A new report from the Center for Responsible Lending (CRL) asserts that while changing reforms have mitigated the impact of pre-crisis lending behaviors, the mortgage industry still has a long way to go before it's completely out of the woods.
The report, titled _The State of Lending in America and its Impact on U.S. Households_, is the first in a series of three documents created to examine how the common working family is coping with debt and stagnant incomes. The report covers major CRL findings and incorporates research from the Federal Reserve, the Pew Research Center, and the Consumer Financial Protection Bureau (CFPB).
The report suggests that although there are numerous financial risks associated with purchasing a home, homeownership is still one of the safest, most accessible ways to build wealth in the United States. The equity acquired through long-term homeownership is often used to pay for retirement, unemployment, college, and healthcare--all categories that receive relatively little subsidization from the government--making ""the American dream"" all the more important for families.
However, poor consumer protection and predatory lending practices have made the achievement of that dream a problem for many households. According to CRL, the ""spillover"" cost of foreclosures brought on by the financial crisis has wiped out nearly $2 trillion in family wealth, turning back the clock on previous equity gains. That damage has yet to be addressed, the report says.
CRL also points to evidence of discrimination in predatory lending. In general, non-white borrowers between 2004-2008 were much more likely to see risky features in their loans, including prepayment penalties and higher rates. For example, African-American borrowers were 2.8 times as likely to receive a high interest rate, while Latino borrowers were 2.3 times as likely to receive a loan with a prepayment penalty. The result, the report says, is the ""largest documented wealth gap ever between white households and families of color.""
Adding to the problem is the fact that the current marketplace is leaning toward a dual mortgage market ""where only the highest-wealth borrowers with near-perfect credit can gain access to the conventional market, while lower-income and minority borrowers who can be successful home owners are relegated to more expensive FHA loans, or find credit largely unavailable.""
With that risk in mind, CRL makes three recommendations going forward. First, ""[p]olicymakers should not weaken or undermine the mortgage reforms established in the Wall Street Reform and Consumer Protection Act, because this could result in future abusive lending and the possibility of a new foreclosure crisis.""
Second, servicers and policymakers should promote reasonable foreclosure alternatives, including providing full and fair consideration to loan modifications.
Finally, mortgage finance reform needs to keep a balance between borrower protections and broad market access.
In the report's foreword, Systemic Risk Council chair Sheila Bair emphasizes the importance of these reforms and warns of the fallout that may occur if CRL's recommendations go unheeded:
""If abusive lending practices are not reformed, we again will all pay dearly,"" Bair writes. ""Abusive practices not only harm the family that loses its home to an unaffordable mortgage ├â┬ó├óÔÇÜ┬¼├é┬ª they also profoundly harm neighborhoods, communities, and cities, and hold back our entire economy.""