During the Past Two Decades, the U.S. Housing Finance System Experienced Changes of a Magnitude Unseen Since the New Deal Era

FOREWORD During the past two decades, the U.S. housing finance system experienced changes of a magnitude unseen since the New Deal era. In the 1980s, the primary mortgage market restructured and consolidated as a result of the savings and loan crisis, adjustable-rate mortgages became widely available, and the secondary mortgage market grew rapidly. The 1990s saw continued industry consolidation, as well as significant technological de- velopments in mortgage finance. In addition, the past decade was a time of considerable innovation in affordable mortgage lending, part of a growing movement to connect historically underserved households and communities to the mainstream housing finance system. This volume examines this movement through case studies of organizations recognized by their peers as leaders in expanding homeownership opportunities. In an extension of their earlier research for the U.S. Department of Housing and Urban Development, the authors describe the efforts of a broad cross section of industry participants, including small and large lenders, nonprofit community-based organizations (CBOs), and lending consortia. They document a wide range of strategies—in the areas of management, outreach, borrower qualification, and homeowner retention—designed to expand and sus- tain homeownership among lower-income and minority households. The case studies illustrate three notable aspects of recent efforts to extend the reach of homeownership. First, they demonstrate that leaders in the mortgage finance industry view historically underserved populations and communities as viable business markets rather than regulatory burdens, and back this perspective with action. Second, the studies show the vital role that partnership plays in expanding opportunity. They provide examples of lenders working with each other in consortia; CBOs partnering with govern- ment to provide financial assistance to new home buyers; and lenders, mortgage insurers, and the secondary market joining forces to develop new affordable mortgage products. Finally, the case studies show how changes in the marketplace are continually altering the actors and strategies involved in the movement to increase homeownership. In the two years since the fieldwork for this volume began, several of the case study organizations have been involved in mergers or acquisitions. Other organizations have reassessed their missions and strategies in response to the changing marketplace. Indeed, from our current vantage point within a rapidly transforming industry, it is difficult to predict what a similar set of case studies would reveal five years from now. Certain, however, is the need for continued scholarly investigation of promising approach- es for expanding the American dream. The authors of this volume have made an invalu- able contribution on this front by documenting the strategies employed by the mortgage lending industry at a critical juncture in its evolution. Franklin D. Raines Chairman Fannie Mae Foundation v PREFACE Sweeping demographic changes are reshaping the face of the nation and the character of housing demand. An important change affecting U.S. housing markets is the rapid increase in the number of racial and ethnic minorities, many of whom encounter unique obstacles in their pursuit of affordable housing and homeownership. During the 1990s, minorities accounted for almost 70 percent of total U.S. population growth. In the next 10 years, the Census Bureau projects that minorities will account for almost 80 percent of total population increase. Much of the growth in the minority population is being driven by a burgeoning foreign-born population, which now accounts for one of every ten Americans. In an effort to better understand how increasing racial and ethnic diversity and other demographic changes are affecting the housing sector, the Fannie Mae Foundation ini- tiated a research program on emerging and underserved markets. This program has two major thrusts. The first is exploring the changing characteristics of the U.S. population, the effects of these changes on housing demand, and the unique obstacles to housing opportunity faced by some groups. A major focus of this research has been a series of studies on immigrants’ housing demand and neighborhood conditions. The second thrust is examining how the housing industry is responding to increasing diversity in the marketplace. The Foundation enlisted the Center for Urban Policy Re- search at Rutgers University to initiate this line of inquiry. The Rutgers team, led by David Listokin and Elvin K. Wyly, partnered with other research institutions to conduct several studies. They revisited the landmark Color of Money study on mortgage lending patterns in Atlanta, conducted homeownership affordability simulations that examine the limitations and potential of new affordable mortgage products, and prepared this collection of case studies on strategies used by the housing industry to expand mortgage opportunities. The case studies document the efforts of a diverse set of industry participants, ranging from small banks and nonprofit community-based organizations (CBOs) to the largest home mortgage lenders in the nation. These rich case studies suggest that a new paradigm has begun to permeate the U.S. housing finance system. This new perspective views historically underserved populations and communities—defined by the researchers to include low- and moderate-income or minority borrowers or neighborhoods—as viable markets. The CBOs and community- based lenders profiled in this volume have long recognized the market potential of historically underserved populations such as Haitian Americans in Miami, Asian Ameri- cans in New York City, Navajo on the Navajo Nation, African Americans in Washington, DC, and Latinos in Los Angeles. The study demonstrates that large national and region- al lenders have also begun to focus on these markets and their profit potential. The words of Dan Russell, currently in charge of emerging markets at Wells Fargo Home Mortgage and during the study the head of affordable housing at Norwest Mortgage, reflect this new perspective: We are doing this [affordable lending] because it is our principal business. We do not believe that this is something that we “have to do.” We do not believe that this is vii viii David Listokin, Elvin K. Wyly, Larry Keating, Kristopher M. Rengert, and Barbara Listokin something that “is just nice to do.” This is where we make our money. Lending to low- and moderate-income, ethnic, and first-time home buyers is almost 40 percent of our business. And that’s not counting immigrant home buyers who[m] we are just starting to track. This is not a pilot or an initiative for us—it’s where we make our money. Norwest and the other large lenders profiled in this report are implementing this new perspective through management reforms, aggressive outreach, consumer education and counseling, mortgage product innovation, and flexible underwriting. The case studies also illustrate how information-related market imperfections have hindered development of these new markets. As the authors point out, these imperfections occur on both the demand and supply sides of the market. In response to lack of information or misinformation on the part of consumers, the case study organizations have developed a variety of education and counseling initiatives. These efforts range from standardized home-buyer education programs offered by large lenders and designed to reach broad audiences, to the more customized and intensive interventions of CBOs. Some of the large lenders are reaching thousands of prospective homeowners with these efforts; for example, 17,000 consumers completed Countrywide’s telephone credit counseling services in less than three years of operation. CBOs’ education and counseling programs generally reach smaller, more targeted audiences with customized information. Educational materials, seminars, and counseling are often offered in native languages and address unique information challenges faced by the target group. For example, the training program of the Little Haiti Hous- ing Association (LHHA) is offered in Haitian Creole and Spanish in addition to English. The program includes instruction on household finance and developing alternative credit histories, a response to the Haitian community’s greater propensity to rely on barter and cash rather than formal credit. On the supply side, lenders have invested in becoming more knowledgeable about the employment, savings, housing expenditure, and credit usage patterns of historically underserved households. These patterns often do not conform to requirements for standardized mortgage products and underwriting guidelines. As a result, creditworthy applicants have been denied loans or forced to borrow on less favorable terms. In part by working with CBOs that are more familiar with these patterns, lenders are increasingly realiz- ing that the nontraditional profiles of underserved households do not necessarily entail greater credit risk. The following excerpt illustrates how a CBO worked with a bank to clear up an information-related imperfection on the supply side of the mortgage market: In one case we [Asian Americans for Equality (AAFE)] had a client who was run- ning a business in Indonesia. He and his son wanted to buy a home in New York City. The substantial income and assets were coming from the father and were coming in from Indonesia. The lending institution was raising concerns about

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