New type of subprime loan pushed
With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.
They’d like to call it the Dignity Mortgage, but it has another name -- one that’s become more of an epithet since the housing crash: subprime.
Applicants might include people caught in the early stages of the mortgage meltdown who have since rebuilt their finances, said Faith Bautista, who heads the National Asian American Coalition.
“They lost their work, their homes and their credit scores four or five years ago,” Bautista said.
Since then, she said, many have found new jobs and saved up enough for a 10% down payment. But they can’t get a loan because lending standards remain tight -- even for the Federal Housing Administration mortgages designed to help lower-income borrowers, Bautista said.
The proposal starts with the classic subprime trade-off: a higher rate for a higher-risk clientele. Borrowers would pay 1.25 percentage points above the going interest rate, maybe 4.75% if more creditworthy borrowers were paying 3.5%.
But the deal would get better if borrowers made timely payments for five years.
At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20% down payments were charged at the time the loan was made.
Pattie Sibug of San Diego is among those who got caught short by the housing crash. By early 2010, the property improvement company she and her husband had owned for a dozen years had already seen its business fall off. Then a stream of work repairing foreclosed homes for a big bank dried up.
BID Construction wound up owing suppliers about $60,000 it could never fully repay, which ultimately ruined the couple’s personal and business credit scores. “It was 585 the last time I checked,” Sibug said of her score.
Sibug and her husband, Ollie, would like to buy the Scripps Ranch town house they are renting for $1,750 a month, and could come up with a 10% down payment. But they had to decline the owner’s recent offer to sell because they knew they couldn’t get financing.
“There’s got to be some kind of program to help you reestablish yourself,” Sibug said. “I’d be the first person in line if there was.”
Situations like hers are why Bautista and other activists have been talking to bankers and regulators, proposing the new type of loan. Those activists include Bob Gnaizda, a longtime minority rights attorney who co-founded Berkeley’s Greenlining Institute, and financial literacy activist John Bryant, whose Operation Hope -- founded in South Los Angeles after the 1992 riots -- now operates nationally and in South Africa and Haiti.
The proposal comes as home lenders remain besieged by demands that they pay billions of dollars in damages for defaulted housing-boom loans. Regulators have required banks to increase reserves against losses.
And the lenders also are evaluating new mortgage rules from the Consumer Financial Protection Bureau, which they say will determine how freely they can lend.
In reaction, many banks have imposed higher standards for writing new home loans than those required by the FHA or by Freddie Mac and Fannie Mae, the finance outfits that have kept the mortgage market afloat since the financial crisis -- thanks to $137 billion in taxpayer assistance.
Edward J. Pinto, a former Fannie Mae chief credit officer who argues that lax FHA lending helped feed the foreclosure crisis in low-income neighborhoods, said the Dignity Mortgage proposal “is a stupid and crazy idea -- a poison pill.”
“Haven’t we learned anything from the cratering of our housing finance market?” said Pinto, a resident fellow at the American Enterprise Institute, a free-market think tank.
Bank officials continue their soul-searching over the mortgage misdeeds of the past and the prospects of the business.
“By being overly aggressive, the entire housing system caused a great deal of damage to the very people we were trying to help attain homeownership,” said Brian T. Moynihan, chief executive of Bank of America Corp.
That lesson has been especially painful for Bank of America, which has recorded more than $40 billion in mortgage-related losses since acquiring risky mortgage specialist Countrywide Financial Corp. of Calabasas, once the nation’s largest home lender, in 2008.
“There are very real concerns that a too-high standard can lock some people out of homeownership -- something we don’t want,” Moynihan said in a speech to a Brookings Institution housing forum last month.
“How do we make credit available but protect people from taking on too much risk and ending up in a home they can’t afford? And how do we strike the right balance between prudent underwriting, responsible down payments and access to homeownership?” Moynihan asked.
Gnaizda and Bryant say the need for a new mortgage deal is apparent in Federal Reserve home lending statistics.
In 2010, the latest year for which data are available, only 1 in 11 mortgages were made to low- to moderate- income families. Just 4% of home loans were made to African Americans, who make up 13% of the population, and 6% to Latinos, who represent 16%.
Their proposed new loan would be structured to avoid features that contributed to the subprime implosion six years ago, setting off a chain reaction that nearly caused the financial universe to melt down and dragged the economy into the worst downturn since the Great Depression.
No one would be allowed to merely state their income instead of providing pay stubs and tax returns. There would be none of the 100% financing that became prevalent during the boom -- borrowers would need to put down at least 10% to get a loan, Bautista said.
The borrowers, who could have incomes no higher than 120% of the regional poverty level, also would be required to undergo extensive financial counseling to ensure that they could afford the home, even in the case of a temporary illness or job loss. They would be allowed to purchase only homes selling for 95% or less of the median price for the region.
“We want to encourage you to buy the home you need, not the home you may want,” Gnaizda said. “I’m talking about 1,700-square-foot houses instead of 2,600 square feet.”
The rub is that requiring Fannie Mae and Freddie Mac to purchase the loans may make the proposal truly more of a starting point for debate than a reality any time soon, observers say.
“From a political perspective, this seems like a non-starter,” said Edward Mills, a policy expert at FBR Capital Markets. “No one in D.C. is voting to allow Fannie, Freddie or the FHA to take on more risk.”
Representatives for the FHA and for the Federal Housing Finance Agency, which oversees Fannie and Freddie, declined to comment. Officials at Bank of America, Wells Fargo & Co. and JPMorgan Chase & Co. either declined to comment or didn’t respond to a request for comment.