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Small Business Financing May Suffer From Obama’s Proposed Budget and Political Wrangling
Jerry Chautin
Business Mentoring
Posted: 02/21/2012 10:11 am
Lenders are concerned that President Barack Obama’s proposed 2013 budget and the political scuffling in Congress may leave the U.S. Small Business Administration and U.S. Department of Agriculture with inadequate loan-guarantee authority to satisfy the needs of small-businesses owners. If that happens, and “guarantee coffers are low, the borrower needs to worry if their loan will be approved before the program runs out of money,” says Mike Rozman, co-president and chief strategy officer of BoeFly.com. The New York City-based company matches borrowers with lenders online. Of further concern, he notes that “there is still limited conventional financing for start-ups.”
Before the financial meltdown and the Great Recession, start-ups were able to get financing when the applicant had related experience, invested approximately 20-percent equity into the venture and pledged collateral. That has changed drastically and fledgling entrepreneurs are left with few, if any alternatives. For more mature companies, however, “we’ve seen an increase in conventional lending over the past six months for existing profitable businesses seeking to expand or refinance debt,” Rozman says.
Kraig Kramers, a management consultant and consummate entrepreneur who turned around such Fortune 500 Companies as Snapper-brand lawn mowers, has advice for surviving economic turmoil and a possible tightening of credit. “Stay close to lenders and prospective investors long before you need them,” Moreover he says, “You must have prior happy relationships with those who will provide the cash timely when you really need it.”
He also coaches business owners to drill down “into cash management with tools you can introduce into your business to accelerate incoming cash.” Additionally, “Delegate these tools to those managers and employees who can do the best with them.”
Borrowing an idea from “a Fortune 500 company,” he says, “Look at a detailed balance sheet, yes, to the penny.” As a result, “we found a half-million-dollar stock certificate that had been forgotten.” But the technique is not just for large corporations. Kramers also found “recapturable deposits in several smaller businesses this way.”
Equally as important, cleaning up your financial statements, footnoting the most important line items and highlighting key financial ratios, prepares you for making a loan application. Furthermore, include an extensive discussion telling the loan officer and her committee how you arrived at the forecast for the next 12-month’s proforma.
Rozman adds that if customers get the cold shoulder from their exiting bank, the borrowers will need to be “aggressively seeking alternatives.” BoeFly’s 1,500 participating lenders pay subscription fees in order to view applications from entrepreneurs seeking financing. In addition to conventional loans, some of the lenders make loans that are partially guaranteed by SBA and USDA and may consider start-ups — especially for franchises.
SBA’s 7(a) loans are suitable to finance real estate, equipment, machinery, working capital, and to purchase an existing business. The agency’s 504 program is for fixed assets and most suitable to build, expand or purchase real estate. More recently, SBA initiated a temporary 504 program to “rescue” borrowers who have existing loans with balloon balances coming due and find that take-out lenders are scarce.
The basic 504 program requires job creation or retention and does not include working capital. But the temporary refinancing program waives the job-creating requirement. And it also allows some working capital for projected operating expenses.
USDA’s Business and Industry Loan Program is similar to SBA’s 7(a) but the businesses must be in rural locations. Sometimes, sparsely populated locations on the fringe of urban areas are approved. Unlike SBA’s loan limits of $5 million for 7(a) and approximately $10 million for 504, USDA’s B&I program tops out at $25 million under certain circumstances. And the loans may go up to $40 million for rural cooperative organizations that “process value-added agricultural commodities,” according to USDA’s web site.
Small-business owners are holding their collective breaths as the Obama Administration’s proposed budget wends its way through the politically-charged Congress. It is as much the chief executive’s opening salvo, as it is his wish list. But if the budget that survives includes large reductions of SBA and USDA guaranteed loans, you need to be prepared.
To test the water, talk to your bank’s loan officer about your chances of getting financing. It is better to see if your loan officer tap dances and stutters now than before crunch time. And if you don’t get a positive reply, start looking for other funding alternatives.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at http://www.Twitter.com/JerryChautin
Copyright © 2012 Jerry Chautin — All rights reserved
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Low Mortgage Rates — Finally Having Impact on Housing Market?
CIN Alert for January 24, 2012
Vicky and Joe had always dreamed of buying a nice neat home in a Northern city suburb. That dream came true in 1972 when they purchased a Cape Cod style three bedroom home for $45,000 with a 30-year fixed-rate mortgage of 7.5%.
