New Tools to Challenge Predatory Lending and Create More Homebuyer-Ready Borrowers
by Kenneth Wade, chief executive officer, NeighborWorks® America
Although the nation has made great progress in increasing homeownership, we still face significant challenges — especially in combating the rise in predatory lending and persistent gaps in homeownership and wealth.
NeighborWorks’® 26 years of experience provides some instructive lessons and insights into how consumer education and counseling, creative lending, and technology can confront predatory lending and reach underserved markets.
The NeighborWorks® network of 235 community development organizations across the nation serves 2,700 rural, suburban, and urban communities. Since 1993, they’ve provided homeownership education and counseling to more than 500,000 people and helped more than 90,000 families attain homeownership. Many of these clients are consumers typically left out of the prime market and vulnerable to predatory lending. The average NeighborWorks® client has a FICO credit score in the 600s and earns about $35,000 per year. About half are minorities and more than a third are women.
Through intensive and thorough education and counseling, these clients pay off collections, correct credit report errors, collect alternative forms of credit history, such as phone and utility bills, and take other action to become more bankable borrowers. To illustrate, our NeighborWorks® organization in Troy, New York — the Troy Rehabilitation and Improvement Program, Inc. — reports a more than 60-point credit score increase from the time a client walks in the door to when he or she completes education and counseling. Those points can translate into thousands of dollars in savings for the consumer and a much less risky borrower for the bank. Delinquent payments at the 90-day mark are cut by a third and default rates are cut in half.
In Montana, the Montana Board of Housing has set aside a $62 million loan pool to promote homeownership. Montanans who successfully complete pre-purchase counseling through Neighborhood Housing Services (NHS) of Great Falls can take their certificate to a local lender, who will work with NHS to place homebuyers in an appropriately priced mortgage product. The lender completes the loan and sells it to the board of housing at 102 percent of the loan price. By tapping the state loan pool, lenders receive a rate three-quarters of a percent below the standard board of housing rate.
The state and lenders alike understand that educated consumers are not only good credit risks, but also save precious time in assembling a credit profile and accessing down payment and mortgage supplement assistance. The evidence of success is clear. NHS of Great Falls is the second highest producer in the national NeighborWorks® network, generating more than 400 loans per year.
Nevertheless, we estimate that nationwide only about 15 percent of current first-time homeowners receive adequate counseling and education. The number of consumers who could benefit from homeownership education and counseling is growing at a much faster pace. At the current rate, we’ve projected a ‘counseling gap.’ From 2005 to 2025, 15.8 million first-time buyers will go un-counseled, including 3.2 million African Americans, 3.0 million Hispanics, and 6.3 million lower-income households.
To help close this gap, NeighborWorks® is tripling the number of homeownership and financial education counselors. Our goal is to increase the number of counselors trained from 700 to more than 2,000 per year by 2007, providing education and counseling for more than two million families each year.
Stretching without breaking
While education is an important tool for creating more bankable customers, technology is creating new ways to help those customers stretch without breaking to achieve homeownership. Our secondary market partner, Neighborhood Housing Services of America (NHSA), will soon pilot a state-of-the-art, Web-based, automated underwriting system. Created with private sector funding, the program will interface with lenders and alternative credit providers across the nation, rendering faster decisions that take into account nontraditional credit criteria, such as telephone and utility bills and pooled family savings.
NHSA provides a secondary market for our NeighborWorks® network of local community development organizations, offering loan products and purchasing loans from network members to ensure their continued solid lending capacity. NHSA provides liquidity to local revolving loan funds and capital pools for network organizations and their financial partners by purchasing their loans. This frees up new local capital to be available to the communities they serve. The second mortgages are used to cover down payment and closing costs for low-income homebuyers who qualify for a first mortgage loan from private lenders. In the past two years alone, the NeighborWorks® revolving loan fund financed $61.4 million in second mortgages — and secured funding from private lenders, foundations, government agencies, and other sources to finance another $143.4 million in second mortgages.
NHSA’s new Web-based underwriting system has the potential to provide the smallest NeighborWorks® organization in the nation with the power to partner with new lenders and should significantly reduce the cost of underwriting – one of the most expensive facets of lending.
The openness of this networked system should also bring unprecedented transparency to lending, creating new opportunities to define and measure creditworthiness. And the increased number and diversity of lenders and alternative credit providers in the system has the potential to create breakthroughs in comparison shopping, providing borrowers with more appropriately priced loan products. This transparency and capacity to compare products can provide NeighborWorks® organizations a greater rationale for pursuing appropriately priced subprime products for their clients. Recognizing that expansion of the lender pool introduces more fringe elements, the system contains a built-in fraud-detection mechanism.
The need for more tools to reach underserved markets has never been greater. Federal and state policies are aggressively promoting homeownership; mortgages are becoming increasingly complex and risky; personal debt is rising; and stubborn homeownership and wealth gaps persist. Using a combination of education and counseling, creative lending and technology, lenders and community development organizations can work together to ensure that no potential homeowner is overlooked, underserved, or overcharged.
For more information, contact Kenneth Wade at firstname.lastname@example.org or (202) 220-2410.