In 1998, Self-Help, the Durham community development organization, proposed an ambitious plan to demonstrate to the financial world that making home loans to low-income and minority borrowers could be profitable for lenders.
Self-Help asked the Ford Foundation for a $50 million grant that would allow it to purchase such loans, which carry more risk because the borrowers have poorer credit and fewer assets.
The loans would then be sold to Fannie Mae, the government-sponsored entity, with Self-Help retaining the risk on the loans should they fail.
Between 1998 and 2009, the program purchased more than 46,000 such loans. The performance of those loans over the years has been tracked closely by UNC-Chapel Hill's Center for Community Capital.
In a new book, "Regaining the Dream," three employees of the center - Roberto Quercia, Allison Freeman and Janneke Ratcliffe - write about what they learned from the information they've collected over the years. The loans purchased by the program have performed much better than the subprime loans that have been at the heart of the country's financial woes.
Quercia, 58, the director of the Center for Community Capital, recently spoke with staff writer David Bracken about the book and the future of homeownership in the United States.
Here are some excerpts:
On what the performance of the Self-Help loans says about the mortgage market
Our evidence suggests that if you do the lending right, it's more likely to be sustainable than if you don't. The mortgage someone gets can amplify or minimize whatever risks that particular borrower may have.
On the keys to making a sound mortgage
To us it's not rocket science. The first one is a sound mortgage product. We are a firm believer in fixed-rate mortgages. The second is the writing and servicing. We find in our research that what the lender does at the origination and after origination makes a difference - issues such as documented income, reasonable fees upfront, proper underwriting, the appropriate incentives for everyone involved in the transaction are all important. And then, after the loan is originated, we find that proactive servicing makes a difference. Lenders have learned this, I think, the hard way over the last few years. If you contact a borrower who is one week late with the check to find out what happened you're more likely to have the borrower catch up with payments.
On the importance of the down payment in making a sound mortgage
Evidence suggests that even borrowers who have a fraction of the 20 percent down payment have continued to be responsible borrowers. So there is something beyond the down payment that makes for a good or a bad loan, so it seems. If a low income or working family wants to buy a house, for them maybe $5,000 will be a lot of skin in the game. So there is something beyond the percentage that makes people work two jobs and do the utmost to stay afloat and pay the mortgage. Yes, we know from research for a decade that the size of the down payment makes a difference. But we also know from research, including our own, that there are other things beyond the down payment that are important - and some cases more important. I'm not saying the down payment is not important. It's just not the only thing.
On who should and should not be homeowners
There are some people that are not ready to buy a house and other people are never going to be ready to buy a house. And some people really don't want to buy a house. One of the things we feel very strongly about is the statement that we don't think homeownership is for everybody. But there's a very big jump from making that statement to restricting credit in a way that is not only bad for consumers but bad for business. We know how to do this kind of lending. We've been doing this for decades.
On what a reformed mortgage market in the U.S. should look like
The one thing I would say is not to generalize at a time of crisis. At the moment, markets are nonfunctioning. The fact that nine out of 10 mortgages go through the government - Fannie, Freddie, FHA - suggests to me that the market is not working or it is not working the way it should work. Trying to generalize from what is happening at the moment to what the future is going to be like is dangerous. ... I think the basic role government has is to provide basic ground rules. The private sector should do what the private sector does: innovation and looking for markets. I think there was a role for government before the crisis for decades. But we always had a favorable policy with regard to homeownership, so I assume that will continue.
On why promoting homeownership remains important
The reality is that the tax code, the whole economy is geared toward owning. But probably the simplest answer for why promote homeownership is that it is part of the American dream, and I know that may sound cliché to many people. It's part of who we are as a nation. There's no reason to drop that as part of our character. I think we need to do it responsibly and to do it sustainably. The little I know about development and economies in other countries is what makes for a stable democracy are strong middle classes, and those typically are based on homeownership. So the implications are huge. The concern I have is throwing the baby out with the bathwater.
