Ethical Subprime Lenders

One big concern I've had about the financial crisis is that it would result in some middle and lower income buyers being excluded from the home ownership market even though those individuals are relatively low risk. So I'm glad to see this type of activity expanding:

The Subprime Good Guys, by Daniel Gross, Commentary, Slate: In recent months, conservative economists and editorialists have tried to pin the blame for the international financial mess on subprime lending and subprime borrowers. If bureaucrats and social activists hadn't pressured firms to lend to the working poor, the story goes, we'd still be partying like it was 2005 and Bear Stearns would be a going concern. The Wall Street Journal's editorial page has repeatedly heaped blame on the Community Reinvestment Act... Fox Business Network anchor Neil Cavuto ... proclaimed that "loaning to minorities and risky folks is a disaster."

This line of reasoning is absurd for several reasons. Many of the biggest subprime lenders weren't banks and thus weren't covered by the CRA. Nobody forced Bear Stearns to borrow $33 for every $1 of assets it had, and Fannie Mae and Freddie Mac didn't coerce highly compensated CEOs into rolling out no-money-down, exploding adjustable-rate mortgages. Banks will lose just as much money lending to really rich white guys like former Lehman Bros. CEO Richard Fuld as they will lending to poor people of color in the South Bronx.

But the best refutation may come from Douglas Bystry, president and CEO of Clearinghouse CDFI (community-development financial institution). Since 2003, this for-profit firm based in Orange County ... has issued $220 million worth of mortgages in the Golden State's subprime killing fields. More than 90 percent of its home loans have gone to first-time buyers, about half of whom are minorities. Out of 770 single-family loans it has made, how many foreclosures have there been? "As far as we know," says Bystry, "seven." Last year Clearinghouse reported a $1.4 million pretax profit.

Community-development banks, credit unions, and other CDFIs—a mixture of faith-based and secular, for-profit and not-for-profit organizations—constitute what might be called the "ethical subprime lending" industry. Even amid the worst housing crisis since the 1930s, many of these institutions sport healthy payback rates. ... Their numbers include tiny startups and veterans such as Chicago's ShoreBank, founded in 1973, which now has $2.3 billion in assets... Cliff Rosenthal, CEO of the National Federation of Community Development Credit Unions, notes that ... "delinquent loans are about 3.1 percent of assets." In the second quarter, by contrast, the national delinquency rate on subprime loans was 18.7 percent. ...

In order to keep their doors open, they have to charge appropriate rates—slightly higher than those on prime, conforming loans—and manage risk properly. ... What sets the "good" subprime lenders apart is that they never bought into all the perverse incentives and "innovations" of the bad subprime lending system—the fees paid to mortgage brokers, the fancy offices, and the reliance on securitization. Like a bunch of present-day George Baileys, ethical subprime lenders evaluate applications carefully, don't pay brokers big fees to rope customers into high-interest loans, and mostly hold onto the loans they make rather than reselling them. ... Clearinghouse's borrowers must qualify for the fixed-rate mortgages they take out. "If one of our employees pushed someone into a house they couldn't afford, they would be fired," says CEO Douglas Bystry. ...

"We're in business to improve people's lives and do asset building," says Linda Levy, CEO of the Lower East Side People's Federal Credit Union. ... The average balance in its savings accounts is $1,400. The typical member? "A Hispanic woman from either Puerto Rico or the Dominican Republic in her late 40s or early 50s, on government assistance, with a bunch of kids," Levy says. Sure sounds like subprime. But the delinquency rate on its portfolio of mortgage and consumer loans is 2.3 percent, and it's never had a foreclosure.

Ethical subprime lenders have to look beyond credit scores and algorithms when making lending judgments. Homewise, based in Santa Fe, N.M., which lends to first-time, working-class home buyers, makes credit decisions based in part on whether borrowers have scraped together a 2 percent down payment. ... Of the 500 loans on Homewise's books in September, only 0.6 percent were 90 days late. That compares with 2.35 percent of all prime mortgages nationwide. ...

