What my experience with Habitat for Humanity tells me about the Community Reinvestment Act

I was browsing the feed for Instapundit when I saw this link, Stop Covering Up and Kill the Community Reinvestment Act. Since I view my experience with Habitat for Humanity to be relevant to a discussion about the Community Reinvestment Act, I followed the link. The Investor’s Business Daily article argues for the elimination of the the Community Reinvestment Act because it led to lower mortgage standards and subsequently higher number of mortgage defaults. Here is my argument for modification of the Community Reinvestment Act rather than elimination.

  1. The Community Reinvestment Act in its present form appears to throw money at the home ownership problem in low income areas and hopes that something good will happen. From my Habitat for Humanity experience I can tell you that this does not work. When I look at the low income community we focus on, I can see little effect from the Community Reinvestment Act. Home ownership numbers languish at the same numbers they were at twenty years ago. At Habitat we spend a large amount of time on the front end and the back end of the mortgage to make home ownership work for the families. Building houses is the fun part. Making home ownership work for low income families is hard work and it is not an option for us. We either spend the time or the home owner will fail. We take this personally. When one of our home owner fails, we fail. There is a fine line between between building a home that blesses the family and the community and building tomorrow’s ghetto. Mortgage brokers are reluctant to perform this kind of nurturing even though it is necessary for success. Low income home owners are not like the other home owners, they have more problems. At Habitat we feel we are lucky if we can break the rental mentality in a couple of years.
  2. I think that the Community Reinvestment Act would be more effective if the mortgage originators were not allowed to securitize the mortgages. This places an ownership burden on the mortgage originator that would force a small town banker mentality to this sector of the mortgage market.  The most important number for making mortgages work in low income areas is the home owner’s telephone number. If you have a personal relationship with the home owner, they will pick up the phone and listen to your advice.
  3. When we follow normal mortgage practices at Habitat, it works. When we do not follow standard mortgage practices, we frequently fail. When we get carried away with compassion, we cause more harm than good. The only difference between a Habitat mortgage and a standard mortgage should be the zero interest loan.

How deep a recession?

In the Christian Monitor article, “How deep a recession? “, they said:

The housing-bubble collapse makes recovery hard to predict.

This is one of the few times I have read where our current “crisis” is described as a housing-bubble collapse. I happen to agree with this economist’s view of the source of “crisis”. Most of the government’s actions and reactions have been targeted at the short term problems which center around liquidity issues in the financial sector. The financial crisis is important and news worthy but it contributes little to solving the rest of the problems facing our economy. Relatively little has been spoken about the source of the housing-bubble and how we can avoid repeating this mistake. We cannot go back to the economy of 2005 because housing construction and real estate related services will be diminished industries for some time. Where does the job growth come from and why isn’t this a higher priority? In my day job a correct identification of the problem is essential to developing a solution. In this case we made a small step in the right direction.

Video: Peter Schiff circa 2006-07

In these video clips I was amazed at how Peter Schiff stuck to his beliefs about the severity and breadth of the impending mortgage crisis despite the ridicule and criticism he was receiving. The clips are both funny and sad. It is funny because we know his predictions were right on target and his critics were wrong. It is sad because we ignored his predictions and have suffered much. It took a lot of courage and character to stand up for your beliefs. I showed the clips to my son since he fancies himself as a stock picker.

Video: Blogger stocking up on ammunition, canned goods for recession
Sat, 15 Nov 2008 02:21:44 GMT

The Weekend Interview – WSJ.com

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."

The Weekend Interview – WSJ.com

I could not have said it better myself. A  few days ago I went to the AIG web site and looked up their financials. I was curious how they spun this mess. Their balance sheet does not show a problem but they have a separate presentation explaining that they were in a severe financial crisis. The MBA in me says the balance sheet should reflect the risks the company is facing. It did not reflect these risks for AIG and the balance sheets for other financial firms do not reflect the risks either. You just cannot trust any of them. Now that’s a problem that is going to take a long time to fix!

RE: housing_projection.jpg

I found this image on my del.icio.us feed. I believe the Internet source of the graph is actually from a post written in 2006 titled “How Far Will Your House’s Price Fall?” on the Capitalism 2.0 blog.  I believe the original graph may have been created by Shiller. Reading this post for the first time in 2008 I think it is interesting to note that the graph appears to show the same trend as the graph I did in Excel this year. However my graph shows the actual Case-Shiller numbers through 2008 while the 2006 graph is a projection of the future written in December 2006. The portion of the 2006 graph predicting a steep decline in home values appears to follow the actual results in 2007 and 2008. The most ominous thing I see in the 2006 prediction is that he is assuming that we have a basically sound economy like we had in the two previous declines. This is a debatable choice. I think the problems in those recessions are considerably less severe than today’s economic problems. Maybe I have a rosier view of the past but this recession looks like it is going to be much worse for a much longer period. The magnitude of the decline is much larger and the economic problems are more severe. The 2006 prediction of a 2011 bottom in home values just below the trend line may be too optimistic.


2000-08 Real Estate Appreciation versus the Consumer Price Index

A Fatal Cancer To The Republican Party

Dear David,

I know you intended to praise Mr. Obama in this article when you say that the characteristic you are most impressed with is his intellect but your logic does not work for me.  I do not have a problem if this characteristic inspires you but it gives me an icky feeling. It gives me the same feeling I had when a friend told me that my blind date has a nice personality. In this time of crisis I really do not care how well Mr. Obama can discuss obscure authors like Niebuhr. I do care whether he can lead this country. Intellectualism is pretty low on my list of leadership characteristics.

