Today, Camerota, chairman of the California Mortgage Bankers Assn., and Leonard, California office director for the Center for Responsible Lending, discuss building homeownership. Previously they focused on the ethics of lending, the scale of the sub-prime crisis and proposed solutions. Later this week, they'll debate the bailout proposals and more.
More responsible lending practicesBy Paul Leonard
A well-functioning housing market of any stripe should feature a reasonable supply of entry-level-priced homes, access to fair and responsible credit and incomes sufficient for buyers to purchase homes. What we have seen in the mortgage market over the last few years a relaxing of lending standards in particular is now beginning to impact the housing market. Foreclosures are on the rise, and entire neighborhoods are being destabilized by the ripple effects that foreclosures have on communities.
For a variety of reasons, California has systemically failed to provide a growing supply of housing, leading to extremely high prices and resulting low homeownership rates.
Until last year, California housing prices had been growing at a record level, and though they have steadied or even declined in many regions of the state, the average home price still exceeds half a million dollars, according to the California Assn. of Realtors. With average median household income hovering around $50,000 for the past few years, it's no surprise that homeownership is out of reach for many Californians.
And the data prove it: California's homeownership rate was 60.2% last year lower than every other state's except for Hawaii and New York and well below the 68.8% national total. At 54.4%, the Los Angeles metropolitan statistical area had the lowest homeownership rate among the nation's 75 largest MSAs except for New York City.
These dynamics have surely contributed to the sub-prime mess we are in today. Remember, only half of all sub-prime borrowers in California are using these loans to purchase a home as opposed to refinancing a home and only a portion of those are first-time buyers, as a large number of purchase loans are often used to buy a second house.
But high and growing prices and low homeownership rates set the stage for the success of unscrupulous loan originators and the risky products that have been dominant in the sub-prime market. Renters seeing housing prices growing are desperate to get into homes. They become so focused on becoming homeowners that believing that mortgage brokers and lenders have their best interests in mind, as they did 30 years ago they are willing to take the plunge into loans their brokers know they will not be able to afford.
Similarly, many existing homeowners, particularly those with sub-prime loans, have been refinancing very rapidly and well before their loan payments jump at month 25. Many do this to take out growing equity often used to cover annual insurance and property tax bills, since approximately three-quarters of sub-prime loans don't feature escrow accounts for such fees. In the prime market, it is standard practice for a small slice of the monthly mortgage payment to be siphoned off and placed in a separate account to be used to pay the taxes and insurance when those bills come in. This is not the case in the sub-prime market, so many sub-prime borrowers are caught unaware and unprepared when tax time rolls around.
What's needed to make this market work better? Part of the answer is greater supply of entry-level homes. The other part is more responsible lending practices, particularly in the sub-prime market. That's a subject I've already covered a bit this week and will no doubt return to tomorrow.
Paul Leonard is the director of the California office of the Center for Responsible Lending.
Harness the power of American opportunity By Robert A. Camerota
One of the first things that caught my eye in your article today, Paul, was that you maintain that there are a "variety of reasons" that California has systematically failed to provide adequate levels of housing. Although we've had our differences this week, I certainly couldn't agree with you more on that.
With California's exploding population, it is incumbent upon our state's leaders to take action to ensure that we can provide adequate housing. Unfortunately and speaking as someone who's put one or two families in a home I can be trusted on this the amount of red tape and burdensome regulation that all sectors of the housing market face is out of control. If our affordable housing supply is ever to catch up with demand, entry level housing must be increased. This isn't a case of specific mortgage products being at fault we can't fund loans for affordable homes that don't exist.
Speaking of those products, you mentioned yesterday that some of the higher-risk loan types are "designed to fail." I disagree, as there is not a legitimate mortgage lender in this country who has or will design a mortgage product that is intended to end in the borrower's failure. The original question yesterday pointed out that close to nine out of 10 high-risk loans are being paid on time. In addition, Wall Street investors provide the capital for mortgage companies to fund loans to consumers, and they are simply not in the habit of investing in companies or loans "designed to fail."
As far as housing-market policy in general, we know that it is driven by purchase transactions, the availability of affordable housing and geographic demand based on employment. While an increase in the ability to build new affordable housing is sorely needed, there are a few areas where the buying and selling of starter homes will continue to maintain the base of the housing market. In addition to new construction, aging baby boomers moving from urban to suburban neighborhoods provide potential homeowners with a great opportunity to purchase, as well as existing homeowners looking to move up to a larger home.
Unfortunately the current conforming loan limit of $417,000 for single family homes has made it difficult to meet the needs of every consumer, especially in Los Angeles County, where the current median home price is $545,000. This gap in liquidity between the conforming loan limit and the median price forces consumers and lenders to look at non-conforming loan products to meet the demand, making it more expensive for the home-purchasing public. We need to continue to push for higher loan limits to ensure that first-time home buyers are not shut out of the opportunity based on the artificial ceiling applied to loan limit availability.
The bottom line is that if our goal is to increase the supply of affordable starter homes, we've got to unleash the power of American opportunity, not stifle it. We must work together to increase homeownership, not reflexively point fingers or fail to see the link between over-regulation and a lack of affordable housing. Paul, you and I both want the same thing more opportunities for more people to become homeowners. It's just a matter of how we get there.
Robert A. Camerota is chairman of the California Mortgage Bankers Assn. and is currently the senior vice president and managing director of the consumer lending operations group for GMAC-ResCap.