Ethical subprime lenders are now expanding beyond mortgages. ... Lending ... money carefully and responsibly to working-class people isn't a recipe for riches or grand executive living. ... Bystry, the CEO of Clearinghouse CDFI, earns a salary of $190,000 .... (Angelo Mozilo, former CEO of Countrywide Financial, was paid $22.1 million in 2007.) For all the growth, this remains very much a niche industry.

Still, the mortgage crisis has provided an opportunity for ethical subprime lenders to expand. ShoreBank has added staffers and in August 2007 rolled out a Rescue Loan program, which aims to move borrowers out of expensive adjustable-rate mortgages into fixed-rate loans. "We really believe we can help people caught in these bad mortgages,"...

Comments

[Keith]

Yes, it's called the free market. You let the greedy short-sighted assholes die, while the visionary good guys prosper and expand their business. Whoa, so revolutionary!

Gee, I wonder if there's a lesson there that we could apply to GM...

[Keith]

My god, it's almost as if...the market works.

[Steven Earl Salmony]

Where are the ethical sub prime lenders? They should be given a Nobel Prize of some kind.

Billions of dollars in bailouts and year-end bonuses are being directed to the "wonder boys" on Wall Street. What have these lenders done in 2008 to warrant such returns? From what I can see, these self-proclaimed Masters of the Universe have turned a great capitalist system into a paltry gambling casino. In the light of all their avaricious risk-taking and conspicuous hoarding behavior among lenders, such predators can no longer be called by any name other than "thieves of the highest order".

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176

[OhNoNotAgain]

Money quote:

"money carefully and responsibly to working-class people isn't a recipe for riches or grand executive living. ... Bystry, the CEO of Clearinghouse CDFI, earns a salary of $190,000"

Get rid of the outrageous compensation packages. If the POTUS can make under half-a-mil, then so can the CEO of a major corporation. Any profit should go to the investors and employees that put in their own savings and sweat. If the CEO wants to invest his own savings in the company, then he/she will become a multi-millionaire if he/she manages the company correctly, and maybe he/she will then will pay more attention to the long-term health of the company.

[Patrick]

I think 'sub-prime' is a misnomer in this case.

If someone has a steady job, and a history of paying their bills then lending them an appropriate amount of money under fair terms to buy an appropriately priced house or flat is reasonable.

The real problem is decent affordable housing in urban areas. If someone who is on the low end of the income spectrum is forced out into the suburban asteroid belt, they are forced to own a car; an expensive proposition that likely precludes being able to afford the house.

The best thing that could be done for affordability is to rebuild and to reactivate mixed income urban areas where the activities of daily life don't require an automobile.

[Farrar]

I vaguely remember that most banks used to make reasonable loans to reasonable people about 50 years ago.

[ken melvin]

Sub-primes for the proper value - no problem. I gather, most of the sub-primes that started the avalanche were for several time the going value and thus impossible to pay off.

In re leverage - @33 to 1, they made upwards of 200% on each dollar deposited, which they stuffed in each other pockets since that was the more efficient.

[Price]

"...middle and lower income buyers being excluded from the home ownership..."

They are being excluded by high prices more than anything else. Creative financing will not enable them to buy McMansions on over priced land. Lower the price, and they will be able to afford a home.

[Beezer]

The typical member? "A Hispanic woman from either Puerto Rico or the Dominican Republic in her late 40s or early 50s, on government assistance, with a bunch of kids," Levy says.

At least this sounds like a good use of government assistance.

Being close to the action provides detailed knowledge that cannot be replaced. Factoring in realistic interest rates, vetting potential customers, and holding the loan at the local lending institution are keys to successful mortgage lending.

We just got away from it all. Money ran uphill in great gobs. Legalized bribery all the way up in the form of grand commissions and CEO salaries greased the "wink and move on" mentality. And although those at the top have spent and wasted much, they still retain enough to take advantage of the next upcycle.

