Unintended fallout of loan crisis
AS THE IMPLOSION of the $1.3 trillion subprime mortgage crisis threatened even government-sponsored
In fact, the subprime mortgage market, which represented just 5 percent of lending in 1994 and grew to 20 percent of all outstanding mortgages by 2005, became an effective tool by which community-based organizations were able to help many low- and moderate-income families - for whom access to credit had previously been limited - realize opportunities for home ownership.
Subprime lending was originally buoyed by changes in banking regulations, and particularly the 1977 Community Reinvestment Act, which mandated that banks extend credit to low- and moderate-income customers in the communities where banks did business or else face interference from regulators. Understandably challenged by banks not wishing to take on risky loans, the law did, however, provide a stick which housing advocates effectively used to bludgeon banks into writing mortgages for what would have previously been considered unqualified borrowers.
Bruce Marks, as one notable example, now CEO of the Neighborhood Assistance Corporation of America, in the 1990s browbeat local Boston banks by calling them "unrepentant corporate criminals" for their lending practices and was successful in extracting a multimillion-dollar loan pool targeted to low-income home buyers, using the Community Reinvestment Act as a key bargaining chip. "Every individual and community has the right to credit," Marks testified at the time to the Senate Banking Committee. "It's what allows communities to grow and prosper."
But despite its good intentions, the Community Reinvestment Act may have had unintended negative consequences for the very people it was designed to help, according to Federal Reserve Chairman Ben S. Bernanke, who recently questioned the soundness of a policy that expanded lending to new groups of sub-par borrowers, observing "that an underlying assumption of the CRA - that more lending equals better outcomes for local communities may not always hold."
That view, of course, contradicts the conventional wisdom of affordable housing advocates, who had always pushed for first-time home buying opportunities for their constituents and generally believed that a rewriting of the mortgage rules was necessary; their efforts eventually resulted in a new mortgage product, a subprime loan, specifically created to meet the needs of borrowers with less than perfect credit or low incomes.
These "nontraditional" mortgages included a number of risk-laden features to help buyers qualify, such as no income verification for borrowers, loans of up to 100 percent of the property's value, interest-only loans, low introductory teaser interest with back-ended adjustments to considerably higher rates, unrealistic property appraisals, and other loosening of what had been well-regulated and rigid mortgage underwriting standards.
But as it has happened, the new homeowners whom housing advocates were trying most to help were the first to feel the fallout of their ill-advised decisions and risky mortgage deals. The Center For Responsible Lending, an advocacy group that fights predatory lending, for instance, found "that, for most types of subprime home loans, African-American and Latino borrowers are at greater risk of receiving higher-rate loans than white borrowers, even after controlling for legitimate risk factors."
Those statistics suggest that darker days may well be ahead for housing advocates' core constituents - those for whom credit and ownership had previously been unavailable - and that, as the Neighborhood Assistance Corporation itself estimates, it is possible that some "2.2 million subprime home loans made in recent years have already failed or will end in foreclosure" as interest rates readjust, property values continue to decline, and hard economic times make keeping one's home difficult, even with the best of intentions.
Richard L. Cravatts is director of Boston University's certificate program in publishing in the Center For Professional Education.
