Keeping Americans At Home

By Luis Ubiñas Published in Forbes.com: October 9, 2008

The government's effort to stabilize the financial system has started a long overdue debate about economic fairness in America. This conversation is important because how it plays out will determine how our financial system serves the aspirations of the American people for decades to come. Congress struggled to pass legislation to support financial institutions precisely because it found the public skeptical of a package that does not address the needs of families losing their homes.

Unfortunately, the debate on the mortgage crisis has given life to a damaging and unsubstantiated myth about how we got into such bad shape to begin with. The basic premise is that irresponsible households'most of them lower-income'are to blame for the bad debt that has brought down Wall Street. The myth maintains that far too many people who simply couldn't afford to pay a mortgage took on the debt with abandon.

This explanation leads many to suggest a seemingly logical solution: Make sure the nation's mortgage brokers avoid lending to families of modest means and modest credit scores. Once we cut these "undesirable" families out of the picture, the housing market will eventually recover (helped by the federal plan for big banks).

In most cases, however, this myth doesn't hold. New research by the Center for Community Capital at the University of North Carolina suggests that, given an opportunity to access fair mortgages, most families who foreclosed under the burden of reckless loan products would still be in their homes.

The national study tracked two large groups of borrowers with similar risk profiles, the kind that would have prevented them from getting prime loans from traditional lenders. The first group wound up with sub-prime loans, while the second group received prime fixed-rate loans through a program seeded by the Ford Foundation to help banks serve low-income families. Both groups had the same financial background and the same ability to pay. Not surprisingly, the study shows that the loans with prepayment penalties, variable interest rates, and other sub-prime features were four times more likely to fail than the prime mortgages. Put simply, it's the loan products that are the problem, not the families.

Such results have tremendous implications for the road ahead. First, we must reject the notion that helping homeowners facing foreclosure amounts to a bailout of "deadbeat" households. Instead, we should pursue a plan to stabilize American families with the same urgency that has been applied to the financial system. Such an effort should include counseling to prevent additional foreclosures, and a new mechanism to restructure mortgages into sensible loans that keep borrowers in their homes. The time has passed for a loan-by-loan, piecemeal approach to the crisis. The government must facilitate the bulk transfer of mortgages to institutions with the incentive to restructure them on viable and fair terms for the current owners.

Second, we must end predatory lending practices that made subprime mortgages destined to fail. Key features of these loans and the way they were marketed'such as prepayment penalties, escalating interest rates and hidden fees'made it next to impossible for families to stay current on payments. What's worse is that many families did not need to pursue these products in the first place. Three years ago, researchers at Freddie Mac estimated that 20 percent of subprime borrowers would have qualified for prime loans at closing. Housing experts believe that this number is much higher. Whatever the figure, these practices must never be allowed again.

Third, we must act quickly to ensure that properties vacated by foreclosure are put back into use. If left vacant, these properties threaten all nearby families by driving down property values and putting precious home equity at risk. Getting these homes back in use will require creating a national entity that can acquire them in bulk and transfer them to cities for renovation and sale to private owners. Each abandoned house within 500 feet of an occupied home reduces the value of every surrounding home by 2.27%, according to a 2007 study by the Land Policy Institute at Michigan State University.

Finally, we must respond to the mortgage crisis not by closing the door to homeownership, but by ensuring that all Americans have access to fair and responsible financial services. Such services promote saving and the building of assets, which enable families to move up the economic ladder and boost the economic stability and opportunities of the next generation. Denying access to these opportunities would extend by years the impact of the current housing crisis, limiting the chances of a generation of Americans to reach the economic mainstream.

Over the last decade, innovative partnerships between the public and private sectors have proven that low and moderate-income Americans can be reliable borrowers and responsible homeowners. Turning back the clock on this progress is the exact wrong way to respond to today's mortgage crisis. We know that responsible lending to these communities works. Now more than ever, we need the commitment to ensure it continues.

Luis Ubiñas is president of the Ford Foundation.

Read the article in Forbes.com

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