of it?
Ms. Guzman.
Ms. Guzman. Yes. With regard to what is happening, is
currently, banks have credit overlays. CFPB put out actually
very rational rules that mitigate risk to any qualified
borrower, but banking comes in. If there is a 41 percent DTI,
debt-to-income ratio, which is the CFPB rule, they will say
they need 43 percent. So, that eliminates 10 percent right
there.
Then, if they look at a credit score, 650 maybe being the
average on a consumer, they will say, well, we need 680 or 700.
That eliminates another subsection right there. And, credit--
that number has nothing to do with risk. It is, rather, they
have a lot of revolving debt or not. Many consumers actually
prefer to pay cash, and we are looking at FICO 9, which is one
of the new models that would actually help and introduce more
borrowers into the market.
The credit overlays do need to be removed, or buffers, as
they say, because we have already gone through a sense of
reform, you could say, with the CFPB. And, by the elimination
of that, you would still have good creditworthy borrowers,
rational lending, and you would see a reintroduction of opening
that pool and access to more borrowers into the American dream.
Chairman Menendez. Does anyone else want to opine? Ms.
Gordon.
Ms. Gordon. If I could pick up on the fact that the lenders
have these overlays and talk about why they have the overlays,
it would be hard for us to know exactly why, because every time
we talk to lenders about it, we hear a different story,
depending on what problem we are working to solve.
For a long time, the concern had to do with the
representation of warranty framework or the indemnification
framework, lenders concerned about being forced to buy back
their loans. Both FHA and FHFA have been doing their best to
provide lenders with more certainty in that area. But, as soon
as you hear more certainty in that area, you hear the lenders
talk about other regulatory risks. You hear they talk about the
DOJ settlements.
There are a whole variety of reasons lenders have been
putting forward about why they are not lending and it is very
difficult to tell exactly what policymakers can do to change
the fact that, at the moment, some of the biggest lenders, some
of the biggest banks, simply do not appear to really want to
ramp up their mortgage businesses, which is why I do think it
is really important for us to focus on alternative mortgage
channels, to focus on credit unions, CDFIs, smaller
institutions. While, typically, the answer to that is, well,
you can never scale that up to the point where it matters, I
think that we would be doing ourselves a disservice if we did
not really try to scale the efforts of the more mission-based
organizations that have a desire and willingness to be in the
mortgage business and to serve the communities that we are
talking about.
And, in terms of who is being left out the most, you know,
low-wealth borrowers, but in particular, borrowers of color are
being very, very deeply hurt, and I want to strongly support
what the CFPB is trying to do in terms of collecting more and
better HMDA data. We really need that data to understand what
is going on. I would also urge CFPB to add a few more data
fields and think about how we can also be keeping track of
things like housing counseling and loan modifications, as well
as the origination data.
Chairman Menendez. I have several other questions. I only
got to one. You all expounded significantly on it. But, in
deference to my colleagues, I am going to come back a little
later.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you all
for being here today. Thank you for calling this hearing.
You know, home ownership remains the principal way for most
families to build economic security. But, access to mortgage
credit is very tight. Only about half as many new mortgages
were approved in 2012 as back in 2001, well before lending
standards were loosened up in the run-up to the financial
crisis.
Now, Fannie and Freddie are responsible for a huge portion
of the secondary mortgage market and that means their standards
have a major influence on what mortgages are actually offered
in the primary market. Since the crash of 2008, trouble with a
mortgage or short-term job loss has left millions of Americans
with dings on their credit scores, and moderate-income
families, African American and Hispanic families, have been hit
especially hard.
But, instead of taking that into account in loosening
credit score standards, Fannie and Freddie have gone in the
other direction. In 2012, the average credit score associated
with a mortgage purchased by Fannie or Freddie was over 760.
That is more than 50 points higher than the average credit
score associated with mortgages they purchased back in the
early 2000s, and more than 50 points higher than the average
credit score of the average American. To be blunt, Fannie and
Freddie have put home ownership out of the reach of millions of
creditworthy families.
So, Ms. Gordon, I just wanted to start with you. Do you
agree that Fannie and Freddie's credit standards have played a
key role in keeping many Americans out of home ownership?
Ms. Gordon. Well, the answer is yes, but it is not just
their credit standards per se. The whole direction of Fannie
and Freddie's policies since the conservatorship has been
extremely conservative and not aimed at performing their
chartered mission of serving all markets all times.
Senator Warren. Fair enough. I just wanted to focus in,
though, in particular, on credit scores. It is an easy piece to
get a hold of and an easy piece to talk with Fannie and Freddie
about. We have got other aspects, I promise, we will----
Ms. Gordon. Sure. Absolutely, on the credit scores. I mean,
it is partly because of the overlays, partly because they are
using the old FICO model, and, you know, with a heavy reliance
on automated systems as opposed to manual underwriting, they
have some important exemptions from some of the QM standards
but often are not able to use the compensating factors or do
not want to use them.
Senator Warren. Well, that is right, and the data would
suggest they are not using them----
Ms. Gordon. Right.
Senator Warren. ----right? And, Ms. Guzman, you are out
there doing real estate. Would you agree with that?
Ms. Guzman. Absolutely.
Senator Warren. OK.
Ms. Guzman. Absolutely. When we look at the HMDA filings in
2006, 56.8 percent of African American and Black borrowers had
an Experion credit score of 650 or less. When we are looking at
FICO 9, this will result in increased acceptance of mortgage
applicants. But, we also believe VantageScore is another model
that they need to be using. First of all, again, that number,
650 or 675, does not indicate risk. It just means how much
credit they have available to them.
Senator Warren. Right.
Ms. Guzman. With VantageScore, it takes into account rental
payments, utility payments, and maybe even possibly, with many
Latinos in our market, they send their children to parochial
school. That is a big nut they have to pay on education every
month. They should be using other methodology and have
innovation within the organization to actually look at this and
say, yeah, we need to now expand the way we give credit or how
we determine who is a creditworthy borrower.
Senator Warren. Good. I think that is really valuable, and
offering a lot of approaches that Fannie and Freddie could be
using. You know, with Fannie and Freddie keeping credit so
tight, especially at a time when housing is more affordable
than it has been before, then it is bad for families, it is bad
for the housing market, and it is bad for the economy across
the board.
So, I want to ask about one other thing, and that is since
the Government's Home Affordable Mortgage Program, HAMP, began
in 2009, more than 1.3 million homeowners have received a loan
modification, and many of these modifications reduced the
interest rates, which, in turn, lowered the homeowners monthly
payments and helped people stay in their homes. About 90
percent of these modifications were designed so that interest
rates would begin resetting and gradually increasing after 5
years.
The first reset started last year, and according to an
analysis of Treasury data by the Special Inspector General for
TARP, after all of these resets are completed, the median
monthly mortgage payment will increase by more than 20 percent
for these families. Monthly payment increases will be even
higher for those who needed the most help and, thus, received
the steepest initial discounts in their interest rates.
Now, researchers at Urban Institute's Housing Finance
Policy Center have estimated that the impact of these resets
will hit hardest in 2016 and 2017, and that as a result, we may
see redefaults of about 10 percent among this group. That
translates to about 100,000 families defaulting in the next
couple of years.
So, Mr. Meyer, I wanted to start with you. I was pleased to
see that last week, Treasury announced plans to enhance the
existing HAMP modification to avoid some of the problems that
these resets will cause. Has New Jersey Community Capital
looked at ways to help these families stay in their homes if
they default again?
Mr. Meyer. Yes, Senator. Thank you. We believe that it is
important to engage with principal forgiveness and to make sure
that the mortgage is right-sized to give the homeowner the best
chance of success. But, a really important part, an important
component of our program is a really high-touch financial
counseling component, and it is not just to develop a mortgage
resolution plan to keep the homeowner in their home, but it is
also to support the homeowner on a go-forward basis. So, our
counselors are staying with the homeowner after the mortgage is
modified for a period of 12 to 18 months to make sure that they
stay on track. And, although our track record right now is 2
years, we have modified hundreds of mortgages and have not yet
had one redefault.
Senator Warren. Good for you. Thank you, Mr. Meyer.
I am going to follow the good example set by the Chair and
quit there, but I do want to come back at some point to what
Treasury should be doing about this on the modifications, as
well. Thank you.
Chairman Menendez. Senator Merkley.
Senator Merkley. Thank you, Mr. Chair, and thank you all
for your concern and interest day to day in this challenge of
reestablishing home ownership as a major driver of wealth for
middle-class families.
Ms. Gordon, I thought I would ask you a question, and it is
a little unfair, because I have not briefed you in advance, but
are you familiar with IDA programs, Individual Development
Account programs? This is something that I became interested in
in Oregon. I started the first IDA program that was west of the
Mississippi, essentially in which low-income families, if they
save toward home ownership, they get a matching grant under the
program to enable them to buy a house, pay closing costs,
downpayment, and so forth. And, it has had a very strong
success rate in home ownership. I also worked previously with
Habitat for Humanity, where we worked with very low-income
families to buy homes.
And, the reason I raise this is when we look at the home
mortgage interest deduction, it is our major home ownership
program, but it does not extend to low-income families, and let
me give an example of that. You buy a $200,000 house. You pay 4
percent interest--that is $8,000 of interest--at the beginning
of the mortgage. It gets less over time. And, yet, the standard
deduction currently is $12,400. So, you do not get one dime of
help.
And, one of the things that I have put forward periodically
is the idea of adding on to the home mortgage interest
deduction and with a grant program for those who do not take
advantage of it. For example, if we were to have--we could kind
of create a systematic IDA, still requiring matching funds if a
homeowner was to take advantage of it for closing and
downpayment, but take a value equivalent, kind of the value
that they would have if they could have utilized the home
mortgage interest deduction at a middle-class tax rate and give
it as an annual grant or tax credit.
Is that something you have taken a look at? This is where
it is unfair, but the general idea--do you see where I am
headed with the suggestion--to enable home ownership----
Ms. Gordon. Right.
Senator Merkley. ----not taking away anything from anyone
else, but to help empower home ownership among lower-income
families.
Ms. Gordon. I do see where you are headed and I think it is
a very interesting idea to talk about. I do have to say that we
have recommended actually converting the mortgage interest
deduction into a credit so that we solve the problem of this
enormous subsidy. I mean, the amount we spend on the mortgage
interest deduction every year is bigger than the entire HUD
budget, which is, you know, incredible when you think about it,
and it really is benefiting those in the upper parts of the
income scale. And, so, we do think converting it to a credit
and capping it would help direct that subsidy to the people who
need it the most.
But, knowing that reform of that particular deduction is
challenging, to say the least, and that comprehensive tax
reform may be on the table, but will also be challenging to
accomplish, you know, thinking about ways to tax advantage
programs that help lower-income borrowers get into housing is
very important and I would love to talk to you more about that.
Senator Merkley. Thank you, because I think we spent about
$70 billion on the mortgage interest deduction.
Ms. Gordon. Yeah. Yeah.
Senator Merkley. It would take just a few billion dollars
to provide these credits at the lower end. So, I like to think
of it as ``yes plus'' if you will, the possibility.
I also wanted to--does anyone else want to make any
comments on that?
Ms. Goldberg. I would add just one thing, which is that I
think it is a very interesting idea, as well, and agree that
the way we handle the mortgage interest deduction definitely
disfavors people with modest means, which often means people of
color.
But, I also want to say that I think it is important for us
not to fixate on downpayment. The downpayment is a huge hurdle
for people of modest means to get into home ownership, and the
truth is that if we look back beyond this most recent period of
trouble in the mortgage market, we find that we actually know
how to make low downpayment loans that are very sustainable,
affordable and sustainable. If you do it right, with the right
product, it helps to have housing counseling along with it, and
we have a long history, actually, of being able to make low
downpayment loans to low- and moderate-income people that are
extremely successful, and we need to remember that history and
revive that approach. Then, the IDA program will get you a lot
farther and there will be fewer people who need that kind of
help to get over the hurdle of getting into home ownership.
Senator Merkley. Yes, fair point, Deborah. But, even with
low downpayment loans, the downpayment and the closing costs
together can still be a substantial hurdle to undertake.
Ms. Goldberg. That is right.
Senator Merkley. But, the type of thing I was just
describing does not help just with the downpayment. It helps on
an annual basis when you do not utilize the mortgage interest
deduction as an alternative----
Ms. Goldberg. The ongoing cost----
Senator Merkley. As ongoing costs, yes. And, so, it mimics
the effect of the mortgage interest deduction, if you will.
I am out of time. So many questions, so little time. Thank
you all very much.
Chairman Menendez. Well, we are going to have another
round, so if you want to stick around, you will maybe have--if
your schedule permits. But, let me--and I know Senator Reed is
going to be returning shortly. He has a very significant
interest.
Let me--there is so much here. First of all, Ms. Goldberg,
I am glad you raised the history of the low downpayment program
and its efficacy and its success. I think it is going to be
under siege in the next Congress, so we are going to have to
remind people about the facts, not the creation of the image,
and that is going to be a challenge.
I want to get, since part of the focus of why I wanted this
hearing, in addition to where we are at and what our challenges
are, is also to drive here a point that I think is very real,
and that is, certainly for many families, the whole essence of
home, in addition to being the place that we nurture our
families and raise them, represents the most significant, or in
some cases the only source of savings. And, for half of
American families, for example, home equity accounts for at
least 60 percent of their net worth, including nearly 70
percent for the typical Latino family and about 60 percent for
African American families, and almost 80 percent for families
in the bottom 25th percent of income earners.
So, with those numbers in mind, what is the implication of
the current credit conditions for savings, wealth building, and
income mobility? It seems to me that that is rather
challenging. And, one of the things that we just--I think I
perceive from this last election is despite every major
macroeconomic indicator, you know, the 6 consecutive years of
private job sector growth, the lowest unemployment in 6 years,
the lowest deficit in 6 years, the lowest deficit as a percent
of the economy by 40 years, the low gas prices, I mean, I could
go on and on and on, but what is the reality for most families,
is that incomes have been stagnant. If you add to that, then,
the inability to have the single most significant source of
asset and wealth to be stuck or not attainable, then you are
creating an even more caste set of circumstances in our
society. So, I would like to hear some of you address that,
anyone who wishes to.
Ms. Goldberg. Sure. Yes, it is absolutely true.
Particularly for families of color, home equity has tended to
be the largest single asset that they have. It is an asset that
can be passed intergenerationally and that has been used very
powerfully in many moderate-income neighborhoods around the
country. Those neighborhoods were particularly devastated by
the foreclosure crisis. They were the first neighborhoods
targeted. They were equity stripped before we even invented
some of the toxic products that eventually took down the whole
superstructure. It has left people of color in a very bad
position in terms of wealth. I mean, if Whites lost about a
quarter of their net worth over the course of the crisis,
African Americans and Latinos lost 50 or 60 percent of their
net worth. It is really--it is really frightening and the
disparity is huge.
You know, also, going forward in the mortgage market, the
majority of family formation is going to be people of color,
and if we want to have a healthy mortgage market, if the White
baby boomers want to someday sell their houses, we are going to
have to find a way for people of color who are now even lower
wealth than they were before the crisis to be able to come in
and buy these houses.
And, honestly, I think this is a national emergency and
that we need to think very creatively and boldly about how we
solve this problem.
Chairman Menendez. And, as some of you others answer, I
wonder if you have any policy considerations for how we improve
access to affordable home ownership for creditworthy borrowers.
I do not want to lose sight that we are still looking for
creditworthy borrowers. Ms. Guzman and then Mr. Meyer.
Ms. Guzman. Well, absolutely. I was--I participated in the
Neighborhood Stabilization Program, which targeted 25
communities in the city of Chicago, and predominately
communities of color that were hardest high by foreclosures. A
lot of those properties were bought through that program, and
the first initial round was $55 million and Realtors played a
big role helping the NSP recipient to actually buy a lot of
those properties and then reintegrate them into the market.
Additionally, they set up programs where first-time borrowers
would have counseling. And, additionally, they would help them
with closing costs. But, at the end, there were 2,000 units
that were purchased. It is now a national model.
And, on the competitive bid for the NSP on the second
round, it was $98 million was awarded to the city because of
the success of the program, and it continues to grow. Four
thousand units of housing were created, 75 percent rental,
because, again, the market was in freefall. But, many
communities were stabilized, and mostly in communities of
color.
It is wealth building. It is a wealth builder. It changes
the dynamic of a family. To have prosperity, economic self-
reliance, we really do need to reintroduce these borrowers back
into their communities to create that stabilization and also
economic prosperity for themselves.
Chairman Menendez. Mr. Meyer.
Mr. Meyer. I agree that wealth building is such a
challenge, and Senator, I may even take it a step further. In a
lot of the neighborhoods where we work, more than 50 percent of
the renters pay more than 50 percent of their income toward
housing, which leaves them with very little other room for
food, for health, for education. So, it is not just about
wealth building. It is also about being able to put your
housing costs into line with your income.
So, what Ms. Guzman's point was around, the NSP program, I
agree, that was a significant program. But, we are in an age of
limited, shrinking Government resources. So, in New Jersey, for
example, we receive $65 million of NSP monies. I think we did
maybe a little less than 300 units with these funds, which is
not a lot. And one of the policy changes we can make is to
increase access to FHA mortgages, because through that alone,
we have bought 800 mortgages at a discount. So we are able to
repurpose 300 of these properties that are vacant or tenant-
occupied for just a fraction of the cost of doing 300 units
through NSP. I think that is a significant consideration.
So, then the challenge becomes how do we put into the hands
of nonprofits and others the inventory of assets that can
create these opportunities for low- and moderate-income
families rather than only selling them into private equity
firms. I think DASP is a great opportunity to do that. I really
do believe that. And, I think this opportunity is going to pass
us if we do not act quickly on it.
Chairman Menendez. In this regard--and I want to turn back
to Senator Warren, but just to keep this train of thought while
we have it--Ms. Gordon, in your testimony, you discussed the
FHFA's recent announcement about allowing Fannie and Freddie to
resume backing well underwritten loans with downpayments as low
as 3 percent in cases where borrowers can demonstrate their
creditworthiness and ability to repay and with other
compensating factors. What is the track record for well
underwritten loans with lower downpayments with other
compensating factors?
Ms. Gordon. The track record is good. I mean, at Fannie and
Freddie themselves, the difference in performance between a 3-
percent down and a 5-percent down is almost indistinguishable,
and we have worked with the Center for Community Self-Help--I
actually used to work there--where we had a portfolio of many,
many thousands of mortgages that were low-downpayments
mortgages made to families with nontraditional credit histories
or thin files and that were properly underwritten and were
safe, sustainable 30-year fixed-rate mortgages, and we actually
had a grant to follow very closely the performance of those
mortgages and so we have been tracking them carefully
throughout the crisis, and that portfolio of loans, which,
really, many people might have looked at and said, really, do
you want to make these loans, they have performed better than
any other cohort of loans except for the very prime fixed-rate
mortgages. They have performed better than adjustable rate
prime. They have performed better than any all day or subprime
categories.
Chairman Menendez. So, these were not the drivers of the
crisis.
Ms. Gordon. These were not the drivers of the crisis.
Chairman Menendez. I ask, because we are going to hear the
opposite of that.
Senator Warren.
Senator Warren. Well, what does it mean when you say you
are going to hear the opposite?
Chairman Menendez. No, no----
[Laughter.]
Chairman Menendez. No, no, we are comrades in arms on here.
Senator Warren. We certainly are on this one.
So, I want to actually, though, ask you about another part
of this. I want to raise another issue, and that is when a
Fannie- or Freddie-owned mortgage goes into default, Fannie or
Freddie buys the property and then resells it, and last year
alone, Fannie sold more than $2.8 billion worth of property.
So, when these notes are sold to homeowners rather than to
investors or absentee landlords, families do better,
neighborhoods do better.
So, FHFA has a First Look policy that gives families and
individuals first crack at buying these repossessed properties
before the bidding is opened up to investors, but the policy is
not working. The houses are priced so high during the First
Look period--significantly above market value, according to
many reports that we hear--that regular buyers do not really
have a shot at this. The prices come down only later, when
investors are moving in.
So, I thought I would start with you again, Ms. Guzman. As
a Realtor, you have firsthand experience with the difficulties
that borrowers are facing in today's housing market. How do you
think Fannie and Freddie could better ensure that these notes
end up in the hands of owner-occupants?
Ms. Guzman. Well, it is beyond the First Look. I mean,
getting the First Look and then being able to submit an offer
right away, also, in a timely response on that offer, is
completely different than the First Look, let the clock run out
10 days later, then it is a multiple-bidding process. That
seems--you know, they say they want to support owner occupancy,
but we find that it really kind of confounds everything.
As I said, working with several buyers, it has been a
multiple offer process. You know, they are writing five, six
offers just to get into housing. The Vasquez family, I mean,
with their three children, it ended up that we did not even get
into a Fannie Mae property. We actually worked with a private
seller and it worked out just fine.
But, the First Look, it has to be more than First Look. It
has to be First Look, first bid.
Senator Warren. Good.
Ms. Guzman. Give them a crack, and then after that, if it
does not succeed, then, fine. Then go ahead and reintroduce it
to the public and let the private market go at it. But, it has
to be First Look, first bid.
Senator Warren. Good. Thank you.
Anybody else want to add on the First Look? Ms. Goldberg.
Ms. Goldberg. So, our recommendation would be to extend the
First Look period longer, but also, that any time the price
drops, there should be a new First Look period----
Senator Warren. Oh, interesting.
Ms. Goldberg. ----so that, once again, people who want to
live in the home as opposed to use it as an investment have an
opportunity to take a shot at it.
And, in addition, we would recommend that we remove the
incentives for the preference for cash offers. We understand
that a lot of times the real estate agents who list these
properties are paid incentives to move things quickly. This
means that when they get two offers, one of which requires the
buyer to get a mortgage and the other one of which is a cash
offer, if they're going to get a bigger commission if they move
the property quickly, then they're going to go for the cash
offer that can settle immediately without having to worry about
whether and when the mortgage is going to come through.
When it comes to both foreclosed properties and
nonperforming loans that are under the control of either
Government agencies, such as HUD, or Government-controlled
entities, such as the GSEs, we need to be looking at these as
resources to help stabilize communities. That means our
approach to disposing of these assets needs to be mindful of
both the bottom line for the agencies involved and also the
bigger neighborhood stabilization efforts that are really
needed. Those help shore up all the other mortgages and all the
other properties in those same neighborhoods.
So, we should make some changes to the First Look process
so that we do not create incentives for investors and cash
offers to get a preference. We actually have a settlement with
Wells Fargo as a result of some of our REO work and a complaint
that we filed with HUD under the Fair Housing Act. That
settlement includes provisions addressing the First Look
process. It mandates that any time there is a cash offer to buy
a Wells REO and at the same time there is an offer from a
prospective owner occupant that is as good or better but
requires financing, the noncash offer must get preference. We
would recommend that this be instituted across the board in
First Look programs.
Senator Warren. Thank you----
Ms. Guzman. I need to respond to that.
Senator Warren. I will let Ms. Guzman respond, and then Mr.
Meyer.
Ms. Guzman. I think it is ultimately, when offers come in
and they are cash and/or if they are financed, we always
recommend the financed deal, because, actually, it is a better
price. So, we do not actually lean toward the cash investor
ever. We want it to be----
Senator Warren. You mean, we, the real estate----
Ms. Guzman. We, the real estate, the Realtors----
Senator Warren. The Realtors----
Ms. Guzman. I have represented REO properties for Bank of
America and I have friends who worked on Fannie Mae properties,
as well, and what it comes down to is that the investor--that
person on the end that you do not see is making a decision to
go with cash, even though we believe that the financed deal is
a better deal. It is a better price. But, they do not want to
wait. They do not want to wait. They would rather go ahead,
especially, in many cases, just go with cash, because they
figure it is going to be a clean deal and that is it.
