Credit Access For Less Secure Borrowers Central to Housing Finance Reform

Center for American Progress (CAP) and the National Council of La
Raza have released a paper, Making
the Mortgage Market Work for American’s Families, which
evaluates some of the problems facing the current mortgage market and
presents challenges for its reform. The paper also presents a couple
of concrete suggestions for reform including creations of a Market
Access Fund to provide credit enhancement and supportive services to
underserved but creditworthy populations and a framework for
evaluating participants in an eventual new secondary market.

are summarizing the paper’s assertions in two parts. This initial article deals
with an overview of current market challenges and the need for
increased access and affordability
and the secondary market’s role in
supporting this access and affordability. Part Two will look at the
connection of rental-housing to the secondary market and CAP’s
suggestions for a Market Access Fund and a suggested model for
evaluating the secondary market.

Current Market Challenges; The Need For Increased Access and Affordability

housing-finance system is at a decision point. We can chose to
restructure it to restore balance to the housing market and provide
credit to a broad and diverse population, or we can live with a
system in which credit and housing choices are more costly, more
and less sustainable, especially for minority and low- and
moderate-income households.

United States has a long history of unequal access to sustainable,
affordable mortgages, particularly for minority and low- and
moderate-income communities. Government programs such as the mortgage
interest deduction disproportionately help those who least need it
and creditworthy borrowers often have difficulty obtaining high
quality mortgages. In the run-up to the housing crisis in 2007 many
borrowers found themselves in “credit deserts” that left them few
choices beyond subprime lending.

of equal access to mortgage credit can be explained by a variety of
factors, including not only traditional discrimination but also the
failure of mortgage lenders to serve geographies and populations that
they may see as less lucrative (known as market creaming).

Congress has tried to level the playing field – through the Fair
Housing and Equal Credit Opportunity Acts and other laws, minorities
continue to have trouble accessing safe and sustainable mortgage
. Additionally, different communities or borrowers have
generally been served by different financial institutions and as a
result face higher costs of borrowing and are more likely to be
denied loans.

the 2012 homeownership rate for whites was 73.6 percent, Hispanic and
Africa American rates were 46.5 and 44.1 percent respectively. These
differences significantly contribute to the dramatic wealth
disparities between whites and minorities. The Urban Institute found
in 2010 the average white family had six times the wealth ($632,000)
as the average black family ($98,000) or Hispanic family ($110,000)
and that lower homeownership rates and falling home prices were the
key drivers of the gap. For this reason, it is critical to redesign
the system to account for shifting demographics
and changing consumer
profiles, including the rapid growth of communities of color,
decreased economic security, and increasing demand among rural

Harvard Joint Center for Housing Studies projects that communities of
color will account for more than 70 percent of new household growth
between 2010 and 2020. Given the relatively low rates of
homeownership among these communities, this demographic shift creates
tremendous opportunity for lenders to expand into new markets.

borrowers are likely to be less economically secure and will also
increasingly be low-wealth borrowers so the size of a required
downpayment will be a crucial issue. Large downpayments are already
a significant barrier to homeownership. Even with a 10 percent
requirement it would take 20 years for the average family to save for
a downpayment plus closing costs.

future homeowners will live in rural areas where homeownership rates
are already higher but residents still have few choices for accessing
mortgage credit. In 2010 approximately 8.7 percent of rural
originations were classified as high cost loans compared to 3.8
percent in the nation as a whole.

nations housing-finance system needs to serve all of these
populations and while these potential customers present some
they also present tremendous opportunities for lenders to
expand into new markets and threaten to make irrelevant those who

these underserved populations are many people with the capacity to be
successful homeowners. A recent study looked at these ostensibly
risky populations who took out loans in 2010 and found that, despite
their risk profile and the economic turmoil, these loans performed
with a serious delinquency rate 60 percent of the prime ARM
portfolio and less than half that of subprime FRM.

study attributed this success not so much to the borrowers but to
the mortgage product itself
. The lenders helped these nontraditional
borrowers buy homes they could afford with mortgages they could
manage. These success stories exist throughout the country.

obstacle to increasing access to affordable home ownership is “market
creaming,” the market’s tendency to give preference to serving
those perceived to be the easiest, most lucrative, or least risky
borrowers – the so-called cream of the crop. Left to its own
the market will tend to deliver the best loans where it is
easiest to do so and to channel higher-cost loans where borrowers have fewer options.

Reserve Chairman Ben Bernanke has suggested that the pendulum on
lending standards has swung too far the other way and that overly
tight lending standards may now be preventing creditworthy borrowers
from buying homes and slowing the housing and thus the economic
recovery. Bernanke said because there are no incentives to loosen
lending standards
, lenders are unlikely to do so anytime soon.

policymakers reshape the incentive structure, the housing industry is
likely to continue to chase the most lucrative loans at the expense
of safe affordable homeownership opportunities for a wider spectrum
of borrowers.

Secondary Market’s Role in Promoting Access and Affordability

people think of mortgage lenders as the point of intersection with
the public. However the very large secondary mortgage market plays a
critical role in ensuring access and affordability
. Lenders prefer
to make the types of mortgage loans that the secondary market will
buy and so one of the most effective ways to ensure a broad,
accessible, and affordable primary mortgage market is by creating a
secondary market that promotes these same principles.

individual lenders with their constrained resources, the secondary
market can quickly and effectively pilot new concepts and can take
innovations emerging from the primary market and standardize them to
reach a larger market and can quickly establish such a new product

secondary market’s policies regarding underwriting practices,
documentation, risk-capital reserves, and repurchase requirements
influence the behavior of the primary market and the secondary market
can ensure credit is extended in a responsible way by
well-capitalized entities. It is in an ideal position to monitor and
counteract the primary market’s tendency to service a narrower slice
of the market through outreach, pricing, and counterparty management.
Equally important, the secondary market can affirm and uphold the
principles of fair and equitable access to credit.

achieve an optimal balance between access to credit and safe and
responsible lending any secondary market system should include
mechanisms to incubate and support innovation around new products and
processes that can expand homeownership both safely and profitably.
Second, the system should discourage market creaming and encourage
broad-based lending. Upholding these principles is the
responsibility of the secondary market but also its regulators.

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