Affordable Housing Institute : US

Catching up with AHI, the New York Times explores the cresting bubble through the lens of neighborhoods and borrowers for whom a downturn has meant the difference between economic viability and default:

 

The housing boom of the last decade helped push minority home ownership rates above 50% for the first time in 2004 and the overall foreclosure rate below 1 percent.  Social scientists laud these accomplishments because ownership can foster greater neighborhood stability and economic progress. President Bush cites rising minority ownership as a milestone achievement under his “ownership society” programs.

 

Four months ago, I posted on subprime delinquency rates and argued that this was the miner’s canary signaling a market top.  As I wrote at the time:

 

For housing markets, forecasting is notoriously difficult.  Prices are extremely complex, interdependent, multi-variant, and phase-delayed (with larger and smaller economic forces having both leading and trailing effects).  They are seasonal, regional, tragical, comical, lyrical, pastoral …

 

One day existing home sales are down (doom!), literally the next new home sales are up (cheer!). 

 

Out of all that apparent chaos, how does one prospectively determine major trends?  (Anybody can determine them retrospectively, but that’s very cold consolation.)

 

Larry Niven: “Any damn fool can predict the past.”

 

Enter the miner’s canary — the sensitive universal leading indicator.  And mine, default rates on subprime loans, has just started wobbling.

 

Back to the Times:

 

But hidden behind such success stories lies a disturbing trend: in the last several years, neighborhoods with large poor and minority populations in places like Cleveland, Chicago, Philadelphia and Atlanta have experienced a sharp rise in foreclosures, in some cases more than a doubling, according to an analysis of court filings and other housing data by The New York Times and academic researchers.

 

The words “and minority,” arriving reflexively as they do, not only miss the point, they distort it.  Capital isn’t black and white, it cares about only two colors:

 

Green, as in making it.

Red, as in being in it.

 

Green means lend, red means don’t lend

 

The right phrase to substitute would be “newly accredited neighborhoods.”  Credit is like the tide: it rolls in, it washes out.  Naturally the last lubricated is the first left high and dry. 

 

The increase in foreclosures could be the first of a wave of financial distress for many minority homeowners …

 

Please, gentlemen of the Fourth Estate, do not get your eyes crossed on this:

 

 

You are conflating minority (a visual aspect) and with credit risk (a financial aspect).  They correlate but one does not cause the other.  Instead the distinction is “newly accredited” (and probably lacking in assets) versus “credit established” (with available additional collateral).

 

Race and credit status correlate, of course.

 

Reader, when below you see ‘minority’, just mentally global-replace with ‘newly accredited’.

 

… experts say, because they are twice as likely as whites [Again, the issue isn’t white versus black, it’s previously accredit versus newly accredited — Ed.], to have taken out expensive subprime mortgages, most of which will jump to higher interest rates in the next two years, according to an analysis of data that lenders disclose under the federal Home Mortgage Disclosure Act.

 

Subprime loans, which are made to borrowers with credit histories that the industry considers less than prime, have interest rates that are, on average, three points higher than the prime rate, about 6.2% now, and they carry higher fees and prepayment penalties that make it expensive to refinance.

 

Some housing experts worry that the minority [Newly accredited — Ed.] foreclosure rate could worsen if the economy or the housing market, nationally or regionally, hits a rough patch as it has in industrial Midwestern states like Ohio.

 

“Anybody who is on the edge, those are factors that can tip them over into foreclosure,” said William C. Apgar, a lecturer at Harvard [And former FHA Commissioner! — Ed.] who has studied foreclosure patterns in Atlanta, Chicago and Los Angeles. “That could happen even though [general — Ed.] foreclosure rates are down.”

 

Curiously, for reasons best known to itself, the Times picks a ‘representative’ borrower that has almost nothing to do with the trend the Times is positing:

 

CLEVELAND — Catrina V. Roberts, a single mother of four, joined a new, growing class of minority homeowners when she moved from her subsidized apartment to a two-story house in 1999.

 

In other words, Ms. Roberts bought six-plus years ago, long before the housing ‘bubble’ expanded. 

 

But Ms. Roberts fell behind on her payments and declared bankruptcy last year.

 

Catrina Roberts, left, with her daughter Sanautica, 12, and granddaughter Neakia, 4. Ms. Roberts’s home in Cleveland is in foreclosure and she has declared bankruptcy.

 

She went into default long before the miner’s canary trend.

 

Now, as she loses her modest home to foreclosure, Ms. Roberts may represent the vanguard of a worrying trend of retreat.

 

The example of Ms. Roberts is noteworthy [Huh? — Ed.] because her loan was not considered subprime. 

 

Then why use it to lead an article about subprime risks?

 

It came from KeyBank, a longstanding Cleveland institution, and carried a relatively low fixed interest rate of 7.4% on a principal of $65,000.  She never had a credit card, much less a credit record, and put down only $2,000.

 

Rewind, pause, and rant, as we re-examine who was kind, who cruel:

 

 

Ms. Roberts was assisted into a new home via a loan with 97% leverage and only 3% down.  She had a fixed interest rate.  She had no credit history.  Rather than focus on Ms. Roberts’ current difficulties, consider for a moment the extraordinary optimism shown in lending to Ms. Roberts. 