Senator Warren. Same outcome.
Ms. Guzman. Yes.
Senator Warren. Mr. Meyer.
Mr. Meyer. Senator, we have a fair amount of experience
with the First Look Program, both with Fannie Mae and also
through the National Community Stabilization Trust, and our
experience is that they need more time. It would be helpful.
But, we also advocate for a last look, because all too often,
the price does come down and then the homes ends up in the
hands of an investor. But the homeowner or nonprofit could have
purchased it first if they had more time to do so.
And, I have an example of that. About 2 years ago, I was
working with Fannie Mae on a bulk transaction where we were
going to buy 40 properties in a very targeted neighborhood and
we thought it was an opportunity for us to really increase home
ownership and also build neighborhoods. We could not get to an
agreement on price. At the end of the day, they ended up
selling it for less. You know, they ended up breaking it up and
selling it into the market, but the price kept dropping and
dropping and dropping. And, of course, nothing good happens
when these properties sit on the market vacant. So I urge the
consideration of a ``last look'' where homeowners and
nonprofits have a final opportunity to buy before the
properties end up in the hands of investors.
I think another area where we can have success--and I
really do believe this--we entered into a direct sale of
nonperforming mortgages from FHA--it was to help with Sandy
recovery. We purchased 517 mortgages. We paid a premium. The
Office of Management and Budget calculated that premium. But,
it was worth it for us to be able to get control of those
assets and be able to repurpose them for the community
stabilization outcomes we thought important: number one,
keeping family in their home, and number two, when houses were
vacant, to to offer them as affordable housing opportunities.
I would urge that this direct sale approach continue to be
developed, both at FHA and FHFA, and that they tighten the
neighborhood stabilization outcomes to make sure that these
properties do end up being used for community stabilization
purposes.
Senator Warren. Well, I want to thank you all for these
comments. They are very helpful.
You know, I just think it is very important that the First
Look Program actually work to help keep homeowners in homes and
to help stabilize communities, not, as you say, a box to be
checked off before the property gets shipped over to investors.
So, thank you. It is really important. And, I appreciate all
the ideas you have got for how it is that this program could be
changed to make it more effective for families and more
effective for communities. Thank you.
Thank you, Mr. Chairman.
Chairman Menendez. Thank you.
One last question. Ms. Goldberg, you know, I guess maybe I
know this or knew it, but hearing it from you is really
bothersome to me, and that is the question of the differences
on how foreclosed homes are treated in different communities.
And, if a foreclosed property is less well managed in
communities that are already facing challenges, does that not
create a self-fulfilling prophecy that it is going to make it
harder for it to recover at the end of the day?
Ms. Goldberg. That is right, and it has a tremendous impact
not only on the people who lost their homes, obviously, but on
all the surrounding properties and then on the larger community
and the resources available to the city to provide the kinds of
services that are needed.
You know, it has been estimated that the foreclosure crisis
and the loss in value of property as a result is going to lead
to about $2.2 million in wealth drained out of communities
across the country, and half of that, $1.1 trillion--did I say
trillion? I meant trillion. One-point-one trillion----
Chairman Menendez. Around here, millions, you know, get
lost, so----
Ms. Goldberg. Yeah----
[Laughter.]
Ms. Goldberg. One-point-one trillion is expected to be
drained from communities of color. So, the way these properties
are managed and maintained and marketed is a huge piece of
that. And making the First Look program work for prospective
owner occupants is important, as well, because one of the
things we found in our investigation is that certain
neighborhoods become targeted by the owners of the REOs--
whoever those may be, whether that is a bank or a GSE or some
other investor--they become targeted as investor communities
and then they put less money into fixing that house up and
maintaining that house. And, so, then it adds to your self-
fulfilling prophecy because those homes then become less
attractive to a homeowner who is going to have to put a bundle
of money into it to make it the kind of house they want to live
in.
And, so, dealing with these problems, creating the kinds of
standards that we really need for marketing and for maintenance
of these properties, making sure that the companies that are
hired to do that work on the ground have the qualifications,
making sure that the Federal agencies who oversee this whole
process take that responsibility seriously and conduct that
oversight, conduct enforcement where it is needed, that is a
big piece of solving the puzzle, as well.
Chairman Menendez. So, this was your entity's own
investigation.
Ms. Goldberg. That is right. We worked with 17 of our
members across the country, but, yes.
Chairman Menendez. Well, and you also said that this was a
violation of the Fair Housing----
Ms. Goldberg. That is right. So, that gives us another tool
for addressing the problem.
Chairman Menendez. Well, maybe we need an Inspector
General's report.
It is unimaginable to me that with challenges already
existing in communities like this, that there would be added
with another challenge in which their properties would become
less marketable at the end of the day as a result of a
purposeful neglect, because you have to think of it as
purposeful at the end of the day. It is obviously a judgment by
those who own the REOs to treat them in a different way.
Ms. Goldberg. That is right.
Chairman Menendez. If that is the findings, then we need to
act upon that. That is very insightful.
Well, with the thanks of the Committee for all of your
insight, this record is going to be open for 7 days. I feel
that there may be questions coming to you, so we would ask you
to answer them as expeditiously as possible so we can complete
the record.
And, with that, this hearing is adjourned.
[Whereupon, at 12:28 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF WAYNE T. MEYER
President, New Jersey Community Capital
December 9, 2014
Introduction
Senator Menendez and Members of the Subcommittee, thank you for
this opportunity to speak with you about New Jersey Community Capital's
efforts to advance the housing and foreclosure recovery. I am honored
that our experience may be of value in your consideration of solutions
for communities across the Nation that continue to struggle with the
devastation of the foreclosure crisis.
My name is Wayne Meyer, and I am the President of New Jersey
Community Capital, which is the largest nonprofit community development
financial institution, or CDFI, in the State of New Jersey. I would
like to share with you several approaches that my organization has been
taking to prevent and mitigate foreclosures and to stabilize distressed
housing markets in New Jersey. But first, I think it is important to
discuss the challenges facing our State, because while the housing
market has begun to turn the corner in some places, New Jersey is still
very much in a housing crisis.
Challenges
Ongoing Foreclosures
As of June 2014, 5.7 percent of homes in New Jersey were in
foreclosure and 9.3 percent more were seriously delinquent. \1\ Those
are the highest rates in the Nation. 12.8 percent of mortgaged homes in
the State had negative equity--that equals 240,000 additional homes
still threatened by foreclosure and abandonment. \2\ Moreover,
foreclosures are actually increasing in New Jersey due to its prolonged
foreclosure process: in October 2014, foreclosure auctions across the
State were 118 percent higher than in the prior year, the third highest
jump in the Nation. \3\
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\1\ CoreLogic. National Foreclosure Report, June 2014.
\2\ CoreLogic. Equity Report, Second Quarter 2014.
\3\ RealtyTrac. U.S. Foreclosure Market Report, October 2014.
---------------------------------------------------------------------------
These numbers reflect dire outcomes, especially in low-income
areas: hundreds of thousands of families facing the severe negative
outcomes of debt and displacement; communities facing high vacancies
and declining property values and their dire consequences on public
health and safety; and a State facing major budget deficits in large
part due to the crisis, which affects all of its residents.
Barriers to Stable Housing
It is also worth noting the barriers faced by many lower-income
families trying to recover from the crisis and to regain housing
stability. First, mortgage credit has become increasingly inaccessible:
over the last 2 years, almost 98 percent of new mortgages have been
extended to buyers with credit scores over 640, which is out of reach
to even most financially stable moderate-income families, and while
Fannie Mae and Freddie Mac's new guidelines will relax mortgage credit
standards, the impact of these changes will take time to take effect.
\4\ In New Jersey, the number of available home purchase loans
decreased by 55.1 percent from 2001 to 2012, the second largest decline
in the country. \5\ So stable home ownership is less and less of an
option for recovering families.
---------------------------------------------------------------------------
\4\ Joe Light, ``Mortgage Lenders Set To Relax Standards'', Wall
Street Journal, Nov. 28, 2014.
\5\ Laurie S. Goodman, Jun Zhu, and Taz George, ``Where Have All
the Loans Gone? The Impact of Credit Availability on Mortgage Volume'',
Journal of Structured Finance 20, No. 2 (2014).
---------------------------------------------------------------------------
At the same time, New Jersey has the fourth highest rental costs of
any State, and these costs are rising, \6\ even as wages for the bottom
50 percent of New Jersey wage earners has declined by a dollar per hour
in the past year. \7\ As a result, many more lower-income families are
spending over 50 percent of their income on rental housing, in turn
causing even greater economic and housing insecurity, with impacts that
span generations. This cycle is hurting families across the State
today, and without effective interventions, they will hurt thousands of
additional families as foreclosures continue to release debt-ridden
households into a high-cost rental market with extremely insufficient
affordable housing options.
---------------------------------------------------------------------------
\6\ National Low-Income Housing Coalition. Out of Reach 2014, 2014
State Summary.
\7\ Legal Services of New Jersey. Assessing New Jersey's Progress
in Combatting Poverty, September 2014.
---------------------------------------------------------------------------
Solutions
For New Jersey Community Capital, an equitable and healthy housing
market has always been and remains a fundamental pillar for stabilizing
neighborhoods and increasing the well-being and economic mobility of
lower income families. As first and foremost a community development
lender, we annually invest millions of dollars into the creation and
preservation of hundreds of affordable housing units, both for sale and
rental. In a difficult financial climate, we have diversified funding
sources and created new medium-term lending products to continue to
provide flexible capital for this purpose.
But we know that this is not enough--development capital by itself
does not prevent foreclosures or make mortgage credit more accessible,
nor does our lending activity begin to approach the scale necessary to
meet New Jersey's growing unmet affordable rental housing needs. So we
have taken up the task of innovating additional solutions to
stabilizing New Jersey's housing markets.
ReStart
The first of these solutions is a program we call ReStart. In 2012,
we leveraged major investments from several financial partners to
acquire two ``NSO targeted'' pools of nonperforming mortgages through
the FHA's Distressed Asset Stabilization Program, a total of 261
mortgages in the areas of Newark, NJ, and Tampa, FL. A year later, we
partnered with private investors to directly purchase a pool of 517
additional nonperforming FHA mortgages in the nine New Jersey counties
most impacted by Superstorm Sandy. Cumulatively, the total unpaid
principal balance on these mortgages was over $190 million.
We were the only nonprofit to successfully win bids for multiple
DASP mortgage pools, and the only thus far to complete a direct
purchase from FHA. We are also the loss mitigation manager for a
private purchaser of DASP pools in both Florida and North Carolina. We
are using the provision of Hardest Hit Funds from each State and our
existing mortgage resolution infrastructure to manage and resolve all
occupied homes under the mortgages in their pools, a total of more than
300 homes that will be stabilized.
Through ReStart, we are striving to produce 100 percent positive
outcomes for homeowners and properties under the mortgages we acquire
or manage. We first look to provide principal reductions to the
distressed homeowners still occupying the homes, preventing their
foreclosure and displacement. We are generally able to reduce the
mortgages to 100 percent of current market value, with mortgage
payments at under 35 percent of monthly income. We also provide these
homeowners with high-touch financial counseling through local HUD-
approved agencies, ensuring that they are stabilized for the long-term.
So far, we have provided over 250 successful principal reductions,
totaling over $18 million in forgiven principal, to families in need.
Mortgage modifications are just one component of the ReStart
program, and not every home is owner-occupied, and not every occupant
is in a position to sustain ownership. For homeowners who cannot or
choose not to pursue a mortgage modification, we offer deeds-in-lieu of
foreclosure and transitional assistance to help them attain new
affordable housing. And for units that either were vacant or tenant-
occupied--which account for about 45 percent of the units under
mortgages we acquired--or become vacant over the course of the program,
we are working with local community developers and contractors to
rehabilitate them into new quality affordable housing opportunities.
CAPC
Our second major community stabilization innovation is Community
Asset Preservation Corporation, or CAPC, which we incorporated as a
real estate affiliate in 2009. The foreclosure crisis has almost
entirely impacted one-to-four-family homes, but in the State of New
Jersey, there has been a dearth of affordable housing developers with
the capacity to compete with speculators to acquire these abandoned
real-estate-owned homes at a scale large enough to begin to reverse
trends of neighborhood decline.
Over the last 5 years, CAPC has used its capacity and expertise to
acquire over 320 housing units, the vast majority of which have been
clusters of single-family properties, and it has partnered with local
community developers in order to return them to productive affordable
housing. CAPC has also developed the capacity to manage many of these
properties as rental housing, which is a critical and otherwise unmet
function that both ensures the productive occupancy of these units and
meets the needs of the growing number of low-to-moderate income renters
in New Jersey.
CAPC will be serving a critical role in ReStart by acquiring and
fostering the redevelopment of a number of the vacant ReStart
properties. CAPC has also partnered with the City of Newark to serve as
the lead redeveloper for 156 vacant properties that are primarily
clustered in four distressed neighborhoods that the City is targeting
for revitalization. CAPC is continuing to work with local partners to
redevelop and reoccupy these units. It has also begun a series of
trainings to help local contractors build their capacity to partner on
this effort and in other local redevelopments, and it has committed to
providing the majority of the construction jobs through this program to
local workers.
Mortgage Bank
Our next major step is the collaborative expansion of a Credit
Union Service Organization (CUSO) to provide direct access to stable
mortgage credit and credit counseling to qualifying prospective low- to
moderate-income homebuyers that cannot access mortgages in the
traditional market. We are currently developing a partnership with a
major New Jersey-based credit union to build this platform.
The CUSO will originate and service CRA-qualifying mortgages for
potential low-to-moderate income buyers of formerly abandoned
properties that we have redeveloped into affordable housing through
ReStart or CAPC or have financed through our loan products, as well as
buyers of other affordable for-sale homes across New Jersey. Each of
these buyers will be required to complete credit counseling through an
NJCC-approved agency, which NJCC will compensate for services, and
therefore the buyers will be pre-approved for the available mortgage
products. NJCC and its partners will also provide eligible homebuyers
with access to downpayment assistance programs and other subsidies. We
believe we can launch this critical effort within the next year.
Needs
Between our flexible lending products and the programs I have
outlined for you today, New Jersey Community Capital is seeking to
foster the comprehensive stabilization of New Jersey's distressed
families and communities: not only providing financing for rental
housing, but directly developing and managing it on a large scale; not
only preserving home ownership, but creating new pathways to it. And we
believe that these are models that could be replicated in distressed
communities across the country.
But for these efforts to operate on the scale necessary to really
bring New Jersey another step closer to recovering from its persistent
foreclosure crisis, they require partnerships and resources from
Federal and State government and from private financial institutions.
Decision makers in each sector can together provide large-scale access
to distressed mortgages and vacant properties and can make available
substantial financial resources that will produce both social outcomes
and substantial direct and indirect returns on investment. Today, I
would like to suggest several low-cost or no-cost approaches that
Federal legislators and agencies could take to advance these steps to
recovery, in New Jersey and elsewhere.
Improving Access to Nonperforming Mortgages
To expand ReStart to more homeowners and more vacant properties,
NJCC has relied on access to discounted pools of nonperforming FHA
mortgages offered through DASP program auctions. The DASP program has
been a huge and vital resource in our efforts to scale up our
foreclosure recovery efforts. The program has preserved homes,
minimized foreclosures, protected property values, and promoted broad-
based community stability, and from our perspective, it is one of the
last remaining foreclosure recovery programs to preserve and create
home ownership for low- to moderate-income communities at significant
numbers.
However, this program has become increasingly dominated by profit-
driven private investors, which have won bids on 98 percent of DASP
loans, including 88 percent in designated Neighborhood Stabilization
Outcomes (NSO) pools. We believe that it is critical that FHA refine
the DASP auctions to make them more accessible to nonprofits and
community-based organizations. Thus far, studies of the program have
shown that nonprofits and community-based organizations have produced
far more positive outcomes for homeowners and for communities.
There are several straightforward solutions to this challenge. FHA
could complete more direct sales of these mortgages to nonprofits,
especially in NSO areas, where positive neighborhood outcomes such as
foreclosure prevention and affordable housing creation are of
especially high importance. Also, FHA could tighten NSO requirements by
awarding additional points to those committed to social outcomes, or it
could set aside certain mortgage pools on which socially motivated
nonprofits would have the first option to bid. Finally, FHA could
heighten minimum NSO outcomes, such as requiring that a certain portion
of vacant properties be redeveloped and sold or rented as affordable
housing.
Continuing Programs To Finance Principal Reductions
Studies have shown that principal reductions are more effective
than almost any other foreclosure prevention strategy, especially when
paired with counseling. And these modifications benefit everyone
involved: the homeowners, the neighborhoods, the mortgagees, and the
local and State governments. But funds that are critical for producing
affordable principal reductions have been difficult to access, and even
more so now that Hardest Hit Funds are no longer available. We hope
that similar funds can be made available for affordable principal
reductions in places like New Jersey where the foreclosure crisis is
still ongoing, including Department of Justice Settlement Funds. If
more available, these funds could carry a program like ReStart to
thousands more distressed homeowners.
An alternative approach would be to incentivize financial
institutions to partner with nonprofits to directly provide principal
reductions to distressed homeowners under mortgages they are servicing.
We are currently working with one major financial institution to
directly acquire over 500 mortgages located in communities we serve,
but this transaction is just one of many that could occur if greater
incentives were in place. These incentives could take the form of CRA
credits or a number of other benefits.
We also believe that similar incentives--CRA credits perhaps being
the best example--could spur financial institutions to increase access
to stable mortgage credit for qualifying low-to-moderate-income
families who are truly ready for home ownership. This could include the
purchase of nonperforming mortgages that are modified and stabilized
through programs like ReStart, as well as mortgages that have been
seasoned though a program like our developing CUSO and would attain
long-term success by being transferred into the conventional mortgage
market.
Expanding the CDFI Bond Guarantee Program
Lastly, while we have used our existing resources and creativity to
expand our provision of capital for affordable rental housing
development, we simply do not have sufficient access to long term
capital that is truly necessary for large-scale rental housing
investments. The CDFI Bond Guarantee Program has the potential to be a
truly momentous program in transforming the ability of CDFIs like ours
to foster the large-scale creation of affordable rental housing, an
especially severe need in places like New Jersey. The extension and
expansion of this program will be transformative for the communities we
serve.
Conclusion
In conclusion, I would once again like to thank the Members of the
Subcommittee for their time and attention to this critical issue of
saving our neighborhoods from the detrimental impact of foreclosures.
And I would like to acknowledge Senator Menendez' leadership in helping
residents of our at-risk communities across our State. I hope this
conversation can continue, as I believe that, with the right set of
policies and programs, we can truly stabilize our distressed
communities, to the benefit of everyone.
PREPARED STATEMENT OF MABEL GUZMAN
2014 Chair, Conventional Finance and Policy Committee, National
Association of Realtors
December 9, 2014
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF JULIA GORDON
Director of Housing Finance and Policy, Center for American Progress
December 9, 2014
Good morning Chairman Menendez, Ranking Member Moran, and Members
of the Subcommittee. My name is Julia Gordon, and I direct the housing
finance team at the Center for American Progress, a nonpartisan think
tank dedicated to improving the lives of Americans through progressive
ideas and action. Thank you so much for convening this hearing on the
critical topic of inequality and opportunity in the housing market. I
greatly appreciate the opportunity to testify today about the state of
our housing recovery and its relationship to the well-being of families
and the broader economy.
Research and our lived experience confirm the link between housing
and opportunity in this country, from the many benefits of home
ownership for families and communities to the central role of the
housing economy on economic vitality. A healthy housing market, when
coupled with appropriate protections to ensure responsible and
sustainable lending, offers opportunities for young people to begin
building wealth through home ownership, for growing families to access
good schools and high-opportunity neighborhoods, and for older people
to choose whether to age in place or seek a smaller or more supportive
environment.
Yet at present, our Nation's housing recovery is neither strong nor
equitably distributed. Not only has the mortgage market shrunk
nationally, but many communities, especially communities of color, lag
far behind other parts of the country, with hard-hit neighborhoods
continuing to suffer the ongoing effects of multiple foreclosures,
negative equity, vacant homes, and blight. We have turned back the
clock nearly 20 years on home ownership rates, and rental costs are
soaring relative to incomes. \1\
---------------------------------------------------------------------------
\1\ Prashant Gopal, ``U.S. Homeownership Rate Falls to the Lowest
Since 1995'', Bloomberg, April 29, 2014, available at http://
www.bloomberg.com/news/2014-04-29/u-s-homeownership-rate-falls-to-the-
lowest-since-1995.html; Joint Center for Housing Studies of Harvard
University, ``America's Rental Housing: Evolving Markets and Needs'',
(2013) Table A-1, available at http://www.jchs.harvard.edu/sites/
jchs.harvard.edu/files/ahr2013_appendix_tables.pdf.
---------------------------------------------------------------------------
Historically, the housing sector has led economic recoveries
following downturns. Unfortunately, the market is not yet strong enough
now to play that role, which is one of the reasons why the overall
recovery still has a lot farther to go. While we have had 57 months of
consecutive private sector job growth, too many people are still out of
work or underemployed, small business formation remains depressed, \2\
and consumer demand has not rebounded sufficiently. The combination of
stagnant wages and rising costs for basic needs, including housing, has
squeezed the budgets of all families in America, with the result that
entering or even staying in the middle class has become increasingly
difficult. \3\
---------------------------------------------------------------------------
\2\ U.S. Census Bureau, ``Business Dynamics Statistics'',
available at http://www.census.gov/ces/dataproducts/bds/.
\3\ Center for American Progress, ``The Middle-Class Squeeze'',
(2014), available at https://www.americanprogress.org/issues/economy/
report/2014/09/24/96903/the-middle-class-squeeze/.
---------------------------------------------------------------------------
Despite this bleak picture, we see many options for policy choices
that can help strengthen the housing market, aid struggling families,
and revitalize hard-hit neighborhoods. In this testimony, we provide a
set of recommendations to help. While no single recommendation is a
silver bullet, taken together, we believe we could move the dial
significantly. Many of these recommendations do not require legislative
action, but can be accomplished by regulatory agencies, while others
would require Congress to act.
To increase access to safe and affordable credit, we recommend:
a. Congress should complete comprehensive reform of the housing
finance system.
b. The Federal Housing Finance Agency should play a powerful role in
increasing access to credit.
c. As a provider of credit to so many underserved populations, the
Federal Housing Administration should continue to improve
access to and affordability of credit.
d. Congress and regulators should support alternative mortgage
channels, innovative products to reach underserved borrowers,
and effective housing counseling.
e. Congress should extend the Mortgage Forgiveness Debt Relief Act,
and it should convert the mortgage interest deduction to a tax
credit.
f. Regulators should collect better mortgage data to help identify
problems and potential solutions in the market.
In addition, to assist struggling families and neighborhoods, we
recommend:
a. FHA should improve its Distressed Asset Sale Program to better
promote home retention and neighborhood stability.
b. FHFA should take additional steps to aid struggling homeowners
and communities.
c. The Consumer Financial Protection Bureau should continue to
improve its servicing rules.
d. Policymakers should take steps to help renters, particularly very
low-income renters.
