wlm4 at cornell.edu (Will
01-01-1995, 02:39 AM
WHAT ARE THE FEATURES OF THE SECONDARY MORTGAGE MARKET THAT CAUSE
DISCRIMINATION?
What are the underwriting standards of the secondary market that turn away
low income and minority borrowers that are not risk related?
- Over reliance on credit history. Historically, the secondary market
would not look at applicants without conventional credit history. We feel
this is unfair. If you can't get credit without credit, it is impossible to
improve a situation. Applicants with NO or short credit history are at a
disadvantage. Financially conservative members are penalized. For
applicants without conventional credit history, we verify rent payments,
utility payments and any other bills that have been paid that are not
reported to the credit bureau. We come across renters who have been paying
a landlord for 20 years. Why can't they pay a mortgage rather than rent?
Only recently are underwriting standards beginning to recognize rent
payments, utility payments and other ongoing obligations as a credit record.
Last year we received an update saying Freddie Mac has relaxed some of its
rules and will now use rent and utilities as credit history. This change
was made because the old way was proven to discriminate against the poor and
minorities.
- Over reliance on Private Mortgage Insurance (PMI) underwriters, which add
another layer to qualification and review. PMI firms are not answerable to
anyone. They aren't required to file CRA reports, no one asks them about
redlining.
- Lack of available options for escrows of repair costs for damaged
properties. Often, a low income person is likely to find a house that is
well priced because it needs repair work. This type of house does not
qualify for secondary market loans until repair work is completed. The
secondary market will not escrow repairs anymore, except for outdoor repairs
that cannot be done because of the time of year (even this is very difficult
to get approved). When the market did allow repair escrows, the borrower
had to put 1.5 times the cost of the repair in the escrow account and sign
an agreement that the work would be completed by a certain date. How can a
borrower come up with 50% more than the expected repair costs AND make the
loan repayment schedule? We have never had any problems with escrowed
repairs. If a deadline is not met, we give the borrower a reasonable,
agreeable period of time to complete the repairs. We were surprised when
the secondary market stopped escrowing repairs. With the repair money held
by us, we could always hire a contractor to complete the work if necessary.
We also believe in keeping our existing housing stock alive and recycling,
repairing, renovating. Because of this, we have continued to work with
properties that may be in need of repairs.
- Preference of high cost properties. Our average loan is less than
$50,000, our maximum $130,000. VA loan average $132,000. The bottom
minimum secondary is $30,000, but any loan below $40,000 is charged an
additional fee.
- Lack of appreciation for non-nuclear family units and the changing
financial patterns they imply. Today, the number of single parent
households equals nuclear families in this country. These families are not
encompassed by the qualifying ratios. Their financial profile does not fit
into the secondary market mold.
- Lifestyle style assumptions are built into forms. We've seen extended
families, especially in immigrants from SE Asia - father, mother, kids,
grandparents all in one house. With a low paying job these people have
managed to save substantial down payments. The qualifying analysis says it
can't be done. We've also seen the market deny recognition to same sex
couples. Really, is this any business of a mortgage lender?
- Building style assumptions built into appraisals. We had a member who
built a home that included a very effective solar heat storage system in a
concrete floor. The secondary market considers a concrete floor unfinished.
They would have required that our member cover the floor with permanent
carpet or tile flooring. This would have eliminated the solar energy heat
gain. We fought this with the underwriters and they finally bought the
loan. The secondary market has not kept up with non-traditional (solar,
wood) heating sources, super- insulation and other leading edge building
techniques.
- Poor treatment of self employed The secondary market has a hard time
dealing with anyone who doesn't get the same paycheck each week. We also
see different financial profiles in the self employed: for example,
carpenters will not incur home repair expenses, caterers have diminished
food expenses. Here is a perfect place to recognize the economic value of
being a part of a community.
We had a Doctor 2 years in business turned down for a mortgage. The
underwriters pointed that out that in his first partial year - 3 months - of
business he showed a loss. They second year was profitable, but that wasn't
enough. The secondary market was willing to let this physician leave the
neighborhood.
