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Neighborhood Reinvestment Corporation. By Doug Dylla – August 11, 2004. Acknowledgements. Many thanks to the following people for their help with this presentation: Mark Duda, research Allegra Calder, research Nancy McArdle, research Michael Collins, editing Jim Houghton, graphics.

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Neighborhood Reinvestment Corporation

By Doug Dylla – August 11, 2004


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Acknowledgements

  • Many thanks to the following people for their help with this presentation:

    • Mark Duda, research

    • Allegra Calder, research

    • Nancy McArdle, research

    • Michael Collins, editing

    • Jim Houghton, graphics


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Neighborhood Reinvestment Corporation

Key Topics

  • Review brief history of industry

  • Discuss key trends in homeownership, lending and counseling

  • Reflect on implications of these trends on our work


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Brief History of Housing Counseling

1968 - HUD establishes housing counseling program

1972 – HUD certifies housing counseling agencies

1977 – HUD funds housing counseling programs

CRA and HMDA laws are passed

1989 - CRA and HMDA are amended

1992 - Affordable housing goals set for GSEs

1990s -Dramatic growth of partnerships with lenders

2001 – With recession, delinquencies rise

2002 - White House sets minority ownership goals


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2200 BC

Egypt

Indications

that housing counseling occurred much earlier than previously thought


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HUD 9902

Form

1455 AD

Mainz,

Germany

Johannes Gutenberg prints a second document after the Bible.


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1993

New research reveals the typical brain of the first-time homebuyer

Feng Shui


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2001

The first empirical study demonstrating the impact of homeownership counseling by Abdighani Hirad and Peter Zorn of Freddie Mac on reducing loan delinquencies.


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What We Know About Homeownership

  • Solid gains in homeownership – highest overall homeownership rates in U.S. history (69%) but still persistent racial gaps

  • Historically-low interest rates

  • Homeownership has been the key toasset-buildingfor working families

  • Minorities contribute heavily to household growth



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Homeownership Rates Across the World

Percent

Note: China rate refers to urban areas only.Source: National Association of Realtors, U.S. Census Bureau, and Y.P Wang, Progress and Problems in Urban Housing Reform.


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Minority Ownership Rates Have RisenBut Still Greatly Lag White Rates

Percent

Source: Joint Center for Housing Studies.


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Historically Low Mortgage Rates

Percent

Source: NAR and Freddie Mac


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Minority Renters Have Very Low Levels

Of Net Wealth(Median Net Wealth: 2001)

Source: Joint Center for Housing Studies tabulations of the 2001 Survey of Consumer Finance.


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Minority and Low-Income Ownership Growth Strong

Millions of home owners

Notes: Blacks and Asians/others are non-Hispanic. Hispanics can be of any race. Low-income is defined as bottom quintile.

Source: Joint Center tabulations of Current Population Survey, March Supplement 1994, 2001.


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Minorities Will Make Up A Substantially Larger Share of First-Time Buyers This Decade(Estimated Growth in First-Time Buyers)

Millions

Note: Assumes minority share of first-time buyers will increase at same rate in the 2000s as it did from 1991 to 2001.

Source: Estimates based on analysis of the American Housing Surveys: 1993-2001, HUD’s US Housing Market Conditions, Fall 2001,

“First-Time Homebuyers: Trends from the American Housing Survey,” and Homeownership Alliance’s “America’s Home Forecast.”


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Homeownership Rate First-Time Buyers This Decadeby Citizenship Status

Higher Rate for New Citizens

Source: Harvard Joint Center


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What We Know About Lending First-Time Buyers This Decade

  • Huge consolidationin the lending industry

  • Technology advances

  • Boomin low-income and minority lending

  • Expansion of risk-based pricing and fringe financial services

  • Growing personal debt loads in U.S.

  • Weak economy straining many families as delinquencies and defaults rise


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Technology Advances in Lending Industry First-Time Buyers This Decade

  • Credit Scoring

  • Automated Underwriting

  • Move towards Electronic Mortgage

  • Expedited Home Appraisal

  • Explosion of Aggressive Mortgage Products

  • Huge Growth of Mortgage Securitization


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Lower-Income Lending Outpaces Others First-Time Buyers This Decade

Growth in lending (index 1993=100)

Note: Lower (higher) income borrowers have income of less than (at least) 80 percent of area median in that year. Represents loans for home purchase only.

Source: Joint Center report, “The 25th Anniversary of the Community Reinvestment Act: Access To Capital In An Evolving Financial Services System”, Released March 20, 2002.


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Subprime Lending Growth, 1993-2001 First-Time Buyers This Decade

percentage change

Source: Harvard Joint Center, State of the Nation's Housing 2004.


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3% First-Time Buyers This Decade

15%

1%

81%

Higher-Income Borrowers

In Higher-Income Neighborhoods

Note: Lower (higher) income borrowers have income of less than (at least) 80 percent of area median in that year. Lower (higher) income neighborhoods have income of less than (at least) 80 percent of area median as of 1990.

Source: Joint Center report, “The 25th Anniversary of the Community Reinvestment Act: Access To Capital In An Evolving Financial Services System”, March 2002.

