Partners (Number 3, 2008)

Reconsidering U.S. Housing Policy

Photo of James H. CarrExcerpts from an Interview with James H. Carr, Chief Operating Officer, National Community Reinvestment Coalition

In a recent interview with the Federal Reserve Bank of Atlanta on the future of the housing market, National Community Reinvestment Coalition Chief Operating Officer Jim Carr responded to questions about which housing policies would best meet the challenges presented by the foreclosure crisis. The following excerpts discuss measures to address the destabilization of housing markets, the loss of billions of dollars in home equity and the long-lasting negative impacts on areas with high concentrations of foreclosed properties.

In my view, at least five major areas of public policy related to the housing markets demand serious attention and action.

Number 1Contain the current foreclosure crisis and purge predatory lending.
Addressing the current foreclosure crisis in a meaningful way is essential. The longer this crisis lingers, the more households will be impacted and the greater the damage will be to housing markets, the financial system and the economy. To date there has been limited legislative response to address the magnitude and depth of the current foreclosure crisis. The most promising legislation enacted thus far has been an expansion of Federal Housing Administration (FHA) to enable the refinancing of up to 400,000 additional loans that likely are heading to foreclosure between 2009 and 2011. While this is a start, it represents a very small portion of existing problem loans. Moreover, for a variety of legislative and administrative reasons, the program is not likely to go into effect fully until early 2009. By that time, more than an additional million households will have gone into foreclosure. And, the recently enacted $700 billion financial system rescue package remains imprecise about how foreclosures will be addressed.

Earlier this year, the National Community Reinvestment Coalition proposed the establishment of a national Homeownership Emergency Loan Program or HELP Now. This program would authorize the U.S. Treasury to purchase loans in bulk and at steep discounts (equal to their current market values) from securitized pools and apply those discounts to problem loans in order to achieve significant modifications that would ultimately create long-term borrower affordability. The advantage of this program is that loans could be modified, repackaged and resold immediately.

In addition to an improved loan modification or refinancing program, four categories of post-foreclosure activity are needed:

Improve data on the ownership and availability of foreclosed properties. The first challenge is to determine the full extent of the damage likely to occur should there be no additional and meaningful support for borrowers. The housing industry is in need of more robust data—specifically forecasts—on the types, as well as locations, of loans likely to fail over the next 12 to 36 months. This information would be useful for cities to better plan and prepare for the continuing foreclosure crisis.

Photo of a house floating on a life preserverDevelop and implement post-foreclosure damage mitigation and rehabilitation strategies. Nonprofits and local governments also need enhanced initiatives to enable them to coordinate the identification of vacant and abandoned properties. This allows for early intervention and preventive efforts to limit vandalism and crime. Programs are also needed to facilitate the transfer of ownership of foreclosed properties into a housing trust or similar vehicle for renovation and return to affordable housing usage. This intervention is needed in many communities, especially where foreclosures are concentrated. Increasing need for affordable rental housing will also be a challenge for these communities as homeowners losing their properties contribute to a growing rental demand.

Jump-start emerging market homeownership. This issue relates to the resale of housing. Innovative products and approaches to homeownership will help minority families and communities regain the losses they are disproportionately experiencing as a result of the foreclosure epidemic. Shared equity mortgages, for example, hold great promise for bringing consumers into the housing market who are unable to make large down payments, but who are otherwise ready for homeownership.

Under a shared-equity arrangement, an investor contributes some or all of the down payment for a home purchase in return for a fixed share of the future home price appreciation. Shared-equity mortgages would also be an important antidote to the market's recent failure to protect financially vulnerable borrowers, because they ensure that an investor's equity is on the line, and therefore the borrower's and investor's interests are aligned.

Lease-purchase products are also promising tools, particularly in the current environment in which the credit scores of potentially millions of consumers have been damaged, in many cases due to unfair and deceptive loan products. Despite their blemished credit histories, millions of families may, nevertheless, remain fully prepared to own under reasonable financial circumstances. And, lease-purchase products might be the innovation to return those consumers safely to the homeownership market.

Purge predatory lending from the housing markets. Unfair and deceptive lending practices greatly contributed to the current foreclosure crisis. Those behaviors should also be purged from the housing market through more comprehensive anti-predatory lending legislation. The Federal Reserve Board has issued new Home Owner Equity and Protection Act (HOEPA) regulations pertaining to a broad range of abusive lending practices in the mortgage industry. The rules address almost every aspect of high-cost lending, from underwriting and appraisal practices to product marketing and more.

