Neighborhood Reinvestment Corporation

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Neighborhood Reinvestment Corporation
By Doug Dylla August 11, 2004
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Acknowledgements

• Many thanks to the following people for their
  help with this presentation
• Mark Duda, research
• Allegra Calder, research
• Nancy McArdle, research
• Michael Collins, editing
• Jim Houghton, graphics

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Neighborhood Reinvestment Corporation
Key Topics

• Review brief history of industry
• Discuss key trends in homeownership, lending and
  counseling
• Reflect on implications of these trends on our
  work

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Brief History of Housing Counseling

• 1968 - HUD establishes housing counseling
  program
• 1972 HUD certifies housing counseling agencies
• 1977 HUD funds housing counseling programs
• CRA and HMDA laws are passed
• 1989 - CRA and HMDA are amended
• 1992 - Affordable housing goals set for GSEs
• 1990s -Dramatic growth of partnerships with
  lenders
• 2001 With recession, delinquencies rise
• 2002 - White House sets minority ownership goals

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2200 BC Egypt Indications that housing
counseling occurred much earlier than previously
thought
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1455 AD Mainz, Germany Johannes Gutenberg prints
a second document after the Bible.
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1993 New research reveals the typical brain of
the first-time homebuyer
Feng Shui
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2001 The first empirical study demonstrating the
impact of homeownership counseling by Abdighani
Hirad and Peter Zorn of Freddie Mac on reducing
loan delinquencies.
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What We Know About Homeownership

• Solid gains in homeownership highest overall
  homeownership rates in U.S. history (69) but
  still persistent racial gaps
• Historically-low interest rates
• Homeownership has been the key to asset-building
  for working families
• Minorities contribute heavily to household growth

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HO Rate Slide
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Homeownership Rates Across the World
Percent
Note China rate refers to urban areas
only.Source National Association of Realtors,
U.S. Census Bureau, and Y.P Wang, Progress and
Problems in Urban Housing Reform.
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Minority Ownership Rates Have RisenBut Still
Greatly Lag White Rates
Percent
Source Joint Center for Housing Studies.
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Historically Low Mortgage Rates
Percent
Source NAR and Freddie Mac
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Minority Renters Have Very Low Levels Of Net
Wealth(Median Net Wealth 2001)
Source Joint Center for Housing Studies
tabulations of the 2001 Survey of Consumer
Finance.
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Minorities Contributed Heavily to Recent Growth
in Owners
Share of Net Increase in Owners 1994-1999
Total Net Growth 6.9 Million Owners
Source Joint Center tabulations of the March
Current Population Surveys.
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Minority and Low-Income Ownership Growth Strong
Millions of home owners
Notes Blacks and Asians/others are non-Hispanic.
Hispanics can be of any race.
Low-income is defined as bottom
quintile. Source Joint Center tabulations of
Current Population Survey, March Supplement 1994,
2001.
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Minorities Will Make Up A Substantially Larger
Share of First-Time Buyers This Decade(Estimated
Growth in First-Time Buyers)
Millions
Note Assumes minority share of first-time
buyers will increase at same rate in the 2000s as
it did from 1991 to 2001. Source Estimates
based on analysis of the American Housing
Surveys 1993-2001, HUDs US Housing Market
Conditions, Fall 2001, First-Time Homebuyers
Trends from the American Housing Survey, and
Homeownership Alliances Americas Home
Forecast.
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Surging U.S. Immigration
Source INS
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Homeownership Rate by Citizenship Status
Higher Rate for New Citizens
Source Harvard Joint Center
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What We Know About Lending

• Huge consolidation in the lending industry
• Technology advances
• Boom in low-income and minority lending
• Expansion of risk-based pricing and fringe
  financial services
• Growing personal debt loads in U.S.
• Weak economy straining many families as
  delinquencies and defaults rise

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Technology Advances in Lending Industry

• Credit Scoring
• Automated Underwriting
• Move towards Electronic Mortgage
• Expedited Home Appraisal
• Explosion of Aggressive Mortgage Products
• Huge Growth of Mortgage Securitization

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Lower-Income Lending Outpaces Others
Growth in lending (index 1993100)
Note Lower (higher) income borrowers have income
of less than (at least) 80 percent of area median
in that year. Represents loans for home purchase
only.
Source Joint Center report, The 25th
Anniversary of the Community Reinvestment Act
Access To Capital In An Evolving Financial
Services System, Released March 20, 2002.
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Subprime Lending Growth, 1993-2001
percentage change
Source Harvard Joint Center, State of the
Nation's Housing 2004.
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The Dual Mortgage Market
Share of Growth in Home Purchase Lending,
1993-2000
Manufactured Homes
Subprime
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37
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Prime Loans
Subprime
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Govt. Loans
Lower-Income Borrowers In Lower-Income
Neighborhoods
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Americas Debt Challenge
Source Federal Reserve
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Subprime Lending Adds Costs and Reduces Wealth
Building
Based on a loan amount of 80,000
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What We Know About Counseling