Background: The State of the Housing Market
Overall, the national mortgage market today is significantly
smaller than it was before the Great Recession, both in terms of
overall volume and home sales. \4\ The national home ownership rate has
dropped from close to 70 percent to 64 percent. Cash investors made 29
percent of all purchases in 2013, way above their historic norm of 10-
12 percent. \5\ Housing starts remain depressed, and even optimistic
projections for 2015 remain well below levels seen before the housing
boom. \6\
---------------------------------------------------------------------------
\4\ Johnathan Miller, ``Real-Estate Appraisals Are Bubbly Again'',
Bloomberg View, December 4, 2014, available at http://
www.bloombergview.com/articles/2014-12-04/back-to-inflated-realestate-
appraisals.
\5\ Realtytrac, ``Short Sales and Foreclosure Sales Combined
Accounted for 16 Percent of U.S. Residential Sales in 2013'', Press
Release, January 22, 2014, available at http://www.realtytrac.com/
content/news-and-opinion/december-and-year-end-2013-us-residential-and-
foreclosure-sales-report-7967.
\6\ Bill McBride, ``Preliminary: 2015 Housing Forecasts'',
Calculated Risk, October 31, 2014, available at http://
www.calculatedriskblog.com/2014/10/preliminary-2015-housing-
forecasts.html; Census Bureau data shows we averaged more than 1.5
million annual housing starts between 1998 and 2002.
---------------------------------------------------------------------------
Additionally, access to credit remains tight. For a conventional
home purchase mortgage, the average FICO score is 754. While FHA credit
is easier to obtain, with average credit scores for purchase money
mortgages around 680, it is still tighter than historical norms. \7\
The Urban Institute estimates that approximately 1.2 million fewer
purchase mortgages were made in 2012 than would have been the case had
credit availability remained at pre-bubble 2001 levels. \8\ Testimony
today from the National Association of Realtors provides considerable
additional detail on the size and condition of the market. \9\
---------------------------------------------------------------------------
\7\ Ellie Mae, ``Origination Insight Report: October 2014'',
(2014) available at http://www.elliemae.com/origination-insight-
reports/Ellie_Mae_OIR_OCTOBER2014.pdf; Historical FHA data available in
HUD's FHA Single-Family Mutual Mortgage Insurance Fund Programs
Quarterly Reports to Congress, available at http://portal.hud.gov/
hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/
fhartcqtrly.
\8\ Laurie Goodman, Jun Zhu, and Taz George, ``Where Have All the
Loans Gone? The Impact of Credit Availability on Mortgage Volume'',
(Washington: Urban Institute, 2014, available at http://www.urban.org/
publications/413052.html.
\9\ Statement of the National Association of Realtors before the
United States Senate Committee on Banking, Housing, and Urban Affairs
Subcommittee on Housing, Transportation, and Community Development,
``Inequality and the Housing Market'', December 9, 2014.
---------------------------------------------------------------------------
In terms of specific populations, home ownership rates for young
people (ages 25-34) are among the lowest in decades. \10\ While that
could in part be explained by the timing of the Great Recession and by
the later ages at which this demographic group is forming families,
even 35 to 54 year olds (Generation X)--which should be in their prime
home ownership years--have a home ownership rate lower than expected.
\11\
---------------------------------------------------------------------------
\10\ HUD, ``U.S. Housing Market Conditions Historical Data''.
\11\ Jed Kolko, ``The Recession's Lost Generation of Homeowners
Isn't Millennials--It's the Middle-Aged'', Trulia Trends, July 16,
2014, available at http://www.trulia.com/trends/2014/07/recessions-
lost-generation/.
---------------------------------------------------------------------------
The health of the mortgage market is also important for the Baby
Boomer generation, many of whom will soon be seeking to sell their
homes. The Bipartisan Policy Center estimates that Echo Boomers--those
born between 1981 and 1995--will drive 75 to 80 percent of owner-
occupied home acquisition before 2020 as Baby Boomers sell off their
homes. \12\ Homes are significant reservoirs of wealth, and a lack of
sufficient effective demand for homes could significantly affect the
retirement security and the ability to remain independent for these
families.
---------------------------------------------------------------------------
\12\ Bipartisan Policy Center, ``Demographic Challenges and
Opportunities for U.S. Housing Markets'', March 2012, available at
http://bipartisanpolicy.org/library/report/demographic-challenges-and-
opportunities-us-housing-markets.
---------------------------------------------------------------------------
Perhaps most troubling, home ownership rates for people of color
have dropped dramatically, with Latinos falling by 9 percent from their
peak, and African Americans by 13.7 percent. \13\ Because the majority
of families formed in America going forward will be families of color,
a steep reduction in the numbers of Latinos and African Americans
buying homes spells trouble for the housing market for decades to come.
\14\
---------------------------------------------------------------------------
\13\ Calculations based on U.S. Census Bureau Housing Vacancies
and Homeownership data, available at http://www.census.gov/housing/hvs/
data/histtabs.html.
\14\ Daniel McCue, ``Baseline Household Projections for the Next
Decade and Beyond'', (Cambridge: Harvard Joint Center for Housing
Studies, 2014), available at http://www.jchs.harvard.edu/sites/
jchs.harvard.edu/files/w14-1_mccue_0.pdf.
---------------------------------------------------------------------------
The drop in home ownership rates plays a significant role in the
ever-increasing wealth disparities between Whites and people of color.
The median White household lost 29 percent of their home-equity-based
wealth between 2005 and 2011, while the median African American
household and the median Hispanic household lost 38 percent and 55
percent of their home-equity wealth, respectively. \15\ Loss of home
equity translates directly in overall asset reductions, especially for
households of color, since their homes are their largest asset (for
African American families, homes account for more than half of all
wealth, compared to 39 percent for Whites). \16\ Specifically, Whites
lost about 26 percent of their net worth during this period, while
African Americans lost 50 percent and Hispanics lost 61 percent. \17\
---------------------------------------------------------------------------
\15\ Center for American Progress calculation based on 2005 and
2011 Survey of Income and Program Participation data, adjusted for CPI-
U.
\16\ Thomas Shapiro, Tatjana Meschede, and Sam Osoro, ``The Roots
of the Widening Racial Wealth Gap: Explaining the Black-White Economic
Divide'', (Waltham, MA: Institute on Assets and Social Policy, 2013)
available at http://iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/
racialwealthgapbrief.pdf.
\17\ Center for American Progress calculation based on 2005 and
2011 Survey of Income and Program Participation data, adjusted for CPI-
U.
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Today's lending patterns mirror our long history of unequal access
to mortgage credit for low- and moderate-income and minority
communities and borrowers. Census tracts with low levels of any type of
home purchase lending are disproportionately minority (45 percent on
average, compared to 33 percent in other areas) and lower-income (with
an average income of 82 percent of area median income vs. 107 percent
of AMI in other areas). \18\ In 2013, African Americans received only
4.8 percent of home purchase mortgages, despite making up 13 percent of
the population, and Hispanics received 7.3 percent of these loans,
despite constituting 17 percent of the population. \19\ Minority
households disproportionately lack access to the more affordable
mortgage credit offered in the conventional market, as 70 percent of
home purchase loans made to African Americans and 63 percent of these
loans made to Hispanics in 2013 were Government supported. \20\
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\18\ Low-lending census tracts defined as those with fewer
originated home purchase loans per owner-occupied home than the median
(2.15 percent) in 2012. Center for American Progress analysis based on
2012 HMDA data for applications for conforming loans for the purchase
of 1-4 family owner-occupied units.
\19\ Clea Benson and Alexis Leondis, ``Lending to Minorities
Declines to a 14-Year Low in U.S.'', Bloomberg, September 24, 2014,
available at http://www.bloomberg.com/news/2014-09-24/lending-to-
minorities-declines-to-a-14-year-low-in-u-s-.html.
\20\ Neil Bhutta and Daniel R. Ringo, ``The 2013 Home Mortgage
Disclosure Act Data'', (Washington: Federal Reserve, 2014), available
at http://www.federalreserve.gov/pubs/bulletin/2014/pdf/2013_HMDA.pdf.
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Recently, the Urban Institute's Housing Finance Policy Center
developed a groundbreaking methodology for measuring the tightness of
credit in the housing market. \21\ This technique better accounts for
the changing credit profile of applicants over time, an important
adjustment because far fewer applicants with weaker credit profiles are
applying for mortgages than did during the housing bubble (2004-07) or
the more normal period of lending activity that preceded it (1998-
2003). Most notably, in the conventional sector, \22\ only 8 percent of
conventional borrowers in the post-crisis period were of lower credit
quality compared to 29 percent in the pre-bubble years, before the rise
of the irresponsible practices that led to the crisis. This tightness
in the conventional sector has a disproportionate impact on borrowers
of color, who find themselves relegated to the more expensive
Government-backed channels or locked out of the mortgage market
altogether.
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\21\ Wei Li and Laurie Goodman, ``A Better Measure of Mortgage
Application Denial Rates'', (Washington: The Urban Institute, 2014),
available at http://www.urban.org/UploadedPDF/2000031-A-Better-Measure-
of-Mortgage-Application-Denial-Rates.pdf.
\22\ The conventional channel includes GSE, bank portfolio, and
private-label securities executions. The Government channel consists of
FHA, VA, and USDA loans guaranteed by Government agencies.
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At the same time, while home prices nationally have rebounded from
the lows reached during the Great Recession, price recovery has been
remarkably uneven, with some geographies still deeply underwater. Not
only are 8.7 million (17 percent) of homeowners underwater nationally,
\23\ but in the 395 hardest-hit zip codes, between 43 percent and 76
percent of homeowners are underwater. \24\ More than 70 percent of
these zip codes have incomes below the national median, and in two-
thirds of them, African Americans and Latinos account for at least half
the population.
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\23\ Zillow, ``Negative Equity Causing Housing Gridlock, Even as
It Slowly Recedes'', (2014) available at http://www.zillow.com/
research/2014-q2-negative-equity-report-7465/.
\24\ Peter Dreier and others, ``Underwater America: How the So-
Called Housing `Recovery' Is Bypassing Many American Communities''
(Berkeley, CA: Haas Institute for a Fair and Inclusive Society, 2014).
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The combination of tremendous home price declines, widespread
negative equity, and the impact of the recession on unemployment
resulted in the worst foreclosure crisis since the Great Depression.
Since the start of the crisis, there have been 5 million completed
foreclosures. Even today, with foreclosure rates much lower, about
630,000 homes are currently in some stage of the foreclosure process
while more than 1.6 million borrowers are seriously delinquent. \25\
Foreclosures have cost homeowners, neighborhoods, and investors dearly.
A typical foreclosure costs borrowers up to $7,000 in administrative
costs alone, \26\ costs investors more than $75,000, \27\ reduces the
value of neighboring homes, \28\ and burdens local governments through
reduced property taxes and increased anti-blight expenditures. \29\ A
recent study even linked foreclosures to declines in neighbors' health.
\30\ Weakness in the housing market deprives our economy of the
economic multiplier effects of a strong housing market, including
additional construction jobs, consumer demand for household-related
items, and local and State tax revenue. The stubborn persistence of
negative equity also continues to depress aggregate consumer demand for
all goods and services, with significant macroeconomic consequences;
homeowners with high levels of debt relative to the value of their
assets have experienced larger declines in consumption than less highly
leveraged homeowners, even after taking into account declines in net
worth. \31\ Additionally, fewer small businesses are being founded in
the aftermath of the Great Recession, \32\ which is not surprising
given that roughly one in four small-business owners uses home equity
as a source of capital or collateral. \33\
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\25\ Corelogic, ``National Foreclosure Report: March 2014'',
(2014) available at http://www.corelogic.com/research/foreclosure-
report/national-foreclosure-report-march-2014.pdf; Corelogic,
``National Foreclosure Report: August 2014'', (2014) available at
http://www.corelogic.com/research/foreclosure-report/national-
foreclosure-report-august-2014.pdf.
\26\ HUD, ``Economic Impact Analysis of the FHA Refinance Program
for Borrowers in Negative Equity Positions'', available at http://
www.hud.gov/offices/adm/hudclips/ia/ia-refinancenegativeequity.pdf.
Family Housing Fund, ``Cost Effectiveness of Mortgage Foreclosure
Prevention'', (1995) available at http://www.fhfund.org/_dnld/reports/
MFP_1995.pdf.
\27\ HUD, ``Economic Impact Analysis of the FHA Refinance Program
for Borrowers in Negative Equity Positions''.
\28\ Massachusetts Institute of Technology, ``How Foreclosures
Hurt Everyone's Home Values'', Press release, July 20, 2010, available
at http://newsoffice.mit.edu/2010/housing-prices-0720.
\29\ William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey,
``The Municipal Cost of Foreclosures: A Chicago Case Study'',
(Minneapolis: Homeownership Preservation Foundation, 2005), available
at http://www.nw.org/network/neighborworksProgs/
foreclosuresolutionsOLD/documents/2005Apgar-DudaStudy-FullVersion.pdf.
\30\ Dina ElBoghdady, ``Foreclosures May Raise Neighbors' Blood
Pressure, Study Finds'', Washington Post, May 12, 2014, available at
http://www.washingtonpost.com/business/economy/study-foreclosures-may-
raise-neighbors-blood-pressure/2014/05/12/5f519952-da03-11e3-bda1-
9b46b2066796_story.html; Mariana Arcaya, M. Maria Glymour, Prabal
Chakrabarti, Nicholas A. Christakis, Ichiro Kawachi, and S.V.
Subramanian, ``Effects of Proximate Foreclosed Properties on
Individuals' Systolic Blood Pressure in Massachusetts'', 1987-2008.
Circulation, May 2014.
\31\ Karen Dynan, ``Is a Household Debt Overhang Holding Back
Consumption?'' (Washington: Brookings Institution, 2012), available at
http://www.brookings.edu//media/projects/bpea/spring%202012/
2012a_dynan.pdf; Atif Mian and Amir Sufi, ``House of Debt'', University
of Chicago Press, 2014.
\32\ U.S. Census Bureau, ``Business Dynamics Statistics''.
\33\ Mark E. Schweitzer and Scott A. Shane, ``The Effect of
Falling Home Prices on Small Business Borrowing'', (Federal Reserve
Bank of Cleveland, 2010), available at http://www.clevelandfed.org/
research/commentary/2010/2010-18.cfm.
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Finally, the decline in home ownership has led to an increase in
renters, placing significant upward pressure on rent prices. As of
2012, more than half of all renters spend more than 30 percent of their
income on housing, which is the historical upper limit of rent
affordability. More than a quarter of all renters spend more than half
of their gross income on rent, significantly reducing their ability to
pay for food, child care, health care, and other necessities. \34\
While the number of households experiencing ``worst case'' housing
needs--either because they live in severely inadequate housing or spend
more than half of their income on rent--has increased, Congress has
repeatedly cut rental assistance programs, and the share of households
eligible for these benefits that actually receive them has continued to
fall. \35\
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\34\ Center for American Progress analysis of Minnesota Population
Center, ``Integrated Public Use Microdata Series'', available at
https://usa.ipums.org/usa/ (last accessed June 2014).
\35\ Doug Rice, ``Better Federal Policy Needed To Address Rental
Affordability Crisis'', Off the Charts Blog, July 2, 2014, available at
http://www.offthechartsblog.org/better-federal-policy-needed-to-
address-rental-affordability-crisis/.
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Policy Recommendations
Increase Access to Safe and Affordable Credit
Ironically, even as home prices experienced historic declines over
the past 6 years, the tightness in the credit market meant that far too
many households--especially families of color and lower-wealth
families--missed what could otherwise have been an ideal opportunity to
access affordable and sustainable home ownership, build family wealth
and security, and provide better opportunities for their children. Too
many communities that lost significant wealth due to foreclosures are
now failing to rebuild it through home ownership; as more people rent,
and especially as more formerly owner-occupied homes transition to
long-term rental, payments that could be contributing to rebuilding
residents' wealth continue to flow to investors, many of whom live
outside the community.
It is not too late to turn this situation around, but we must focus
our efforts on enabling more families to join the ranks of home
ownership. While there is no one silver bullet, there are many dials
and levers that can help increase access without opening the door to
predatory or unsafe lending.
At the same time, it is critical to ensure that any expansion of
access not lead to the same predatory and abusive market practices that
led to the crisis. While the Dodd-Frank Act created strong protections
for mortgages, and while the Consumer Financial Protection Board (CFPB)
has tried to set a sensible, moderate course in implementing those
protections, some industry participants continue to fight for broader
and more exemptions from Dodd-Frank's mandate for creditors to assess a
borrower's ability to repay a mortgage loan. An exemption for an entire
class of assets, such as portfolio loans, is overly broad and would
undermine existing incentives that deter creditors from ignoring the
damage caused by making unaffordable loans.
Moreover, we do not believe the Dodd-Frank rules will adequately
protect consumers unless all market participants, including brokers,
appraisers, lenders, securitizers, and investors, bear liability for
noncompliance. Additionally, while we commend regulators involved in
the so-called QRM rulemaking for choosing not to impose a downpayment
requirement, which we believe would have unfairly excluded lower-wealth
households from home ownership, we support the overall risk retention
rule as an important tool to provide securitizers with skin in the
game.
A. Congress should complete comprehensive reform of the
housing finance system.
One thread that runs throughout most policy recommendations about
easing tight credit is the need to provide as much certainty as
possible to market participants and stakeholders. Perhaps the largest
of such uncertainties is the fate of mortgage giants Fannie Mae and
Freddie Mac, which have now been under conservatorship for more than 6
years.
Some advocate for simply returning to the system we had before the
crisis, where Fannie and Freddie's private shareholders profited from
an implicit Government guarantee with minimal capital requirements.
While we agree the conservatorship should not last forever, it is
critical that in the process of ending it, we fix the misaligned
incentives that resulted in the GSE's financial crisis and that we
create an explicit, priced, and paid-for Government guarantee to
protect the taxpayer.
In our view, S. 1217 provided a very useful framework for this
conversation. However, the legislation as passed by the Senate Banking
Committee lacked a number of essential elements that we have
recommended, particularly with respect to access to and affordability
of credit. \36\ Placing the goal of access to affordable, sustainable
credit at the center of the new system's purpose will provide the
greatest benefit in the long run not only to families but also to
lenders and investors, and will also protect taxpayers from future
bailouts.
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\36\ Testimony of Julia Gordon before the Senate Committee on
Banking, Housing, and Urban Affairs, ``Essential Elements of Housing
Finance Reform'', (2013) available at https://www.americanprogress.org/
issues/housing/report/2013/09/12/74041/essential-elements-of-housing-
finance-reform/.
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We look forward to working with the 114th Congress to craft a
housing finance system that can take this country into the future
smoothly and successfully.
B. The Federal Housing Finance Agency can play a powerful
role in increasing access to credit.
While comprehensive housing finance reform proceeds through the
legislative process, we urge the Federal Housing Finance Agency (FHFA)
to use its extraordinary powers of conservatorship to promote a robust,
inclusive mortgage market that provides liquidity for the broadest
possible range of credit needs.
1. FHFA should use its housing goals and duty to serve rulemakings
to expand access to populations that are being left out of the housing
recovery.
Given the GSE's dominance in the secondary market, their appetite
for mortgages essentially determines whether the mortgages will be made
at all by the primary market. Understanding this dynamic, Congress has
charged FHFA with advancing access to credit by setting specific goals
for the GSEs to meet in supporting underserved borrowers and
communities and by asking the GSEs to provide ``leadership to the
market in developing loan products and flexible underwriting guidelines
to facilitate a secondary market,'' supporting very low- to moderate-
income families in the areas of manufactured housing, affordable
housing preservation, and rural markets. \37\
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\37\ Public Law 110-289, Sec 1129.
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Housing Goals: In recent years, FHFA has failed to set strong goals
that push the Enterprises to responsibly innovate and serve broadly,
instead setting single-family goals that allow the Enterprises to lag
the primary market's performance. During this time, whole segments of
the market have moved to FHA or have not been served at all. In 2012,
for example, the Enterprises financed only 16 percent of home purchase
loans originated in low-income and minority census tracts, a quarter of
home purchase loans to African Americans, and under one-third of home
purchase loans to Hispanics or Latinos. \38\
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\38\ Center for American Progress analysis of 2012 Home Mortgage
Disclosure Act Data for applications for conforming loans for the
purchase of 1-4 family owner-occupied units.
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This year's goals rulemaking is an important opportunity to push
the Enterprises to support low- and moderate-income communities. We
recommend that FHFA set strong single- and multifamily benchmarks for
GSE performance, including a 27 percent goal for low-income home
purchase lending; take strong and predictable enforcement action that
considers the performance of the overall market when the Enterprises
fail to meet the housing goals; and establish subgoals for small
multifamily properties and reporting requirements for single-family
rental. \39\
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\39\ For more detail, see Center for American Progress and
Consumer Federation of America, ``Comments on the Proposed Rule on the
Enterprises' Housing Goals 2015-2017'', (2014) available at http://
www.consumerfed.org/pdfs/CAP-CFA-Comments-on-the-Enterprises-Housing-
Goals-2015-2017.pdf.
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Duty To Serve: Although more than 6 years have passed since
Congress asked FHFA to create this requirement for the GSEs, the rule
proposed in 2010 has not been finalized or implemented. Because the
housing market and the financial status of the Enterprises has evolved
significantly in the intervening years, we urge FHFA to re-propose the
rule and once again take public comment. The proposal should encourage
responsible innovation and give the Enterprises strong incentives to
serve broadly and lead the market. \40\
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\40\ For a fuller set of recommendations, see Center for American
Progress and others, ``Re: Enterprise Duty to Serve'', (2014),
available at http://www.consumerfed.org/pdfs/CAP-letter-FHFA-on-Fannie-
and-Freddie.pdf.
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FHFA can make a significant contribution to greater affordability
in the manufactured housing area by using the duty to serve rule to
push the market toward more responsible practices in the area of
chattel lending (the majority of manufactured housing is titled as
chattel rather than real property, meaning that buyers often lack basic
consumer protections). \41\ In the affordable housing preservation and
rural markets, we similarly believe that the Enterprises can actively
support these markets through new products, flexible underwriting,
affirmative outreach, and other activities, including grants to and
partnerships with high-performing nonprofits devoted to this work.
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\41\ Consumer Financial Protection Bureau, ``Manufactured-Housing
Consumer Finance in the U.S.'', (2014), available at http://
www.consumerfinance.gov/reports/manufactured-housing-consumer-finance-
in-the-u-s/.
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2. FHFA should adjust its pricing to pool risk and to charge only
for its actual risk, thereby making loans more affordable, and should
align pricing policies with private mortgage insurer counterparty
requirements.
We consider it critical that FHFA return to a pricing structure
that is transparent, countercyclical (or, at the very least, not
procyclical), and takes full advantage of the Enterprises' unique
ability to pool risk.
After the inception of the conservatorship, Fannie and Freddie
instituted across-the-board risk based pricing through a system of loan
level price adjustments, or LLPAs. The LLPAs charge different prices
for different loans depending on the profile of both the loan and the
borrower. This change from more of a risk pooling approach occurred at
a time when housing prices were dropping, foreclosure rates were
rising, and the Enterprises were in dire straits financially. FHFA also
was concerned about the financial woes of private mortgage insurer
counterparties, many of which struggled or even went under financially
during the crisis and could not pay all their claims.
Today, the Enterprises are in a very different financial condition,
having returned to profitability due to a very strong book of new
loans, a decline in foreclosure rates, an increase in home prices, and
numerous big-dollar settlements with financial institutions. These
profits also have enabled them to use deferred tax assets, further
improving their financial position. At the same time, the private
mortgage insurers also have returned to financial health, and FHFA is
now instituting a set of capital and management requirements for those
companies that will significantly reduce the Enterprises' exposure to
counterparty risk.
Yet the LLPAs remain in force, where they play a significant role
in driving less wealthy borrowers out of the conventional market and
making loans for those borrowers more expensive--which in and of itself
increases the risk of the loans. We recommend that FHFA immediately
discontinue use of the LLPAs and return to the historical norm.
