Home Ownership Goals Created a House of Cards

Lender guidelines were 'obliterated' in buying frenzy
Government long has promoted home ownership as a means of strengthening communities and building the wealth of its citizens, but the recent housing market collapse has some analysts wondering whether consumers have gotten too much of a good thing.
While federal policies helped tens of thousands of U.S. consumers achieve home ownership during the housing boom, they also opened the door to the widespread use of risky loans, a national credit crunch and a wave of foreclosures.
“Public policy has been used to promote home ownership since the wake of the Great Depression,” said Mark Zandi, chief economist at Moody's Economy.com. “These efforts were overdone this decade during the housing boom and bubble.”
In 2005, the year the San Diego County real estate boom peaked, the home ownership rate in the county was 58.2 percent, according to the U.S. Census Bureau's American Community Survey. By 2007, the rate in the county had fallen to 55.9 percent. That marked a loss of nearly 22,000 owner-occupied residences.
Nationally, the home ownership rate steadily increased from 44 percent to 63 percent between 1940 and 1970, the bureau found. It remained in the mid-60s for more than three decades before rising to 67.3 percent in 2006. In 2007, it declined slightly to 67.2. Zandi expects the rate to continue to slide until it reaches to pre-boom levels.
Veteran lender Bill Dallas, a former board member of the California Mortgage Bankers Association, said government intervention combined with loose loan underwriting standards put many buyers into home loans they couldn't afford. In the buying frenzy that characterized the first half of this decade, guidelines for making sure that borrowers had enough cash in reserve to weather economic storms were “obliterated.”
Adriana Erni, a real estate broker, recently became a renter after losing her University City home to foreclosure. Erni bought her three-bedroom house in 2005, near the height of the surge in prices.
When she and a friend bought the home with an adjustable-rate loan and no money down, she figured they could refinance it before their mortgage payments increased. Instead, she found herself unable to get a new loan when home values dropped. At the same time, her income declined as the real estate market slumped.
Erni sought help from Community HousingWorks, a nonprofit that assists distressed borrowers in negotiating loan modifications. Even with the agency's help, she was unable to stop the foreclosure process. She vacated the home in late November.
Although she feels “crushed and wounded,” Erni hopes to buy another home. For now, she is content to rent.
“You need some time to heal,” she said.
Healing the economy was what U.S. policymakers had in mind when they were looking for ways to boost home ownership in 2001. The nation was in a slump amid the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. To get back on track, then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.
Home ownership became a key driver of the economy. Federal regulators did not intervene when lenders began using subprime, adjustable-rate mortgages to temporarily reduce mortgage payments, allowing more people to qualify for loans.
Thousands of borrowers became homeowners without regard to their creditworthiness or their ability to cope when adjustable mortgages reset at higher rates. Because such loans carry higher fees, lenders made more money.
Attempts to pass federal legislation against predatory lending to protect borrowers from being placed in unnecessarily costly loans were opposed by the Bush administration and members of Congress. They feared that restrictions on lending would slow the rise of home ownership.
Instead, the housing market heated up as lenders and consumers went on an easy-credit bender. Highly leveraged loan products surfaced that had not been widely used since the Great Depression. At the height of the home-buying frenzy, a running joke in the lending industry was that anyone who could fog a mirror could get a loan.
In mid-2002, President Bush urged lenders to add 5.5 million minority homeowners by the end of the decade. In the years that followed, San Diego County neighborhoods with large minority populations would be hard-hit by foreclosures resulting from risky subprime loans.
Government-sponsored mortgage giants Fannie Mae and Freddie Mac ensured that funds were consistently available to lending institutions. Under pressure from the Bush administration, Fannie Mae and Freddie Mac increased their funding of mortgage loans to lower-income borrowers.
If government and lenders pushed hard for increased home ownership, it was with good intentions, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
“You definitely had, for generations, presidents from both parties and congressmen from both sides really pushing home ownership, with Fannie and Freddie and every way they could, and with good reason,” Hobbs said. “It is the best way that individuals acquire wealth. There was a consensus from consumer groups to mortgage bankers to government that more needed to be done to create home ownership.”
Not everyone bought into the idea that owning is preferable to renting. Some contrarian economists held that people could build more wealth by renting and investing the money that would have gone into down payments and home maintenance.
They pointed out that home prices fluctuate. People who buy at the peak of a fevered market run the risk of losing wealth during a speculative price bubble.
“What is wrong with renting?” asked economist Christopher Thornberg of Beacon Economics. “I am so tired of hearing that owning a home is the height of being an American.”
While government played a strong role in triggering the current credit crisis, others share the blame, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a research group in Washington, D.C. Real estate speculators and consumers were eager to take advantage of low interest rates.
One of the first national voices to warn that the rising home ownership rate was based on unsustainable debt was Nicolas P. Retsinas, the head of Harvard University's Joint Center for Housing Studies. Retsinas recalled that the marketing of risky loans to consumers was aggressive.
“At one point, there were 250,000 people working for mortgage brokerages in the U.S.,” he said. “Their compensation was based on transactions. And they were all selling. Were risks understated? Yes.”
Lenders were feeding Wall Street investors' growing appetite for securities backed by subprime loans.
Rob Katz, president of the Del Mar DataTrac software firm in San Diego, recalls meeting with his company president in 1999 when he was a technology officer at a mortgage firm in Northern California. Katz was told that the company was going to begin making loans for 107 percent of a home's value without verifying income. When Katz protested, he was assured that the loans would quickly be sold to mortgage investors, who would take the hit if they failed.
Many lenders have been forced out of business since the end of the housing boom. Most analysts say that chastened financial institutions won't loosen their purse strings and allow another big surge in home ownership.
While he applauds the newfound restraint, Retsinas worries that tight credit will prevent low-and moderate-income households from achieving home ownership, particularly in high-cost markets such as San Diego County.
Although there was much abuse of adjustable subprime loans, they were a home ownership lifeline for many buyers.
“The question going forward is, what is going to replace subprime lending?” Retsinas said. “There are always going to be people who do not make a lot of money. Should they be shut out? I think we can find a way to develop mortgage products that are reasonable, that are transparent, where everyone knows the risks involved. That will be a challenge, because we just shut the spigot tight.”





By Emmet Pierce (Contact) Union-Tribune Staff Writer