- Down Payment. Down payments are intended to show borrower commitment to
sharing the risk of owning a house. For a low income borrower, the risk is
clear enough: this may be their only chance to escape poverty. The
secondary market looks at gifts with a jaundiced eye. We've seen gifts by
distant relatives or by same sex partners require extra documentation.
- Frequent job changes are looked at as a sign of instability. Some
professions: stock broker, school principal, often have a pattern of
frequent and positive job changing.
- Unequal treatment of immigrants. We did a mortgage for a Cornell
professor 2 1/2 years ago. He had not received his permanent green card so
at that time the secondary market would not approve his loan. He provided
all of the paper work to show us that he expected his green card within a
couple of months. The secondary market can't deal with this type of
uncertainty. We try to separate uncertainty from risk.
- Rural properties. The secondary market was built with suburbia. The
market is concerned about acreage and "unimproved" land. There is no
consideration for the value of home grown food, home grown energy (wood).
- Urban properties. The market treats coops, condos and other urban
ownership structures as special cases. In order to finance urban
properties, a developer must subdivide (and take out profit) before renters
can become owners.
- Home buyer training, counseling, home buyer clubs. An unchallenged
assumption in the home financing market is that it is not up to lenders to
educate borrowers. Borrowers who have families who rented need training.
The mutual support group Home Buyers Clubs have been very successful at
setting goals and getting community renters into their own houses. Credit
Unions can sponsor these clubs and reward graduates with mortgages.
- Debt ratios. Debt ratios are constructed around middle class budgets. A
low income family may, year after year, spend 60% of family income on
housing. They have learned to make ends meet. Why shouldn't their
frugality be taken into account when they apply for a mortgage? Our most
dramatic examples of non- standard debt ratios come from recent Asian
immigrants. Living in extended families and employed in maintenance service
and food handling, they have very low incomes, but very high savings rates.
These are the problems that our Credit Union has identified through
experience. A look at the results of reliance on national standards is
extremely discouraging. Redlining, lack of community service,
discrimination fit nicely into the secondary market concept. In short the
secondary market has a big problem with diversity.
Last year the Federal Reserve Board released a report stating that in 1990
Black and Hispanic-Americans were denied mortgages at much greater rates
than were white and Asian-Americans of similar incomes. The report
criticized the underwriting standards of Freddie Mac and Fannie Mae as being
"minority unfriendly". The markets came under criticism from affordable
housing groups for bias against low-income household income and savings
patterns and inadvertent mortgage loan discrimination.
What is the cost of being a minority when you're looking to own a house in
America? On the secondary market, according to FNMA, Blacks earning over
$42,000 are rejected at similar rates to whites earning less than $28,000.
This is an interesting statistic - a black family gets about as much credit
as a white family earning $14,000 less.
We have seen the secondary market exclude minorities, non traditional
families, Gays, Extended families, Foreigners, alternative energy designs,
homes in need of repairs, self employed business people. Can we in good
faith endorse these standards as our own?
If NCUA said we had to apply GMAC standards to all our Car loans there would
be revolution - and yet NCUA is saying much the same thing about mortgages.
The problem with this type of normative analysis is that it doesn't say what
is safe and sound, it says what is common practice, what is average, what is
conservative. It asks Credit Unions to play follow the leader, be average.
It is a kind of group think that may lead to safe management OR, just as
easily to lemming-like mutual destruction. It may be instructive to note
that from 1986-1990, a S&L with negative capital and losses could still look
better than its peers. A CAMEL 1 S&L, would have been perched on the edge
on insolvency.
The reliance on bank standards for underwriting strikes at the heart of the
CDFI mission. We agree that one should not willy nilly loosen underwriting
standards and expect no outfall. Business are problem solving institutions
and Credit unions are no exception. One would expect a Credit Union to:
- Know its community and judge it more accurately than a national standard
allows.
- Look at each loan individually.
- Separate cosmetic flaws from substantial problems.
- Separate technical flaws from substantial problems.