Additionally, we do not believe additional increases to the base g-
fee are required at this time. FHFA has justified these increases by
claiming they are needed to encourage the return of private label
securitization. Yet, analysts believe current fees more than cover
outstanding risk, \42\ and even the dramatic increase in g-fee over the
past several years has not succeeded in ``crowding in'' private
capital, although it has undoubtedly driven business to FHA, which
carries a 100 percent explicit Government guarantee.
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\42\ See, e.g., joint comment letter from 23 industry and consumer
groups, available at https://www.fhfa.gov//AboutUs/Contact/Pages/input-
submission-detail.aspx?RFIId=164; Laurie Goodman, Jim Parrott, Ellen
Seidman, and Jun Zhu, ``Guarantee Fees--An Art, Not a Science'',
(Washington: Urban Institute, 2014) available at http://www.urban.org/
publications/413202.html.
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As we recommended in our comment letter to FHFA, \43\ we think FHFA
should price based on what is needed to cover expected losses and
costs--including a justifiable level of capital and revenue to support
its cost--and protect the taxpayer in the event of stress scenarios,
rather than on pursuing particular market shares for non-GSE entities
or sectors.
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\43\ Center for American Progress, Consumer Federation of America,
and the Mortgage Finance Working Group, ``Re: Request for Input on
Guarantee Fees'', (2014), available at http://www.consumerfed.org/pdfs/
CAP-CFA-g-fee-comment-final-9-8-14.pdf.
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Similarly, while we support the overall effort to impose meaningful
requirements on private mortgage insurer counterparties, we have
serious concerns about the financial requirements as proposed. \44\
Because the cost of private mortgage insurance by definition falls on
lower-wealth borrowers, first time homebuyers, and borrowers of color,
the PMIERs are as important, if not more important, than guarantee fees
when it comes to affordable credit. In our view, the proposed
requirements will unnecessarily raise the cost of credit for the very
borrowers for whom the GSE mission is most important, and we suggest
that significant adjustments be made before finalizing these
requirements. It is also critical to coordinate g-fees and LLPAs with
the private mortgage insurance requirements.
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\44\ For specific recommendations, see Center for American
Progress and others, ``Re: Private Mortgage Insurance Eligibility
Requirements'', (2014), available at http://www.consumerfed.org/pdfs/
CAP-PMIER-sign-on-letter-9-8-14.pdf.
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3. Providing a 97 LTV product is a good start, and FHFA also should
provide public, loan-level data on past efforts to promote access to
credit.
We support the recently announced policy change permitting Fannie
and Freddie to buy mortgages with as little as 3 percent down under
certain circumstances. Properly underwritten, low-downpayment mortgages
with long-term, fixed-interest rates have performed well even
throughout the Great Recession. The predatory mortgages that brought
down Wall Street's house of cards sometimes included low downpayments,
but also layered multiple risks--such as exploding interest rates,
exorbitant fees, and steep prepayment penalties--with little or no
underwriting. Most of these practices are now prohibited by the Dodd-
Frank mortgage rules.
We also generally support FHFA's intention in its strategic plan to
ask the Enterprises to ``assess whether there are additional
opportunities to reach underserved creditworthy borrowers.'' \45\ Prior
to conservatorship, the Enterprises undertook diverse efforts to
promote access to affordable mortgage credit, with flexible
underwriting standards for core affordability products such as
MyCommunityMortgage as well as specialized products that met the
particular needs of borrowers, such as SmartCommute and Construction-
to-Permanent mortgages. They also worked to serve harder-to-serve
markets, such as community land trusts, tribal lands, and small
multifamily properties, and partnered with diverse entities in support
of their affordable housing mission, including nonprofits, housing
counseling agencies, Housing Finance Agencies and Community Development
Financial Institutions.
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\45\ Federal Housing Finance Agency, ``FHFA Strategic Plan for
FY2015-2019'', (2014) available at http://www.fhfa.gov/AboutUs/Reports/
Pages/FHFA-Strategic-Plan-for-FY-2015-2019.aspx.
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However, in considering how Fannie and Freddie should proceed, FHFA
should instruct the Enterprises to conduct detailed analyses of their
past efforts to promote access to affordable mortgage credit to use in
designing effective programs for the future. In addition to analyzing
previous efforts, we encourage FHFA to make release to the public
performance data on affordable lending efforts so that external
stakeholders working in the housing finance field can understand better
how to reach underserved borrowers and communities. We commend the
Enterprises for releasing loan characteristic and performance data on a
large number of their acquisitions in recent years, \46\ but data
released so far is limited to single-family, 30-year, fixed-rate, full
documentation, fully amortizing mortgages.
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\46\ See Freddie Mac's Single Family Loan-Level Dataset at http://
www.freddiemac.com/news/finance/sf_loanlevel_dataset.html and Fannie
Mae's Single-Family Loan Performance data at http://www.fanniemae.com/
portal/funding-the-market/data/loan-performance-data.html.
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4. FHFA should require Fannie Mae and Freddie Mac to update the
credit score model used by their automated underwriting systems.
Currently, the Enterprises require the use of a ``classic'' FICO
credit score--i.e., FICO 04--in their automated underwriting systems.
\47\ However, newer scoring models, including both FICO 09 and
VantageScore, have made some critical changes that will improve the
reliability of scores and/or allow the scoring of tens of millions of
consumers.
---------------------------------------------------------------------------
\47\ See Fannie Mae Selling Guide, B3-5.1-01, General Requirements
for Credit Scores, available at https://www.fanniemae.com/content/
guide/selling/b3/5.1/01.html (last accessed December 2014).
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These newer models no longer consider paid collection items,
including medical debt collections, and give less weight to unpaid
medical debts. Given that the CFPB has found that the presence of
medical debt on a credit report results in a credit score that is
typically lower by ten points than it should be, and for paid medical
debt, up to 22 points lower than it should be, \48\ and given that
about 35 percent of Americans--or 77 million--have debt collection
items on their credit reports, \49\ about half of which are for medical
debt, \50\ this is a critical issue.
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\48\ Consumer Financial Protection Bureau, ``Data Point: Medica
Debt and Credit Scores'', (2014) available at http://
files.consumerfinance.gov/f/201405_cfpb_report_data-point_medical-debt-
credit-scores.pdf.
\49\ Caroline Ratcliff and others, ``Delinquent Debt in America'',
(Washington: Urban Institute, 2014) available at http://www.urban.org/
publications/413191.html.
\50\ Robert Avery, Paul Calem, Glenn Canner, and Raphael Bostic,
``An Overview of Consumer Data and Credit Reporting'', Fed. Reserve
Bulletin 89(2)(2003); Ernst & Young, The Impact of Third-Party Debt
Collection on the National and State Economies (2012), available at
www.acainternational.org/files.aspx?p=/images/21594/
2011acaeconomicimpactreport.pdf.
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In addition, these newer models are better able to deal with
consumers with limited credit history, or ``thin file'' consumers. For
example, FICO 09 has enhancements to better assess thin file consumers,
and VantageScore claims to be able to score an additional 30 to 35
million thin file consumers. \51\
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\51\ VantageScore, ``VantageScore 3.0: Better Predictive Ability
Among Sought-After Borrowers'', (2013), available at http://
www.vantagescore.com/images/resources/VantageScore3-0_WhitePaper.pdf.
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While Fannie Mae and Freddie Mac have already agreed to study the
issue, we do not believe more research is necessary to demonstrate the
advantages of alternative models. Instead, FHFA should instruct them to
modernize their systems forthwith.
C. As a provider of credit to so many underserved
populations, FHA should continue to improve access
to and affordability of credit.
The Federal Housing Administration (FHA) has played a crucial role
in supporting our economic recovery, preventing not only even more
catastrophic home price declines but also a double-dip recession. While
this support came at a cost to the agency's capital ratio, a
combination of strong management and improvement in the economy has put
the agency on track to fully replenish its reserves by 2016. FHA has
particularly supported first-time homebuyers and buyers of color, who
are all currently poorly served by the conventional market. The
following are three suggestions for FHA to help expand affordable
credit further.
1. FHA should reassess its insurance premium structure to see if it
is possible to reduce premiums.
As noted above, FHA has of necessity focused very heavily in recent
years on making programmatic changes to help replenish its insurance
fund. While such a focus is important, we believe the fund is strong
enough at this point for FHA to reconsider the pricing of mortgage
insurance premiums. Forty percent of the agency's home purchase loans
made in the second half of 2013 qualified as high cost, which--despite
otherwise providing fixed rate, long-term credit--can in and of itself
make a loan more risky. \52\ If FHA's fees are not set correctly, its
customers, who are more likely to be minority and first time
homebuyers, will be saddled with additional unnecessary expenses,
perpetuating an unequal mortgage market. Additionally, the dramatic
increases in premiums appears to be driving borrowers away from FHA,
reducing its volume significantly, and with FHA operating as the only
program available for many lower-wealth borrowers and borrowers of
color, we fear those borrowers will not find other alternative credit
sources.
---------------------------------------------------------------------------
\52\ Bhutta and Ringo, ``The 2013 Home Mortgage Disclosure Act
Data''.
---------------------------------------------------------------------------
While we do not believe we have sufficient information at this time
to recommend a specific change to the premium structure, we strongly
encourage FHA to examine the impact its premiums are having on access
to credit and to consider whether some reductions could provide
sufficient additional volume to offset any harm to the fund.
2. FHA should complete its work to provide clarity to lenders and
reduce overlays.
To address lender concerns about indemnification, FHA has proposed
a new system for detecting defects in loan quality and holding lenders
accountable for such defects. In this proposal, FHA more clearly
identifies and classifies defects in loan applications, establishes
severity levels of such defects and provides a more objective approach
to analyzing appropriate cures for defects. We support this effort and
believe it is extremely important, although we believe more work is
required to clarify and align definitions and to further reduce
subjectivity in defect and cure classifications. Additionally, we
believe it would be sensible for FHA to work closely with FHFA to align
its policies protecting lenders, such as providing a 3-year window of
clean payment history for indemnification with exceptions for fraud,
data inaccuracies, and compliance with responsible lending practices.
D. Congress and regulators should support alternative
mortgage channels, innovative products to reach
underserved borrowers, and effective housing
counseling.
Many communities hardest hit by the housing crisis and the economic
downturn have long been either underserved or not served by traditional
financial institutions that could provide safe and affordable credit.
Similarly, for many borrowers, the most popular mainstream products
will always be difficult to access. For this reason, we recommend
taking steps to strengthen alternative mortgage channels and experiment
with safe but innovative products to reach more borrowers.
The strong need for alternative lenders in underserved communities
can be attributed to years of discrimination, redlining, and market
failures in which mainstream financial institutions lacked incentives
to lend to projects where the aggregate social return was positive.
Community Development Financial Institutions (CDFIs) and Housing
Finance Agencies (HFAs), which combine deep knowledge of local
communities' needs with safe, targeted products, can identify and
assist potential homeowners, and CDFIs can also provide business and
consumer loans, investments, and retail banking services to
neighborhoods that need critical economic catalysts to overcome years
of disinvestment.
Congress and regulators should consider whether there are changes
to regulations such as the Community Reinvestment Act (CRA) that can be
used to strengthen these institutions. For example, changing the way
that financial institutions subject to CRA receive credit for investing
in CDFIs could provide a win-win solution for banks unwilling to take
risks on certain populations, especially since CDFIs and nonprofits
receive special treatment in the Dodd-Frank mortgage rules to enable
them to better serve lower-income families. Similarly, sources of
funding such as recent settlements between Government agencies and
large banks could be directed to helping alternative mortgage channels
scale their operations.
Similarly, a typical mortgage product is not always accessible to
some households due to the downpayment requirements or fear of placing
assets in a first loss position. Shared equity/shared appreciation
approaches can provide a middle ground between renting and traditional
home ownership. In general, these products share certain common
features: owner occupancy of residential properties, initial
affordability, and sharing of risk and equity/appreciation. These
strategies can potentially support modest individual asset accumulation
while protecting consumers against home price declines while also
providing more stability to the macroeconomy in times of market
disruption. \53\ Congress and regulators should consider how to
encourage safe experimentation with alternative products.
---------------------------------------------------------------------------
\53\ Atif Mian and Amir Sufi, ``House of Debt''.
---------------------------------------------------------------------------
Finally, it is critical to support housing and credit counseling to
help more people achieve sustainable home ownership. Whether counseling
a first-time homebuyer to avoid predatory loans, negotiating a
modification that will allow a distressed homeowner to stay in their
home, helping a low-income family find affordable rental housing, or
helping a homeless person find emergency shelter, nonprofit housing
counselors are advocates for housing consumers, especially those from
traditionally underserved communities such as communities of color,
low- and moderate-income communities, and the elderly. A growing body
of research demonstrates that those who receive housing counseling
realize better outcomes than similarly situated people who do not. \54\
---------------------------------------------------------------------------
\54\ Neil S. Mayer and Kenneth Temkin, ``Pre-Purchase Counseling
Impacts on Mortgage Performance: Empirical Analysis of NeighborWorks
America's Experience'' (Washington: Neighborworks America, 2013);
Marvin M. Smith et al., ``The Effectiveness of Pre-Purchase
Homeownership Counseling and Financial Management Skills'',
(Philadelphia: Federal Reserve Bank of Philadelphia, 2014); Kenneth M.
Temkin et al., ``National Foreclosure Mitigation Counseling Program
Evaluation: Final Report, Rounds 3 Through 5'', (Washington:
Neighborworks and the Urban Institute, 2014).
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Recently, FHA proposed a program entitled ``Homeowners Armed With
Knowledge'' (HAWK) that would offer reductions on the upfront and
annual mortgage insurance premiums (MIPs) to FHA borrowers who
participate in a specified housing counseling curriculum. Other
Government agencies such as VA and USDA could create the same type of
program, and FHFA could work with Fannie and Freddie to create a
similar incentive structure in the secondary market through
preferential pricing for counseled mortgages. Borrowers could yield
additional incentives if they committed to post-purchase counseling, as
well. Bonus points could be awarded under the goals that would incent
this kind of proven, safe and sustainable lending. Additionally,
Congress should grant HUD's Office of Housing Counseling the authority
to accept funds from private entities to be distributed and used for
housing counseling activities.
E. Congress should extend the Mortgage Forgiveness Debt
Relief Act, and it should convert the mortgage
interest deduction to a tax credit.
Mortgage Forgiveness Debt Relief Act: When a lender forgives
mortgage debt through a short sale, a principal reduction modification,
or even after a foreclosure, the amount that the borrower no longer
owes counts as taxable income to the borrower unless it fits into an
exemption in the tax code. Given the deep inappropriateness of this
result for those losing their homes, Congress created a tax code
exemption in 2007 entitled the Mortgage Forgiveness Debt Relief Act.
For the past several years, the MDRA has been extended on a year-to-
year basis.
The MDRA has been crucial to virtually every effort to assist
troubled homeowners and restore the housing market to health. However,
this past year, the MDRA was not extended. Consequently, the number of
short sales dropped, adding to the continued woes of the housing
market. What's more, principal reduction is less valuable to homeowners
if they must pay tax on the forgiven debt, which hampers loss
mitigation efforts. Congress must extend the MDRA not just until the
end of 2014, but at least until the end of 2015. Ideally, this
exemption would become permanent. \55\
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\55\ See Mark Goldhaber and Julia Gordon, ``Extend and Broaden the
Mortgage Debt Relief Act Now'', American Banker, September 5th, 2012,
available at http://www.americanbanker.com/bankthink/extend-and-
broaden-mortgage-debt-relief-act-now-1052364-1.html; see also Laurie
Goodman and Ellen Seidman, ``The Mortgage Forgiveness Debt Relief Act
Has Expired--Renewal Could Benefit Millions'', (Washington: The Urban
Institute, 2014), available at http://www.urban.org/UploadedPDF/413025-
Mortgage-Forgiveness-Debt-Relief-Act-Has-Expired.pdf.
---------------------------------------------------------------------------
Mortgage Interest Deduction: The Federal Government spends $70
billion a year on the mortgage interest deduction--more than a trillion
dollars over a 10-year period and more than the entire HUD budget. \56\
Yet, the benefit of the mortgage interest deduction is heavily skewed
to households in upper-income tax brackets. As a taxpayer's income
increases, their tax rate increases and so does the value of the
deduction. In addition, the mortgage interest deduction is only
available to those who are able to itemize deductions, rather than
taking the standard deduction. According to the Tax Policy Center's
analysis of 2010 data, less than a third of taxpayers itemize their
deductions, and the majority of those who itemize fall in the top
income tax brackets. \57\
---------------------------------------------------------------------------
\56\ See http://www.whitehouse.gov/sites/default/files/omb/budget/
fy2015/assets/hist04z1.xls; http://www.whitehouse.gov/sites/default/
files/omb/budget/fy2015/assets/teb2015.xls.
\57\ Benjamin H. Harris and Daniel Baneman, ``Who Itemizes
Deductions?'' (Washington: Tax Policy Center, 2011), available at
http://www.taxpolicycenter.org/UploadedPDF/1001486-Who-Itemizes-
Deductions.pdf.
---------------------------------------------------------------------------
As part of comprehensive tax reform, we recommend replacing the
current mortgage interest deduction with a tax credit. Our proposal
would gradually phase out the current deduction and replace it with an
18 percent nonrefundable tax credit. \58\ The effect of this change
would be to provide the same benefit to all taxpayers, rather than a
much larger benefit to those with higher incomes. Increasing the value
of the credit to low- and moderate-income taxpayers not only increases
fairness and access to home ownership, but also contributes to economic
growth, since it puts more money in the hands of a large number of
families who typically need to spend every dollar they earn just to get
by.
---------------------------------------------------------------------------
\58\ Roger Altman and others, ``Reforming Our Tax System, Reducing
Our Deficit'', (Washington: Center for American Progress, 2012)
available at https://www.americanprogress.org/issues/tax-reform/report/
2012/12/04/46689/reforming-our-tax-system-reducing-our-deficit/.
---------------------------------------------------------------------------
F. Regulators should collect better mortgage data to help
identify problems and potential solutions in the
market.
As a free and public database, the Home Mortgage Disclosure Act
(HMDA) provides critical data to housing market participants and
stakeholders, especially to nonprofits and other entities without
access to expensive proprietary databases. However, the HMDA database
has long suffered from some key omissions, both in terms of who is
reporting data and what data are reported.
Recently, the CFPB issued a set of proposed changes to HMDA,
including changes to definitions of covered institutions and
transactions as well as the addition of the proposed new fields would
improve the usefulness and quality of the HMDA data. We strongly
support the CFPB's efforts. In addition to their proposals, we
recommend additional data enhancements that would be of great benefit
to researchers and community groups in the efforts to promote fair
access to credit, while also helping equip regulatory and enforcement
agencies with fair lending compliance.
For example, we think the CFPB should take further steps to
simplify the reporting requirement to one eligibility standard, should
add further fields on various topics such as denials and language/race,
and collect information on loan modifications and housing counseling.
\59\
---------------------------------------------------------------------------
\59\ For more information, see Center for American Progress,
Center for Responsible Lending, and others, ``Re: Consumer Financial
Protection Bureau's Amendments to Regulation C'', (2014) available at
http://www.responsiblelending.org/mortgage-lending/research-analysis/
HMDA-Comment-Final-10-29-14.pdf.
---------------------------------------------------------------------------
Assist Struggling Families and Neighborhoods
A. FHA should improve its Distressed Asset Sale Program to
better promote home retention and neighborhood
stability.
Since 2012, the FHA has been selling distressed loans in bulk prior
to foreclosure in order to save money and potentially provide these
borrowers with a last chance to save their homes. The Distressed Asset
Stabilization Program has auctioned about 100,000 loans over the past 2
years, and the FHA still insures about a half million seriously
delinquent loans that could be eligible for the program. The FHA's
program sells some loan pools with almost no strings attached, while
others are sold through a special ``neighborhood stabilization''
channel that requires the buyers to help families and neighborhoods.
The loans sold through neighborhood stabilization auctions tend to be
geographically concentrated, while the loans sold through the national
auctions are dispersed among many States.
This summer, the FHA released outcome data about these pools for
the first time since the program's inception. \60\ Nearly one quarter
of loans sold through the neighborhood stabilization outcome auctions
and resolved have resulted in the homeowners staying in their homes, at
least for the time being. Another 35 percent of families have avoided
foreclosure through a short sale or similar outcome. Loans that were
sold in pools without requirements and later resolved, on the other
hand, had a markedly different outcome. Less than 9 percent of those
families remained in their homes, and 21 percent avoided foreclosure.
In short, the data demonstrate that imposing even relatively modest and
flexible requirements on auctioned loan pools can lead to much better
outcomes for households and neighborhoods. The geographic concentration
of the loans sold through the neighborhood stabilization auctions may
also make it easier for note buyers to service the portfolio.
---------------------------------------------------------------------------
\60\ Federal Housing Administration, ``Quarterly Report on FHA
Single Family Loan Sales: Data as of May 30, 2014'', (2014) available
at http://portal.hud.gov/hudportal/documents/
huddoc?id=report082814.pdf.
---------------------------------------------------------------------------
Distressed mortgage sale programs, if designed responsibly, can
limit the damage of the foreclosure crisis by helping homeowners to
access foreclosure alternatives, supporting neighborhood home prices,
and limiting losses to taxpayers. However, if loans are simply passed
off to the highest bidder without any built-in protections for
homeowners and neighborhoods, we will have missed an extraordinary
opportunity to support the housing recovery.
Thus, as the FHA moves forward with more auctions, we suggest the
following four overarching recommendations to promote home retention
and neighborhood stability while still helping the agencies save
taxpayer dollars.
FHA should impose a set of basic requirements on all buyers
in all pools. First, the agency should require all buyers to
work with existing homeowners to keep them in their homes if
possible through a sustainable, permanent loan modification
(perhaps using the HAMP program). When a loan modification is
not possible, buyers should be required to pursue short sales
or deeds in lieu of foreclosure before foreclosing on a
property. For properties that go to REO, FHA should require
that the investor provide an opportunity for owner-occupant
purchase before either selling to another investor or
transforming into long-term rental. Reasonable requirements of
this nature may have less of an impact on price than FHA may
fear, both because the loans with requirements have sold for
similar prices to those with no requirements and because demand
for all of these pools is only growing with time. \61\
---------------------------------------------------------------------------
\61\ Heather Perlberg and John Gittelsohn, ``Hedge Funds Boost
Bad-Loan Prices as U.S. Sales Increase'', Bloomberg News, August 11,
2014.
FHA should help nonprofits participate effectively in the
bidding process because neighborhood-based nonprofits often
produce the best outcomes for families and neighborhoods. To
the extent that nonprofits lack either capital or capacity, we
believe the best option is for FHA to provide a preference to
private investors that partner with nonprofits and have a track
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record of serving homeowners effectively.
Before placing loans in a sale pool, FHA should ensure that
mortgage servicers have fully complied with the agency's
requirements for attempting to assist borrowers and that the
home is still occupied before placing a loan into distressed
mortgage sale programs. Reports from buyers and from consumer
representatives indicate that some loans are moving into the
program before servicers have completed their work with
homeowners, and that many homes are vacant when the buyer takes
possession of them. The Government should be careful that
servicers are prevented from using the program to evade their
contractual responsibilities.
FHA should collect and share more detailed performance data
about the programs so the public can fully understand their
effectiveness. The agency took roughly 2 years to publish its
first set of outcomes, and that information is very limited.
These agencies have an obligation to track in detail what
happens to the loans after they are sold and to share this
information with the taxpayers, neighborhoods, and local
governments.