• Fragmented, labor-intensive, decentralized
  industry - estimates of 2,000 agencies across
  nation
• Highly dedicated counselors and trainers that
  have helped fuel the homeownership boom of the
  last decade
• Lack of standards has hurt industry
  counseling can mean anything from a phone call
  to 40 hours of one-on-one work
• Funding for work is piecemeal

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The Benefits of Counseling

• Reaching underserved markets
• Providing a trusted advisor to potential buyers
  in an increasingly complex process
• Helping families gain access to special mortgage
  financing and homes they can afford
• Informing potential buyers about the
  responsibilities of homeownership
• Helping consumers build better money management
  skills
• Reducing loan delinquencies and defaults

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Classroom and Individual Pre-PurchaseCounseling
Reduce Delinquency (Percentage by Which
Counseling Lessens Likelihoodof Becoming 60 days
Delinquent vs. No Counseling)
Percent
No Statistically Significant Effect
Source Hirad and Zorn, A Little Knowledge is a
Good Thing Empirical Evidence of Effectiveness
of Pre-Purchase Homeownership Counseling, 2001.
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Whats Ahead?

• Significant growth expected from 2005-2025
• Households
• First-time homebuyers
• Minority and immigrant homebuyers
• Without more counseling capacity, a significant
  counseling gap will grown over next 20 years

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Homeownership Continues to Grow Over the Next Two
Decades
Estimated owner and renter households, 2000-2025
(millions)
Note Assumes constant homeownership rate of 69
percent over the entire period. Source Estimated
from household projections in Masnick and Di
(2004).
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First-Time Homeowners 2004-2013NAR Estimates 16
million
Million
Minority Total 8.4 million
Source NAR Estimates
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Projected First Time Buyer Levels Average Nearly
1.5 Million Annually
Estimated net new owners and first time buyers,
2000-2025 (millions)
Note Assumes constant homeownership rate of 69
percent and ratio of 1.645 first time buyers for
each net new owner over the entire
period. Source Estimated from household
projections in Masnick and Di (2004) and first
time buyers figures in Drew (2002).
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Counseling Gap for First Time Buyers Exceeds One
Million Annually
Estimated counseled and un-counseled borrowers,
2000-2025 (millions)
Note Assumes constant homeownership rate of 69
percent, ratio of 1.645 first time buyers for
each net new owner over the entire period, and 15
percent share of new owners counseled over the
entire period. Source Estimated from household
projections in Masnick and Di (2004) and first
time buyers in Drew 2002.
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Counseling Gap Concentrates among Minorities as
White Share of 1st Time Buyers Declines
Estimated un-counseled borrowers, 2000-2025
(millions)
Note Assumes constant homeownership rate of NH
White homeownership rate starts at 75 percent and
increases 0.5 percentage points until 2020,
assumes minority homeownership rate starts at 48
percent and increases 1.0 percentage points until
2025, assumes ratio of 1.645 first time buyers
for each net new owner over the entire period,
and 15 percent share of new owners counseled over
the entire period. Source Estimated from
household projections in Masnick and Di (2004),
first time buyers in Drew 2002.
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Challenges to the Counseling Industry

• Consumers increasingly overwhelmed by options
• Technology and transaction speed may limit
  opportunities for counseling for many borrowers
• Riskier loans inherently mean higher levels of
  loan delinquencies and defaults
• Clustered foreclosures have significant negative
  impact on neighborhoods and communities
• Community services that extends beyond loan
  origination to servicing, loan workouts, loss
  mitigation and disposition practices

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Opportunities for the Counseling Industry

• Marketing the value of counseling directly to
  consumers
• Packaging incentives and discounts to attract
  consumers to counseling
• Embracing national standards and new technology
  to improve quality, reduce costs and broaden
  coverage across the U.S.

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Opportunities for the Counseling Industry

• Engaging with other key partners in the
  transaction, especially with Realtors, lenders,
  mortgage insurers and loan servicers
• Working cooperatively to promote counseling as a
  standard part of first-time homebuyer process
• Partnering with schools, employers and churches
  to use financial education as the first step

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Todays Discussion Questions

• How can we build sustainable counseling capacity
  in the industry?
• How can we expand the coverage of high-quality
  counseling across the nation?
• How we make better use of technology and
  efficiencies of scale to reach more consumers and
  close the projected counseling gap in the
  decades ahead?

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2003 HomeSight in Seattle uses an aggressive
marketing campaign to reach prospective buyers
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2005 The benefits of counseling are promoted
directly to consumers along with incentives from
partners such as free computers
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2006 Consumers are willing to pay directly for
counseling and in turn, get incentives from
partners
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2007 and Beyond Mortgage Application
Fee 400 Appraisal Fee 300 Unexpected Home
Repairs 3,500 The Value of Counseling
Priceless!