These revisions take an important step forward in providing enhanced consumer protection in the high-cost mortgage market. But there remain a number of ways in which consumers are vulnerable to abusive mortgage lending practices, such as yield-spread premiums. That practice, as well as many others, should be addressed by a strong national anti-predatory lending law that can complement the revised HOEPA regulations.

Number 2Reform regulation of the financial system.
The current foreclosure crisis is a clarion call for financial system regulatory reform. The U.S. Department of the Treasury recently released a report that recognized the need to restructure the financial regulatory system. The report focuses heavily on the advances in financial engineering, technological evolution, conflicts of interest, overlapping or confusing regulatory oversight or authority, and growth of new international competitor financial systems.

Image of a yellow houseThese are all important issues, but the current financial distress may be due to more fundamental issues, such as poorly regulated markets that allowed reckless lending behavior to permeate the system. Although much of the current financial crisis results from regional economic downturns and speculative purchases of homes in response to rapidly rising prices, widespread deceptive lending practices fueled, or at least supported, the market's meltdown.

Stated otherwise, the basic welfare of the borrowing public was not the paramount focus of regulatory oversight. Failure to acknowledge this issue in the context of financial system modernization amounts to a reshuffling of the chairs on the deck of the ship. And it leaves the ship of financial regulation vulnerable to further catastrophic events in the future. As Harvard University law professor Elizabeth Warren has artfully stated, consumers had better protection buying a toaster or microwave oven than they had when purchasing the family home.

Rethinking the financial system should begin with the goal of enhancing the economic well-being of the American public. This means helping people, families, communities and the nation build wealth, enhance economic mobility, and ensure the nation's economic competitiveness in an increasingly competitive global economy. Regulation of the financial system should include a measure of how well the system promotes the economic interests of the American public—not just measure the profitability of financial institutions.

"Inefficient land use patterns artificially drive up the costs of housing and create problems where problems need not exist."

This goal should be self-evident, but it is not. We now have millions of problem loans and hundreds of troubled financial institutions that prove that it is possible for financial institutions to make extraordinary sums of money (in the short-term) while acting in a manner that is in contravention of the financial needs of their customers. Financial system modernization cannot afford to ignore this point in the future.

As a starting point for an enhanced consumer focus for financial regulation, financial regulatory agencies should study more in depth which households are left out of the system, why, and what can be done to bring them into the financial mainstream of the 21st century. Not everyone has the same potential to participate in the financial system. But with nearly 10 million unbanked households, it seems more could be done to achieve a more inclusive financial system. In fact, a recent report by the Center for Financial Services Innovation estimates that there are 40 million under-banked households (those not accessing the full and appropriate range of banking services) in the U.S. Bringing them into the financial mainstream would enable them to leverage their resources and better engage the housing markets in a more supported and financially sophisticated manner.

Finally, regulation of the financial system should encourage product innovation, particularly among mortgage products, in a manner that might expand safe and sound homeownership.

Number 3Encourage more efficient, lower-cost and environmentally sensitive land-use planning, building codes, construction practices and related practices.
Prior to the foreclosure crisis, the U.S. was suffering from rapidly growing problems that reached from coast to coast. When the current inventory of unsold homes is off the market, those problems will return. Inefficient land-use patterns artificially drive up the costs of housing and create problems where problems need not exist.

Image of a lit lightbulbThe silver lining of the recent energy price shock was the wake-up call that our current land-use practices are counterproductive to the public interest. Although energy prices recently have fallen dramatically, as a direct result of fears of a global recession, energy prices will return to unaffordable levels when global economic markets rebound. As a result, federal policies should tie HOME, Community Development Block Grants (CDBG), and other housing subsidies—along with highway, mass transit and other infrastructure funds—to the way in which communities plan and build in an efficient manner. This would help reduce the need for public subsidies to buy down the rents on unnecessarily over-priced housing.

Addressing fundamental weaknesses in land-use regulations with the goal of providing opportunities to produce more housing, encouraging greater reliance on innovative building technologies, determining the benefits and costs of alternative green technologies, updating building codes, and streamlining permitting-and-approval processes is the key to leveraging market forces more effectively to meet the housing challenges of the future.

Number 4Reform federal housing policy.
It would be a stretch to say that the U.S. has a housing policy. With the exception of the general goal of increasing homeownership held by multiple and successive administrations, and an occasionally expressed desire to promote mixed-income housing, there are few, if any, meaningful national objectives against which federal housing programs might be measured. In fact, rather than a policy, we have a range of programs that date back to the Great Depression—many of which are in need of serious overhaul. The demographic face and age of the population has changed dramatically over the last half century and continues to evolve rapidly. Both of these issues present a host of challenges and opportunities for the nation's housing infrastructure.