Joe remembers telling Vicky at the time that they would never see rates that low again, and over most of the next 40 years he was right.
However, something quite unusual has happened during the past several years: mortgage rates have plummeted to new record low levels, most recently 3.88 %. Of course, Joe and Vicky, now retired, don’t need the low rates anymore, but for many others – including their kids and grandkids — those rates seem very inviting.
Inviting they may be, but the low rates have not thus far been able to trigger a strong stimulation of the US housing market as (sad to say) relatively few people qualified for the lower rates. High unemployment and small wage gains have made it harder for many people to qualify. Other would-be borrowers didn’t want to sink money into a home that they fear could lose value over the next few years.
However, new statistics just released would seem to indicate that things are beginning to change. Perhaps there is good news coming over the horizon.
“Existing home sales rose for the third consecutive month in December, according to data released Friday by the National Association of Realtors, which touts the upswing as a sign of recovery in the national housing market.
“Sales of existing homes rose to a seasonally adjusted rate of 4.42 million during the final month of the year, marking a 5% increase over the downwardly revised 4.39 million homes sold in November and a 4 percent increase over the 4.25 million homes sold in October.
“The number of homes sold in December 2011 also marked a 3.6 percent increase over the 4.45 million homes sold during the same month one year ago. “The pattern of home sales in recent months demonstrates a market in recovery,” NAR chief economist Lawrence Yun said in a statement. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.” (Source: The Washington Post)
Builders are hopeful that the low rates will boost sales even more as the year progresses. In fact, low mortgage rates were cited as a key reason the National Association of Home Builders survey of builder sentiment rose in December to its highest level in more than a year.
Mortgage rates are one of the major issues your CIN editors monitor and report on regularly in our Housing Section, which is designed to provide information to prospective homebuyers, their counselors and advisors, lenders, developers, and others focused on the critical issues surrounding housing.
These include aspects of arranging financing and other details of the purchasing process, such as obtaining a fair appraisal of the value of the intended home. We also present information on various bank mortgage lending programs and mortgage banking programs to help borrowers understand the process they are entering as they select a home for purchase. Here’s a sample of some articles recently included in CIN’s Housing Section:
One million homeowners may get mortgage writedowns: U.S.
(Source: Reuters) About one million American homeowners would get write downs in the size of their mortgages under a proposed deal with banks over shady foreclosure practices. The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.
Do FHA Mortgage Borrowers Still Face Credit Score Layering?
(Source: Our Broker.com) More than a year has passed since HUD announced that it would investigate 22 lenders on possible ‘Layering’, the addition of requirements on top of FHA standards. The investigations are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African-Americans and Latinos with credit scores as high as 640.
WSJ: Home Equity Squeeze Sparks Reverse Mortgage Revival
(Source: Reverse Mortgage Daily) The real-estate crunch left most home values with much to be desired, prompting a revival in reverse mortgages. Although the number of reverse mortgage endorsements has decreased compared to its peak a few years ago, lending has been picking up, with MetLife Bank’s 2011 reverse originations increasing by 171% compared to the previous year.
Confidence Among U.S. Homebuilders Climbs to Highest Since 2007
(Source: Bloomberg) Confidence among U.S. homebuilders rose in January to the highest level in more than four years as sales and buyer traffic improved. The National Association of Home Builders/Wells Fargo sentiment gauge increased to 25 this month, exceeding the median forecast of economists surveyed by Bloomberg News and reaching the highest level since June 2007.
Feds investigating possible fraud at GE’s former subprime unit
(Source: i watch news) Federal authorities are investigating possible fraud at General Electric Co.’s former subprime mortgage arm amid increased public pressure to hold Wall Street accountable for its role in the financial crisis.
Mortgage, foreclosure issues top AG’s complaint list for the first time
(Source: Boston.com) Complaints about mortgage, loan modification and foreclosure issues soared in 2011 and were the biggest source of problems for consumers who asked the Massachusetts State Attorney General’s office for help.
COMMENTARY:
Why Falling Home Ownership Is a Good Thing
(Source: The Motley Fool) Commentator Dan Caplinger opines that falling levels of home ownership may not be such a bad thing, since for many, owning a home never made financial sense and avoiding the burden of having so much debt on one’s biggest asset can make financial life a lot easier.
Related articles
CoreScore: A New Credit Report Opens Door For More Profiting Off The Poor
Thanks to a new kind of credit score, more borrowed money may end up in the hands of the increasing number of Americans who are sliding down the economic ladder.
