The country is busy tearing down the system that's worked for seven decades to finance the American Dream — without knowing what will take its place. What does this mean for rural America?
Just imagine for a moment: You live in a small town with just one bank. You’re an empty nester. You want to sell the home where you raised your kids and move into something easier to get around in, easier and less costly to maintain.
You’ve put a lot of work and money into your Victorian home. You really can’t afford to buy something new until you sell it. You list your property. The open house is a big success. Several local couples with young children seem really interested. But none of them makes an offer. You lower the price as much as you can. Any lower and you won’t have enough to pay off your mortgage and buy a new place. Still no offers. What is the problem?
It seems that the only long-term, fixed rate mortgage the bank offers requires buyers to put 20 percent down. None of the families who want your home has enough savings to qualify. There are Internet mortgage companies marketing more expensive and shorter term loans, some charging interest only. But remembering the great financial meltdown, your potential buyers shy away from these. You can’t blame them. You are stuck, and so are they.
Deterioration and Disinvestment
Eventually more families and homes suffer the same fate. Values fall. The tax base and public services decrease. Existing home owners invest less in fixing up and maintaining their homes. Young families move. Disinvestment takes hold and your community slides downhill. You are aging. You need to borrow to make your home accessible. You can’t find a lender who wants your business. The bank isn’t offering home improvement loans. Neither are the Internet companies. You can’t refinance because that requires at least 25 percent equity
Or, the housing in your neighborhood has great architecture, attracting buyers from a nearby city who can afford to redo their homes. What was once a solid middle class enclave becomes upper income. Values increase. Your taxes skyrocket, squeezing your budget. Even though your grown children have steady jobs paying pretty well, they can’t afford to raise their kids in the neighborhood where they grew up.
In short, things are the way they were decades ago before the federal government intervened to induce lenders and the secondary market to make low down payment, long-term, fixed rate mortgages to home buyers with good credit and modest means, regardless of neighborhood or community, so long as the homes have adequate appraised value. It was also before the number of nonprofits developing and renovating housing and counseling these families grew to thousands.
Call me crazy, but I believe that unless we pay attention and make our voices heard, we are headed back to those bad old days.
The last time we were mired in a housing crisis as serious as today’s was during the Great Depression.
Here’s what happened. The stock market crashed, home prices plummeted, foreclosures skyrocketed, buyers disappeared and so did thousands of banks.
Franklin D. Roosevelt took two approaches. He mandated a financial regulatory system much the same as today’s, and he made the first national commitment to addressing people’s housing needs. Among the tools the New Deal deployed were the Home Owners Loan Corporation (HOLC), Federal Housing Administration (FHA) and Fannie Mae. The HOLC purchased and restructured defaulted mortgages and advanced funds to pay taxes and insurance and make repairs. In roughly two years, it made more than one million loans. By offering federal guarantees for fixed rate, long-term loans meeting uniform criteria, FHA revolutionized mortgage lending. And by purchasing these kinds of loans, Fannie Mae made it possible for banks to offer these mortgages on a continual basis.
There appears to be little national commitment or appetite to play a central role in addressing housing needs. The best evidence? The absence of any requirements that banks help residents stay in their homes and stabilize neighborhoods in exchange for billions in bailout monies.
Recently passed reforms of bank practices are meeting stiff opposition. Forty-four Senate Republicans say that if they don’t get concessions weakening the law, there won’t be any vote for a director of the new Consumer Financial Protection Bureau. They’re planning to stay in token session preventing the President from making what’s known as a recess appointment. When dubious and fraudulent foreclosures came to light, federal regulators accepted bank assurances that they would do better. State attorneys general are negotiating more significant measures.
One reason rural housing prices haven’t dropped as far as those in the cities is that they didn’t rise during the boom years of 2000 through 2005.
Federal agencies are proposing a regulation that defines “qualified residential mortgages”(QRMs) as mortgages on homes for which buyers put 20 percent down and QRMs for refinancing as mortgages on homes in which owners have 25 to 30 percent equity.
These definitions are very important. If a loan is “qualified,” the bank has no obligation to keep five percent when it sells the loan in the secondary market. Banks will have a strong incentive to make only loans that “qualify”.
These QRM rules would prevent millions of creditworthy borrowers from buying or refinancing their homes. Economists for the Mortgage Bankers Association estimate that:
• At current savings rates and home prices, it would take first-time home buyers nine years to save a 10 percent down payment and nearly 14 years to save a 20 percent down payment; and
• Today, nearly 25 million existing home owners would not be able to refinance because they have less than 25 percent equity in their homes.
In an April 13, 2011, White Paper presented to Congress, the Association cites data showing that low down payments and equity do not produce high default rates. It concludes that the proposed rules “will require millions of consumers, who are at low risk of default, to either put off borrowing or pay unnecessarily high rates. The government is penalizing responsible consumers, making home ownership more expensive or simply out of reach for millions.”
