How Fannie Mae is Abandoning African-American Borrowers in Cleveland
Even as President Obama works to help under-water home owners refinance their mortgages, Fannie Mae and Freddie Mac are pursuing loan policies that divide access to credit by lines of wealth.
In Cleveland, Ohio, that divide quickly becomes one of race.
Many people are “under water” in Cleveland. Yet there are still people getting refinance loans. Indeed, the FFIEC says that there were almost 25,000 conventional refinance loans made to Cleveland households. However, only 1.8 percent of those loans went to African-American borrowers. As recently as 2007, about 12,000 white households refinanced with a conventional loan. In 2010, when the news describes tight underwriting, more than 21,000 white households refinanced in Cleveland. The dynamic was just the opposite in black Cleveland. Conventional refinancing is down to one-quarter of its level from 2007.
How Does this Happen?
These days, banks are making loans, but with a caveat: they want to sell the loan as soon as possible. If the loan does not fit with the conforming standards of the GSEs (Fannie and Freddie) then the proposition becomes daunting. Banks lose their interest if they have to hold a mortgage loan for 30 years. No one really wants to lend money for 30 years at 4.125 percent. The risks far outweigh any benefits.
Fannie and Freddie buy most conventional MBS right now because they are the only entities interested in the low-reward high-risk mortgage-backed security. We owe any loan activity to their efforts. At the same time, the GSEs are for more picky than they were four years ago. Through a somewhat obscure instruction to the banks that deliver loans to the GSEs, Fannie and Freddie have redefined the extent of their duty to serve. They are cutting back on all kinds of borrowers and on all kinds of sectors with the mortgage loan market. There are many fingers, but the big one is their new expectation for higher loan-to-value ratios.
The view from the RTA coming into downtown Cleveland, Ohio.
A loan-to-value ratio is a number that characterizes the principal loan balance against the appraised value of a home. Instead of being expressed as a percentage, people usually refer to it as an integer. An LTV of sixty, for instance, means that the amount of the loan is 60/100ths of the appraised value of a house.
The GSEs make it more expensive when an LTV exceeds 85. When an LTV goes past 95, they lose interest entirely. People that cannot get loans often have lower credit scores. But more often than not, the key reason why people get turned down is because of LTV. Banks do not want to hold a loan. When the GSEs say that they will not buy a loan with an LTV above 85 or 90, then banks walk away from borrowers.
The rubber hits the road when people try to refinance. Many people still have a big mortgage out on a house with a much lower value. Interest rates are very low right now, so refinancing is an attractive prospect. For some people, it is a chance to save a bit on their monthly payment. For other people, refinancing could be the one thing that keeps them in their homes.
This should explain why it is so hard to get a loan in places like Cleveland, Detroit, or Las Vegas. These cities have witnessed substantial declines in property values.
Obama spent this week pushing a new plan to help more borrowers refinance their under-water home mortgage loans. It is estimated that one million households will be freed up by his new idea. However, there is still a long way to go. There are 14 million under-water mortgage loans in the United States right now.
John Galt
October 28, 2011
Really? Are you serious? The one thing your can point to in all of this housing mess is that the housing bubble was created entirely by Freddie and Fannie when they began lowering the standards. (thank you Barney Frank) Had they kept the higher underwriting standards, there would have been a market correction instead of a market crash. Not everybody deserves or can handle a home mortgage. If statistics show that there is a stonger impact within certain parts of our society, that doesn’t mean that there is some underlying racism going on. It does, however, stand as a wake-up call to the ‘leaders’ of the folks who find themselves lacking. Those leaders should be encouraging and educating their followers to pull themselves up. They should not be pressuring politicians to lower standards to even up the columns on the chart.
Adam Rust
October 31, 2011
John -
I have no disagreement with the notion that the “leaders” of this community should be involved in addressing why there is a lack of access to credit for their constituency.
The key thing in my mind with the situation in Cleveland is that part of it is driven by factors that should not prevent a borrower from getting a loan. The current GSE policies emphasize loan-to-value. Lower wealth borrowers are largely excluded from conventional loans. It is worth acknowledging that because it differs from the notion that borrowers get turned down because they have bad credit. Fannie will not buy a loan, even if you have 780 credit, if the loan to value is above 85. So, even if you have paid all of your bills, you won’t be able to get a mortgage. Moreover, if you happen to live in a place like Cleveland, where housing prices have dropped significantly, it will be that much harder to ever drop your loan-to-value.
People should engage in a discussion when these kind of numbers are out there.
John Galt
November 1, 2011
Adam,
There are two major flaws in your response. First, there is not a lack of access to credit. All banks and financial institutions are sitting on piles of money they’d love to loan out. There is, however, a stark lack of qualified borrowers. Prudent lenders have always insisted that the borrower have equity. If the borrower has no skin in the game it exponentially increases the risk of credit loss to the bank. Otherwise, if someone cannot save enough to have a down payment, how can they argue that they have the resources and ability to manage a mortgage? Your second incorrect premise is that someone with a 780 credit score deserves a home loan. (backed by and insured by the taxpayers of the country) I can pay my light bill and cell bill and my Sears credit card like clockwork. But if I don’t have the income to service a mortgage or cannot carry enough savings to handle those unexpected expenses that come with owning a home, I don’t deserve a home mortgage.
The other item that is adversely impacting many would-be borrowers is the regulatory over-reach that is taking place in this country. Many banks are fearful of making any loans that aren’t picture perfect. In the last couple of years, activist regulators have brutally punished banks for taking a chance on marginal loan applicants. Unless and until that environment changes, loan applications will be looked at under a microscope in an effort to predict what level of ire the transaction could earn from examiners.
-JG
Adam Rust
November 1, 2011
John –
Well, we can find common ground on your comment about the decision by regulators to pull back on availability of capital. I think people need to understand that the tightness in credit markets is less about the banks and more about regulators. People tend to give banks more credit than they deserve. When it comes to mortgage lending, most banks are merely sales agents for the GSEs.