B. FHFA should take additional steps to aid struggling
homeowners and communities.
As with respect to access to credit, FHFA's singular role in the
housing market provides them with many opportunities to support
struggling families and communities. Over the past several years, the
agency has made improvements to the HARP refinancing program and to
their own Servicing Alignment Initiative that have provided assistance
to many borrowers, but there are many additional steps they can take to
ensure that both homeowners and neighborhoods are better protected.
1. To assist performing borrowers, improve the HARP program to
reach more people.
The Obama administration's HARP program has already helped over 2.7
million households refinance their mortgages and could reach many more
with a few targeted improvements. The Responsible Homeowner Refinancing
Act of 2013 would require that Fannie Mae and Freddie Mac eliminate all
upfront participation fees to borrowers; that the same benefits be
available to all eligible lenders, including waivers of certain
representations and warrantees; and that all borrowers with Fannie- and
Freddie-backed mortgages will be notified about the program, its
eligibility requirements, and participating lenders. \62\ These changes
could help more homeowners take advantage of low interest rates, lower
their monthly mortgage payment, and reduce the risk that they will
default on their mortgage.
---------------------------------------------------------------------------
\62\ The Responsible Homeowner Refinancing Act of 2013 (S. 249),
available at https://www.congress.gov/bill/113th-congress/senate-bill/
249/text.
---------------------------------------------------------------------------
2. FHFA should join Treasury and FHA in extending the GSE Home
Affordable Modification Program (HAMP) at least to 2016.
Some months ago, Treasury announced it would extend its HAMP
modification program at least through 2016. We urge FHFA to ensure that
HAMP will continue to be available to Fannie and Freddie borrowers as
long as HAMP is available to private label borrowers. Moreover, when
HAMP expires (and especially if FHFA does not require the GSEs to
extend HAMP to 2016), FHFA should require Fannie and Freddie to
implement a new proprietary modification that includes measures to
ensure affordability, which the current Standard Modification does not
do.
3. To assist troubled borrowers, participate in the HAMP principal
reduction alternative and enable borrowers who lose their homes through
a short sale or foreclosure to buy back their homes at fair market
value.
We are encouraged that FHFA's strategic plan expresses a commitment
to ``develop and actively promote home retention and loss mitigation
programs.'' Unfortunately, FHFA still prohibits the Enterprises from
engaging in one of the most effective forms of loss mitigation:
principal reduction. Numerous studies have demonstrated that principal
reductions help keep troubled borrowers in their homes more effectively
than loan modifications alone. \63\ Additionally, the Congressional
Budget Office has estimated that allowing principal reductions through
HAMP on loans guaranteed by the Enterprises would result in savings for
the taxpayer. \64\
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\63\ See, e.g., Standard and Poor's, ``The Best Way To Limit U.S.
Mortgage Redefaults May Be Principal Forgiveness'', (2012) available at
http://www.standardandpoors.com/ratings/articles/en/us/
?articleType=HTML&assetID=1245335672295; Andrew Haughwout, Ebiere Okah,
and Joseph Tracy, ``Second Chances: Subprime Mortgage Modification and
Re-Default'', Federal Reserve Bank of New York Staff Reports (2010)
available at http://www.newyorkfed.org/research/staff_reports/
sr417.pdf; Roberto G. Quercia and Lei Ding, ``Loan Modifications and
Redefault Risk: An Examination of Short-Term Impacts'', CityScape
(2009) available at http://ccc.unc.edu/contentitems/loan-modifications-
and-redefault-risk-an-examination-of-short-term-impacts/.
\64\ Congressional Budget Office, ``Modifying Mortgages Involving
Fannie Mae and Freddie Mac: Options for Principal Forgiveness'', (2013)
available at http://www.cbo.gov/publication/44115.
---------------------------------------------------------------------------
Lifting this prohibition should be an FHFA priority. FHFA could
either design its own principal reduction modification or use the HAMP
Principal Reduction Alternative (HAMP-PRA). If FHFA is worried about
strategic default, HAMP-PRA requires a borrower to be delinquent or in
imminent default, to demonstrate a hardship, and to meet various other
criteria related to the size of the loan, owner-occupancy, etc. The
modification must be both net-present-value positive and affordable by
the borrower. Working through HAMP also would provide access to
Treasury incentive payments and related Treasury programs such as the
second-lien modification program (2MP). HAMP-PRA also allows an
investor to create a shared appreciation modification, where any gains
upon sale would be shared by the investor and homeowner, as some
Senators have recommended. \65\
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\65\ https://www.congress.gov/bill/113th-congress/senate-bill/
2854?q=%7B%22search%22%3A%5B%22Preserving+American+Homeownership+Act%22%
5D%7D
---------------------------------------------------------------------------
FHFA has previously raised concerns about the operational burdens
associated with implementing principal reduction. While these concerns
are valid and real, Treasury has offered to pay the additional
administrative costs required to implement HAMP-PRA and to free up
human and technical resources that would accelerate implementation of
this program.
If FHFA will not provide principal reduction, or for homeowners for
whom a new principal reduction program would not come in time, we
encourage FHFA to continue to explore additional ways to enable former
homeowners to buy back their homes at fair market value. Recently, FHFA
announced that it will permit former homeowners who have gone through a
foreclosure or deed-in-lieu to buy back their house at fair market
value if they are able to obtain financing through a channel other than
the GSEs. However, most homeowners whose homes are already in the REO
portfolio are not likely to be in a position to return to their home or
to obtain financing to do so, given the damage to their credit score
and the need to have already moved out.
Instead, FHFA should focus on enabling mission-based organizations
to assist troubled underwater borrowers in a short sale transaction
whereby homeowner can repurchase their own home if they can afford the
mortgage at the fair market value. Sometimes called a ``structured
short sale,'' this transaction provides a way for borrowers to right-
size their mortgage without forcing them through a foreclosure or
risking an eviction. Borrowers should still be required to meet the
GSE's existing hardship requirements for obtaining a short sale.
4. If and when Fannie Mae or Freddie Mac sell nonperforming loans
in bulk, FHFA should require that these sales actively promote home
retention and neighborhood stability.
Between them, Fannie Mae and Freddie Mac hold close to 700,000
seriously delinquent loans. \66\ Many of these loans have languished
for years, with foreclosures in process or imminent. Observers had long
speculated that Fannie and Freddie would sell these loans to investors
at a discounted rate to minimize Enterprise losses, as the Federal
Housing Administration, or FHA, has been doing. Confirming this
speculation, this past August, Freddie Mac auctioned its first pool of
nonperforming loans. \67\
---------------------------------------------------------------------------
\66\ Federal Housing Finance Agency, ``Foreclosure Prevention
Report: May 2014'', (2014) available at http://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/ForeclosurePreventionReportMay2014FINAL.pdf.
\67\ Nick Timiraos, ``Freddie Mac To Sell $659 Million in
Defaulted Home Loans Sale Is a First for the Mortgage Finance Giant
Under Government Control'', The Wall Street Journal, August 1, 2014.
---------------------------------------------------------------------------
We encourage FHFA to follow the recommendations we outlined above
for FHA in making home retention and neighborhood stability an explicit
goal for any further Enterprise note sales. In particular, we recommend
that FHFA impose on purchasers meaningful post-sale requirements aimed
at home retention and neighborhood stabilization, including an explicit
loss-mitigation waterfall; encourage sales to nonprofit or other
entities who will prioritize these goals; and collect and regularly
share data on outcomes. \68\ Especially given strong investor demand
for nonperforming loans, we do not think such requirements would unduly
impact investor bids for the loans.
---------------------------------------------------------------------------
\68\ To view CAP's full recommendations on how FHA should improve
the DASP program, see Sarah Edelman, Julia Gordon, and Aashna Desai,
``Is the FHA Distressed Asset Stabilization Program Meeting Its
Goals?'' (Center for American Progress: 2014), available at http://
www.americanprogress.org/issues/housing/report/2014/09/05/96531/is-the-
fha-distressed-asset-stabilization-program-meeting-its-goals/.
---------------------------------------------------------------------------
5. FHFA should instruct Fannie and Freddie to reform their approach
to lender-placed (force-placed) insurance.
FHFA has recognized that abuses within the lender-placed insurance
market--the insurance a lender must obtain on behalf of a homeowner if
a homeowner's property insurance lapses--are burdensome not only for
consumers but also for Fannie Mae and Freddie Mac. The GSEs spent $360
million on lender-placed insurance premiums in 2012 alone, according to
the FHFA Office of Inspector General. \69\ The costs of forced-placed
insurance are exorbitant because mortgage servicers often receive
kickbacks--in the form of free or below-cost services, commissions or
bonuses--from insurance companies. Homeowners, and the GSEs when a
homeowner loses their home to foreclosure, are responsible for paying
the FPI bill.
---------------------------------------------------------------------------
\69\ FHFA Office of Inspector General, ``FHFA's Oversight of
Enterprises Lender-Placed Insurance Costs'', (2014) available at http:/
/fhfaoig.gov/Content/Files/EVL-2014-009.pdf.
---------------------------------------------------------------------------
FHFA took an important step last year to lower FPI costs by
prohibiting mortgage servicers from collecting commission from
insurance companies for buying FPI. FHFA also included lowering FPI
costs as an objective in the GSEs 2014 performance scorecard. However,
these steps alone will not bring down the costs of FPI since insurance
companies, and mortgage servicers are likely to find new ways to
exchange kickbacks. FHFA must consider a more comprehensive approach to
prevent the kickbacks between insurance companies and mortgage
servicers, and we recommend they consider allowing the GSEs to purchase
insurance directly, instead of reimbursing mortgage servicers. Cutting
out the middle man could help protect consumers and taxpayers from
inflated costs.
C. The Consumer Financial Protection Bureau should continue
to improve CFPB servicing rules.
The CFPB's servicing rules provide essential procedural protections
that promote better servicing outcomes for homeowners, investors, and
communities. The recent proposed amendments to that rule make
substantial improvements in crucial areas including transfers of
servicing, bankruptcy, and access to the loss mitigation system for
subsequent hardships. They also make important strides in protecting
homeowners who seek assistance following death or divorce of a
cohomeowner.
However, there are still some basic building blocks to servicing
reform that are not yet in place. First, servicer compensation reform
has been sidetracked and must be revived. As long as servicers profit
at the expense of homeowners and investors, the system will not
reliably produce healthy outcomes for the housing market and
communities regardless of the rules or enforcement thereof. Regulators
must come together to develop a framework to modernize and rationalize
servicer compensation.
Second, with the eventual sunset of the Home Affordable
Modification Program (HAMP), policymakers need to find a way to require
loss mitigation and to require sustainable modifications to homeowners
that also benefit investors. Loss mitigation before HAMP did not always
happen, and when it did, it did not always promote long-term home
retention. Without rules in place, it is possible--perhaps even
likely--that the system will soon forget the lessons of the crisis. To
the extent that CFPB does not or cannot mandate loss mitigation and a
substantive requirement for loan modifications, Congress and other
regulators should step in to ensure that such a requirement is
developed.
Third, we encourage CFPB to continue to address issues that remain
outstanding in other follow-up actions to their servicing rules. For
example, current rules do not yet clarify what homeowners need to
submit to have their request for assistance reviewed. In addition,
borrowers who do not speak English as their native language continue to
face significant problems communicating orally and in writing with
mortgage servicing companies.
D. Policymakers should take steps to help renters,
particularly very low-income renters.
1. FHFA should capitalize the Housing Trust Fund and Capital Magnet
Fund.
In the Housing and Economic Recovery Act of 2008 that created FHFA,
Congress created a mechanism by which Fannie and Freddie would
capitalize the Housing Trust Fund and Capital Magnet Fund, both sources
of subsidy to produce affordable housing for very low-income families.
After FHFA put Fannie and Freddie into conservatorship, however, it
prohibited the companies from contributing these funds at all.
While this prohibition may have been justified when the Enterprises
were drawing on taxpayer funds to stay afloat, now that they have
returned to profitability, there is no justification for continuing the
prohibition. We believe that FHFA has both the right and the
responsibility to direct the Enterprises to begin contributing to these
funds right away.
2. Congress should extend the Low-Income Housing Tax Credit.
Since its creation in 1986, the Low-Income Housing Tax Credit, or
LIHTC, has leveraged more than $100 billion in private investment
capital through a dollar-for-dollar reduction in a developer's tax
liability, providing critical financing for the development of more
than 2.5 million affordable rental homes. \70\ The program annually
supports 95,000 jobs and finances approximately 90 percent of all
affordable rental housing. Moreover, it is a critical resource to
transform communities suffering from blight. \71\
---------------------------------------------------------------------------
\70\ LISC, ``The Low Income Housing Tax Credit'', (2013),
available at http://www.lisc.org/docs/resources/policy/
Policy_Brief_LIHTC.pdf.
\71\ Ibid.
---------------------------------------------------------------------------
Ever since the minimum Housing Credit rate expired at the end of
2013, Housing Credit developments have been underwritten using a
floating rate, which has hovered near 7.5 percent. The tax extenders
package from the House would provide a minimum 9 percent credit rate
through January 1, meaning there are essentially no housing deals that
will benefit from this provision. Congress should extend the Housing
Credit's 9 percent minimum credit rate floor for 2 years until the end
of 2015 so at least 1 year would have the full benefit.
3. Congress should protect important programs for affordable
housing from budget cuts.
In 2012, 75 percent of extremely poor households paid more than
half of their meager incomes for housing. This results in little left
over for groceries, medication, transportation, and other of life's
necessities. It also is a strong determinant of homelessness, which is
much more expensive than rental assistance to mitigate.
HUD's rental assistance programs (public housing, project-based
Section 8, and housing choice vouchers), which serve about 5 million
extremely low income households, are facing a big threat next year:
sequestration. HUD programs, although they serve the poorest
households, are not exempt from sequestration's impacts. Sequestration
has already led to 100,000 fewer low-income families receiving housing
vouchers. \72\ As a result of sequestration and other austerity
measures enacted since 2011, nondefense discretionary funding in FY14
was about 15 percent below 2010 levels, adjusted for inflation. Without
action to stop sequestration, in FY16 nondefense discretionary programs
will decline to 3.1 percent of GDP--equal to the lowest level in at
least 50 years. These programs already serve only one quarter of those
eligible, and it is critical not to cut these budgets further. \73\
Congress must protect these most vulnerable residents from losing one
of the few forms of housing assistance currently available.
---------------------------------------------------------------------------
\72\ Douglas Rice, ``Sequestration's Rising Toll: 100,000 Fewer
Low-Income Families Have Housing Vouchers'', (Washington: Center on
Budget and Policy Priorities, 2014), available at http://www.cbpp.org/
cms/index.cfm?fa=view&id=4229.
\73\ Rice, ``Better Federal Policy Needed To Address Rental
Affordability Crisis''.
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Additionally, we recommend a renewed commitment of funding to the
HOME Investment Partnerships program. This program creates affordable
housing for people in need nationwide--since 1992 over one million
homes. It does so by giving States and localities the flexibility to
deploy scarce resources to the affordable housing challenges particular
to their communities. HOME leverages other resources almost four to
one, and frequently is critical gap financing for Low Income Housing
Tax Credit properties.
4. Congress and agencies should act to encourage renters to
increase their savings.
Another opportunity for addressing inequality in our housing market
lies in developing programs that effectively encourage renters to build
assets. Renter households in the United States have a median net worth
of about $5,100, while households that own homes have a median net
worth of more than $170,000. \74\ This inequality remains true when
comparing renters with incomes comparable to their homeowner
counterparts. \75\ A significant cause of this phenomenon is the fact
that mortgage payments typically represent a form of ``forced
savings,'' while renting lacks a similar mechanism to encourage
households to save. The proportion of the population who rents is
expected to grow in the coming years, portending an increase in our
Nation's already large wealth inequality.
---------------------------------------------------------------------------
\74\ Joint Center for Housing Studies, ``The State of the Nation's
Housing 2013: Appendixes'', (2013) Table A-6, available at http://
www.jchs.harvard.edu/sites/jchs.harvard.edu/files/
son2013_chap7_appendix_tables.pdf.
\75\ Joint Center for Housing Studies, ``America's Rental Housing:
Evolving Markets and Needs'', (2013), available at http://
www.jchs.harvard.edu/sites/jchs.harvard.edu/files/
jchs_americas_rental_housing_2013_1_0.pdf.
---------------------------------------------------------------------------
Addressing this issue will not be easy, but research and experience
suggest there are ways we can encourage more renters to save. HUD's
Family Self-Sufficient Program, which escrows into a separate account
the increased portion of rent a public housing tenant would be expected
to pay if their income increases, has proven to be a powerful savings
vehicle for many participating households. \76\ We support legislative
efforts to enhance and extend this program to more groups of renters
receiving some kind of Government assistance. \77\
---------------------------------------------------------------------------
\76\ Hannah Emple, ``Asset-Oriented Rental Assistance: Next
Generation Reforms for HUD's Family Self-Sufficiency Program''
(Washington: New America Foundation, 2013); Planmatics, Inc. and Abt
Associates Inc., ``Evaluation of the Family Self-Sufficiency Program:
Prospective Study'' (U.S. Department of Housing and Urban Development,
Office of Policy Development and Research, 2011).
\77\ See the Family Self-Sufficiency Act (S. 454), introduced by
Sens. Reed and Blunt.
---------------------------------------------------------------------------
Programs implemented by nonprofits and for-profit landlords alike
likewise show promise in promoting savings among renting households.
And behavioral economics research suggests that an effective renter
savings program would make savings automatic, make participation easy,
give short-term rewards for saving and, if possible, provide a match
for savings. \78\ As more families rent rather than own homes, it is
critical to ramp up the policy discussion about how to make it easier
for renters to build wealth.
---------------------------------------------------------------------------
\78\ This research is summarized in David Abromowitz and Sarah
Edelman, ``As More Households Rent, How Can We Encourage Them to
Save?'' (Washington: Center for American Progress, 2014), available at
https://www.americanprogress.org/issues/housing/report/2014/09/10/
96706/as-more-households-rent-how-can-we-encourage-them-to-save/.
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Conclusion
In the aftermath of the Great Recession, policymakers face some
important choices. We can tolerate a weaker housing market in which
fewer families build wealth through home ownership, more lower-income
renters must choose between decent housing and other necessities, and
too many communities lack access to safe and affordable mortgage
credit. Alternatively, we can work to create a healthier and more
equitable housing market by promoting sustainable home ownership,
affordable rental housing, and stronger neighborhoods. Choosing the
latter will require action by a wide array of policymakers and market
participants, which is challenging. Ultimately, however, by working
together, we can create a more robust, fairer housing market that
drives economic growth and promotes opportunity for America's families.
Thank you again for inviting me to testify today. I look forward to
continuing to engage with you on these and other issues.
______
PREPARED STATEMENT OF DEBORAH GOLDBERG
Special Project Director, National Fair Housing Alliance
December 9, 2014
Good morning, Mr. Chairman and Members of the Subcommittee. Thank
you for the opportunity to testify here today on ``Inequality,
Opportunity, and the Housing Market''. My name is Debby Goldberg, and I
am a Special Project Director at the National Fair Housing Alliance
(NFHA). Founded in 1988, and headquartered in the District of Columbia,
the National Fair Housing Alliance is a consortium of more than 220
private, nonprofit fair housing organizations, State and local civil
rights groups, and individuals from 37 States and the District of
Columbia. Through comprehensive education, advocacy, and enforcement
programs, NFHA seeks to provide equal access to housing for millions of
people.
The title for this hearing is one that resonates with NFHA and its
members. We work at the intersection of housing and opportunity, and we
are very mindful of the impact that where people live has on so many
aspects of their lives. It determines whether they have access to good
schools, good jobs, quality health care, good transportation, a healthy
environment, and so much more--the kinds of resources and opportunities
that we all need to flourish. As Americans, we believe strongly that
everyone should have access to opportunity, regardless of the color of
their skin, their gender, their ancestry, the language they speak,
where they worship, or whether they have children. Unfortunately, the
reality often differs from this ideal, as we can see clearly in the
housing market.
My testimony today will focus on widespread problems in the
maintenance and marketing of foreclosed properties, particularly in
communities of color, and the long-term impact of those problems. It is
based on a 5 year investigation conducted by the National Fair Housing
Alliance. I will also describe some of the patterns and practices that,
over many decades, created the conditions in which these problems could
take root. Finally, I will draw some lessons for future policies and
programs that are suggested by the conclusions of our investigation.
Why Homeownership Matters
Home ownership has long been the key to opportunity in this
country--a path into the middle class. Home ownership has provided
millions of families the means to create economic stability and build
wealth. Families have used the equity in their homes to send their kids
to college, start or expand small businesses, weather economic
hardships, fund retirement, and pass along wealth to the next
generation.
But home ownership rates in the U.S. vary tremendously by race and
national origin, and have done so for many decades. According to the
Census Bureau, \1\ in 1994, some 70 percent of White households were
homeowners, while for both Black and Hispanic households the rate was
closer to 42 percent. In 2004, the White home ownership rate hit a high
of 76 percent, while the rates for Black and Hispanic households rose
to 49 percent. At the end of the third quarter of this year, the White
home ownership rate had fallen to 72.6 percent, and the rates for
Blacks and Hispanics were 42.9 percent and 45.6 percent, respectively.
As these figures illustrate, while home ownership rates have risen and
fallen for all homeowners, the gap between home ownership rates for
White households and others has remained remarkably constant.
Households of color have not experienced the benefits of home ownership
to the same degree as their White counterparts.
---------------------------------------------------------------------------
\1\ See ``Quarterly Homeownership Rates by Race and Ethnicity of
Householder: 1994 to Present'', available at http://www.census.gov/
housing/hvs/data/histtabs.html.
---------------------------------------------------------------------------
There are many factors that explain these differences. They include
policies of the Federal Government, enacted many decades ago, that
provided access to affordable home ownership for White families while
denying it to their Black counterparts. Foremost among these were the
early policies of the Federal Housing Administration (FHA). FHA fueled
the expansion of the suburbs in the post-World War II era, insuring
construction loans for companies building new subdivisions, as long as
they agreed not to sell any of the houses to Black families. Similarly,
FHA's insurance for individual mortgages made long term, fixed rate,
low downpayment loans available to White families of modest means, but
excluded Black families from obtaining similar mortgages. \2\ This
practice came to be known as ``redlining.'' FHA has long since changed
its policies, and has become an important source of mortgage financing
for many families, including families of color. But the policies it
adopted in its early years laid the foundation for the differences in
home ownership rates that we see today. And the policy changes alone
have not eliminated the gap.
---------------------------------------------------------------------------
\2\ For a more detailed description of the racially exclusionary
policies of the FHA and other Government agencies, see Richard
Rothstein, ``The Making of Ferguson: Public Policies at the Root of Its
Troubles'', Economic Policy Institute, October 15, 2014, available at
http://www.epi.org/publication/making-fguson/.
---------------------------------------------------------------------------
These Federal Government policies were adopted by those in the
private sector, and for decades, inner city communities, communities of
color, and low- and moderate-income communities were redlined--denied
access to affordable, sustainable mortgages from mainstream financial
institutions.
During this past decade, communities of color that had previously
been starved for credit were flooded with subprime and other
unsustainable mortgages, a phenomenon that some have called ``reverse
redlining.'' According to the Federal Reserve Board, in 2005-2006--the
peak subprime lending years--more than 53 percent of the home purchase
loans made to African Americans nationwide were subprime loans, as were
more than 49 percent of the refinance loans made to these borrowers.
