In spite of the housing crisis, homeownership is still central to the hopes and aspirations of many Americans. A home isn’t only shelter: it’sa key source of economic mobility and financial security.
Not all of the benefits of homeownership can be measured in dollars. Research suggests that children in home–owning households do better academicallyand are less likely to become teen parents. Homeownership benefits neighborhoods, too, since areas with high ownership tend to have higher property values and tax revenues,which can be used to support community assets like schools and parks.
In recent years, the mortgage market changed drastically. Two major developments stand out:First, lenders began to rely on mortgage brokers to originate loans. Lenders paid brokers based on the number of loans they sold and on how much they charged borrowers, not based on whether they were affordable.
Second, Wall Street financial companies began issuing their own mortgage–backed securities and selling them to investors. The mortgages purchased by private companies did not have to conform to the same standards as the loans purchased by Fannie Mae and Freddie Mac.
Thevolume of mortgage-backed securities issued by Fannie and Freddie (the government-sponsored enterprises, GSEs) went down in the early 2000s, while those by private Wall Street banks went up.
These mortgage developments meant that brokers, lenders and mortgage securitizers were often more interested in the volume of their mortgage business, not the performance of the loans. Many lenders and brokers aggressively marketed and originated mortgages without evaluating whether borrowers could pay them back. The market became inundated with dangerous mortgages.
As a result, the composition of the mortgage market changed dramatically. Between 2001 and 2006, the share of the overall mortgage market made up of subprime and other types of risky loans went from 10% to 39%.
No one stopped the proliferation of reckless lending. Many market participants, such a brokers and servicers, were virtually unregulated at the federal level. Where consumer protections did exist, the authority was fractured among several agencies. In some cases federal regulators actually hindered consumer protections that had been passed at the state level.
Once the foreclosure crisis began, the sheer volume of work completely overwhelmed the capacity of servicers, who were not equipped to handle large volumes of distressed loans.
Combined, all these factors produced the worst foreclosure epidemic in U.S. history. Since 2007, millions of homes have gone into foreclosure, and millions more remain in distress. The crisis has devastated families and communities across the country and continues to impair economic growth for our nation as a whole.
Foreclosures have affectedborrowers of all races and incomes, but the crisis has disproportionately affected borrowers of color. 11% of African–American borrowers and 14% of Latino borrowers have already lost their home to foreclosure – that’s compared to 8% of Asian borrowers and 6% of non–Hispanic whites. This disparity reflects that African–American and Latino borrowers were targeted by subprime lenders and were more likely to receive riskierloan products than white borrowers.
Unfortunately, foreclosure costs extend beyond the individual families losing their homes. Foreclosures decrease the values of surrounding properties, causing losses of wealth for neighboring families. We estimate that $1.95 trillion in home equity has been lost to property owners who happen to live near foreclosed homes. Our full report also includes state-by-state “spillover” costs.
The housing crisis has made mortgage loans harder to get, even for qualified families. As shown in this chart, the credit crunch would be even worse if the Federal Housing Administration had not stepped up its lending support.
The housing market is slowly recovering today, but we’re left with new challenges:One - the Dodd-Frank Financial Reform Act of 2010 will go a long way toward preventing the types of lending abuses that caused this crisis but there are ongoing efforts to weaken or repeal the law. Financial reforms must be protected. Two – we must stop preventable foreclosures. Every successful intervention helps the homeowner, their community, and our economy as a whole.Finally, policymakers must avoid creating a permanent “dual” mortgage market, where only the highest–wealth borrowers with near–perfect credit can gain access to mainstream mortgages.
Evolution of the Mortgage Market Loans from Third PartiesIn 2005—theheight of thehousing boom—half of allmortgagesand 71% ofsubprimeloanscame throughbrokers.
Evolution of the Mortgage MarketPrivate-Label Mortgage-Backed Securities
Evolution of the Mortgage Market Fannie-Freddie Market Share DeclinesMortgage-Backed Securities Issued by Wall Street vs. GSEs(“GSEs” = Fannie Mae and Freddie Mac, the government-sponsored enterprises) (“Non-agency MBS” = private label mortgage-backed securities) $2,500.00 $2,000.00 $1,500.00 Non-agency MBS $1,000.00 GSEs MBS $500.00 $0.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: FDIC
Factors that Led to the CrisisAbusive Products• “Exploding” adjustable rates• Abusive prepayment penalties• No income verification• False promises - e.g., “you can always refinance”
Evolution of the Mortgage MarketTotal Mortgage Market Volume and Market Share of Subprime and Alt-A Loans 2001-2006 $4,000 45.0% $3,500 40.0% $3,000 35.0% 30.0% $2,500 25.0% $2,000 20.0% $1,500 15.0% $1,000 10.0% $500 5.0% $0 0.0% 2001 2002 2003 2004 2005 2006 Subprime Market Share Alt-A Market Share Total Market Volume (in $billions) Source: Inside Mortgage Finance
Factors that Led to the CrisisWeak RegulationBorrowers, state regulatorsand consumer advocatesrepeatedly raised concernsabout abuses in the subprimemarket –but , for years,nothing was done.
Factors that Led to the CrisisPoor Loan ServicingServicers lacked the propertechnology, staff and systemsto handle the flood offoreclosures produced bymassive loan failures.
Foreclosure Epidemic National Foreclosure Starts1.60%1.40%1.20%1.00%0.80%0.60%0.40%0.20%0.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Mortgage Bankers Association National Delinquency Survey
Disparate Impact of the Foreclosure Epidemic Rates of Completed Foreclosures and Serious Delinquencies by Race/Ethnicity (2004 – 2008 Originations)30.0%25.0%20.0%15.0%10.0% 5.0% 0.0% Asian African-American Latino NH White Others Completed Forclosures Seriously Delinquent
“Spillover” Costs of ForeclosureCRL’s estimate of the spillover costs: nearly $2 trillion.
A Key Issue: Fair, Affordable Access to Home LoansDecline in Private Lender Mortgage Originations by Race/Ethnicity Share of Government-Backed Originations, 2000-2010 (purchase loans, not refinances)
Challenges1. Protect new financial reforms2. Prevent unnecessary foreclosures3. Preserve homeownership opportunities for working families
For More InformationSee all CRL research on Mortgage: http://rspnsb.li/QMGYMaContact us: Kathleen Day (DC): 202-349-1871 Graciela Aponte (CA): 510-379-5518 Ginna Green (SC): 510-866-5989