Meanwhile those below. Well, they will stay below.

[Robinia]

I have mentioned CDFIs several times in comments before-- they are, indeed the "good guys," in both senses of the word: doing good, but, also, good at what they do. Patrick, "subprime" is not a misnomer in this case. CDFIs really do take chances on people who other banks would not necessarily approve a loan for... in fact, CDFIs pioneered lending to subprime borrowers back before many banks would do so. Their success was part of what made banks see subprime borrowers as a potential market. Unfortunately, the "big boys" did not copy CDFI best practices.

There is a huge difference in how places like Countrywide and CDFIs approached giving subprime borrowers a loan. CDFIs provide counseling, support guidance in the process of borrowing money. In some cases, first-time homebuyers must complete classes before they are eligible for loans, learning about the responsibilities and costs of homeownership, and/or how to determine what house fits their budget. Rather than try to evade responsibility for the fate of a local community by playing "hot potato" through securitization of loans that were written with dubious underwriting procedures, CDFIs take an ongoing interest in building communities through community development and engagement, which can take the form of small business loans and/or active participation by CDFI staff in nonprofit community-building programs like volunteer tax-preparation or bankruptcy or credit counseling.

Yeah, the folks who do this kind of work DO deserve a Nobel prize, Steven Earl Salmony. Luckily, the Nobel committee agreed, and Muhammed Yunus and the Grameen Bank were awarded the Nobel Peace Prize in 2006. It's not "the free market," Keith. It is business done as if people and local communities mattered, and were worth both investing in and developing through the caring engagement of local businesspeople in civic society. Doing good and doing well.

[Bruce Wilder]

There was a time when mutual savings banks and savings & loans were deliberately chartered and privileged with this sort of mission in mind. But, then the Republicans reformed them into catastrophe. oops.

[Steven Earl Salmony]

Dear Robinia,

Thanks for reminding us of Muhammad Yunus. He is the first banker to the poor I have ever heard of. The bankstas I know cater to the rich and powerful.

As I noted above, billions are paid in bonuses and bailouts to the “wonder boys” on Wall Street. Precisely what have these self-proclaimed Masters of the Universe been doing for billion dollar year-end paydays?

Yesterday we found out.

In recent years “the brightest and best” have perfected the rule-making governing the manipulation of ‘free’ markets and the institutionalization of fraudulent financial instruments and business models.

What still mystifies me is this: What have these heirs of Ozymandias done in 2008 to merit this self-enrichment? More manipulation and more fraud for more ill-gotten gains, I suppose.

What can done for the benefit of the human community to put right this massive wrongdoing?

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustaianbilityscience.org/content.html?contentid=1176

[Robinia]

What, indeed, can be done?

Here is a short presentation that promotes a promising strategy, very much in the mold of Grameen Bank, and the international entrepreneurship-development organization Kiva.

http://www.youtube.com/watch?v=WIvmE4_KMNw

I think it is an experimental design well worth considering. One thing you can say is, ever since Ozymandias, the gangstas, bangstas and bankstas have not, in the majority, been girls.... maybe there is something about the evolutionary construct of human females that favors a more long-term view of social success? We surely have not run that social experiment.

[bp]

as explained by Nouriel Roubini, there's a difference between predatory lending versus gaming of a loan by borrowers

when the borrower dupes the lender, the loan is gamed, and when the lender dupes the borrower, it's a predatory loan

the free-market crowd refuses to acknowledge that the vast majority of sub-prime loans were predatory rather than gamed, because its ethos cannot accept the failed market that produced them

blame is assigned instead to failed government intervention claimed to have caused the overselling of high-risk loans "gamed" by borrowers as well as lenders

but sub-prime loans surged from the private sector in response to predatory opportunities in the form of gross overpricing and fees - it was not a supply-push effect from the government, but a supply-push effect from grossly overleveraged upstream credit generated by the private sector

it was upstream borrowers like Bear Stearns - not homeowners - which were "gaming" loans at $33 borrowed for every $1 of assets, which fueled the supply of predatory loans made to original borrowers

[Bruce Wilder]

there's a lot of deliberate glossing over the vital point made by bp

[papa zita]

Farrar,
50 years ago, there was a cute practice done in mortgage loaning called redlining. Read and learn about it. You may think it was an idyllic time, but people of the "wrong" hue may beg to differ.

