What's Behind America's Housing Crisis? Today, we begin a new series on housing. Recent reports show that nearly a million American households are at risk of foreclosure — that's 71 percent more than a year ago. Farai Chideya talks with professor Raphael Bostic and personal finance expert Lynnette Khalfani-Cox.
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What's Behind America's Housing Crisis?

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What's Behind America's Housing Crisis?

What's Behind America's Housing Crisis?

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This is NEWS & NOTES. I'm Farai Chideya.

A roof over one's head - it's a basic human right according to the United Nations, but the kind of roof you have and whether you own it are something else entirely. America's economy is wobbly. Bad mortgage lending has put people in jeopardy. How will that affect how and where you live?

Well, all this month on NEWS & NOTES, we're focusing on housing from a consumer perspective. Some of the news is tough. Many American households are at risk of foreclosure. Homes are selling for less than they used to, which you think would be a plus for ready buyers. But a lot of potential buyers can't get the credit to purchase a home.

Black communities are also grappling with lending bias, redlining, and gentrification. Here to give us the big picture, we've got Raphael Bostic. He's an associate professor at the School of Policy Planning and Development at the University of Southern California. He's also the director of the USC's Master of Real Estate Development Degree Program.

Also joining us, Lynnette Khalfani-Cox of themoneycoach.net. She's a personal finance expert who's appeared on shows like "Dr. Phil" and the "Oprah Winfrey Show." She's also written several books. Her latest is "Your First Home: The Smart Way to Get It and Keep It."

Raphael, Lynnette, welcome.

Professor RAPHAEL BOSTIC (Director, Master of Real Estate Development; School of Planning and Development, University of Southern California): Good to be here.

Ms. LYNETTE KHALFANI-COX (Author, "Your First Home: The Smart Way to Get It and Keep It"): Thank you for having me.

CHIDEYA: So, Raphael, give us a snapshot of what's going on in the housing market today.

Prof. BOSTIC: Housing market is very weak. There are a couple of things that are going on. You're alluded to the credit crunch, and we've seen the lending community by and large cut off the credit that was making housing affordable for a lot of households, and that - what that's meant is that we have a glut of properties on the market that weakens the price power.

And in addition, a lot of the folks who got into those initial mortgages, are using some of the alternative mortgage products, have found that those products didn't really work for them and that they're struggling to meet those payments having to consider foreclosure, default, reworking, and that also has weakened the housing market.

So, the overall picture is pretty week particularly in high-cost markets, but it's weak very much across the board.

CHIDEYA: Now, when you say weak, is this something that's hurting say the big mortgage lenders and the investment banks or neighborhoods or both, and how?

Prof. BOSTIC: It's hurting all of them. It's hurting the banks and the investors because they were expecting returns, and the defaults and delinquencies we're seeing are eating away those at rates that no one was really expecting, at least no one at the banks were.

In terms of the homeowners, foreclosure and loss of housing is always very painful. It's always disruptive and a traumatic experience. And then for neighborhoods, what we're seeing in terms of where these foreclosures are is that they're concentrated in particular areas. And those areas where we see a hollowing out of the homeownership and of the residential occupancy, that has its own negative spillover effects that we all will wind up having to face and deal with at community level.

CHIDEYA: Lynnette, you are someone who's an expert in really talking to people directly about how their finances work. But give us a little bit of the big picture in terms of how African-American families and neighborhoods have been a part of the housing market, some of the challenges that we face, and, you know, some of the ways that we might bring a little bit of baggage from the past into, you know, the transactions we make today.

Ms. KHALFANI-COX: Well, I think there's no question that the African-American market has been disproportionately hit by the mortgage meltdown that we saw that began in August of 2007, and as you know now continued into 2008 and is being manifested in the credit crunch.

When you look at the types of loans that African-Americans in particular receive, for instance, there is pretty much a uniform belief and statistics to back it up that groups is varied. There's the Federal Reserve, the Center for Responsible Lending, the Consumer Federation of America. They've all done studies and have statistics that show, for instance, that African-Americans, black women in particular, were two to three times more likely to get subprime loans or predatory loans than their white counterparts. And that's frankly regardless of the person's credit.

I think in years past, people would be steered into high-cost loans. And the rationale, the justification if you will, was always, well, of course, they have to pay more to get a loan. They have to have a higher interest rate because they have bad credit. But what we're seeing now is that many people who frankly had quite good credits still wound up with subprime loans and/or predatory loans.

