Posted by:
Steve Dubb
Nonprofit promotes home ownership without sub-prime rates
A recent article by Gretchen Morgenson of the New York Times illustrates the growing dimensions of the explosion of foreclosures, resulting largely from sub-prime (that is, loans that charge three or more percentage points higher than prime) mortgage lending to low-income families.
“Figures from the Federal Reserve Board show that the share of subprime mortgages in default is more than 14 percent. And researchers at the Center for Responsible Lending say that 64 percent of foreclosures filed during the 12 months ended June 30 involved subprime loans,” according to Morgenson.
Morgenson notes that, “It has become fashionable of late to say that America’s subprime borrowers themselves deserve a good part of the blame for the current mortgage mess. They were either greedy (looking for easy money in a bubbly real estate market) or irresponsible (assuming a debt whose terms they did not understand).” Fashionable to blame the borrowers perhaps, but not accurate.
For some time this website has highlighted the role that community development financial institutions (better known as CDFIs) can play in avoiding predatory lending.
The New York Times article, by examining the record of NeighborWorks, a nonprofit chartered by the federal government in 1978, provides more evidence of the important role of community development financial intermediaries can play. It is worth quoting the article at length:
“The fund contains almost 3,000 loans totaling $205 million as of June 30. Its borrowers do not meet conventional credit standards, and their incomes average less than two-thirds the national median income. Some 93 percent of those receiving loans from the fund are first-time home buyers, and almost 90 percent are low- or moderate-income borrowers. Approximately 54 percent are minority households.
And yet, the NeighborWorks borrowers aren’t experiencing the same mortgage woes as subprime borrowers elsewhere around the country. Why? ... Some of the success of these loans may be a result of an extensive mortgage education program conducted by the 130 loan counselors of NeighborWorks before and after a loan is made. But surely the biggest reason that the NeighborWorks loans outperform is that they were not the so-called affordability mortgages, with adjustable interest rates that skyrocket after several years or those that allow borrowers to pay none of their principal for an extended period.”
The differences are dramatic: the payment rates of NeighborWorks customers, while not as good as that of “prime” (higher income) borrowers—are dramatically better than subprime borrowers:
30-days delinquent loans as of June 30, 2007
Prime borrowers 2.63%
NeighborWorks borrowers 3.34%
Subprime borrowers 14.5%
Foreclosure rates (2nd quarter, 2007)
Prime borrowers 0.25%
NeighborWorks 0.56%
Subprime 2.45%
Put another way: with adequate federal support for the CDFI lending and financial education model, hundreds of thousands of families who are currently losing or at risk of losing their homes could have avoided this fate.