The new CoreScore looks at financial records such as credit card borrowing, bank transactions and mortgage information, much like a traditional FICO credit score. The new rating also examines the kinds of transactions likely to occur at the lower end of the income scale. These include car and rental payments and payday loans. The CoreScore even examines the record for missed child support payments. If something can be financed, it seems, it can be linked to this new credit score.
CoreLogic, a financial data collector, made theCoreScore credit report available to lenders last week. The company said the new score creates an opportunity for borrowers and lenders alike, making credit available to those who have traditionally been shut out. However, consumer advocates are concerned that using a wider range of nontraditional information opens the door to justify even higher rates for down-and-out borrowers.
By including additional information like payday lending, which is notorious for high fees and interest rates, the financial picture of a potential borrower or job applicant is worsened, not improved, say consumer advocates. That could potentially lead to higher rates on everything from car insurance to borrowing.
“The companies don’t care if it’s accurate, or up to date, or what the consequences are,” said Marc Rotenberg, executive director at the Electronic Privacy Information Center, a public interest research center.
CoreLogic collects data from nearly 700 million residential property transactions and 50 million courthouse records. “We have resources in courthouses everyday,” said Debra Rothrock, vice president and product line management for CoreLogic. “Once a doc has been recorded at courthouse, it’s 23 days on average before data is updated in our system.”
From all this information, the company plans to boil down a consumer’s financial life into one number that can be used to supplement a traditional credit score. Rothrock said that the new score will also include the existing FICO score so lenders can see which direction a credit score is trending.
CoreScore supplements traditional credit reports from the three major credit reporting companies, the company said. Lenders of all stripes, including for mortgages, cars and credit cards can buy the new reports, which are scheduled to debut publicly in March. Currently one mortgage lender, which CoreLogic would not name, is using the CoreScore for its credit evaluations and several top lenders, including major banks, are planning to test the score soon, Rothrock said.
At least 100 million Americans will have a new CoreScore report, says CoreLogic, and that includes both people who have traditional credit scores, as well as those who have no prior credit history with TransUnion, Equifax or Experian. At least 200 million people have traditional reports, used to create a FICO score that lenders consult when deciding to approve a loan application or new financial account. Employers even use credit scores to evaluate job applicants.
For Americans who essentially live off the credit grid, either using cash or borrowing through informal channels, the new CoreScore could be a rude awakening. Rothrock did not identify how many of the 100 million people would be newly reported, but for those who have never had a report, the CoreScore may not be any help.
“Putting you in the system is not necessarily a benefit if you’re not going to get affordable credit,” said Chi Chi Wu, an attorney at the National Consumer Law Center, a public interest law group.
These new developments in credit reporting show lenders’ hunger to tap a deeper well of customers, who are outside of the traditional FICO box. “[The Core-Score] increases a lender’s understanding of a borrower’s financial obligations, assets, and history to identify previously hidden lending opportunities,” the company said in an email.
Falling wages, a dismal housing market and high unemployment have sent more Americans to the margins of borrowing in recent years. The problems is especially acute in American suburbs, where poverty is spreading. Meanwhile, alternative consumer financial tools have seen tremendous growth. For example, online payday lenders — high-interest short-term loans accessible only through the Internet — experienced 35 percent growth in revenue in 2010, according to a market report from Core Innovation Capital and Center for Financial Services Innovation, a think tank focused on financial service innovation for consumers who use banks minimally or not at all.
Rothrock said customers can request one free report each year through the company’s toll free number (877-532-8778); they also can dispute inaccuracies. But that raised additional concern from consumer attorney Wu, who said credit report disputes are hard to remedy.
“Your credit report has become your permanent financial record. A bad one is like a scarlet A for your economic life.”
Related articles
Another Small Business Success Story
CIN ALERT
October 27, 2011
For many of us, the idea of starting a small business is a lifetime goal. In fact, the chance to be your own boss by providing a product or service ranks right up there with homeownership as one of the true American dreams. Despite tough economic times, the environment for starting a small business in many parts of the country is better than you might think, particularly in view of the various assistance programs made available for small business owners.
An enterprising business owner can be very successful, but it takes a lot of work. (And usually a lot more time and money than the business plan calls for.) Christy is an individual who knows the score. A Registered Yoga Teacher, she has been helping people achieve healthier lifestyles through massage therapy, group exercise, yoga, and Pilates for over 17 years. However, success had rendered a problem for her: the small storefront she used for years in a downtown Midwest city is just too small for her growing clientele. She faced a daunting task: Find a new location that would be a lot larger — yet also fit into her operating and personal budgets.
