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April 06, 2007
Promoting Homeownership--Wisely, for a Change
I don't always agree with Scott Syphax, the CEO of non-profit Nehemiah Corp., but I think he has a fair point this time.
Syphax strongly believes that homeownership is a good way for lower-income families to lift themselves up into the middle class. He's appalled by what he sees as an unjustified backlash against it. Instead of trying to correct the obvious problems with the subprime mortgage mess, he says, pundits are concluding that people with low incomes, minimal savings, and patchy credit histories simply shouldn't be allowed to own homes. That, says Syphax, is going too far. Here's what he said in an interview with me yesterday:
"I am extremely disturbed and concerned about the tenor of the reporting that is going on with regards to the housing market, especially subprime. There is almost a rush to judgment: 'Oh, wow, we??e made a mistake! We need to save them from themselves by essentially closing the doors of access and decreasing innovation in the marketplace!'"
Syphax says that instead of shutting down the subprime market altogether, society should try to fix it. He said there's good evidence that even seemingly marginal borrowers can succeed in homeownership as long as they get lots of consumer education and counseling. It also helps, he says, if they carry insurance that will cover their mortgage payments for awhile--say, a year--if they suffer a major setback such as a serious illness.
Trouble is, Syphax says, all those things cost money. Borrowers don't want to pay for it. And neither do lenders, because it wipes out their narrow profit margins. (He knows, because Nehemiah tried offering insurance and didn't get many takers.)
One solution, he says, would be a government mandate of education, counseling, and payment insurance for every subprime loan. But he would prefer a more free-market approach involving the rating agencies such as Standard & Poor's (a sister of BusinessWeek in The McGraw-Hill Companies Inc.). He says the agencies should give a higher credit rating for pools of mortgages whose borrowers have gotten education, counseling, and insurance, because they're less likely to suffer defaults. That higher rating would translate back into a lower cost of funds for the lenders, covering the extra expense of the interventions.
Interesting idea, huh? I think so. Now, as I mentioned at the start, I don't particularly like the business Nehemiah is in. The company arranges for the seller of a house to make a gift of the downpayment to the borrower. The seller usually turns around and raises the price of the house by the amount of the gift. I think this is just a way to circumvent downpayments--and it probably helped inflate the housing bubble and exacerbate the foreclosure problem. Not surprisingly, Syphax sees things differently. But that disagreement aside, I think his idea of finding a way to prevent disclosure short of shutting down subprime altogether makes a lot of sense.
By the way, if you want to know more about programs aimed at preventing foreclosure, read this article published this past December by the Federal Reserve Bank of San Francisco.
The American Dream
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The real problem with the housing market is the high-prices of these condos and homes. It's outrageous. The subprime market was caught up in the craze mentality, the home buyers were caught up in the crazy mania mentality. Everyone saw housing prices climb to astronomical values, most of it was overpriced and inflated because assessors practically had a gun to their heads, and mortgage brokers & real estate agents could get a better commission. That was the problem. In my neighborhood in Chicago, a 1-bedroom condo is selling for $255,000. That is totally outrageous, totally! and it's just a plain old neighborhood, not the Gold Coast. That's what the problem is. The cost of owning a home is totally out of reach and people feel frustrated that they cannot buy a house or condo.
I couldn't be happier that the market is settling down and houses are sitting on the market, but you know what? the sellers STILL want the highest prices and the assessors are still being threatened to keep their values high.
Posted by: Sally at April 9, 2007 07:12 AM
if you stop trying to seed lettuce in the moon you can develope homeless projects..call me..sincerely.
Posted by: francisco garrido-lecca at April 9, 2007 11:38 AM
Syphax is on to something here. People are trying to shut down subprime and that is not a good thing. I'm a mortgage lender in Arizona and my experience has been that a lot of times people in the subprime have fallen into hard times for one reason or another or they just have low income. However, most of the time 90% of them are decent, hard-working people who want to build a better life for themselves and are in need of a second chance. Subprime for these folks is oftentimes the only way out. Now if we can just fix these low documentation loans at ridiculous LTV's then we'd eliminate a lot of the problems in the subprime world.
Thanks for your post.
Arizona Mortgage Guru
Posted by: Shailesh Ghimire at April 9, 2007 05:45 PM