- Balance true credit flaws with compensating factors.
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********
This post transferred from the cdb-l mailing list
DISCRIMINATION?
What are the underwriting standards of the secondary market that turn away
low income and minority borrowers that are not risk related?
- Over reliance on credit history. Historically, the secondary market
would not look at applicants without conventional credit history. We feel
this is unfair. If you can't get credit without credit, it is impossible to
improve a situation. Applicants with NO or short credit history are at a
disadvantage. Financially conservative members are penalized. For
applicants without conventional credit history, we verify rent payments,
utility payments and any other bills that have been paid that are not
reported to the credit bureau. We come across renters who have been paying
a landlord for 20 years. Why can't they pay a mortgage rather than rent?
Only recently are underwriting standards beginning to recognize rent
payments, utility payments and other ongoing obligations as a credit record.
Last year we received an update saying Freddie Mac has relaxed some of its
rules and will now use rent and utilities as credit history. This change
was made because the old way was proven to discriminate against the poor and
minorities.
- Over reliance on Private Mortgage Insurance (PMI) underwriters, which add
another layer to qualification and review. PMI firms are not answerable to
anyone. They aren't required to file CRA reports, no one asks them about
redlining.
- Lack of available options for escrows of repair costs for damaged
properties. Often, a low income person is likely to find a house that is
well priced because it needs repair work. This type of house does not
qualify for secondary market loans until repair work is completed. The
secondary market will not escrow repairs anymore, except for outdoor repairs
that cannot be done because of the time of year (even this is very difficult
to get approved). When the market did allow repair escrows, the borrower
had to put 1.5 times the cost of the repair in the escrow account and sign
an agreement that the work would be completed by a certain date. How can a
borrower come up with 50% more than the expected repair costs AND make the
loan repayment schedule? We have never had any problems with escrowed
repairs. If a deadline is not met, we give the borrower a reasonable,
agreeable period of time to complete the repairs. We were surprised when
the secondary market stopped escrowing repairs. With the repair money held
by us, we could always hire a contractor to complete the work if necessary.
We also believe in keeping our existing housing stock alive and recycling,
repairing, renovating. Because of this, we have continued to work with
properties that may be in need of repairs.
- Preference of high cost properties. Our average loan is less than
$50,000, our maximum $130,000. VA loan average $132,000. The bottom
minimum secondary is $30,000, but any loan below $40,000 is charged an
additional fee.
- Lack of appreciation for non-nuclear family units and the changing
financial patterns they imply. Today, the number of single parent
households equals nuclear families in this country. These families are not
encompassed by the qualifying ratios. Their financial profile does not fit
into the secondary market mold.
- Lifestyle style assumptions are built into forms. We've seen extended
families, especially in immigrants from SE Asia - father, mother, kids,
grandparents all in one house. With a low paying job these people have
managed to save substantial down payments. The qualifying analysis says it
can't be done. We've also seen the market deny recognition to same sex
couples. Really, is this any business of a mortgage lender?
- Building style assumptions built into appraisals. We had a member who
built a home that included a very effective solar heat storage system in a
concrete floor. The secondary market considers a concrete floor unfinished.
They would have required that our member cover the floor with permanent
carpet or tile flooring. This would have eliminated the solar energy heat
gain. We fought this with the underwriters and they finally bought the
loan. The secondary market has not kept up with non-traditional (solar,
wood) heating sources, super- insulation and other leading edge building
techniques.
- Poor treatment of self employed The secondary market has a hard time
dealing with anyone who doesn't get the same paycheck each week. We also
see different financial profiles in the self employed: for example,
carpenters will not incur home repair expenses, caterers have diminished
food expenses. Here is a perfect place to recognize the economic value of
being a part of a community.
We had a Doctor 2 years in business turned down for a mortgage. The
underwriters pointed that out that in his first partial year - 3 months - of
business he showed a loss. They second year was profitable, but that wasn't
enough. The secondary market was willing to let this physician leave the
neighborhood.
