Make mortgage lending more responsible
NOW THAT everyone is paying attention, let's review how we got here: Subprime loans became the mortgage flavor of the day several years ago. The worst kind of lenders preyed on the universal yearning for the American Dream -- homeownership -- and too often targeted African-Americans and Latinos with alluring, affordable, and ultimately deceptive sales pitches.
"Your bank says no, we say yes." "If your rate is higher than 1.5 percent, then you need to call us now." "Bad credit, no problem!"
In Boston in 2005, 70 percent of higher-income African-American and Latino borrowers received a high-cost loan. That is 70 percent of those earning more than $100,000 per year. Subprime lending spilled over into the suburbs as well with towns like Weymouth, Holbrook, Dedham, Milford, and others reporting more than 1 in 10 homeowners getting high-cost loans.
These are not just run-of-the-mill high cost loans. Subprime lenders keep coming up with new products and new gimmicks. That is why there has been a proliferation of "stated income" loans and interest-only loans. These products have been around awhile but they had a limited use until brokers and mortgage companies started selling them to average consumers who didn't have a realistic chance of paying the mortgage.
No surprise, delinquency rates on these products started rising. One recent report puts subprime delinquencies at more than 14 percent. Investors started getting nervous and put the squeeze on subprime mortgage companies to buy these loans back and, in some cases, cut off the funding stream for new loans. It is a recipe for a crisis.
And as in any crisis, there is no shortage of proposed solutions. Increased financial education for borrowers is a starting place that everyone can agree on. Education could inoculate consumers against the persuasive, but deceptive, advertising that fueled the current situation.
Beyond education, legal and legislative remedies have surfaced. Can the attorney general go after subprime companies or perhaps the Wall Street investors? How about legislation? Debate on Beacon Hill this year will probably focus on proposals that would crack down on unfair and deceptive advertising, license loan originators, and help consumers caught in the foreclosure process. The Legislature's Joint Committee on Housing will hear testimony today on those bills.
All these ideas need to be investigated but one solution before the Legislature stands above the rest. On this 30th anniversary of the federal Community Reinvestment Act and 25th anniversary of the state Community Reinvestment Act , there is an important opportunity. The act encourages responsible lending behavior in all neighborhoods. It is the reason that companies like New Century, Ameriquest, and Option One are in current scandal and not Bank of America, Sovereign, and Citizens. Local banks comply with the act and generally avoid lending policies that destabilize neighborhoods. But today fewer than 20 percent of mortgage loans are made by a local bank or credit union with reinvestment act responsibilities. Those mortgage companies are in trouble now largely because they don't come under the Community Reinvestment Act.
The legislative proposal would modernize this effective lending law. Mortgage companies, especially subprime companies, need to be covered by a new Community Reinvestment Act -- a Comm unity Responsibility Act -- that would prevent them from preying on neighborhoods. A new act would give them public ratings and create a system where affordable and sustainable lending is rewarded and loans made without regard to a borrower's ability to repay would generate bad ratings. A new act would give elected officials and community organizations a seat at the table when lending practices threatened to destroy families and neighborhoods. A new act would once again make Massachusetts a leader in encouraging the best lending in all of our communities. Eighteen years ago, the Federal Reserve Bank of Boston released a study showing racial disparities in Boston mortgage lending. Thanks to the Community Reinvestment Act banks, community groups, and city and state government responded by negotiating the SoftSecond mortgage program. This year, the Massachusetts Housing Partnership SoftSecond program, which reaches the lowest income home-buying population, will surpass 10,000 homeowners with a current delinquency rate of just 2.2 percent. We need more programs like this that emphasize sustainable homeownership and fewer crazy lending schemes invented by out-of-state subprime companies. The Community Responsibility Act is the way to get there.
Thomas Callahan is the executive director of the Massachusetts Affordable Housing Alliance. 