 

The Mortgage Bankers Association said lenders used a number of factors like credit scores and the size of down payments, in addition to income, to determine what kind of loan and interest rates are offered to borrowers. For instance, “whites have traditionally had more wealth than minorities, and that’s a factor in who gets what kind of loan, as well,” said Douglas G. Duncan, the chief economist at the trade group.

 

It’s a shame that Ms. Roberts is losing her home — it’s extraordinarily traumatic — but retrospective confirmation bias has crept in to this analysis.  How many other families, whose lives have been greatly improved by the decision to extend such generous credit, are being omitted from the story?

 

For every 100 subprime loans made nationally, only 5 end in foreclosure.  [95% success rate. — Ed.] Some increase in total foreclosures is to be expected simply because the number of mortgages has increased substantially over the last decade, he said.

 

In fact, late in its story, the Times observes this:

 

The Role of Subprime Loans

 

In addition to lowering crime and revitalizing blighted neighborhoods, home ownership also helps families build wealth that can pay for education and be passed on to the next generation, said Dowell Myers, a professor at the University of Southern California who has studied Hispanic home buying patterns.

 

Experts attribute the recent increase in minority ownership to income and employment gains, but also to the growth of subprime lending, which provides credit in areas where few lenders and banks operated before. The expansion of credit, particularly to the poorest minorities, has been controversial.

 

Expansion of credit isn’t controversial.  Expansion of credit is good. 

 

Expanding credit is a key to expanding an economy

 

Advocates for the poor say that aggressive lenders and mortgage brokers have given loans to borrowers who are lured by dreams of home ownership but have few savings and little job security.

 

Should these brokers not have given the loans?  I can imagine the headlines were they to establish a policy of denial.  Someone might invent a term for it and call it red-lining. 

 

Many families might be better off, and receive less expensive loans, if they saved for a down payment and paid down other debts before buying a home, said Kathleen E. Keest, a senior policy counsel at the Center for Responsible Lending, a housing advocacy and research group [Anti-predatory lending. — Ed.] based in Durham, N.C.

 

Yes, they might: saving precedes borrowing.  And homeownership counseling enhances homeownership tenure.  Conversely, turning an own-not into an owner gives the household a chance to gain appreciation (such as over the last six years). 

 

At the same time, there is a phenomenon known as predatory lending, that does ruin lives by exploiting the hopes of the financially inexperienced and naive. 

 

Predatory lending is reprehensible; optimist lending is exemplary.  Distinguishing one from the other is very difficult. 

 

Even for well-intended private lenders, the decision to lend to the newly accredited is quite complex and the risk factors of either choice are high.

 

Note the obvious: subprime delinquency rates lead normal market rates.  You might think that subprime borrowers, having managed to leap onto the rising economic ladder of homeownership, could rapidly pull themselves up.  Economic reality is more cruel; while many do, quite a few don’t.

 

Meanwhile, some markets heavily financed with subprime lending are indeed wobbling:

 

But broad national statistics can obscure hard local realities. In Cuyahoga County, which includes Cleveland, Ms. Roberts’s hometown, court filings by lenders seeking to foreclose on delinquent borrowers totaled more than 11,000 in 2005, more than triple the number in 1995.

 

There were 17 auctions of foreclosed properties for every 100 regular single-family homes sold in the county in 2005, up from 10 in 2004 and 5 in 1995, according to data tabulated by Cleveland State University. (Not all homes that enter foreclosure are sold at auction; sometimes borrowers and lenders settle out of court or the property is sold on the open market.)

 

Any way you slice it, 10% to 17% is a trend.  A worrisome one.

 

 

Why is subprime lending a leading indicator?  Because by definition, subprime borrowers are at the edge of the bankable frontier (as my AHI colleague David Porteous has discussed on his blog), and as such, they are the most sensitive to changing economic circumstances. 

 

This is another longer-wave clue: the much higher percentage of loans being subprime means more folks closer to the economic edge have elected to buy homes.  Observant herds can turn into stampedes and in so doing can drive prices up above ‘normal’ (whatever that is).

 

Stampedes are much more likely when an area is geographically concentrated with similar on-the-edge buyers:

 

Ohio lost 215,000 jobs from 2001 to 2005 [Out of 5,400,000, or 1 in 25, ouch!. — Ed.], with 63,800 of them coming from the Cleveland metropolitan area. The state unemployment rate was 5.6% in December, up from 4% in 2000. The jobless rate in Cleveland was 5.5% in December, up from 3.8%.

 

James Rokakis, the Cuyahoga County treasurer and an advocate of tighter lending standards, said a 5% national foreclosure rate for subprime loans was acceptable to lenders because their profits were greater on those loans than on prime mortgages. But he noted that his county’s 17% rate is creating blight in many neighborhoods.

 

The 17% foreclosure rate in Cuyahoga County, Ohio, is creating blight in many neighborhoods, including Slavic Village, where about 500 homes are vacant.

 

That’s the real story here.  Two things, often but not always correlated, can kill a market: shrinking demand and free-falling prices. 

 

The housing, unlike the people, simply cannot move. 

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