"What are the relationships between housing policy and energy, transportation, education and other national programmatic priorities?"

Moreover, energy and other environmental concerns are now major inputs into housing policy considerations—issues that were all but completely ignored a half-century ago. These issues raise broad questions such as: What is the role of housing policy in promoting vibrant communities and the economic interests and social well-being of the population? And, based on that response, what are the relationships between housing policy and energy, transportation, education and other national programmatic priorities? Suffice it to say that having a focused discussion on the goals of housing policy would enhance our discussion of ways in which the financial system can play the most expansive and robust role in its support. Beyond these general macro issues, housing policy should address each segment of the population and their unique shelter challenges.

In a recent lecture, Henry Cisneros, former Secretary of the U.S. Department of Housing and Urban Development, suggested that housing can be viewed as a continuum of steps. The lowest step is homelessness, moving next to supportive housing and ultimately a move up to long-term homeownership. Perhaps most powerful about this approach is that by conceiving of housing as a continuum, it encourages policymakers to think of households as moving up a chain of housing successes. This housing staircase can also be used as a tool to examine the federal subsidies provided at each level to determine where the allocation of public resources might be more effectively and appropriately redirected to create upward mobility on the housing continuum.

Number 5Enforce fair housing and fair lending laws.
Many of today's housing problems, particularly those related to minority communities, are the result of the legacy of discrimination and its continuation. Failure to eliminate housing discrimination reinforces the economic distress of disenfranchised communities and contributes to continuing severe levels of segregation and its attendant problems of inferior housing options, limited access to quality education, restricted job opportunities, and artificially constrained home price appreciation for communities of color.

Unfortunately, fully 40 years after the passage of the Fair Housing Act, the laws protecting the rights and interests of minority families in the housing market remain poorly enforced. Today, a conservative estimate by the National Fair Housing Alliance suggests that roughly 3.7 million instances of discrimination occur annually. At the same time, the number of cases brought by federal agencies responsible for fair housing and equal credit opportunity enforcement is abysmally low.

In fact, for more than a decade community leaders, civil rights proponents and consumer groups have warned about unfair, deceptive and abusive lending practices targeted in communities of color. Yet, those pleas for better lending supervision were not only ignored, but in some cases contradicted by regulatory policy that weakened the ability of states to protect their own citizens from predatory lending. The net result, according to the Center for Responsible Lending, is that the current foreclosure trend could result in more than 10 percent and 8 percent losses in homeownership for African American and Latino households respectively. United for a Fair Economy estimates this loss could translate into a total loss of wealth among minority households of between $164 billion and more than $200 billion.

A lack of funding is a major part of the problem of poor regulation. But money is not the only issue. A lack of appropriate coordination among various agencies responsible for enforcing civil rights and equal opportunity, and insufficient political stature at the federal administrative level of government to make elimination of discrimination a national priority, all combine to undermine progress on this essential national mandate.

In response to this continued failure to enforce the law, the National Community Reinvestment Coalition has asked, in Congressional testimony in June of this year, for the establishment of a new cabinet-level agency focused on Civil Rights Enforcement. This agency would be responsible for measuring, monitoring and eliminating all forms of discrimination from our society once and for all. And given the importance of housing to accessing opportunities for social and economic advancement, housing-related laws would be among the new agency's highest priorities. Enforcing the law would immediately open the door for millions of households who are ready and prepared to access improved housing opportunities and for whom the only impediment is illegal discriminatory actions.

The future of housing policy demands a systemic approach to the issues. Piecemeal strategies have run their course and will be insufficient to address our severe housing challenges. Success will require that the financial system better serve the American public. Success will hinge on the extent to which land-use and development practices are better managed to create greater affordable housing opportunities with fewer federal housing resources.

Success will require that housing subsidies be allocated in a fair and equitable manner to achieve greater benefits by a broader range of households. Success will depend on special programs by local governments and nonprofit organizations to address the unique problems created by high foreclosure activity—particularly in distressed communities. And, finally, success demands an end to biased and discriminatory real estate practices that deny minority households a broader range of housing and economic opportunities for reasons unrelated to their financial ability.

This is a tall order to fill, but if we are willing to address the problems we face at a more systemic level, perhaps we may finally see more substantial positive results that are achievable and essential.

For more information about the National Community Reinvestment Coalition visit