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TIGHTENING CREDIT AND THE CHANGING FINANCIAL MARKET Mike Calhoun. NeighborWorks Atlanta, Georgia February 18, 2009. Center for Responsible Lending.

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tightening credit and the changing financial market mike calhoun



Atlanta, Georgia February 18, 2009

center for responsible lending
Center for Responsible Lending
  • Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.
  • Affiliated with Self-Help, one of the nation’s largest community development financial institutions.
    • Over $5 billion of financing to 55,000 low-wealth families, small businesses and non-profits.


chronology of the crisis
  • Unsustainable mortgage products and practices
  • A lending bubble that inflated the housing bubble
  • Securitization of these loans into AAA securities and derivatives
  • Leverage of investments that amplified gains and risks
  • Loss of market confidence
  • Deleveraging as asset values fall
  • Foreclosures creating more downward home values
the products that got us into this mess subprime home loan traits
The Products That Got Us Into this Mess: Subprime Home Loan Traits
  • Typically hybrid ARMs with built-in payment shock
  • Most carry large prepayment penalties for refi prior to first interest rate adjustment
  • No escrows for taxes or insurance – prompts further refis
  • Typically refinance loans
  • Typically broker-originated
  • Up-front fees far higher than in prime market
  • Debt-to-income ratios can rise as high as 55%
  • Underwritten to introductory rate – no expectation that borrower could afford the loan after rate adjustment
unnecessary losses most homeowners sold sp loans qualified for better loans
Unnecessary Losses: Most HomeownersSold SP Loans Qualified for Better Loans
  • A Wall Street Journal Study found that 60% of borrowers who received SP loans in 2006 had credit scores high enough to qualify for prime loans.
  • Even those who did not qualify for prime loans could have received 30 year fixed rate SP loans with payments similar to and often lower than the exotic arm loan they received.


chairman bernanke s conclusion
Chairman Bernanke’s Conclusion

Fed. Reserve Chairman Ben Bernanke:

“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

(July 14, 2008 Statement)


how did this happen market incentives
How did this happen?Market Incentives
  • “The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford.” (Alan Greenspan to Newsweek, “The Oracle Reveals All,” (9/24/2007) pp.32-3)
  • Yield Spread Premiums – paying brokers to put borrowers into loans with higher rates than they qualify for.
  • “The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans … What would you do?”(CEO of Ownit Mortgage to The New York Times (1/26/2007) pp. C1, C4.
  • Why would lenders make these loans? “Because investors continued to buy the loans.” (Mortgage Bankers Ass’n Chief Economist to CNN (2/20/2008))


what s coming current foreclosure forecasts subprime
WHAT’S COMING?Current Foreclosure Forecasts – Subprime

2 million homeowners with subprime mortgages will lose their homes to foreclosure, most by year-end 2009.

This is in addition to the 700,000 homes with subprime loans currently in foreclosure or REO.

(Source: Credit Suisse, Foreclosure Trends 4/23/08)


racial impact of subprime loans
Racial Impact of Subprime Loans

Higher cost (subprime) 1st lien loans: 2005 HMDA Data

          • # of higher % of total loans cost loans to group
  • African American 388,471 52%
  • Latino 375,889 40%
  • White 1,214,003 19%


alt a loans
Alt-A Loans

Made to credit-worthy borrowers with some element of added risk, e.g.:

  • Reduced borrower income and asset documentation
  • Debt-to-income ratios above Fannie/Freddie guidelines
  • Credit history with some problems (e.g., low scores or delinquencies, but no recent charge-offs or bankruptcy)
  • High loan-to-value ratios
next wave of foreclosures payment option arms
Next Wave of Foreclosures: Payment Option ARMs
  • Affords low monthly payments by allowing borrowers several payment options each month
  • 75% of POARM borrowers make lowest payment
    • based on low teaser rate in effect for 1 month or 1 day
    • includes no principal and less than all of interest owed
  • Interest shortfall is added to loan balance
  • After 5 years, or when loan balance hits 115% of original loan, payments sharply increase
  • Eligibility often was based on initial low payment


foreclosure forecast total market
Foreclosure Forecast – Total Market

10 to 13 million mortgage loans will fall into foreclosure over the next 5 years.

For the market as a whole, 1 out of every 6 homeowners who currently has a mortgage faces losing their home to foreclosure.


ever increasing leverage
Ever Increasing Leverage

Mortgage Backed Securities (MBS) are securities backed by pools of mortgages.

Collateralized Mortgage Obligations (CMOs) are securities backed by pools of MBS, and are often highly leveraged.

Some CMOs are backed by pools of CMOs.


foreclosure s vicious cycle
Foreclosure’s Vicious Cycle
  • Home price declines lead to foreclosures
  • Foreclosures flood already oversaturated home market with more inventory, depressing home prices further, and leading to even more foreclosures


current policy responses
Current Policy Responses
  • Voluntary Loan Modifications and Treasury Dept. Modification Program
  • Hope for Homeowners Program
  • Funds for recycling of foreclosed properties
existing obstacles to voluntary modifications
Existing Obstacles to Voluntary Modifications
  • Insufficient Servicer Staffing
  • Misaligned Financial Incentives for Servicers
  • Fear of Investor Lawsuits
  • Pooling and Servicing Agreement Limitations
  • Second Mortgages


additional policy responses
Additional Policy Responses

Foreclosure Deferment

Court-supervised Loan Modifications (bankruptcy reform)

Additional Consumer Protections for future loans


  • Foreclosures pulled the economy into deep recession and the economic crisis will not be resolved until preventable foreclosures are stopped.
  • Bankruptcy reform is an essential element of any successful foreclosure prevention program and is needed immediately.
  • Protections for future mortgages must establish a floor of consumer protections and must address the incentives that have rewarded the making of bad loans.
breakout sessions
Breakout Sessions:

A. Exploring Lease-Purchase as a Community Stabilization Strategy – Gwinnett

B. New Approaches to Financing and Credit Scoring – Cherokee

C. Maximize Your Technology: How Innovative Tools Can Improve Your Service Delivery – Henry

D. Counseling Challenges and Successes in Response to Market Changes - Forsythe