And the spill-out that we've seen now that's really become quite a drag on the economy overall is obviously getting a lot more attention, because it's not just an issue confined to minority communities. Indeed, millions and millions of homeowners all across the country at every income level at every neighborhood and community in some way are being impacted by these.

I tell people all the time because I hear from both sides, both individuals who've been badly hurt by the mortgage meltdown and are having problems refinancing or selling or are facing the threat of foreclosure, those people clearly are in dire straits.

But then, I also talk to consumers, who say, listen, I'm dong quite well for myself and I'm okay. Thank you very much. And I don't see why I should have to, you know, have financial problems because the next guy or my neighbor down the road didn't pay his mortgage or didn't read his loan documents carefully or et cetera, et cetera. And what I tell both is that we're all in this together. Surely, there is blame to be apportioned here because in many cases, lenders were, dare I say, reckless in terms of determining who should really qualify for a mortgage.

Certainly, some consumers did stretch and overreach and try to take on more mortgages than they could truly afford. Obviously, Wall Street banks were getting rich off of mortgage-backed securities, selling and packaging loans and then, you know, selling those in the secondary markets. So, obviously, too few questions were asked there.

CHIDEYA: But let me get Raphael into this. You know, with all the things Lynnette is saying, it sounds as if there's a situation where we were just doing what we are supposed to do, meaning Americans were chasing the American dream of owning a home, and people did many things to get it that may not have been smart.

Prof. BOSTIC: I think that's exactly right. And, you know, one of the issues is that we haven't sent the message that homeownership really isn't a right, it is a privilege, and it comes with cost obligations and burdens. And collectively, our society has not placed homeownership in a position such that people who are chasing homeownership actually understand that there are potential consequences.

And I did want to actually just comment on the issue about this being concentrated in the black community. That actually is true, and it's true in terms of what types of mortgage products you get, but it's also true in the context of the foreclosure problem.

So, some research that I've done would suggest that even after you control for credit quality and all those sorts of issues, foreclosure is much more prevalent in a lower - in lowering minority communities. And we don't really know why. You know, some of it is certainly steering. Some of it is also, I think, lower level of sophistication in terms of financial literacy in the black community. And some of it actually has to do, I think, with the regulatory structure which provides incentives for banks to stay away from communities, to some extent, that they know less about.

Ms. KHALFANI-COX: And then also…

CHIDEYA: In case - let me just, you know, reintroduce our topic. We're talking about the housing market, the big picture overview. And it's the start of our month-long series on housing.

It's NPR's NEWS & NOTES. I'm Farai Chideya.

And we were just hearing from Raphael Bostic, professor at the School of Policy Planning and Development at the University of Southern California. We've also got Lynnette Khalfani-Cox of themoneycoach.net, author of "Your First Home: The Smart Way to Get It and Keep It."

So, Lynnette, when you, you know, you think about these big picture issues, let's transition a little bit into the practicalities for individuals, and role-play with both of you, a couple of scenarios. You're someone who bought a house a couple of years ago, thought that you were doing the right thing in terms of getting a loan and then you find out, oh gosh, my loan is a subprime loan. What do you do now? Lynnette?

Ms. KHALFANI-COX: Well, first, let me say that just having a subprime loan in and of itself is not necessarily a bad thing. It was not necessarily meant to be punitive to borrowers. Subprime really just refers to a category of borrowers who did not meet the upper-tier qualifications for any bank's lending requirements. In other words, maybe they didn't have the highest credit score. Maybe they didn't have a sufficient down payment, et cetera. If you didn't meet those qualifications, then you are put into a category called non-prime or subprime.

The problem is if you have a predatory loan or a loan that has onerous rates and terms, very high interest rates, high fees attached to it, excessive pre-payment penalties, perhaps a balloon feature that, you know, would make it difficult - any of those things that make it difficult for you to either sell or refinance. The conventional wisdom is, clearly, if you've had, say, an adjustable rate mortgage that is about to reset on you or if you had a mortgage that, for whatever reason, had some terms that were untenable, clearly, the opportunity is there to - for some to try to refinance into a fixed-rate product, something that is less financially detrimental to you.

The problem, though, is that because of the ongoing credit crunch, not everybody can - people are willing, certainly - but not everybody can in fact refinance. And the shame of it is that we're seeing so much done to help the corporate sector - everything from, you know, the Federal Reserve giving the $30-billion loan assistance and guarantee to JPMorgan Chase for the buyout of Bear Stearns to the Federal Reserve opening its discount window to Wall Street banks as was not the custom before to offer hundreds of billions of dollars in loans, to just today, you know, the Senate really late yesterday approving a so-called a $15-billion housing package which included, in fact, $6 billion in tax breaks for home builders. You know, I find a lot of…


Ms. KHALFANI-COX: …a lot of people are saying, oh, I don't want to reward the bad behavior of homeowners who did the wrong thing allegedly and didn't read their documents or made imprudent decisions. Why should we, quote, unquote, "bail out homeowners"?