African American borrowers were 3 times more likely to get a subprime
home purchase loan and 2 times more likely to get a subprime refinance
loan than White borrowers. During those same years, more than 46
percent of the home purchase loans made to Latino borrowers were
subprime, as were more than 34 percent of the refinance loans made to
Latinos. They were 2.5 times more likely to get a subprime home
purchase loan and more than 1.5 times more likely to get a subprime
refinance loan than White borrowers. \3\
---------------------------------------------------------------------------
\3\ Avery, Robert B., Kenneth P. Brevoort, and Glenn B. Canner,
``Higher-Priced Home Lending and the 2005 HMDA Data'', Federal Reserve
Bulletin, available at http://www.federalreserve.gov/pubs/Bulletin/
2006/hmda/default.htm; and ``The 2006 HMDA Data'', Federal Reserve
Bulletin vol. 93, December 21, 2007, available at http://
www.federalreserve.gov/pubs/bulletin/2007/07index.htm.
---------------------------------------------------------------------------
These differences cannot be explained by the creditworthiness of
the borrowers. A Wall Street Journal analysis of subprime loans made in
2005-2006 found that more than half of the borrowers (55 percent in
2005, 61 percent in 2006) would have qualified for a prime mortgage.
\4\ Evidence from several fair lending cases brought by the Department
of Justice found that some lenders steered thousands of African
American and Latino borrowers into subprime loans even though they were
qualified for prime mortgages. \5\
---------------------------------------------------------------------------
\4\ Brooks, Rick and Ruth Simon, ``Subprime Debacle Traps Even
Very Creditworthy'', Wall St. Journal, December 3, 2007.
\5\ See, for example, the cases brought by DOJ against Bank of
America's Countrywide unit and Wells Fargo. Details available at http:/
/www.justice.gov/crt/about/hce/whatnew.php.
---------------------------------------------------------------------------
These subprime loans, and other exotic mortgage products offered
during the early and mid-2000s proved to be expensive and
unsustainable. They contained many risky features, such as high upfront
costs, negative amortization and adjustable payments that caused
monthly payments to rise rapidly. They were targeted and heavily
marketed to borrowers for whom they were not a suitable product,
particularly borrowers of color. And they defaulted at historic rates.
Research from the Federal Reserve Bank of San Francisco found that more
than 35 percent of the subprime first lien mortgages originated in 2006
defaulted within the first 24 months, compared to just over 10 percent
of prime first lien mortgages originated in the same year. \6\
---------------------------------------------------------------------------
\6\ Amromin, Gene, and Anna L. Paulson, ``Default Rates on Prime
and Subprime Mortgages: Differences and Similarities'', Profitwise News
and Views, Federal Reserve Bank of San Francisco, September, 2010.
---------------------------------------------------------------------------
The result has been a deluge of foreclosures--an estimated 5
million since 2008. \7\ Just as subprime lending was concentrated in
communities of color, so have foreclosures been concentrated in these
communities. Neighborhoods that were targeted for subprime lending have
become neighborhoods with high rates of foreclosure. In 2011, the
Center for Responsible Lending (CRL) found that, ``Nearly 25 percent of
loans in low-income neighborhoods and 20 percent of loans in high-
minority neighborhoods have been foreclosed upon or are at high risk of
default.'' \8\ CRL's research also found that, ``Approximately one
quarter of all Latino and African American borrowers have lost their
home to foreclosure or are seriously delinquent, compared to just under
12 percent for White borrowers.'' As these statistics suggest, in many
communities of color, there are now large numbers of vacant, foreclosed
properties, also known as REOs (Real Estate Owned properties).
---------------------------------------------------------------------------
\7\ CoreLogic estimates that 4.4 million foreclosures were
completed between 2008 and May, 2013. It estimates another 594,000
foreclosures were completed between June, 2013, and May, 2014. See
CoreLogic National Foreclosure Report, May, 2013, available at http://
www.corelogic.com/research/foreclosure-report/national-foreclosure-
report-may-2013.pdf, and CoreLogic National Foreclosure Report, May,
2014, available at http://www.corelogic.com/research/foreclosure-
report/national-foreclosure-report-may-2014.pdf.
\8\ Bocian, Debbie Gruenstein, Wei Li, Carolina Reed, and Roberto
G. Quercia, ``Lost Ground, 2011: Disparities in Mortgage Lending and
Foreclosures'', Center for Responsible Lending, November 2011.
---------------------------------------------------------------------------
NFHA's REO Investigations
Several years into the foreclosure crisis, NFHA began to hear
complaints about the neglect of REO properties and the negative impact
of those properties on the surrounding neighborhoods. This prompted us
to begin investigating the REO maintenance and marketing practices of
major lenders and the Government Sponsored Enterprises (GSEs). Since
April, 2009, in partnership with 17 of our members, NFHA has inspected
3,726 foreclosed properties in 29 metropolitan areas and 22 States.
Some of these properties are located in predominantly White
neighborhoods. Others are located in predominantly Black and/or
Hispanic neighborhoods. Many of these neighborhoods are stable
communities where the rate of home ownership is high. At each house,
our investigators evaluate more than 30 aspects of maintenance and
marketing, including curb appeal, structural integrity, signage,
indications of water damage and the condition of the paint, siding,
gutters, and downspouts.
Our Findings
The findings of our investigation are detailed in the report, ``Zip
Code Inequality: Discrimination by Banks in the Maintenance of Homes in
Neighborhoods of Color'', a copy of which is attached to my testimony.
This is the third report NFHA has issued since our investigations began
in 2009, and unfortunately, the findings described in this report are
as troubling as our earlier ones. What we found in many cases was that
the system for managing REO properties in communities of color was
broken. The companies that were hired to do the on-the-ground work of
maintaining and marketing foreclosed properties failed to do their jobs
properly. The banks, owners and investors who hired those on-the-ground
companies failed to manage and oversee their work. And, for the most
part, the Federal agencies with supervisory responsibility in this area
failed to provide the guidance and oversight needed. The problem was
particularly acute in communities of color, with a negative impact on
the families who lost their homes to foreclosure, the families in the
surrounding homes, and the cities in which those homes were located. In
all of these ways, these neglected properties are a drag on our broader
economic recovery. Because the problems are most acute in communities
of color, they constitute a violation of the Federal Fair Housing Act,
which prohibits discrimination in all aspects of housing, including
marketing and maintenance, on the basis of race, color, religion, sex,
national origin, family status, or disability. The Fair Housing Act
also requires Federal agencies with housing and community development
programs and activities to administer those programs and activities in
a manner ``affirmatively to further'' the purposes of the Act. That is,
in a manner to combat the problems associated with segregation and take
steps to overcome them. The Fair Housing Act provides both a mandate
and a tool for dealing with the kinds of problems we found with
foreclosed homes in communities of color across the country.
Some of the highlights of our findings are described below.
We found that REO properties in White neighborhoods were well-cared
for and well-marketed. They were more likely to have neatly manicured
lawns, securely locked doors, and attractive, professional ``For Sale''
signs out front. These properties tended to be maintained to the
standards of other homes in the neighborhood and attractive to real
estate agents and potential homebuyers. Someone driving down the street
would likely never know that the property was for sale because of a
foreclosure.
In contrast, REO properties in communities of color were more
likely to have overgrown yards, trash on the premises, unsecured doors,
and broken or boarded windows. These properties were not maintained to
the standards of nearby homes. They appeared abandoned, blighted, and
unappealing to potential homebuyers, even though they were located in
stable neighborhoods where the surrounding homes were well maintained.
Overall, our investigation found that, compared to REO properties
in White communities, REOs in communities of color were:
2.2 times more likely to have significant amounts of trash
and debris on the premises;
2.3 times more likely to have unsecure, broken, or damaged
doors;
2.0 times more likely to have damaged, broken, or boarded
windows;
2.1 times more likely to have holes in the structure; and
1.3 times more likely to lack a professional ``for sale''
sign.
In some cities, the disparities were much starker. For example:
In Memphis, TN, REOs in communities of color were 8.8 times
more likely to have significant amounts of trash and debris
littered throughout the property than REOs in White
communities.
In Hampton Roads, VA, REOs in communities of color were 6
times more likely to have unsecured, damaged, or boarded doors
than REOs in White communities.
In Miami, FL, REOs in communities of color were 3.7 times
more likely to have overgrown grass or dead leaves on the
property than REOs in White communities.
In Kansas City, MO/KS, REOs in communities of color were 3.6
times more likely to have damaged, broken or boarded windows
than REOs in White communities.
Further, these maintenance deficiencies were cumulative. That is,
REOs in communities of communities of color were more likely to have a
greater number of deficiencies than those in White communities. In our
investigation, 43.2 percent of REOs in White communities had fewer than
5 deficiencies, compared to only 21.7 percent of those in communities
of color. Conversely, 32 percent of the REOs we inspected in
communities of color had 10 or more deficiencies, compared to only 12.4
percent of those in White communities.
In other words, REOs in communities of color were much more likely
to have a great many deficiencies--such as large quantities of trash,
broken or unsecured doors and/or windows, holes in the roof, missing or
damaged gutters and downspouts, overgrown lawns and invasive plants,
graffiti, damaged siding, and exposed or damaged utilities--than those
in White communities.
Poor Maintenance Causes Many Problems
These cumulative deficiencies lead to a host of problems. For
example, they can cause health problems, both physical and mental. REOs
with unsecured doors and windows invite trespassers and vandals, as
well as rodents, insects, cats, dogs, and wildlife. These, in turn, can
increase the risk of disease, and may also be triggers for asthma for
nearby residents. There are other health consequences, as well. Recent
research published by the American Heart Association found that living
near a foreclosed home that remains vacant for some period of time
increases a person's chance of developing high blood pressure. People
who live near vacant properties may feel an increased sense of social
isolation, affecting their psychological well-being. They are also less
likely to walk, run, and play outside, with further health
consequences.
Poorly maintained REOs may also cause safety problems. They attract
vagrants and criminal activity, and may be fire and safety hazards.
Some of the REOs visited in NFHA's investigation have become the houses
where people party on the weekends or engage in illicit activities, or
where squatters take over. They also contribute to violent crime in a
community. Research shows that for every 1 percent increase in the
foreclosure rate in a census tract, violent crimes increase by 2.33
percent. \9\
---------------------------------------------------------------------------
\9\ Immergluck, Dan, ``The Impact of Single-Family Mortgage
Foreclosures on Neighborhood Crime'', Vol. 21, No. 6 in Housing
Studies, 851-866, http://www.prism.gatech.edu/di17/HousingStudies,pdf.
---------------------------------------------------------------------------
All of these problems place an increased burden on municipal fire,
police, health care, and other resources. At the same time, their poor
condition depresses the value not only of these properties, but also
the surrounding homes, even those that are occupied and well-
maintained. This results in lower tax revenues for municipalities, even
as they must expend more resources to cope with the problems created by
the REOs. It is not surprising that a number of cities have taken legal
action in an effort to recoup the increased costs they experience in
dealing with vacant, poorly maintained REOs. One example is the City of
Los Angeles, which has sued both Deutsche Bank and U.S. Bancorp over
their failure to comply with municipal building codes in their
maintenance of foreclosed homes in that city.
Investor Purchases of REOs
The poor maintenance and ineffective marketing of REO properties in
communities of color also have an impact on who ultimately purchases
these properties. In order to understand this relationship better, NFHA
tracked the sales of REOs that were part of its earlier investigations
in two Maryland Counties, Montgomery and Prince George's, and in
Memphis, TN. In Maryland, we found that investors purchased 59 percent
of REO properties that were poorly maintained (had 10 or more
deficiencies), compared to 36 percent of those that were well
maintained. Owner-occupants purchased 46 percent of the well maintained
REOs, compared to only 12 percent of those that were poorly maintained.
Because of the higher incidence of poor maintenance in communities of
color, 52 percent of the REO properties whose sales we tracked in those
communities were purchased by investors, compared to 33 percent of
those in White communities.
We found similar outcomes in Memphis. There, 70 percent of the REOs
with 10 or more deficiencies were sold to investors, compared to 46
percent of those that were well-maintained. Fifty-one percent of the
well maintained properties were sold to owner-occupants, compared to
only 20 percent of the poorly maintained REOs. In communities of color,
70 percent of the REOs were sold to investors, compared to 18 percent
in White communities. Twenty-four percent of REOs in communities of
color were sold to owner-occupants, compared to 78 percent in White
communities.
The Role of the Fair Housing Act
The Federal Fair Housing Act requires banks, trustees, investors,
servicers, and any other responsible party to maintain and market
properties that are for sale or rent without regard to the race or
national origin of the residents of a neighborhood. It is illegal to
treat a neighborhood differently because of the race or national origin
of the residents. Moreover, the law obligates banks, trustees,
investors, and servicers to monitor the actions of vendors engaged in
performing housing-related transactions to ensure that those third
party entities comply with fair housing laws and obligations. Banks,
trustees, investors and servicers who fail to ensure that the REOs they
own and for which they are responsible are maintained and marketed
without regard to the race or national origin of the residents of the
neighborhood may be violating the Act.
The Fair Housing Act also requires Federal agencies (including
those with regulatory or supervisory responsibility over financial
institutions) with programs or activities related to housing and
community development to conduct those programs and activities in a
manner that affirmatively furthers the purposes of the Act. Those
purposes are two-fold: to eliminate discrimination from the housing
market, and to overcome the negative effects of entrenched segregation.
The subprime lending that was targeted to communities of color and the
subsequent surge in foreclosures in those communities has exacerbated
the problems related to segregation. Failure to maintain and market
these properties properly makes the problems even worse.
The Federal agencies responsible for overseeing the activities of
banks, other investors and the GSEs have both the authority and
obligation to ensure that they do not violate the Fair Housing Act in
their maintenance and marketing of REO properties. Effective oversight
can help stem this problem. To date, only the Federal Reserve Board has
taken action in this area. It has provided guidance to the institutions
it supervises about the liability to which they may be exposed for
failure to ensure effective management of their REOs in communities of
color. \10\ Further, the Board is incorporating this issue into the
risk assessments it conducts for institutions in advance of an on-site
examination. To NFHA's knowledge, none of the other Federal agencies
with fair housing responsibilities have taken similar action.
---------------------------------------------------------------------------
\10\ See Federal Reserve Board Supervision and Regulation Letter
SR 12-10 / CA 12-9, Questions and Answers for Federal Reserve-Regulated
Institutions Related to the Management of Other Real Estate Owned
(OREO) June 28, 2012, available at http://www.federalreserve.gov/
bankinforeg/srletters/sr1210a1.pdf.
---------------------------------------------------------------------------
Recommendations
Based on the results of our investigations into the management,
maintenance, and marketing of REO properties, NFHA recommends that a
number of steps be taken to prevent the kinds of problems we
identified. These are detailed in our report, and I provide some
highlights below.
Better Oversight From Federal Regulators and Congress--Many
of the entities that have engaged in discriminatory practices
in the REO market are federally regulated. Federal regulators,
including the Federal Housing Finance Agency, Federal Reserve
and others must be vigilant in their supervision to ensure that
banks and the GSEs do not implement practices that harm
neighborhoods of color or homeowners from protected classes
under the Fair Housing Act. The CFPB also has a role to play as
the key regulator of mortgage servicing. It does not have
authority under the Fair Housing Act, but does have authority
under the Equal Credit Opportunity Act. Congress must hold
hearings to investigate discrimination in the REO arena so that
neighborhoods of color and the businesses that support these
neighborhoods are not left behind in the economic recovery.
Sales Practices Should Help Stabilize Communities--banks and
other owners of REOs should not allow the homes to sell at
auction for prices significantly below the market value of
other homes in the neighborhood.
Selection and Management of REO Vendors--all of the vendors
selected to work on the disposition of REOs should receive
high-quality fair housing training, should not be the subject
of pending discrimination complaints, and should have resolved
any past complaints of discrimination successfully.
Marketing and Disposition Practices--brokers selected to
list REO properties for sale should have an office in close
proximity to the property, have the capacity to closely manage
and oversee the treatment of the REO, and should not have any
discrimination actions pending or any past complaints that were
not resolved satisfactorily. Further, banks and other REO
owners should implement better incentives for their brokers to
sell to owner-occupants rather than investors and should
severely restrict bulk sales. They should also make sure that
some of these homes are made available to nonprofit community
development organizations, community land trusts, and other
community-based and community-minded institutions that have a
vision for rebuilding healthy and vibrant neighborhoods.
Quality Control Measures--Banks and other owners must
implement better quality control measures across the board,
with swift and severe penalties for vendors who fail to do
their work in a professional manor. Special attention must be
directed to neighborhoods that have been found to be vulnerable
to poor work by vendors, including neighborhoods that are
predominantly African American, Latino, or Asian American, as
well as low- and moderate-income neighborhoods.
Transparent, Accurate, and Accessible Information About REO
Ownership--Every bank or REO owner should maintain a public
database containing all of its REO listings, including the name
and contact information of those responsible for the
maintenance or sale of the property. Neighbors and local
advocates must have access to clear ownership records that are
updated in an accurate and timely manner. Local governments
should continue to implement Vacant Property Registries,
monitor these registries, and routinely address any violations.
Create a Path Back to Home Ownership--Five million families
have lost their homes to foreclosure since September, 2008.
Evidence from Federal enforcement actions tells us that many of
these families were steered into loans that were more risky and
more costly than their financial qualifications should have
dictated. Others have been caught between record high levels of
sustained unemployment and falling home prices that have made
it impossible for them to sell or refinance their homes.
Offering these families a path back to home ownership is an
important component of rebuilding stable, vibrant communities.
Because so many of these families have been families of color,
it is also a fair housing issue.
Loss of Wealth Due to Foreclosures and Implications for the Future
The foreclosure crisis has drained enormous wealth from communities
across the country--an estimated $2.2 trillion, according to CRL. Half
of that amount, $1.1 trillion, has been lost by communities of color.
\11\ To be clear, this is not the direct cost to families who have lost
their homes to foreclosure, but rather the loss to families in nearby
homes due to the decline in the value of their homes. The Pew Research
Center reached similar findings. Between 2005 and 2009, according to
Pew, Blacks and Hispanics lost 53 percent and 66 percent of their
household wealth, respectively, due to declining property values. In
contrast, White households experienced a 16 percent loss in median
household wealth. Thus, while the typical White household had $113,149
in wealth in 2009, the typical Black household had only $5,677. For the
typical Hispanic household, that figure was $6,325. \12\
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\11\ ``2013 Update: The Spillover Effects of Foreclosures'',
Center for Responsible Lending, August 19, 2013, available at http://
www.responsiblelending.org/mortgage-lending/research-analysis/2013-crl-
research-update-foreclosure-spillover-effects-final-aug-19-docx.pdf.
\12\ Kochhar, Rakesh, Richard Fry, and Paul Taylor, ``Twenty to
One: Wealth Gaps Rise to Record Highs Between Whites, Blacks, and
Hispanics'', Pew Research Center, July 26, 2011, available at http://
www.pewsocialtrends.org/files/2011/07/SDT-Wealth-Report_7-26-
11_FINAL.pdf.
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This loss of wealth has tremendous implications for the future. It
limits the ability of families of color to tap the equity in their
homes in the way that so many others have done: to send their kids to
college, to start or expand a small business, to weather financial
difficulties, to fund retirement, and to pass along wealth to the next
generation. In other words, it limits their options and opportunities.
This, in turn, has tremendous implications for the housing market
and the economy as a whole. Seven out of ten new households formed over
the next decade will be households of color. \13\ By 2025, people of
color will make up nearly half of the typical first-time homebuyer
population. \14\ If this group cannot afford to buy homes, the housing
market may stall. Current homeowners may have difficulty selling their
existing homes, whether to downsize as they age or to meet other needs.
In order to maintain a robust housing market and a thriving economy, we
must ensure that we address the lingering problems in communities hard
hit by foreclosures and provide access to affordable, sustainable
credit for borrowers of color.
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\13\ See The Joint Center for Housing Studies of Harvard
University, ``The State of the Nation's Housing: 2013'', available at
http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2013.pdf.
\14\ See The Joint Center for Housing Studies of Harvard
University, ``The State of the Nation's Housing: 2014'', available at
http://www.jchs.harvard.edu/research/state_nations_housing.
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Lessons for Other Policies and Programs
NFHA's investigations into the management of REOs provide a window
into the devastation caused by the foreclosure crisis, to the housing
market, the overall economy, and especially to communities of color. It
is a reminder of the importance of taking effective action to prevent
abusive lending practices from causing this kind of devastation in the
future. Full recovery will also require us to take affirmative steps to
help people affected by foreclosure get back on their feet and to
revitalize the hardest hit communities. Congress has an important role
to play in this effort, as it shines a light on housing problems in
hearings like this and as it oversees the work of relevant Federal
agencies.
Reforming the Mortgage Market
One way to prevent a recurrence of the foreclosure crisis is to
ensure that the risky mortgage products and lending practices that
characterized the subprime boom do not creep back into the mortgage
market, either in the forms we saw during the 2000s or in new and
different forms. By enacting the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, with its prohibitions against the
riskiest features of the types of mortgages and lending practices that
caused the crash, Congress took an important step toward eliminating
abusive mortgage lending practices. The regulations that the Consumer
Financial Protection Bureau has issued to implement those statutory
provisions will help ensure that Congressional intent is carried out.
However, abusive practices can only be fully eliminated when strong
regulations are accompanied by strong oversight and effective
enforcement. In this, all of the Federal agencies with responsibilities
for oversight of the mortgage market have important roles to play in
policing the marketplace, as does Congress in its role as overseer.
While it is important to shore up the regulatory system to prevent
risky and abusive products and practices, it is critical to balance
this risk reduction effort with the need to preserve access to
affordable, sustainable credit for creditworthy borrowers. This means
we should eliminate the features that, when layered together, made
loans unsustainable--such as high points and fees, negative
amortization, rapidly rising monthly payments, and the like. At the
same time, we must be careful not to impose requirements, such as large
downpayments, that bear little relationship to risk but have the effect
of eliminating a great many creditworthy potential borrowers,
particularly borrowers of color, from eligibility for a mortgage.
Similarly, we must ensure that the pricing policies adopted by the GSEs
and FHA do not unfairly and unnecessarily shut these borrowers out of
the market.
Another way to ensure that borrowers and communities are not
further harmed by widespread foreclosures is to prevent those
foreclosures that can be avoided, both now and in the future. This
requires reforms to mortgage servicing. The CFPB has issued regulations
to begin this process, and has further regulations in this area out for
public comment now. The testimony of Julia Gordon, from the Center for
American Progress, addresses these regulations and NFHA endorses her
comments on this subject.
Sale of Nonperforming Loans
There are a great many borrowers currently at risk of foreclosure,
whose loans are in default. Many of these loans are owned or backed by
entities under Federal control. The Federal Housing Administration has
more than 311,000 mortgages that are 90 days delinquent, \15\ and the
two GSEs have another $100 billion of seriously delinquent loans. \16\
Both are taking steps to minimize their losses by selling pools of
these nonperforming loans to investors rather than putting them through
the foreclosure process. FHA has created the Distressed Asset
Stabilization Program (DASP), and this past summer, FHFA authorized a
bulk sale of nonperforming loans by Freddie Mac, which is expected to
be the first in a number of such sales by both GSEs. In theory, selling
these loans for an amount below the unpaid principal balance creates
the opportunity for a win-win-win situation. The agencies that own or
back these loans get an immediate return on the sales and eliminate
their exposure to future risk. The investors who purchase these loans
get a bargain and the opportunity to restructure the loan and create a
stream of income for the future. The homeowner gets a shot at a
restructured loan, which may include a reduced loan balance, which is
affordable and sustainable and allows them to stay in the home. This
avoids a foreclosure, which is costly to all parties. It avoids the
potential problems that NFHA's investigation into REO maintenance and
marketing identified, and it helps to stabilize the community,
preserving the value of other loans in the same area that are owned or
backed by the agency.
