Relaxing the Credit Crunch

Three years after the financial meltdown, credit remains elusive in many underserved communities. Although the reliance on credit scores is greater now than it’s been in a decade, many housing activists and community lenders are arguing for other means to evaluate credit risk.

Before Ginger Hitzke was the president of her own Hitzke Development Company, she was frustrated in her efforts to get mortgage credit. Not because her credit history was bad, but because her financial history didn’t necessarily lend itself to a traditional credit history. “When I was a younger person trying to get a loan for the first time,” she says, “I spent money on things like utilities, rent, food, and the babysitter — things that don’t get reflected in a credit score.” By the time she had a credit history developed enough to qualify for lending programs that target underserved communities, her income had grown to the point where she was no longer considered part of that community.

If Hitzke struggled just from being young, imagine how much harder it would be for someone whose credit record is blemished by a foreclosure, medical debt, or job loss, and who might live in an area or belong to a demographic that already experiences credit discrimination. And yet, with the backlash to the housing crisis among lenders, and the effects of that crisis and rising unemployment on households’ finances, mortgage credit is becoming harder and harder to get just when neighborhoods desperately need new homeowners to step in and fill up their vacant properties.

As the mortgage industry tries to recover from the housing crash and deal with piles of toxic debts on its books, the more stringent lending practices of the 1980s have been returning with a vengeance, including for many lenders less leeway on credit score minimums. This means that even with mortgage interest rates at historic lows and with the federal government playing lip service to the notion that banks should get lending again, credit seems to be elusive to those with working-class incomes. How can lenders — and affordable housing advocates — support sound underwriting practices while also trying to keep appropriate amounts of credit flowing to underserved communities?

How Did We Get Here?

Buying your own home — a fixture of the American Dream — was once seen as the hallmark of stability and maturity. Double-digit interest rates enforced the idea that buying a home wasn’t something to be taken lightly. In the early ’80s, loan programs beyond conventional fixed rates and government loans were few and far between, according to Mary Townley, director of homeownership for the Michigan State Housing Development Authority,: “Underwriting criteria was tough and most companies required a hefty down payment of 10 to 20 percent.”

Under both the Clinton and Bush administrations, HUD, Fannie Mae, and Freddie Mac all aggressively pushed an expanded vision of homeownership through tax credits and other programs. “In the ’90s guidelines adjusted and more and more programs rolled out into the market. These programs were created to provide options to homeowners since all of their situations were not the same,” Townley says.

But it wasn’t necessarily the push to expand homeownership that caused the housing crisis. John Taylor, head of the National Community Reinvestment Coalition, (NCRC), argues that it was reckless, predatory lending practices and lack of regulation — not programs designed to helped lower-income homebuyers. “Nine out of 10 of the subprime loans had nothing to do with new homeowners,” he says. “They were refinancing or moving homeowners into bigger homes. I was there. I saw what Fannie and Freddie were doing. There were lenders that were making everyone rich at the expense of the homeowner and the investor. They squeezed the homeowner for everything they could.”

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Matt Chapuran is a Boston-based freelance writer who spent seven years in the affordable housing industry before joining Stoneham Theatre as its managing director. He regularly contributes articles on water and green technology for Official magazine.

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