- Down Payment. Down payments are intended to show borrower commitment to
sharing the risk of owning a house. For a low income borrower, the risk is
clear enough: this may be their only chance to escape poverty. The
secondary market looks at gifts with a jaundiced eye. We've seen gifts by
distant relatives or by same sex partners require extra documentation.
- Frequent job changes are looked at as a sign of instability. Some
professions: stock broker, school principal, often have a pattern of
frequent and positive job changing.
- Unequal treatment of immigrants. We did a mortgage for a Cornell
professor 2 1/2 years ago. He had not received his permanent green card so
at that time the secondary market would not approve his loan. He provided
all of the paper work to show us that he expected his green card within a
couple of months. The secondary market can't deal with this type of
uncertainty. We try to separate uncertainty from risk.
- Rural properties. The secondary market was built with suburbia. The
market is concerned about acreage and "unimproved" land. There is no
consideration for the value of home grown food, home grown energy (wood).
- Urban properties. The market treats coops, condos and other urban
ownership structures as special cases. In order to finance urban
properties, a developer must subdivide (and take out profit) before renters
can become owners.
- Home buyer training, counseling, home buyer clubs. An unchallenged
assumption in the home financing market is that it is not up to lenders to
educate borrowers. Borrowers who have families who rented need training.
The mutual support group Home Buyers Clubs have been very successful at
setting goals and getting community renters into their own houses. Credit
Unions can sponsor these clubs and reward graduates with mortgages.
- Debt ratios. Debt ratios are constructed around middle class budgets. A
low income family may, year after year, spend 60% of family income on
housing. They have learned to make ends meet. Why shouldn't their
frugality be taken into account when they apply for a mortgage? Our most
dramatic examples of non- standard debt ratios come from recent Asian
immigrants. Living in extended families and employed in maintenance service
and food handling, they have very low incomes, but very high savings rates.
These are the problems that our Credit Union has identified through
experience. A look at the results of reliance on national standards is
extremely discouraging. Redlining, lack of community service,
discrimination fit nicely into the secondary market concept. In short the
secondary market has a big problem with diversity.
Last year the Federal Reserve Board released a report stating that in 1990
Black and Hispanic-Americans were denied mortgages at much greater rates
than were white and Asian-Americans of similar incomes. The report
criticized the underwriting standards of Freddie Mac and Fannie Mae as being
"minority unfriendly". The markets came under criticism from affordable
housing groups for bias against low-income household income and savings
patterns and inadvertent mortgage loan discrimination.
What is the cost of being a minority when you're looking to own a house in
America? On the secondary market, according to FNMA, Blacks earning over
$42,000 are rejected at similar rates to whites earning less than $28,000.
This is an interesting statistic - a black family gets about as much credit
as a white family earning $14,000 less.
We have seen the secondary market exclude minorities, non traditional
families, Gays, Extended families, Foreigners, alternative energy designs,
homes in need of repairs, self employed business people. Can we in good
faith endorse these standards as our own?
If NCUA said we had to apply GMAC standards to all our Car loans there would
be revolution - and yet NCUA is saying much the same thing about mortgages.
The problem with this type of normative analysis is that it doesn't say what
is safe and sound, it says what is common practice, what is average, what is
conservative. It asks Credit Unions to play follow the leader, be average.
It is a kind of group think that may lead to safe management OR, just as
easily to lemming-like mutual destruction. It may be instructive to note
that from 1986-1990, a S&L with negative capital and losses could still look
better than its peers. A CAMEL 1 S&L, would have been perched on the edge
on insolvency.
The reliance on bank standards for underwriting strikes at the heart of the
CDFI mission. We agree that one should not willy nilly loosen underwriting
standards and expect no outfall. Business are problem solving institutions
and Credit unions are no exception. One would expect a Credit Union to:
- Know its community and judge it more accurately than a national standard
allows.
- Look at each loan individually.
- Separate cosmetic flaws from substantial problems.
- Separate technical flaws from substantial problems.
- Balance true credit flaws with compensating factors.
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********
This post transferred from the cdb-l mailing list