Goodbye Fannie and Freddie
House and Senate Republicans have announced their intention to wind up Fannie Mae and Freddie Mac as soon as practical. The Administration calls for wrapping up everything but minor activity in five to seven years. The theory is that the private sector, namely the big banks, will replace them.
This scenario seems optimistic, considering that currently Fannie and Freddie purchase more than 90 percent of all mortgages—to the tune of 2.36 trillion dollars last year. Fannie and Freddie require uniform underwriting criteria. Criteria are likely to diversify, not always for the best. It is doubtful that loan packagers marketing to investors will refrain from slicing, dicing and selling loans in ways that make it hard to assess risk or even know who owns the loans.
Other possible results? Unsettled capital markets, volatile pricing and increased transaction costs, plus the reemergence of redlining and more subtle means of limiting loans to low-income and minority individuals and neighborhoods.
Community Reinvestment Act
The Community Reinvestment Act (CRA) encourages federally regulated financial institutions to meet the credit needs of residents around their deposit-taking branches. For better than three decades, it has triggered billions in catalytic investment, much of it for affordable housing. About every five years, CRA comes up for review by the regulators. When they propose changes that would water it down, the industry and community and consumer groups mobilize and comment letters fly.
CRA is due for review soon. This time regulators may tackle a truly fundamental aspect of the law and regulations. The advent of national loan production operations and the Internet means that branch locations no longer signify lender markets. The question will be how to delineate the markets where banks should meet credit needs.
Vociferous critics among House Republicans will do their best to kill CRA. In the face of the facts, too many hold it responsible for the great financial meltdown.
In rural communities, a number of factors complicate the picture. On average, nonmetro incomes lag metropolitan incomes by some 23 percent. Poverty rates are higher than metro rates, 16.6 percent versus 13.9 percent. The population is older — seniors represent 15 percent versus 12 percent in metro areas. By and large, the major housing lenders do not target rural markets; smaller community banks do. Many of them are reluctant to absorb the costs involved in underwriting, selling and servicing home mortgages. Worse still, some rural places have no hometown banks.
Moreover, the House Financial Services Committee is drafting legislation to move the Rural Housing Service from USDA, where it has been for more than 60 years, to US HUD. While it sounds reasonable to consolidate housing related functions, there is no way HUD can match or maintain USDA’s capacity on the ground. In addition, every budget and appropriations cycle brings new cuts in these programs.
What Will Replace What We Are Losing?
“Ignore the law of unintended consequences at your peril.” “Be careful what you wish for.” These maxims are often proven right. In this case, we are tearing down the modern mortgage finance system piecemeal without knowing what will take its place.
A toxic combination of factors created the mess we are in, namely Wall Street, megabank and investor greed, dysfunctional politics, inadequate regulatory oversight, consumer gullibility and an acquisition culture encouraging everyone to live beyond their means. The legislative and regulatory measures we have put in motion are meeting tooth and nail resistance from those who can afford platoons of high-priced lobbyists and unprecedented political contributions, as well as ideological politicians opposed to “big government.”
The “elephant in the living room” is the plain fact that the institutions federal agencies presume to regulate outmatch them at every turn. If we do not invest in beefing up our regulators’ capacity, they will never catch up.
Changing Our Future
Well, there you have it—my case for the contention that we are moving backward when it comes to meeting the commitment made seven decades ago by Franklin Roosevelt, renewed by every president since.
What can we do to prevent a return to the bad old days?
•We can educate ourselves by joining organizations that follow these issues closely and represent inclusive community constituencies. (See partial list below.)
•We can sign up for their information updates and respond when they ask us to help.
•We can tell our families, friends, customers, fellow worshipers and civic group members about this situation and ask them to get involved.
•We can contact our elected representatives and their staff and get to know them personally if we don’t already.
•We can let them know how important an adequate supply of long-term, fixed rate credit is to the health and sustainability of our communities.
• We can ask them to follow and support implementation of the Dodd-Frank financial regulatory reforms, including the Consumer Financial Protection Bureau.
• We can tell them that regulator proposals defining “qualified residential mortgages” will hurt our communities and prevent our children from realizing the American Dream.
• We can say that our experience indicates the private sector is unlikely to replace Fannie Mae and Freddie Mac in our towns.
•We can urge them not to slash the USDA direct loan and related programs or send the Rural Housing Service to HUD.
•We can explain that CRA didn’t cause the meltdown, and its continued existence is vital to our economy.
Most of all, we can never, never, never give up!
Some National Organizations that can put you in the loop:
Sandra Rosenblith directs Stand Up for Rural America. As senior vice president of the Local Initiatives Support Corporation, she founded and managed Rural LiSC, the largest private supporter of grassroots rural community development. Rosenblith is also a board member of the Center for Rural Strategies, which publishes the Daily Yonder.