The Dual Mortgage Market

Share of Growth in Home Purchase Lending, 1993-2000

Manufactured Homes

Subprime

12%

25%

37%

Prime Loans

Subprime

26%

Govt. Loans

Lower-Income Borrowers

In Lower-Income Neighborhoods


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America’s Debt Challenge First-Time Buyers This Decade

Source: Federal Reserve


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What We Know About Counseling First-Time Buyers This Decade

  • Fragmented, labor-intensive, decentralized industry - estimates of 2,000+ agencies across nation

  • Highly dedicated counselors and trainers that have helped fuel the “homeownership boom” of the last decade

  • Lack of standards has hurt industry – “counseling” can mean anything from a phone call to 40+ hours of one-on-one work

  • Funding for work is piecemeal


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The Benefits of Counseling First-Time Buyers This Decade

  • Reaching underserved markets

  • Providing a “trusted advisor” to potential buyers in an increasingly complex process

  • Helping families gain access tospecial mortgage financing and homes they can afford

  • Informing potential buyers about the responsibilities of homeownership

  • Helping consumers build better money management skills

  • Reducing loan delinquencies and defaults


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Classroom and Individual Pre-Purchase First-Time Buyers This DecadeCounseling Reduce Delinquency(Percentage by Which Counseling Lessens Likelihoodof Becoming 60 days Delinquent vs. No Counseling)

Percent

No Statistically Significant Effect

Source: Hirad and Zorn, A Little Knowledge is a Good Thing: Empirical Evidence of Effectiveness of Pre-Purchase Homeownership Counseling, 2001.


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What’s Ahead? First-Time Buyers This Decade

  • Significant growth expected from 2005-2025

    • Households

    • First-time homebuyers

    • Minority and immigrant homebuyers

  • Without more counseling capacity, a significant “counseling gap” will grown over next 20 years


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Homeownership Continues to Grow Over the Next Two Decades First-Time Buyers This Decade

Estimated owner and renter households, 2000-2025 (millions)

Note: Assumes constant homeownership rate of 69 percent over the entire period.

Source: Estimated from household projections in Masnick and Di (2004).


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Projected First Time Buyer Levels Average Nearly 1.5 Million Annually

Estimated net new owners and first time buyers, 2000-2025 (millions)

Note: Assumes constant homeownership rate of 69 percent and ratio of 1.645 first time buyers for each net new owner over the entire period.

Source: Estimated from household projections in Masnick and Di (2004) and first time buyers figures in Drew (2002).


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Counseling Gap for First Time Buyers Exceeds One Million Annually

Estimated counseled and un-counseled borrowers, 2000-2025 (millions)

Note: Assumes constant homeownership rate of 69 percent, ratio of 1.645 first time buyers for each net new owner over the entire period, and 15 percent share of new owners counseled over the entire period.

Source: Estimated from household projections in Masnick and Di (2004) and first time buyers in Drew 2002.


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Counseling Gap Concentrates among Minorities as White Share of 1st Time Buyers Declines

Estimated un-counseled borrowers, 2000-2025 (millions)

Note: Assumes constant homeownership rate of NH White homeownership rate starts at 75 percent and increases 0.5 percentage points until 2020, assumes minority homeownership rate starts at 48 percent and increases 1.0 percentage points until 2025, assumes ratio of 1.645 first time buyers for each net new owner over the entire period, and 15 percent share of new owners counseled over the entire period.

Source: Estimated from household projections in Masnick and Di (2004), first time buyers in Drew 2002.


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Challenges to the Counseling Industry of 1

  • Consumers increasingly overwhelmed by options

  • Technology and transaction speed may limit opportunities for counseling for many borrowers

  • Riskier loans inherently mean higher levels of loan delinquencies and defaults

  • Clustered foreclosures have significant negative impact on neighborhoods and communities

  • Community services that extends beyond loan origination to servicing, loan workouts, loss mitigation and disposition practices


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Opportunities for the Counseling Industry of 1

  • Marketing the value of counseling directly to consumers

  • Packaging incentivesand discounts to attract consumers to counseling

  • Embracing national standards and new technology to improve quality, reduce costs and broaden coverage across the U.S.


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Opportunities for the Counseling Industry of 1

  • Engaging with other key partners in the transaction, especially with Realtors®, lenders, mortgage insurers and loan servicers

  • Working cooperatively to promote counseling as a standard part of first-time homebuyer process

  • Partnering with schools, employers and churches to use financial education as the first step


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Today’s Discussion Questions of 1

  • How can we build sustainable counseling capacity in the industry?

  • How can we expand the coverage of high-quality counseling across the nation?

  • How we make better use of technology and efficiencies of scale to reach more consumers and close the projected “counseling gap” in the decades ahead?


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2003 of 1

HomeSight in Seattle uses an aggressive marketing campaign to reach prospective buyers


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2005 of 1

The benefits of counseling are promoted directly to consumers along with incentives from partners such as free computers


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2006 of 1

Consumers are willing to pay directly for counseling and in turn, get incentives from partners


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2007 and Beyond of 1

Mortgage Application Fee $400

Appraisal Fee $300

Unexpected Home Repairs $3,500

The Value of Counseling … Priceless!