Driving to work one day through town, she noticed that ‘for sale’ signs had just been posted in front of a small one-story home nearby. All along Christy had been thinking about finding a larger storefront or office. Suddenly, the idea of conducting her instruction classes in a small home made sense. The next several weeks were consumed with meetings and communications with the local town officials, realtors and the chamber of commerce, to be sure that the zoning was correct and that she could have access to some small business assistance programs.
That was three months ago, and the bottom line today is: Christy has much more room in brand new surroundings, her customer base is growing by the week and it all fits into her budget very nicely. Things are looking up now for her.
All told, there are an estimated 15 to 17 million small businesses operating in America today. Small businesses are still the backbone of our communities – our Main Streets! — and are seen by many as the embodiment of the spirit of entrepreneurship.
Entrepreneurs are credited with creating the vast majority of new jobs and employing the majority of the nation’s workers. Granted, big businesses have emerged in fields where new technologies permitted economies of scale in the production and/or distribution of goods. Still, small businesses have remained vital to the nation’s economic development, and even more important as a component of American culture.
Even as our new 21st Century embraced what many Americans could view as superior efficiency and productivity (for both small and big businesses), Americans continued to revere small business owners like Christy for their self-reliance and independence and can-do spirit.
Small businesses have also been the primary way immigrant families coming to America have climbed the economic ladder and achieved the American dream. Many minority populations today — in urban, rural and suburban communities — have seized the small business pathway as a road to economic independence and building personal wealth.
CIN editors have always recognized the vital role played by small businesses, and we devote a large section of the CIN to them. This resource tool provides basic information – including the pros and the cons of small business ownership – basic start up information – government assistance programs on the Federal and State levels – grassroots programs provided by NCRC members – private sector assistance programs – franchising basics – banking connections assistance – available small business resources and the latest small business news and information. Here are some recent excerpts:
Keeping Your Small Business Ahead of the Curve
(Source: Small Business Trends) Ten key ways to keep a small business profitable and ahead of the competition are provided by Small Business Trends.
Small Business Owners Think Controlling Employee Expenses Will Lead To Cost Savings
(Source: Gaebler) A recent Citizens Financial Group/Mastercard study found 55 percent of small business owners believe better management of employee expenses would reduce costs and benefit their business, while 40 percent said more control over employee spending would give them a better peace of mind.
Wells Fargo Lends More Dollars to America’s Small Businesses Than Any Other Lender
(Source: Market Watch) 2011 US Small Business Administration data shows Wells Fargo & Company is the top lender in dollar volume, approving $1.2 billion in SBA loans to America’s small businesses for the 2011 federal fiscal year.
How Small Business Owners Were Hurt by the Fall in Home Prices
(Source: Forbes) Personal borrowing plays a key role in how many small business people finance their companies. When the housing crisis hit, small business owners that relied on home equity to finance their companies’ operations faced a credit squeeze. Thus, small businesses have access to about $25 billion less in credit than they would have had if the trend in home equity loans had continued in the direction it had been going in the first half of the 2000s.
Coffee Fix: Starbucks Pushes Small Business Loans
(Source: Business Week) New York Times columnist Joe Nocera lauds Starbucks for supporting community development financial institutions, the nonprofit lenders serving small businesses and affordable housing in low-income communities. The coffee chain is donating $5 million and encouraging customers to pitch in at the checkout line as well.
Geithner Defends Performance of Small Business Lending Fund
(Source: Business Week) Treasury Secretary Timothy F. Geithner says that the Small Business Lending Fund had been successful even if it was smaller than envisioned. The program closed Sept. 27, having distributed $4 billion of its $30 billion to 332 community banks nationwide.
Related articles
- PR Tips for Small Business (wordsforhirellc.com)
- Small Business Concepts That Work in Today’s Economy (cash-bandit.com)
Payday Loans: They Just Won’t Go Away
Image via Wikipedia
CIN Alert for October 4, 2011
The Community Investment Network
As the days of a stagnant economy drag on, some people who have run into personal credit issues — such as bankruptcy — are turning to payday lenders to solve an immediate financial need. That can be a slippery slope for many individuals. Granted, payday loans can help certain consumers with their short term cash flow problems. However, they can also lead them into an uncontrollable spiral of debt.