[Keith]

"the free-market crowd refuses to acknowledge that the vast majority of sub-prime loans were predatory rather than gamed, because its ethos cannot accept the failed market that produced them"

Sure, and predators died while the good guys that weren't predators are around and thriving, thanks to the free market. Um, the free market just destroyed the predators, and now they're looking for a handout from the government.

"It's not "the free market," Keith."

Yes, it is.

"It is business done as if people and local communities mattered, and were worth both investing in and developing through the caring engagement of local businesspeople in civic society."

And thse guys who did business the way you like survived and thrived, while the greedy predators died, thanks to the forces of the free market. In fact, only government intervention has kept the predators alive so far. This is a great story that vindicates market forces and shows how government intervention can undermine the virtues of the free market.

[me]

It's wonderful how everything happens for the best, in this best of all possible markets.

Unless, of course, you're half-assed.

[me]

http://krugman.blogs.nytimes.com/2008/11/16/fannie-freddie-phony/

"... it’s now clear that the phony account of the crisis — that it’s all due to Fannie, Freddie, and nasty liberals forcing poor Angelo Mozilo to make loans to Those People — is setting in as Republican orthodoxy, part of what you have to believe to be a respectable member of the party."

Remember, folks, the disinformation machine for the side that lost the election doesn't have to disband -- in fact they can ramp up their program of lying about the past.

[ken melvin]

Going to take a lot of wulitzering to turn this sow's ear in to anything but. Lo, is that a giant Wurlitzer I hear stating up?

[Keith]

The free market slayed all those evil predatory lenders and investment banks that bought their crap mortgage-backed securities, while the do-gooding community-loving lenders who really want to help the poor now thrive and prosper on the free market.

And you still don't like the free market, even when it delivered the outcome that you yourself find morally just.

[sewells]

Robinia, interesting point you make about the bankstas and gangstas not, for the most part, being female. Of course, if women didn't gravitate toward the bankstas and gangstas when it comes to mating, then there wouldn't be so many of them. It's not a flippant point. There are, I'm sure, gender differences of the sort you point to. It's just that those gender differences don't absolve females of any culpability in the aggregate since most every thing we feeble minded and ethically challenged males do comes down to whether it is likely to impress the ladies or not.

[Steven Earl Salmony]

Dear Sewells and Robinia,

Your comments about "the feminine" are valued. Perhaps both of you are making a strong argument for the immediate empowerment of women.

Sincerely,

Steve

[Check Cashing]

This article has a lot of good inforamtion. It was very interesting to read and helpful to think about.

[Walter]

"The free market slayed all those evil predatory lenders and investment banks that bought their crap mortgage-backed securities?"

I don't think you are quite seeing the whole picture here Keith.

The "predators" didn't just participate in predator lending, they also took advantage of the lack of transparency to turn around and package and sell off those bad loans to suckers. And more than that they managed to multiply those loans through the magic of derivatives (and fraud imo, but that's a different argument) so that when the market finally collapsed (as was inevitable) the impact was much larger than the sum of the bad subprime loans.

So when the market collapsed it squashed the suckers, but the predators walked away fat and happy with 100s of millions in bonuses. The predators weren't punished by the market at all, they gamed the market. And you and I, and every other tax payer get to pay for it. Yay!

[kthomas]

Hear hear, Walter.

Tar and Feather them!!!