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\15\ Annual Report to Congress Regarding the Financial Status of
the FHA Mutual Mortgage Insurance Fund Fiscal Year 2014, U.S.
Department of Housing and Urban Development, Federal Housing
Administration, November 17, 2014.
\16\ Chrisman, Rob, ``Non-Performing Loan Market on Fire; Rates
Back to June 2013 Levels but Production May Drag'', Mortgage News
Daily, August 18, 2014.
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In order to achieve this triple bottom line, however, the sales of
loan pools must be structured to accomplish all of these goals. To the
extent possible, pools should be sold to mission-driven nonprofits or
mission-minded for-profits that are committed to preserving home
ownership for the largest possible number of borrowers. The desired
outcomes and program parameters should be explicit, and purchasers
should be required to report on the outcomes they achieve. The programs
should be transparent, with information about outcomes made available
to the public. And steps must be taken to ensure that borrowers of
color are treated fairly and have the same opportunity to save their
homes as other borrowers.
In addition, before any loan is sold, it is critical to ensure that
all of the required loss mitigation steps have been taken. Servicers
should document the steps they have taken, and the responsible agency
should verify the accuracy of that documentation. Borrowers should be
notified in advance that their loan may be sold, and should be informed
of the loss mitigation steps their servicer says it has taken. In this
way, the borrower can help with the verification process.
HUD is moving in the right direction with its DASP program, but
that program can and should be strengthened. Provisions like these were
not built into the nonperforming loan sales that Freddie Mac conducted
last summer, and to date, it is not clear whether or how FHFA will
structure future sales by the GSEs to accomplish these goals. This is
another area where Congressional oversight would be useful.
Conclusion
We have made substantial progress in dealing with the foreclosure
crisis, but there is more work to do to restore a robust housing market
and ensure that all communities have an opportunity to share in the
recovery. NFHA's investigation into the management of REO properties
shines a spotlight on some of the persistent problems that remain to be
solved. It also underscores the importance of using all of the
Government's tools to their best effect to eliminate inequality and
restore opportunity in our Nation's housing market.
Thank you for the opportunity to testify here today. I will be
happy to answer your questions, and look forward to working with you in
the months ahead.
RESPONSES TO WRITTEN QUESTIONS OF
CHAIRMAN MENENDEZ FROM WAYNE T. MEYER
Q.1. For communities that are still struggling to recover from
the downturn--for example, with high concentrations of
distressed mortgage borrowers or homeowners with underwater
mortgages--in your experience in the market, are there
strategies to break the cycle of home price decline? What more
can be done?
A.1. At New Jersey Community Capital (NJCC), we believe early
intervention and meaningful mortgage modification through
principal reduction are the keys to stabilizing neighborhoods
and halting the downward spiral of home prices. Gaining control
of the properties is the first step. NJCC acquires
nonperforming mortgages in bulk and works with homeowners to
modify their mortgages to affordable levels through meaningful
principal reduction. Other loans in the pools provide an
opportunity to create affordable for-sale and rental housing
units. NJCC also takes positions in properties through the
acquisition of tax liens and looks to aggressively assume first
position in an effort to gain the property through tax
foreclosure and return it to productive reuse. NJCC also
acquires real estate owned (REO) properties in an effort to
rehabilitate abandoned and vacant properties and create
accurate comparable real estate listings and pricing. Together
these efforts create a healthy, stable local real estate market
with rational home prices.
Additionally, we have been advocating with the FHFA to
allow principal reduction as a modification strategy for FHA
loans. We have also advocated with HUD to allow for changes to
the Distressed Asset Stabilization Program (DASP), which we
believe would bring about more positive neighborhood
stabilization effects.
Q.2. As many of you noted in your testimony, the share of
homeowners with negative or low equity on their homes has been
improving, but it's still elevated and the rebound has not been
uniform. In cities like Newark, Paterson, and Elizabeth in my
State of New Jersey, for example, the underwater rates are much
higher than the national average--and many in my State who were
already struggling from the financial crisis then had to deal
with an additional major hit from Superstorm Sandy.
Can you please explain the impact on the housing market of
homeowners who are still struggling with high debt burdens,
particularly at the entry-level segment of the market?
A.2. Homeowners struggling with high debt burdens will
typically forgo paying mortgage payments after reducing other
nonessential household expenses. However, certain expenses are
simply necessary to daily life. After falling behind and
becoming delinquent, it is near-impossible for most homeowners
in at-risk communities to cure default. Instead, these
homeowners are served a notice of foreclosure. First-time
homebuyers, who do not receive counseling, often struggle with
budgeting when household finances decrease or cease and in many
cases do not know where to turn for help.
Q.3. Are there particular populations or communities that were
especially hard hit and continue to face challenges?
A.3. Firstly, this problem impacts minority populations and
communities both disproportionately and more severely. A home
often represents a large portion of the generational wealth for
these families, making the threat of foreclosure that much more
devastating. In New Jersey, the major urban corridors of
Newark, Jersey City, Paterson, Passaic, Trenton, Camden,
Plainfield, Asbury Park, and Atlantic City continue to
experience the compounding negative effects of increased
foreclosures and neighborhood disinvestment and decline.
However, more and more communities along the shore and
elsewhere face mounting challenges and realize the hard-hitting
effects of foreclosure, including Toms River, Bridgeton,
Vineland, Brick, and Egg Harbor.
Q.4. What is the impact for the broader economy of the
continuing number of homeowners with distressed mortgages? To
what extent are consumers still holding back spending because
of outsized debt burdens?
A.4. NJCC works in at-risk communities throughout the State,
which share a disproportionate burden of homeowners in default.
Several of these households are faced with the impossible
choice to forgo proper nutrition and wellness in an effort to
save their homes. These budgeting tactics risk more than just
their financial ruin. In Newark, for example, Dr. Hanaa Hamdi,
Director of Health and Human Services for the City, while
completing research for her dissertation, found that price
gouging by corner stores and bodegas in certain communities
takes place at the beginning of each month when at-risk
families receive public assistance, SNAP and WIC benefits. Even
if these struggling families had the means to stimulate the
broader economy with retail purchases, some still fall victim
to the malice of others. These homeowners simply lack the
necessary disposable income to boost the broader economy.
Q.5. As our witnesses know, the Federal Housing Finance Agency
currently prohibits Fannie Mae and Freddie Mac from engaging in
mortgage modifications that involve principal reductions for
homeowners--even when it would result in a positive net present
value compared to the alternative of a foreclosure. Mr. Meyer,
you testified that principal reductions can be one of the most
effective forms of modification--a win for the mortgage
investor, the homeowner, and the community. Can you please
elaborate?
A.5. When NJCC purchases delinquent loans, we are now the
mortgage holder. We have the ability to modify our investment
as we see fit. Everyone's home in the mortgage pool is eligible
for a mortgage modification and principal reduction. We do not
face moral hazard issues. However, after a thorough analysis of
the household's finances by a ReStart Specialist--our specially
trained, local housing counseling agency partners--many
homeowners will not qualify for a modification. Those families
are provided transitional assistance and the counseling
agencies assist them with finding a new, sustainable living
situation. For those homeowners, who do qualify, their mortgage
is right-sized, meaning it is resized to the current market
value or as close as possible to the current market value of
the home. The homeowner then enters into a trial modification
period for a period of 3-18 months. Once the trial is
concluded, the modification becomes permanent. By offloading
distressed assets, the mortgage issuer or current investor
receives fair value for the mortgages, removes liabilities from
their ledger, and can use the sale proceeds to make further
investments. NJCC, as the new mortgage holder, helps anchor
residents remain in their homes, decreasing neighborhood
delinquency, and stabilizing the local markets through
continued home ownership or the rehabilitation and sale or
rental of the underlying homes at rational prices and
affordable levels. Struggling neighborhoods profit the most,
followed by our organization, and then the seller of the
mortgages. However, stabilizing a neighborhood then protects
the other investments NJCC or the seller of the mortgages has
in that neighborhood. The seller can then realize gains on
these stable investments and perhaps profit more on future home
sales.
Q.6. Mr. Meyer, you testified about New Jersey Community
Capital's ReStart initiative, under which you raise funding to
purchase distressed mortgages and, where possible, modify them
to find a sustainable mortgage for the homeowner or convert the
property to affordable rental housing.
What impact do Hardest Hit Funds have on your ability to
bid for, manage, and modify mortgages in these pools?
A.6. Senator Menendez, in Florida our ReStart program has
benefited greatly from a set aside of Hardest Hit Funds. Not
only do the Hardest Hit Funds allow us to write down mortgages
to the current market value of the underlying property, but
they are integral to amassing and leverage the large amounts of
private capital needed to purchase these pools of delinquent
notes. In New Jersey, for example, our economic model for
purchasing the pools relies heavily on a blend of debt and
equity, while in Florida our model can leverage a transaction
comprised of almost all equity investment. The Hardest Hit
Funds are this powerful in attracting private investment and
giving private capital investors comfort. So much so, that as a
nonprofit organization, which is able to access the Hardest Hit
Funds for mortgage modifications, purchasers of delinquent
pools eligible for Hardest Hit Funds, have come to us to be
their loss mitigation manager for these pools. We use our
ReStart model and the Hardest Hit Funding to write down the
loans. We keep qualified homeowners in their homes and provide
the mortgage holders with a right-sized, reperforming
investment. Without a commitment of Hardest Hit Funds, our
model is more difficult to administer, and our ability to
manage pools for other investors is very limited.
Q.7. Your testimony discusses your work with loans sold by the
Federal Housing Administration. Are you looking at ways to
expand or pursue similar efforts, whether with FHA or other
Government or private sector entities?
A.7. Yes, Senator. In fact, we are advocating and talking to
Government-sponsored entities (GSEs), in an effort for them to
allow the sale of delinquent loans via a program similar to the
HUD DASP. We also continue to advocate for changes to DASP as
well. While our ReStart model has shown the power of principal
reduction and large-scale creation of affordable housing, we
have had difficulty making headway with financial institutions
in regards to direct purchases of pools of delinquent loans in
their inventory. However, we hope to enter into due diligence
for a mortgage pool transaction with one of the five major
financial institutions in the country shortly.
Q.8. What lessons or recommendations would you make based on
your experience with ReStart, whether for the FHA or other
organizations like yours that might be interested in pursuing
similar initiatives? For example, FHA and Freddie Mac have
offered distressed asset sales. How could the terms and
timelines for these offerings be improved to encourage more
nonprofit and community lending organizations to participate?
A.8. This is perhaps the most important question and issue to
address, Senator. It is very difficult for nonprofit
organizations to participate in the loan sale programs. First,
the size of the loan pools require a considerable amount of
capital, which is difficult for nonprofits to raise in the time
afforded. The size of the pools makes careful due diligence
difficult to complete for nonprofits, and the period of time is
also too short. Setting aside specific, smaller pools
designated for nonprofits would help solve these two
challenges. The other major challenge for nonprofits is the bid
process itself. Bidding is highly competitive, and nonprofits
are easily outbid by bigger capital players. Direct sales to
nonprofits of these smaller, targeted pools are a simple and
viable remedy. If the impetus for these loan sales is to
stabilize neighborhoods, then nonprofit or proven, for-profit,
mission-driven community builders are more likely to achieve
the desired neighborhood stabilization outcomes. Private
investors will continue to have a difficult time satisfying
those neighborhood stabilization requirements. Other strategies
could include giving nonprofit organizations and community
lenders priority in winning bids. For example, if a qualified
nonprofit does not win the bid, it could be given another,
final opportunity to outbid the winning bidder, even if by one
dollar, in an effort to effect more stabilization outcomes.
More nonprofits and community lenders would be willing to
participate in these transactions if the scale was not as
large, the risk not as great, and the financial investment not
as substantial. Although many nonprofits with substantial
balance sheets exist, most community lenders do not belong to
that category.
Q.9. Freddie Mac recently engaged in a bulk sale of
nonperforming loans. How would you compare it with the FHA's
program, in terms of neighborhood stabilization and avoiding
unnecessary foreclosures?
A.9. We are aware of this pilot program in Detroit and Chicago,
and we are very encouraged by it. In fact, we are advocating
for the pilot program to be expanded to New Jersey. However, it
would be premature to evaluate the outcomes and compare the
pilot program to DASP.
Q.10. For the FHA's Distressed Asset Stabilization Program and
similar initiatives, do you think neighborhood stabilization
goals are in tension with the desire to maximize returns for
taxpayers?
A.10. No, Senator, not at all. Preventing further delinquency
and foreclosures is critical to halting falling home prices and
greater disinvestment. Under DASP, FHA receives fair value for
the delinquent assets. With additional changes to DASP, FHA
could realize more neighborhood stabilization outcomes, which
in turn stem further financial losses and prevent more
delinquent assets from accumulating for the Government,
financial institutions, and real estate investors.
Q.11. How can Federal programs like the Neighborhood
Stabilization Program, borrower assistance programs like HAMP,
HARP, and the Hardest Hit Fund be improved to spur the recovery
in communities that are still struggling?
A.11. Senator, this is a great question. However, it requires a
lengthy, detailed response.
NSP did not achieve its intended outcomes due to many
factors. One of the major challenges is the significant home
repair requirements for NSP, which in turn necessitate the need
for a large amount of NSP subsidy dollars to realize a
rehabilitation project. These requirements drive up the total
development costs of the project, usually well beyond the fair
market sales price for the newly renovated home. Therefore, a
project only becomes viable, if the total development budget
gap is filled with even more NSP subsidy dollars. This makes
the program extremely inefficient and unable to achieve the
scale necessary to adequately spur the economic recovery. The
only reason why our organization, NJCC, has been able to
efficiently use lower amounts of NSP monies is that we are able
to purchase properties in bulk at a severe discount, lowering
the total development costs for each project. The scale we are
able to generate is not typical for other nonprofit community
builders.
HAMP was structured to protect Fannie Mae and Freddie Mac
loan assets. The program does not allow mortgages to be written
down to the current appraised value of the home. Instead a
balloon payment will become due at the end of 40 years, when
homeowners will be looking to retire. So while HAMP loans can
significantly reduce current monthly payments for the
homeowner, in reality, the amount of the mortgage which remains
underwater is exacerbated, since the ``amount due on sale or
refinance'' will be substantially greater than the future worth
of the home. Homeowners will simply be stuck, unable to sell or
move to a new living situation, and can, in fact, be pursued by
the GSEs for ``nonpayment of amounts due.'' Future generations
will be the ones to actually realize the losses on these past
investments.
Q.12. Several of you discussed the importance of extending tax
relief for mortgage debt forgiveness. This is an issue about
which I've heard a great deal from people in my State, where
many homeowners are struggling not only from the financial
crisis, but also from damage inflicted by Superstorm Sandy. And
when they finally receive a lifeline to address mortgage debt
they are unable to pay, they risk being hit with a tax bill on
phantom income that may be many times in excess of the salary
they make as, say, a teacher or other profession.
Can you please describe why this tax relief is so important
for families, communities, and the economy?
A.12. It is vitally important, Senator. As you say, the debt
relief is not relief if taxes are assessed. If these struggling
homeowners are taxed, the slight gain in disposable monthly
income derived from the mortgage debt forgiveness cannot pay
for the tax bill on this phantom income. In fact, we have had
homeowners in our ReStart program refuse a modification,
because of the uncertainty around the tax extender bill. And
since our trial modification plans can last longer than 12
months, we can inadvertently saddle these homeowners with a tax
bill, should the relief not be reauthorized for another year.
It is important that the extender bill be authorized for
multiple years to provide reassurance to those homeowners lucky
enough to receive mortgage debt forgiveness. Lastly, the gain
or boon from the mortgage debt forgiveness should not be viewed
as income for the individual, instead, I would argue, it is a
boon to the local and regional economies. These homeowners can
become consumers again, can address health concerns, and can
provide quality food options to their children and family
members. Their neighborhoods will be spared further
disinvestment and decline, and the removal of the specter and
fear of being forced out of your home by the sheriff eliminates
a huge stress from these homeowners' lives, allowing them to
regain a healthier quality of life. These are all things that
should not be discounted, as they are interconnected and
influence the economic recovery.
------
RESPONSES TO WRITTEN QUESTIONS OF
CHAIRMAN MENENDEZ FROM MABEL GUZMAN
Q.1. For communities that are still struggling to recover from
the downturn--for example, with high concentrations of
distressed mortgage borrowers or homeowners with underwater
mortgages--in your experience in the market, are there
strategies to break the cycle of home price decline? What more
can be done?
A.1. Only a few markets across the country are currently
experiencing declining prices, but tepid price growth has been
an issue in more places. Price growth has been the defining
difference between markets that were underwater, but have since
restored equity and those that have not. Price growth is driven
by demand relative to supply. This demand is driven by economic
growth and job creation. In recent years, single family
investors have also played an important role in supplementing
demand, but have also removed affordable inventory for first
time buyers in many areas of the country.
Q.2. As many of you noted in your testimony, the share of
homeowners with negative or low equity on their homes has been
improving, but it's still elevated and the rebound has not been
uniform. In cities like Newark, Paterson, and Elizabeth in my
State of New Jersey, for example, the underwater rates are much
higher than the national average--and many in my State who were
already struggling from the financial crisis then had to deal
with an additional major hit from Superstorm Sandy.
Can you please explain the impact on the housing market of
homeowners who are still struggling with high debt burdens,
particularly at the entry-level segment of the market?
A.2. Negative equity puts homeowners in a precarious situation,
as it makes refinancing difficult, weakens owners' incentives,
and makes owners more susceptible to events like an illness or
loss of income/job that could push them into foreclosure.
In addition, owners in negative equity are less likely to
trade-up, which in turn constrains the supply of available
homes for the next generation of first-time or trade-up buyers.
This trend has exacerbated inventory shortages in some local
markets.
Q.3. What is the impact for the broader economy of the
continuing number of homeowners with distressed mortgages? To
what extent are consumers still holding back spending because
of outsized debt burdens?
A.3. Rising home values can boost consumer spending through a
``housing wealth effect.'' It stands to reason that falling
values or negative equity can weigh on homeowners' spending
decisions. Thus, negative equity can impact regional economic
performance through constrained consumer spending.
Furthermore, the general negative equity environment
creates uncertainty that weighs on consumers' demand for
housing, builders' plans for construction, and lenders'
willingness to originate. In turn, this can retard spending and
hiring decisions.
Q.4. How can Federal programs like the Neighborhood
Stabilization Program, borrower assistance programs like HAMP,
HARP, and the Hardest Hit Fund be improved to spur the recovery
in communities that are still struggling?
A.4. While the Neighborhood Stabilization Program and Hardest
Hit Funds have largely played out in the States and localities,
the principles of neighborhood stabilization are valid as we
pursue other initiatives such as the Neighborhood Stabilization
Initiative (NSI) now underway in Detroit and Chicago through
the Federal Housing Finance Agency. The Chicago Association of
Realtors, for example, has demonstrated a strong record of
achievement in helping Chicago meet its NSP goals through
helping to design strategies that make maximum use of limited
resources to bring neighborhoods back.
Q.5. Several of you discussed the importance of extending tax
relief for mortgage debt forgiveness. This is an issue about
which I've heard a great deal from people in my State, where
many homeowners are struggling not only from the financial
crisis, but also from damage inflicted by Superstorm Sandy. And
when they finally receive a lifeline to address mortgage debt
they are unable to pay, they risk being hit with a tax bill on
phantom income that may be many times in excess of the salary
they make as, say, a teacher or other profession.
Can you please describe why this tax relief is so important
for families, communities, and the economy?
A.5. Today, more than 5 million families remain in a home with
a mortgage that is ``underwater.'' If they hit a hardship and
cannot pay their mortgage, or have to move due to a new job and
sell their home, it is quite a trial to go through some kind of
workout or short sale process. And even if they are successful
with this process, they learn they can be subject to paying
income tax on ``phantom income'' from their forgiven mortgage
debt. This can come along at the very worst time possible, as
families in this situation are very often struggling
financially.
Unfortunately, the expiration of the tax provision that
exempts this income from taxation encourages families to simply
walk away and accept a foreclosure on their home. This harms
families, neighborhoods and entire communities, and is contrary
to every policy designed to keep people in their homes and
prevent foreclosures.
Extending the income tax exemption on mortgage debt
forgiven in a short sale or a workout for principal residences
provides homeowners with certainty, allows them to make
reasoned decisions about their mortgage, and provides stability
to our housing markets and communities.
------
RESPONSES TO WRITTEN QUESTIONS OF
CHAIRMAN MENENDEZ FROM DEBORAH GOLDBERG
Q.1. During the housing boom, some originators steered prime
borrowers into subprime, exotic products. Can you please
explain how the concentration of certain types of mortgage
products or securitizations has affected a community's recovery
rate?
A.1. The extent and nature of the steering that occurred during
the boom is illustrated by several fair lending lawsuits
brought by the U.S. Department of Justice against major
mortgage lenders. Evidence presented in the lawsuits against
Wells Fargo and Bank of America's Countrywide unit, in
particular, shows that these institutions placed thousands of
African American and Latino borrowers who were qualified for
prime loans into more expensive, riskier subprime mortgages.
\1\ These subprime products had multiple risky features that
made the loans unsustainable. Among these were high interest
rates, high fees, frequent adjustments to the interest rate
after an initial 2 or 3 year period which created rapidly
escalating monthly payments, and negative amortization. As
interest rates increased, many of the borrowers with such loans
were faced with mortgage payments that had grown to a level
they could no longer afford. Negative amortization resulted in
an increase in the unpaid principal balance, despite making
timely payments, and left many borrowers owing more than their
homes were worth. This was exacerbated by declining home
values. Selling the home, a traditional exit strategy for
troubled borrowers, was not possible for those who were
underwater because the sale would not bring enough money to
enable them to pay off the outstanding mortgage. Some borrowers
sought loan modifications, but for a variety of reasons many
were unable to obtain affordable modifications and wound up in
foreclosure. Five million families have lost their homes to
foreclosure since 2008.
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\1\ Details of the Department of Justice lawsuit against
Countrywide are available at http://www.justice.gov/usao/cac/
countrywide.html; details of the lawsuit against Wells Fargo are
available at http://www.justice.gov/opa/pr/justice-department-reaches-
settlement-wells-fargo-resulting-more-175-million-relief.
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Residential segregation by race and ethnicity is widespread
in this country. Thus, when African American and Latino
borrowers were targeted for subprime and other exotic loans,
the result was a concentration of such loans in communities of
color, including high income communities of color such as
Prince George's County, MD. According to the Federal Reserve
Board, in 2005-2006, African American borrowers were three
times more likely and Latino borrowers were 2.5 times more
likely to receive a subprime home purchase loan than similarly
qualified white borrowers. Borrowers of color were also much
more likely to receive subprime refinance loans. \2\
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\2\ Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner,
``Higher-Priced Home Lending and the 2005 HMDA Data'', Federal Reserve
Bulletin, 2006, available at http://www.federalreserve.gov/pubs/
Bulletin/2006/hmda/bull06hmda.pdf, and ``The 2006 HMDA data'', Federal
Reserve Bulletin, 2007, available at http://www.federalreserve.gov/
pubs/bulletin/2007/pdf/hmda06final.pdf.
---------------------------------------------------------------------------
Thus, while many neighborhoods have been affected by
foreclosures, communities of color have been particularly hard
hit due to the concentration in those communities of mortgage
loans that were unsustainable from the outset. These
foreclosures clearly have an enormous impact on the families
who have lost their homes. They suffer significant financial
losses, disruption to their lives and social networks, their
children's performance in school may be affected, and a host of
other problems may ensue.
