By Mark Goldhaber and James Bennison
(Carolina Banker, Spring 2013)
As the economy slowly recovers, assessing the recession’s damage is obvious and overwhelming in too many neighborhoods. Individuals and institutions have suffered significant financial and personal loss over the last four years. Millions of Americans have lost homes. Millions more have seen credit scores plummet forcing foreclosures and have seen homeownership either become significantly more expensive or out of reach altogether.
A tremendous trust gap has opened between banks and American consumers. A recent Gallup poll revealed just 23 percent say they have “a great deal” or “quite a lot” of confidence in U.S. banks. This figure is down 18 points from June 2007 and 37 points since Gallup first started asking the question in 1979.
This public trust gap is translating into regulatory and reputation nightmares for banks and
financial institutions of all sizes. Banks, small and large, need to work to change this paradigm
and begin re-establishing trust.
Historically, homeownership has been the vehicle to build equity and wealth while contributing
to the growth and development of strong, stable neighborhoods and communities.Establishing
a “Home Ready Buyers” program to provide access to credit, which will be sustainable
over time, will rebuild consumer confidence and institutional reputations.
It is important to make homeownership an attainable goal for hardworking Americans. A
simple and focused program, “Home Ready Buyers,” brings together borrowers, state housing
agencies, lenders, private mortgage insurance companies and credit counseling agencies
to provide a responsible way for first-time homebuyers to enter the market.
This can provide a vehicle for community based financial institutions to reconnect with the
customers and neighborhoods they serve. Building a housing infrastructure, which includes
setting up savings and checking accounts and helping potential homeowners improve their
credit scores, will result in high quality home loans. This is a certain path toward regaining
trust throughout communities.
Community-based financial institutions working in partnership can help potential borrowers understand the value of building equity. In recent years, housing has become less of a wealth builder and more of a consumer ATM. Reversing that trend to create savings patterns which assure not just access to capital, but a low foreclosure rate, builds equity throughout the community. Housing market participants cannot ignore the self-evident: a housing finance system that generates near double digit foreclosure rates fails individuals, neighborhoods and communities.
The Home Ready Buyers program would target those most challenged under the old system:
• First-time homebuyers;
• Those who want to purchase homes but have impaired credit; and
• Those who need time to save for a 3 percent down payment.
State housing finance agencies will set up the “Home Ready Buyers” programs. A modest fee
on purchase mortgages will provide the funding for the program’s activities, which will include credit counseling.
The process starts with borrowers, working with state housing agencies, to enter into a “Home Ready Loan Agreement” with a lender and mortgage insurer that would last up to 36 months and require:
• Establishing a down payment goal of 3 percent plus appropriate closing costs;
• Entering into a credit improvement plan to increase the borrowers’ credit score to at least 680;
• Participating in a credit/financial counseling program to gain greater understanding of borrowing, saving and budgeting; and
• Participating in a home maintenance and repair class.
Preparing first-time homebuyers with the tools to succeed as homeowners requires an investment. But, as the recent economic downturn has clearly shown, that cost pales when compared to the tremendous social costs and devastation to neighborhoods associated with putting people into homes they cannot afford with payments they cannot sustain. In a recent report, The Center for Responsible Lending said that neighbors living close to foreclosed homes have lost $1.95 trillion in property value through no fault of their own.
Undertaking an initiative such as “Home Ready Buyers” for a local community bank or a group of banks, would assure a pipeline of qualified low down payment buyers to purchase homes that will have a higher likelihood of success; and who are building deposits and credit for future bank products. It allows a bank to serve their market area and most importantly is building a long-term program and assets, which are core activities of a community bank.
In addition, it sends a strong message that community banks want to close the gap of trust. This is a message that will resonate with consumers, communities and policymakers at the state and national level.
Mark Goldhaber is a 30-year veteran of the mortgage finance industry, having served in the U.S. Dept. of Housing and Urban Development, worked for Freddie Mac and then GE Mortgage Insurance, the precursor of Genworth Mortgage Insurance. Today he runs Goldhaber Policy Services.
James Bennison has over 20 years experience in capital markets and structured finance. He most recently served as head of Capital Markets and Policy Development for Genworth’s U.S. mortgage insurance business