The Impacts of Housing

Finance Reform on Borrowers

and Communities of Color
Remarks by
James H. Carr
Senior Fellow, Center for American Progress
Distinguished Scholar, The Opportunity Agenda
at
The Color of Wealth 2014 Policy Summit
Washington, DC
May 1, 2014
Wealth Effects of the Great Recession
Recovering from the Crisis
Source: Assessing the Impact of Housing Finance Reform: A Profile of Vulnerable Borrowers. Zillow. April 25,
2014.
Problems Contributing
to the Housing Crisis
Inadequate availability and access to safe, affordable, and
sustainable conventional mortgage products that opened the door
for financially abusive and exploitive loans
Insufficient regulatory oversight that enabled reckless and fraudulent
loans to flourish
Inadequate capital levels by financial institutions that left taxpayers
to pick up the tab for the extraordinary losses that resulted
Short-term profit-maximizing housing finance business models to
support long-term mortgage products
Implicit federal guarantee of private profit
Misaligned Goals of Housing Finance Legislation
relative to Pre-Crisis Housing Market Problems
Primary goal of housing finance legislation:
-Increase private capital in mortgage finance
The Irony of Prioritizing
Increasing Private Capital
Lack of private capital did not contribute to
the housing market crisis
Between 2003-06, private label securities rose from
8% to 38% of the market
85% of subprime loans were financed with private
label securitization
Private label securities failed at a rate of 6 times
those for Fannie Mae and Freddie Mac
Source: David Min. Faulty Conclusions Based on Shoddy Foundations. Center for
American Progress. Washington, DC. February 2011.
Protecting American Taxpayers
and Homeowners Act-Hensarling
Eliminates Fannie Mae and Freddie Mac in favor of a purely
private housing finance system
Reestablishes the implicit federal guarantee of private financial
firm profits
Would eliminate the 30 year fixed rate mortgage as the
principal US loan product and eliminate the To Be Announced
(TBA) market*
Downpayments of less than 20 percent would be rare
Fails to address loss of multifamily financing provided by
Fannie Mae and Freddie Mac
Provides inadequate countercyclical market support
* Source: Mark Zandi and Christian DeRitis. Evaluating PATH. Moodys Analytics. July 2013.
Housing Finance/GSE Reform Bill
Johnson-Crapo
A market-based pricing incentive structure to encourage credit
to eligible borrowers in underserved markets
Greatly expanded funding for the National Housing Trust Fund
and Capital Magnet Fund;
Creation of a Market Access Fund to support research and
development of products to serve more families
Multifamily provisions that support the financing of affordable
rental housing
More Positives of Johnson-Crapo
Servicing standards that would require loss mitigation and
affordable loan modifications; and
An office to monitor access to credit in underserved markets and
provide technical assistance and best practices information
Drawbacks to Johnson-Crapo
Further restricts lending by requiring all loans meet QM plus 3.5%
or 5% downpayment
Would raise interest rates between 40bp to +200bp
Does not mandate actually lending to underserved
borrowers/within underserved communities-in fact, provide opt-
out from underserved provisions
Omits communities of color from the definition of underserved
communities
Lacks an explicit fair housing/fair lending obligation for lenders
accessing federal insurance
Mortgage Rates Will Rise Depending on
Downpayment and Credit Score Assumptions
Lack of Borrowers of Color
Contributing to Housing Market Woes
Home purchase loans to African Americans and Latinos are down 55 %
and 45% respectively between 2001-2012*
Total mortgage originations are at 17 year low**
Investment in residential property is a smaller share of the economy since
World War II***
Since July 2013, existing single-family home sales have declined 15%****
Home prices have been artificially propped up by outsized investor
purchases
Sources: * Laurie Goodman, Jun Zhu, and Taz George. Where Have All the Loans Gone? The Impact of Credit
Availability on Mortgage Volume. Urban Institute. Washington, DC. 2014. **Lending Plunges to 17-Year Low
as Rates Curtail Borrowing. Bloomberg. April 13, 2013. Neil Irwin. ***Why the Housing Market Is Still
Stalling the Economy. The New York Times. April 24, 2014. Eye on the Economy: Existing Home Sales Down,
New Home Sales Flat. Eye on Housing. National Association of Homebuilders. April 2014.
What Should be Essential Goals of
Housing Finance Reform
A system that meets the American publics needs for affordable and
sustainable mortgage products across a broad spectrum of income,
wealth, and credit characteristics
Explicit and paid for federal guarantee of system
Adequate capital levels for financial institutions that access federal
insurance
A full exploration of the most appropriate manner to engage private
capital including utility or cooperative models
Explicit duty to serve borrowers and communities of color
Housing Finance Reform via the
Federal Housing Finance Agency
Improve loan affordability by lowering G-fees and expanding credit
box of accepted loans
Aggressively enforce Fair Housing and Equal Credit Opportunity
Laws
Begin contributions to the National Housing Trust and Magnet
Funds.
Improve servicing standards, including improved loss mitigation
practices
Maintain support for multifamily housing production
jim@jameshcarr.com
jameshcarr.com
@jh_carr