However, the foreclosures also have a tremendous negative
impact on the families who remain in the neighborhood. Perhaps
most significant in terms of the implications for recovery is
the financial impact they suffer as the result of a decline in
the value of their homes. Research shows that foreclosures
depress the value of nearby homes, and the effect is amplified
when there are multiple nearby foreclosures. In Newburgh, NY,
which has an estimated 600 vacant and abandoned properties,
officials have estimated that each vacant and abandoned
building reduces the value of surrounding properties by $7,000.
According to their estimate, a group of 13 such properties has
reduced surrounding property values by $500,000. \3\
Collectively, across the many communities hit hard by the
crisis, this loss of wealth is enormous. At the height of the
crisis, the Federal Reserve Board estimated that declining
property values had cost Americans $7 trillion in lost wealth.
\4\ African American and Latino households, whose wealth is
disproportionately tied up in home equity, suffered the
greatest loss of wealth: 53 percent and 66 percent
respectively, according to research from the Pew Research
Center. This compared to a 16 percent loss for white
households. \5\ The Center for Responsible Lending has
estimated that the nearby foreclosures have drained $2.2
trillion in wealth from American homeowners, with half of that
loss--$1.1 trillion--lost by homeowners in communities of
color. \6\
---------------------------------------------------------------------------
\3\ Shantal Parris Riley, ``The Housing Market Fallout
Continues'', Mid-Hudson Times, January 13, 2015. Available at http://
timesadmin.startlogic.com/wp/2015/01/the-housing-market-fallout-
continues/.
\4\ Federal Reserve Board, ``The U.S. Housing Market: Current
Conditions and Policy Considerations'', January 4, 2012.
\5\ Kochhar, Rakesh, Richard Fry, and Paul Taylor, ``Twenty-to-
One: Wealth Gaps Rise to Record Highs Between Whites, Blacks,
Hispanics'', Pew Research Center, July 26, 2011. Available at http://
www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-
between-whites-blacks-hispanics//.
\6\ Center for Responsible Lending, ``2013 Update: The Spillover
Effects of Foreclosures'', August 19, 2013. Available at http://
www.responsiblelending.org/mortgage-lending/research-analysis/2013-crl-
research-update-foreclosure-spillover-effects-final-aug-19-docx.pdf.
---------------------------------------------------------------------------
This loss of wealth places both individual households and
communities in a precarious position. As illustrated in the
recent series in the Washington Post, ``Dashed Dreams'', \7\
families whose mortgages are underwater as the result of
foreclosure-related drops in property values are stuck. Unless
the loans are owned by Fannie Mae or Freddie Mac and therefore
eligible for a refinance under the Federal Home Affordable
Refinance Program (HARP), the homeowners are unable to
refinance their mortgages to take advantage of lower interest
rates because their homes are worth less than the amount of the
mortgage. They are unable to move to take advantage of job
opportunities elsewhere because they cannot sell their homes.
They no longer have home equity that they can tap to pay for
unexpected medical expenses, their children's educations, or
their own retirement. They are extremely vulnerable to any
disruption of income or unanticipated expense, and if such
events occur, these homeowners may find themselves facing
foreclosure. The tremendous loss of wealth also means they are
less likely to be able to pass wealth along to the next
generation, leaving their children a step behind rather than
being able to offer them a leg up. This loss of
intergenerational wealth means that the foreclosure crisis will
have very long-lasting effects in communities of color.
---------------------------------------------------------------------------
\7\ ``Dashed Dreams'' a three-part series by Washington Post
reporters Michael A. Fletcher, Kimbriell Kelly, John Sullivan, and
Steven Rich, appeared on January 24-26, 2015. It is available at http:/
/www.washingtonpost.com/sf/investigative/2015/01/24/the-american-dream-
shatters-in-prince-georges-county/.
---------------------------------------------------------------------------
At the community level, the effects of concentrated
foreclosures are also felt in many ways. One is the increased
burden on municipal resources to deal with the problems
associated with vacant, abandoned homes. The Mid-Hudson Times
story on Newburgh, NY, cited above, provides ample illustration
of this problem. In Newburgh and many other places, city
officials have been called on to perform a variety of duties on
a more frequent basis than usual. These include cleaning out
trash that is dumped on the premises of vacant homes,
responding to criminal activity that takes place at those
homes, putting out fires, boarding up or demolishing damaged
and deteriorated properties that have become safety hazards,
monitoring vacant properties on an ongoing basis, tracking down
the parties responsible for upkeep, assessing fines for
violations of city ordinances, and trying to collect those
fines. All of these activities are expensive. At the same time,
the concentrated foreclosures have brought down property values
and reduced the in-flow of tax revenues that pay for these and
other municipal services. This creates a drag on the
community's recovery.
Q.2. As many of you noted in your testimony, the share of
homeowners with negative or low equity on their homes has been
improving, but it's still elevated and the rebound has not been
uniform. In cities like Newark, Paterson, and Elizabeth in my
State of New Jersey, for example, the underwater rates are much
higher than the national average--and many in my state who were
already struggling from the financial crisis then had to deal
with an additional major hit from Superstorm Sandy.
Can you please explain the impact on the housing market of
homeowners who are still struggling with high debt burdens,
particularly at the entry-level segment of the market?
A.2. As the Washington Post series cited above describes so
clearly, homeowners who are burdened with high debt--whether
they are underwater on their mortgages and struggling to make
those payments; have high levels of student, medical or other
debt; or both--are vulnerable to foreclosure, unable to sell
their homes, and unable to purchase other homes. Rather than
contributing to a well-functioning housing market, they are
kept on the sidelines and their exposure to foreclosure risk
can contribute to the destabilization of the housing market. In
many cases, they have had their home equity stripped away by
abusive mortgage practices and declines in home values. This
makes it difficult for them to sell their homes because they
cannot sell for a high enough price to enable them to pay off
the existing mortgage. The inability to sell their home means
they cannot purchase another home, either to gain more space,
relocate to pursue job opportunities, or for any other reason.
Their high level of debt and lack of home equity also means
that they may not be able to make major repairs to their homes,
potentially undermining the home's long term value. Nor can
they make improvements to their homes, dampening the home
improvement segment of the housing market with the jobs that it
creates and its positive impact on housing values.
Q.3. You testified that minority communities were especially
hard hit and continue to face challenges in this regard. Can
you please elaborate?
A.3. As I stated in my testimony, communities of color were
targeted for subprime and other unsustainable mortgage loans.
These loans contributed to inflated housing prices in many of
these neighborhoods, followed by a particularly large drop in
housing prices when the bubble burst. According to Black
Knight's November Mortgage Monitor, in States that have been
the slowest to recover from the housing crisis, price recovery
for homes in the bottom 20 percent in terms of value is lagging
well behind that of homes in the top 20 percent. The report
notes that, in California, properties in the top 20 percent
price bracket are currently a little more than 3 percent below
their precrisis peak, compared to a 32 percent lag for homes in
the bottom 20 percent price bracket. Similar patterns exist in
other States, as well. \8\
---------------------------------------------------------------------------
\8\ Garrison, Trey, ``Black Knight: Affordable Homes Lagging
Behind in Price Recovery'', HousingWire, January 12, 2015.
---------------------------------------------------------------------------
In NFHA's work, we have observed that homes in communities
of color tend to be priced lower than comparable homes in white
communities. Based on the numbers above, it appears that the
recovery is slowest is communities of color, and many
homeowners of color may still be underwater on their mortgages,
keeping them on precarious financial footing. This is likely
exacerbated by the continuing high unemployment rates for
people of color. According to the Bureau of Labor Statistics,
at the end of 2014 the unemployment rate for whites 16 years of
age and older was 4.6 percent. For Hispanics in the same age
bracket, the rate was 6.5 percent and for African Americans it
was 10.5 percent. \9\ The combination of loss of income due to
sustained unemployment and the fall-out from abusive mortgage
practices creates particularly difficult challenges for these
families.
---------------------------------------------------------------------------
\9\ See ``Labor Force Statistics From the Current Population
Survey, Table E-16, `Unemployment Rates by Age, Sex, Race, and Hispanic
or Latino Ethnicity' '', available at http://www.bls.gov/web/empsit/
cpsee_e16.htm.
Q.4. What is the impact for the broader economy of the
continuing number of homeowners with distressed mortgages? To
what extent are consumers still holding back spending because
---------------------------------------------------------------------------
of outsized debt burdens?
A.4. This excerpt from the Washington Post series cited above,
``Dashed Dreams'', captures clearly the dilemma of homeowners
who are underwater and struggling to keep up with their
mortgage payments. It describes a family in Prince George's
County, MD, the Bryants. They bought a house in 2001 and later
refinanced into a loan with terms that would no longer be
permissible under the new Qualified Mortgage (QM) regulations.
While the initial loan payments were affordable, the payments
have more than doubled and the Bryants are struggling to keep
up. Here is how the article described the impact of these
unaffordable payments:
The problem is not their income but their home. Once a
source of wealth, it is now their biggest financial
burden.
The Bryants owe just over $560,000 on their house,
which they estimate is worth about $80,000 less than
that. Since they moved in 2001, their monthly payment
has more than doubled to nearly $3,900 a month--a
predicament that arose because of an ill-advised
refinancing into a loan whose terms the Federal
Government now deems predatory.
The couple have never missed a mortgage payment. But
now they are struggling to hold on. They have pulled
their two preteen daughters out of private school. They
bought inexpensive used cars. Instead of going on
vacation last summer, they took the girls to Six Flags
America, a nearby amusement park. They have little
saved for college or retirement.
Multiply this by thousands of homeowners who are in the
same situation and it is clear that this ongoing fall-out from
unsustainable mortgage lending continues to undermine the
broader economic recovery. It underscores the need for
continuing assistance to borrowers who are at risk of default
and foreclosure, and the importance of making principal
reduction available to those whose mortgages are both
unsustainable and underwater. Freeing these families from the
burden of outsized, unaffordable debt would not only restore
their economic security, it would speed the country's overall
economic recovery and help ensure that it reaches those
communities that were hardest hit by the crisis, including
communities of color.
Q.5. As you know, the Federal Housing Administration and GSEs,
like many private sector entities, are responsible for managing
inventories and have engaged in sales of nonperforming loans
and foreclosed properties. What policies or practices should be
applied to these assets to ensure that their disposition best
helps families, neighborhoods, and the overall recovery?
A.5. My testimony described the problems indentified through
NFHA's investigation into the management and marketing of
foreclosed properties in communities of color as compared to
other communities. That investigation focused on bank-
controlled foreclosures. Some of these are managed by various
banks for Fannie Mae, Freddie Mac, or FHA, and some for other
investors. In some cases the bank is the trustee, and is not
directly involved in the day to day management of the
properties, but is ultimately responsible to ensure that they
are properly maintained and marketed on behalf of the
investors. NFHA's investigation found that foreclosed
properties in communities of color were much more likely to
have multiple deficiencies, including unsecured doors and
windows, holes in the structure, damaged or missing gutters and
downspouts, accumulated trash and overgrown yards, and the
like. These conditions depress the value of the individual home
and the surrounding homes. They lower the municipalities'
revenues from property taxes at the same time as they increase
the demand for municipal services such as police, fire, health
care, and others. They create a host of health and safety
problems for the community.
NFHA's report, which was attached to my testimony, outlines
a series of policy recommendations to improve the maintenance
and marketing of these properties and minimize their negative
impact on the communities in which they are located. Freddie
Mac has adopted many of these recommendations, and the benefits
can be seen in the good condition of the foreclosed properties
it owns. Some banks also have effective systems for managing
their foreclosed properties, but many do not. FHA's protocols
require their asset managers to maintain the yards of FHA's
foreclosed properties, but prohibit them from making repairs to
the structures themselves, which can result in deterioration of
those properties. The lack of industrywide standards and strong
oversight by the Federal regulators means that, in too many
cases, foreclosed properties in communities of color are
blighted, linger on the market too long, and end up in the
hands of investors rather than owner-occupants. The Federal
Housing Finance Agency, Fannie Mae, FHA, and many banks have
not yet taken the necessary steps to institute the kind of REO
management policies that will help ensure that communities of
color are not left behind in the recovery from the foreclosure
crisis.
Similarly, Fannie Mae, Freddie Mac, and FHA all control
sizeable portfolios of nonperforming loans. These are loans
that are seriously delinquent but have not yet gone through
foreclosure. The GSEs have some $100 billion of such loans
between them, \10\ and as of year-end 2014, FHA had more than
500,000 such loans. \11\ From one perspective, these
nonperforming loans are a drag on the balance sheets of FHA and
the GSEs, and they have an interest in disposing of these loans
in order to shore up their financial condition and protect
American taxpayers. Experience to date suggests that there is
considerable investor interest in the bulk purchase of these
loans, which are being offered below par.
---------------------------------------------------------------------------
\10\ Chrisman, Rob, ``Non-Performing Loan Market on Fire; Rates
Back to June 2013 Levels but Production May Drag'', Aug. 18, 2014,
available at http://www.mortgagenewsdaily.com/channels/pipelinepress/
08182014-interest-rates-mortgages.aspx.
\11\ See U.S. Department of Housing and Urban Development, Office
of Risk Management and Regulatory Affairs, Office of Evaluation,
Reporting and Analysis Division, ``FHA Single Family Loan Performance
Trends: Credit Risk Report'', December, 2014. Available at http://
portal.hud.gov/hudportal/documents/huddoc?id=FHALPT_Dec2014.pdf.
---------------------------------------------------------------------------
The disposition of these nonperforming loans has a broader
impact, however. In addition to affecting the bottom line for
FHA and the GSEs, the way they are handled also affects the
homeowners who have been struggling to make their mortgage
payments, the value of the surrounding homes, and the
likelihood of default of other loans in those communities, some
of which are also guaranteed or insured by FHA and the GSEs.
Given these larger impacts, it makes sense to approach the
disposition of these nonperforming loans with two goals:
reducing potential losses and stabilizing communities. Both of
these are of equal importance, and in order to accomplish both
goals, both must be built into the design of the asset
disposition programs.
To date, FHA has taken modest steps toward this second goal
in a small subset of the sales conducted through its Distressed
Asset Stabilization Program, or DASP, launched in 2010. As FHA
notes in the May 30, 2014, quarterly report on the program, its
single family loan sales program, ``maximizes recoveries to the
MMI funds, reduces claims costs, minimizes the time that the
assets are held by FHA, and helps keep borrowers--otherwise
headed to foreclosure--in the home. The program also serves as
part of FHA's effort to target relief to areas experiencing
high foreclosure activities. For purchasers, the program is an
opportunity to acquire assets at competitive prices with the
flexibility to service the assets while providing borrowers an
opportunity to avoid costly foreclosures.'' \12\ In other
words, FHA expects that the purchasers of the distressed loans,
who have purchased the loans at a significant discount, have
the financial incentive and opportunity to offer affordable
loan modifications under terms not otherwise permitted by FHA
regulations, such as principal reduction. The reports from the
field mentioned below indicate that this objective is not being
met.
---------------------------------------------------------------------------
\12\ U.S. Department of Housing and Urban Development, Federal
Housing Administration, ``Quarterly Report on FHA Single Family Loan
Sales'', available at http://portal.hud.gov/hudportal/documents/
huddoc?id=report082814.pdf.
---------------------------------------------------------------------------
As of May 30, 2014, FHA had sold 71,231 loans through the
DASP program, with an approximate aggregate unpaid principal
balance of $12,263,325,938. Many of these loans are still
unresolved. Of those where an outcome has been reached, 31
percent have gone through foreclosure, 35 percent have been
sold to other investors and no information about their current
status is available, and the remaining 34 percent have been
resolved in a manner that avoided foreclosure. Eleven percent
of the loans in this last category are reperforming, the rest
have had short sales, deeds-in-lieu or similar outcomes. In
other words, this part of the program has had minimal success
in helping homeowners save their homes.
Beginning in 2012, FHA instituted the sale of so-called
Neighborhood Stabilization Outcome (NSO) pools of loans. In
these pools, the terms of the sale specify that, for at least
50 percent of the loans in each NSO pool, the investor must
resolve the delinquency through one of a series of allowable
nonforeclosure outcomes. Among these are reperformance, rental
to a borrower, gift to a land bank, or payoff of the loan. As
of May 30, 2014, FHA had sold 17,828 loans with an approximate
aggregate unpaid principal balance of $3,164,052,483 in NSO
pools. The experience with these loans is more limited than
with the national pools, both because of their fewer numbers
and the shorter time since the launch of the program. So far,
however, the outcomes appear significantly more promising than
those of the other sales. FHA has reported results on three of
the NSO pools, and for those three, of the loans that have been
resolved, 27.7 percent, 20.6 percent, and 17 percent
respectively are reperforming, meaning that the borrower is
once again making mortgage payments. These are substantially
better outcomes than those achieved by the national pools.
FHA should build on the early successes of the NSO pools to
ensure that more of the borrowers in its defaulted loans are
able to save their homes or otherwise avoid foreclosure. To
accomplish this, it should adopt the following measures:
Ensure that loans are not sold through the DASP
program before all required loss mitigation steps have
been completed. There have been reports from housing
counselors and borrowers' attorneys in the field about
clients who were in the middle of loss mitigation only
to be told that their loans had been sold, were no
longer FHA insured, and that their pending loan
modification could not move forward. FHA should expand
its oversight on this issue to confirm, prior to
including a loan in the DASP pool, the accuracy of the
servicers' certification that they have complied with
all loss mitigation requirements. In addition, FHA
should conduct more extensive quality assurance on
loans that will be included in DASP pools to ensure
that servicers have completed the waterfall analysis
required under FHA's loss mitigation rules. Further, to
aid FHA in its quality assurance protocol, before any
loans are sold through the DASP program, the homeowners
should receive a notice of the impending sale. The
notice should inform them of the servicer's
determination that all FHA loss mitigation options have
been exhausted and give them an opportunity to rebut
the servicer's certification, provide information about
the process and the obligations of the servicer, and
include an explanation of their rights.
Apply neighborhood stabilization requirements to all
pools. The early experience with the NSO pools suggests
that many more homeowners are able to save their homes
when this program goal is made explicit. This outcome
benefits benefit of the homeowner, the community and
the investor. It is important to note that
incorporating neighborhood stabilization outcome
requirements into the program has not resulted in any
negative impact on the price for which the loans were
sold. In other words, there is no conflict between
stabilizing neighborhoods and shoring up the FHA
insurance fund. It makes sense, therefore, to adopt
neighborhood stabilization requirements for all of the
DASP pools.
Strengthen the requirements for neighborhood
stabilization outcomes for loans sold through DASP.
This should include setting out standards for what
constitutes an affordable loan modification--including
the use of principal reduction, and increasing the
percentage of loans in any pool that should receive
sustainable modifications. In cases where no
modification is possible, the priorities should be
selling the home to another owner-occupant or making it
available as affordable rental housing for low- and
moderate-income households.
Take steps to make it possible for mission-driven
community-based organizations to purchase more loans
through DASP. This may mean creating smaller pools that
are more affordable for organizations with limited
access to capital, including in the bidder
qualifications a requirement that the bidder
demonstrate capacity and commitment to meeting
neighborhood stabilization objectives, and helping to
develop additional sources of capital available to
qualified community-based organizations for the
purchase of nonperforming loans.
Increase program transparency. To facilitate
oversight and accountability, FHA should collect and
publish information on program outcomes on a regular
basis. This should include loan-level data on borrower
demographics, the geographic location of the loans, and
more detail on post-sale resolutions. In particular, it
is important to capture information on the current
status of the loans and any changes to the loan terms,
including interest rate reductions, principal
forgiveness or forbearance and term extensions, along
with post-modification debt-to-income ratios. There
have been reports from the field of DASP borrowers
being required to become current before being eligible
for a loan modification, being required to make an
upfront payment of thousands of dollars, and being
offered modifications that do not result in affordable
monthly payments. Such modifications are not affordable
or sustainable, and having more detailed information
about the terms that borrowers are being offered will
help to weed out such practices. In addition, it is
important to track any differences in the modifications
offered or outcomes achieved based on borrower
characteristics or geographic location in order to
ensure that the program is operating in a fair and
nondiscriminatory fashion.
As noted in my testimony, Freddie Mac conducted one sale of
nonperforming loans this past summer. To date, Fannie Mae has
not followed suit, but between them, the GSEs have some $100
billion of nonperforming loans on their books and indications
are that they are likely to conduct more sales in the future.
Little information is available publicly about the details of
the Freddie Mac sale, but it does not appear that the terms of
the sale incorporated any of the principals described above. If
there are further sales of nonperforming loans by either GSE,
they should adopt the kinds of neighborhood stabilization goals
outlined here.
Q.6. Several of you discussed the importance of extending tax
relief for mortgage debt forgiveness. This is an issue about
which I've heard a great deal from people in my State, where
many homeowners are struggling not only from the financial
crisis, but also from damage inflicted by Superstorm Sandy. And
when they finally receive a lifeline to address mortgage debt
they are unable to pay, they risk being hit with a tax bill on
phantom income that may be many times in excess of the salary
they make as, say, a teacher or other profession.
Can you please describe why this tax relief is so important
for families, communities, and the economy?
A.6. Mortgage debt forgiveness is particularly important for
creating sustainable mortgages for families who are not only
delinquent on their mortgages or at imminent risk of default,
but who are also underwater (that is, they owe more on their
mortgages than their homes are worth). These families are
highly vulnerable financially. A loan modification that reduces
their interest rate and/or mortgage payment may not be enough
to restore their financial stability. As long as they remain
underwater, they remain at risk of default and foreclosure if
they face future financial difficulties, such as the loss of a
job, reduction in hours or income, or medical or other
unexpected expenses. A family in this situation cannot sell its
home to move for a job opportunity, to get a bigger house as
the family grows or for any other reason. Nor can it sell its
home to get out from under the debt burden, because the home
cannot be sold at a price high enough to pay off the existing
mortgage. Such families face extremely limited geographic and
economic mobility. For them, a loan modification that includes
principal forgiveness is a lifeline that can secure their
financial stability and economic mobility. However, if they
incur significant tax liability on that principal forgiveness,
it may be impossible for them to afford to accept the loan
modification. They remain vulnerable and financially stressed.
Communities with significant numbers of families in this
situation may have a harder time recovering from the recession.
The economy also suffers when such families and communities are
economically constrained.
Congress has an important role to play in solving this
problem. To date, it has only provided limited and temporary
relief from tax liability associated with principal forgiveness
obtained through 2014. More families would be able to take
advantage of loan modification offers that include principal
forgiveness, and thereby regain their financial footing, if the
relief were made permanent, and if it applied to all mortgage
debt rather than only debt that was incurred to ``buy, build,
or substantially improve'' the borrower's principal residence.
This limited definition of debt in the Mortgage Forgiveness
Debt Relief Act does not include loan modifications on
investment properties, such as those offered in the Home
Affordable Modification Program (HAMP Tier 2). Nor does it
cover all refinance debt for a primary residence--debt that was
often incurred in predatory loan transactions. In addition,
most homeowners are not aware that debt forgiven in a short
sale, deed in lieu of foreclosure, or an uncollected deficiency
after foreclosure can also give rise to potential taxable
income. Thus, the foreclosure prevention options that can help
stabilize communities, such as modifications, short sales and
deeds in lieu of foreclosure that involve principal
forgiveness, can ultimately harm borrowers who believe they
have made a fresh start but later learn that they face a
significant income tax liability despite having resolved the
mortgage matter. Congress should move quickly to pass the Act
on a permanent basis, expanding the range of loans to which it
applies, as described above.