Payday loans are not legal everywhere. Many states — including New York, Connecticut, New Jersey, Maryland, and Massachusetts — have outlawed the practice. Even the states where they are permitted have adopted some laws to protect unsuspecting consumers, such as capping the amount of interest a lender can charge. The Federal government has also enacted laws to protect consumers from abusive lenders during attempts at collection.
Nevertheless, payday lenders are an ingenious group and they have developed ways around the law to take advantage of an unsuspecting consumer. For example, payday lenders have been known to capitalize on consumer ignorance by offering loans that are illegal in their state, or may contain onerous payback terms that require the consumer to keep rolling over their loans just to make ends meet.
Another frequent pitfall: high interest rates. Most payday lenders charge as much as they can according to state law. This means an individual could end up paying more in interest than in principal. That’s precisely how many people end up in serious financial difficulty. Payday lenders are also known to charge very high fees and assess outrageous penalty charges if the consumer gets behind on their payments. Unfortunately for many borrowers there are no state or federal regulations which limit the amount of these types of fees or charges.
The danger in payday loans has been recognized by personal finance experts for some time, and good faith efforts have been made to address the dangers. However, a lack of financial literacy among the public combined with the continued economic recession has resulted in a bumper crop of companies lining up to offer payday loans to the unsuspecting.
Here at CIN, we believe it is important to provide timely information about payday loans. CIN maintains a complete section with relevant information on all types of financial issues, good and negative, in our: Financial Literacy content section. Here you will find information of value to consumers and lenders; everyone interested in advancing personal financial literacy. Bankers and lenders, community advocates, civil rights leaders, educators, academics, and consumers, many of which already offer a menu of financial literacy programs and initiatives for consumers.
A wide range of financial literacy tools and resources is readily available to help individuals and families deal with their financial needs and concerns. CIN places all these tools ‘under one roof’ so our readers will be fully educated. We also include related news and commentary, updated daily. Here are some recent excerpts:
Law quashes local payday lenders
(Source: The Columbian) Payday lending offices in Clark County, Washington, have decreased since the state enacted a law curbing predatory lending, which a new report says has saved millions of dollars for Washington state residents. The law went into effect Jan. 1, 2010. It offers access to a strong repayment plan and an eight-loan limit that is only available in Washington.
Payday loans a debt trap for welfare recipients
(Source: Health Canal.com) Research shows welfare recipients are using payday lenders to meet regular living expenses and are then trapped in a debt spiral, continuously indebted to one or more loan companies for considerable periods.
Ark. AG files lawsuit against payday lender
(Source: Business Week) Arkansas Attorney General Dustin McDaniel is suing an online payday lending company that he says is breaking the law by charging customers 681 % annual interest rates.
Birmingham City Council delays vote on banning payday loan stores
(Source: Alabama’s 13.com) The Birmingham City Council has considered putting a moratorium on Payday lenders in the city, but delayed the matter as some council members were concerned it might be legally challenged or have unintended consequences.
FTC Action Halts Allegedly Illegal Tactics of Payday Lending Operation That Attempted to Garnish Consumers’ Paychecks
(Source: Federal Trade Commission)After the Federal Trade Commission filed an action in U.S. district court, a South Dakota payday lender that allegedly attempted to illegally garnish consumers’ wages has agreed to stop the challenged conduct pending trial.
Related articles
- Payday Lenders ‘Using Tribes as Fronts’ (indiancountrytodaymedianetwork.com)
- Have you taken out a payday loan? (blogs.confused.com)
- The Center for Public Integrity: In trouble from an online payday loan? You might not have to repay it (huffingtonpost.com)
- Payday Loan Business Booming in Wyoming, Payday Loan Trust Concurs (prweb.com)
- CFSA Payday Lenders Respond to WSJ, Forbid Tribal Partnerships (indiancountrytodaymedianetwork.com)
- Payday Lenders Question The Implications of House Bill 1351 in Colorado, Reports About Payday Loan (prweb.com)
- Low-income borrowers get options beyond payday loans (abcnews.go.com)
- Payday lenders prey on the poor, costing Americans billions. Will Washington act? (csmonitor.com)
- How “payday” lenders pull off crippling rates (cbsnews.com)
- SEC charges Wash. payday lender over “massive Ponzi scheme” (bizjournals.com)
Truth and Nonsense About Mortgage Lending, the Housing Collapse and Homeownership
Preeti Vissa
Community Reinvestment Director,
The Greenlining Institute
Posted: 9/28/11 06:19 PM ET
There may be no subject that has generated more nonsense from politicians and pundits than the subprime mortgage crisis and housing market collapse. Recently, a new book landed on my desk that cuts through the bull and obliterates a pile of widely-propagated falsehoods.
