USC’s marvelous Lusk Center sponsored a terrific talk from Carolina Reid, researcher at the San Francisco Fed. Some of her papers can be found here.
The takeaway: there is pretty good evidence from her foreclosure data, which she matched with HMDA data, that mortgage channel really affected the outcomes of high-cost loans for low-income and minority residents. She finds a strong and persistent effect of race on foreclosures, and then using both interviews and logistic regression, traces the differences in high cost loan usage by rates to the channel. Banks covered under Community Reinvestment Act requirements originated loans that were, for the most part, much lower cost to the borrower than ones that originated among mortgage brokers.
However–and this was a point that I think comes through very clearly—the mortgage brokers were more effective at outreach–unfortunately. For a cluster of her respondents in Oakland, almost all had originated their loans with a mortgage broker they knew from their church. In Stockton, many were able to use brokers they met on-site—but who spoke Spanish.
The importance of social networks here does not decline. Even with a house in foreclosure, the mortgage holders appear to be faulting the banks rather than the brokers.
It’s the question of outreach that interests me. If you are from a low-income background where your parents do not own a home, it’s hard to understand what is going on in the mortgage market. Mortgage brokers could be a positive force in these communities if they come from those communities–and were trained and licensed more thoroughly. The goal, I’m thinking, should be to help increase the “pipeline” and “pathways” to better credit and financial management–and then step into home ownership.
Rather than the narrative we have now, which appears to be “Those black and brown people couldn’t handle credit and caused the mortgage market collapse.” Um, no. Maybe they shouldn’t have taken the loans they did, but there was plenty broken about the system that didn’t involve them.
There is good evidence that suggests families can benefit tremendously from home ownership under the right conditions. Those condition preclude an unregulated feeding frenzy on secondary market right along with more and better up-front counseling.