Page 26 - Impact: Collected Essays on the Threat of Economic Inequality

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for homeowners to borrow additional monies on the value of their home as needed, even up to the full appraised value of the home, albeit at a higher interest rate to reflect the greater risk under a junior loan if foreclosure and collection proved necessary . During the subprime lending heyday, lenders dispensed with the formality of deferring borrowing on the home’s equity value until after closing the purchase loan, and began making so-called 80-20 loans—a first mortgage loan for 80 percent of the home purchase price, and a simultaneous loan, ultimately securitized in a different loan pool, for the remaining 20 percent of the purchase price . The upshot is that a borrower, living paycheck to paycheck on wages that were insufficient to accumulate a nest egg for any down payment, was nonetheless able to surmount the loan-to-property value requirement without having saved any down payment whatsoever . But what about the closing costs of the loan (such as upfront points) and the home purchase (e .g ., escrow agent fees), and the costs of moving into the new home and any utility deposits or transfer fees owing to a condo or homeowner’s association? Lenders had that scenario covered, too, for the borrower with insufficient savings— an initial combination of home loans exceeding the purchase price, predicated on the assumption that property values would surely rise over time, which might even put cash back into the home buyer’s pocket to use toward furniture or other move-in expenses .
In sum, mortgage lenders, at least temporarily, developed loan products to confront the disconnect between home affordability and U .S . wages stuck in neutral . But those loan programs were not sustainable . Waves of foreclosures swept across the country and prompted lenders to abandon many of these programs as imprudent and unlikely to appeal to ultimate purchasers in the securitization markets once they appreciated the strong likelihood of default . Federal legislation addressing the crisis (the Dodd-Frank Wall Street Reform and Consumer Protection Act of 201020 as interpreted by Consumer Financial Protection Bureau regulations21) now prohibits or discourages subprime lenders from using some of these devices once used to bridge the affordability gap . For example, the borrower ability to repay standard under the Act, satisfied by so-called qualified mortgages, generally means that home lenders will be verifying income and discontinuing interest-only loans, loans that result in balloon payments or negative amortization (such as flex loans that add skipped payments to the loan balance), and loan terms that exceed thirty years .22
Looking Ahead
Now that the subprime artifices introduced by financial markets to overcome wage stagnation are disappearing due to diminished investor demand or new rules on ensuring loan affordability, it is time to confront the structural roots of the affordability problem that extend to income and wealth inequality, particularly for borrowers of color who were the lifeblood of the exploitative subprime mortgage market . Whether immigrants or native-born, Latinos/Latinas (and Black
20 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (codified as amended at 12 U.S.C. § 5301 (2012)).
21 See Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z), U.S. consumer financial proTecTion Bureau, http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified- mortgage-standards-under-the-truth-in-lending-act-regulation-z/#rule (last visited June 7, 2015).
22 consumer financial proTecTion Bureau, shopping For A MorTgage? WhaT You Can ExpecT Under The Federal Rules (2014), available at http://files.consumerfinance.gov/f/201401_cfpb_mortgages_consumer-summary-new-mortgage.pdf (addressing teaser introductory interest rates that often reset one to three years after the loan was made; the Dodd-Frank Act requires the lender to assess affordability based on the maximum interest rate the borrower would have to pay in the first five loan years).
Impact: Collected Essays on the Threat of Economic Inequality