And my question is: Well, why should we bail out homebuilders? If it - they speculated as much as some homeowners and individual investors did. They engaged in overbuilding, and that's part of the problem as well.

CHIDEYA: Well, let me get Raphael into this again. You know, when you hear Lynnette talking about who should get the benefit of government funds that are used to leverage a change in the industry, what exactly - if you're a homeowner who's in trouble or if you're someone who's wanting to buy a home, what's on the horizon for you in terms of positive things that might actually change your situation? Are there any of these structural changes from the government or from lenders that might benefit individual homebuyers or homeowners?

Prof. BOSTIC: Well, for the homebuyer group, I think the biggest change is going to be a much more rigorous application of underwriting standards. So the likelihood that you'll get into a mortgage that you'll learn two or three years later you can't afford is much lower now. Now, that has - it comes with this cost because that means that you can't afford as much a house today that you could a year ago, but its better to get into house you're going to stay in than to get into house and figure out you have problems.

For the home seller side, if you're in a home now and you're in a situation where you're looking at the prospect of being upside down either because you're in the predatory loan or because you're in a loan where you plan to refi(ph) and the market is not going to let you do that anymore, you've got a limited set of options, and one of them is to go to your bank or go to a credit councilor and say, look, this is my situation. I can afford this amount, and let's see what we can do.

Many credit councilors will be able to work with you, if they've got enough scale. They can go to banks, they can revise and try to get those contracts revised and get you into a mortgage product that is more useful.

The federal government, through some of their insurance programs, and some of the proposals right now are setting up some funds that are going to be available to help in that restructuring. And so there may still be options in that regard. In terms of who we bail out, you know, these are political questions, and the interest here are extremely powerful.

I think, the Federal Reserve in particular has been concerned of - concerned about the housing difficulties spilling over into other parts of the market. We've seen that in terms of - it's more difficult to do mergers and acquisitions of just general - unrelated to housing interest. We've seen it affect other types of real estate. I think they're concerned about a general financial collapse. But the general point about, you know, homeowners should be - making homeowners reach some of the - and receive some of the benefit, I think, is a good one.

CHIDEYA: Lynnette, you know, sort of to wrap things up, when you think about black neighborhoods in particular, there are lot of different challenges which have to do sometimes with people, you know, reaching that dream, buying that house but then not having a lot of money to keep the house up, pay, you know, the taxes on the house and do the maintenance. What do people need to know about keeping a house, not just buying it?

Ms. KHALFANI-COX: Well, you know, one of the things that Raphael said earlier, I think, can't be emphasize enough, which is that homeownership isn't just a right. Automatically, there are responsibilities that go along with it. That's why I called my new book "Your First Home: The Smart Way To Get It And Keep It" to try to keep people out of foreclosure. The big things they have to realize are that, you know, there's a lot of rules, what I call the seven commandments of homeownership, that you just absolutely must do to keep a home.

Obviously, you have to pay that mortgage. You have to keep up with your property taxes. You have to make sure that you - manage the equity in your home appropriately and not use your house as an ATM, as had been done in the past. You have to keep up with maintenance issues. You have to know what's going on in your neighborhood because, yes, what the neighbor down the street does, especially if it results in the decline of his property value, does in fact impact yours as well.

So, all of these things require a certain amount of education. And unfortunately, in African-American communities, and indeed in the larger community, we just do not teach people enough about this dream. Yes, we all say it's a great thing to achieve homeownership. I support it. Many - obviously, others do as well, but we haven't told especially first-time homebuyers that at the other side of the rainbow, once you get to fulfill that dream, there's a nasty four-letter word called debt. And if you don't manage your mortgage debt properly, if you don't do the wise things that you should do with regards to a mortgage, it can really get you into a lot of trouble.

CHIDEYA: Well, Lynnette and Raphael, good advice, and we'll keep on tracking with our housing series. Thank you so much.

Prof. BOSTIC: Thank you.

Ms. KHALFANI-COX: Thank you.

CHIDEYA: We've been speaking with personal finance coach and author Lynette Khalfani-Cox. She spokes with us from member station WBGO in Newark, New Jersey. And Raphael Bostic, associate professor at the School of Policy, Planning and Development at the University of Southern California. He joined us here in our NPR West studios.

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