With regard to your point about Sarah being a fatal cancer to the Republican party, I think you are ignoring how bad some of the “ideas” you are defending. You complain that she is anti-intellectual and scorns ideas. I believe that her lack of respect for some of these ideas is well founded and echoes the sentiment of a lot of people. As an example I went to the AIG web site and reviewed their Conference Call Credit Presentation. From this presentation I can tell that there are some real intellectuals at AIG and they can make some really nice charts. I bet a couple of these intellectuals can even discuss Niebuhr at length. So please excuse Sarah and the bipartisan contempt for AIG. It is not that we are anti-intellectual but we feel our intellectuals have betrayed us. What is readily apparent to the people on Main Street seems to be lost on the smart men and women who used to work on Wall Street. Betting the company on these risk management ideas was a really bad idea. This same argument can easily be extended to Fannie Mae, Lehman, and all of the companies involved in the bailout.

Another intellectual full of grand ideas deserving your attention is Barney Frank. In a feat that would inspire awe from Machiavelli our country has embraced Barney Frank’s ideas of government sponsored mortgage banking and subsidies for housing. Barney could never get his ideas through his committee let alone through the House of Representatives but here we are embracing his ideas for getting out of this mess. Barney is probably pretty confident that once we create these institutions we will never go back. The best part of this trick is that there never was a debate or a vote. As we lurch from capitalism to socialism I find it amazing that we are just a small step from adopting New York City’s model of rent control throughout the land. As we reluctantly embrace socialism as a necessary evil, it is a natural conclusion that we will willingly sacrifice one of our principles that makes home owners so important to the country. Home owners are financially independent because they have allowed themselves to be transformed by their sacrifice, sweat, and equity.  This process of owning a house demands a financial discipline by the families that they typically cannot do on their own. Their sacrifice makes them tough and independent. They are the country’s financial backbone and embody the American Dream. Home ownership without sacrifice, sweat, or equity is not home ownership. It is renting. If you want to see a vision of the future for housing you just need to look at New York City. Despite the fact that Barney Frank’s ideas for government are being implemented there is widespread bipartisan anger, disgust, and contempt. If you are correct and Sarah is the fatal cancer to the Republican Party, then we are already lost. There will be no debate and our path to socialism will be unimpeded. It is a natural conclusion that socialism will change our economy in dramatic ways. Many people will be very uncomfortable if our role model becomes Denmark. On the other hand Sarah’s embrace of populism may be just the balancing power we need to use the best characteristics of capitalism to reform these institutions that successfully avoided reform in the past. It will be difficult. Our “good idea” to fix this financial crisis is to issue more bad loans to cover the past bad loans. This may not be a good time to ignore all of the angry people out there and embrace intellectualism. The drums we hear in the distance is not the sound of a parade.

Nearly 1 in 6 Homeowners ‘Under Water’

The Wall Street Journal article, Nearly 1 in 6 Homeowners ‘Under Water’,  echoes my sentiments on the real estate crisis. Everybody is going to feel the pain but a few states are going to feel a lot more pain than others. There are nice statistics and graphs in this article. I recommend it.

Falling home prices have left nearly one in six owners owing more on a mortgage than the home is worth, raising the potential for more defaults.

The Coming Migration

Although no one is talking about it I think it is likely that Southern California and Florida will suffer both an extended economic downturn and a population loss. This is a natural outcome of the housing industry going on hold for a couple of years as they try to sell a large inventory of houses to a smaller group of qualified buyers. The market is saying it will support a smaller group of construction workers, real estate brokers, etc. For some people it will be the time to move on. I was in Houston during the Savings and Loan meltdown in the 1980’s and despite a great effort by the local administrators people had to move elsewhere to get a steady job.

U.S. Near Deal on Fannie, Freddie – WSJ.com


Sen. Barack Obama, the Democratic nominee, has said the companies are a "weird blend" and that "if these are public entities, then they’ve got to get out of the profit-making business, and if they’re private entities, then we don’t bail them out."

U.S. Near Deal on Fannie, Freddie – WSJ.com

My guess is that the end for Fannie Mae and Freddie Mac is closer than most people thought. My only question was the  continued political support from the Democratic party to maintain the status quo through the election. It looks like the doomsayers have won the battle and the equity issue in the two companies is too critical to ignore for two months. It looks like the companies are in for some serious restructuring and turmoil.

Local perspective from Cincinnati

I meant to write about this article on the ForeclosurePulse blog earlier. My particular interest is low income housing but I have a passing interest in the housing statistics for Cincinnati. So here is the breakdown:

  1. Cincinnati has about 7,385  properties on the RealtyTrac foreclosure list.
  2. The 45215 zip code which includes the low income area I am interested in has about 1,034 properties on the list.
  3. When I narrow the map down to the approximate area of the low income housing area, the number of properties on the list is only 41.

When I looked at this low income area in February the RealtyTrac foreclosure list number was over 100. Unlike the rest of the area and the country, 75% of the properties on this list are already owned by the bank. It looks like the housing bailout bill will be too late to help low income families.