It’s an article of faith among many on the political right that the cause of the meltdown was pressure from the government — mostly through the Community Reinvestment Act. For example, as the crisis was exploding in the fall of 2008, Boston Globe columnist Jeff Jacoby wrote:
The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to ‘meet the credit needs’ of ‘low-income, minority, and distressed neighborhoods.’ Lenders responded by loosening their underwriting standards and making increasingly shoddy loans.
Around the same time, Fox News host Neil Cavuto put it bluntly: “Loaning to minorities and risky folks is a disaster.” Similar views were and continue to be repeated in an almost relentless drumbeat from the likes of Rush Limbaugh, Sean Hannity, and the editors of Investor’s Business Daily, quoted on the House floor by Rep. Michelle Bachmann (R-Minn.)
Yeah, if we’d only watched out for those “minorities and risky folks,” the subprime collapse would never have happened and the economy would still be humming along. It’s a neat, easy answer. One problem, as the new book, Regaining the Dream, demonstrates: It’s not true.
Written by a trio of researchers from the University of North Carolina-Chapel Hill, Regaining the Dream focuses on a study of a North Carolina-based project known as the Community Advantage Program (CAP), aimed at promoting sustainable lending to low and moderate-income communities. It contrasts such responsible efforts (often promoted by the Community Reinvestment Act) with the irresponsible and often predatory lending practices that marked the subprime bubble. I’ll let the researchers speak for themselves:
The issue, center researchers discovered, is not whether low-income, low-resource individuals pose a greater risk than those with higher incomes. It is that the nature of the mortgage they receive can either amplify or mitigate that risk.
CAP worked with a group of borrowers who would normally be rejected for conventional, 30-year, fixed-rate mortgages. They had a median household income of $30,792 and 44 percent had credit scores of 660 or lower. Nearly 70 percent of CAP borrowers made less than a 5 percent down payment. Overall, 90 percent failed to meet at least one of the traditional lending criteria. Trouble waiting to happen, right?
Wrong. “Most of the households never missed a payment,” the researchers write. Some did have trouble, but the overall delinquency rate was almost as low as for prime fixed-rate loans, much better than the delinquency rate for prime adjustable-rate loans and one-fifth that of subprime adjustable-rate loans.
The CAP mortgages were carefully underwritten, fixed-rate loans without tricks or surprises. Borrowers were given counseling both to prepare them for homeownership and after purchase. It worked, providing sustainable homeownership for 46,000 families who have already built significant equity.
The subprime loans that blew up were marketed to similar customers, but they were dramatically different products. Often written with no documentation of income or assets, they had features like low teaser rates with payments that skyrocketed a few years later, negative amortization (meaning that the low early payments actually caused the loan principal and total debt to increase), high upfront fees and prepayment penalties. They were, in short, designed to suck money out of borrowers’ wallets without allowing them to build equity in their property. They made sense only if you believed that home values would rise rapidly and endlessly, making it irrelevant (from the lender’s viewpoint) whether the loan got paid off or not.
We all know how that turned out.
Simply put, the problem is not and never was “lending to minorities and risky folks.” It’s irresponsible and predatory lending practices that were allowed to run rampant.
This isn’t just about the past. The mythology about low-income home buyers is contributing to a profound reduction in access to mortgage loans, even for trustworthy borrowers. Banks have cut back, and a proposed federal rule could require securitized loans to have a 20 percent down payment — far more than is truly necessary to ensure responsible borrowing, as the CAP example shows. In a report released in July, Morgan Stanley argued that we may be heading toward a “rentership society,” in part because “The lack of mortgage credit availability due to tightened lending standards and lower consumer qualifications is severely hindering homebuying.”
Attacks on lending to low and moderate income buyers have gone far beyond what’s needed to avoid the excesses of a few years ago and create a stable system. This overreaction threatens to close the door to homeownership for millions of hard-working, responsible families.
There’s much more in Regaining the Dream that’s worth talking about. Next time, I’ll discuss another startling revelation in the book — a bit of disturbing history that explains why some communities have been at such a disadvantage in terms of homeownership, and how government policy put them in that position.
Follow Preeti Vissa on Twitter: www.twitter.com/Greenlining
Building Community, One Household at a Time 