Bank of America, broker back revival of subprime mortgage market

A decade after the subprime mortgage crisis, thousands of potential home
buyers with poor credit are lining up for zero down, low interest home
loans -- backed by one of the biggest banks in the business.

Throughout this year, Bank of America and Boston-based non-profit
brokerage Neighborhood Assistance Corporation of America are holding
events nationwide offering mortgages to low and moderate income people
and minority home buyers.

Specifically, the groups are offering the loans to buyers with poor or
rehabbing credit, which was one of the issues that contributed to the
last meltdown -- buyers who couldn't afford the mortgages they had.

Bank of America and NACA, though, say they have a vetting system in
place to help prospective home buyers who shouldn't be excluded by
credit score alone.

NACA CEO Bruce Marks told UPI the organization has been working with
Bank of America since the early 1990s when then-CEO Hugh McColl agreed
to commit $1.5 billion in mortgage commitments after reviewing the
program, a number that's grown to $10 billion today.

"We've been satisfied with how NACA has been able to educate home buyers
and the loans that NACA brings us," Bank of America spokesman Terry
Francisco told UPI. "The borrowers that NACA brings us have performed
well over the nearly 20 years we've been involved with them."

Marks hailed the mortgages offered through the program as the "best in
America," touting no foreclosures on loans distributed over the last six

After the subprime lending market had largely cooled in the years
following the housing crisis of the early 2000s, banks have slowly begun
making these kinds of loans again with a greater focus on ensuring they
can be repaid.

"The definition of a subprime loan has changed. What we're calling a
subprime loan today, there's probably a fair amount of overlap between
what we called subprime loans in 2006, but some of the practices from
2006 like the no documentation, no income verification loan are not
really happening at the same rate as they were before," NYU Asst.
Professor of Sociology and Public Service Jacob Faber told UPI.

"Character-based" lending

NACA and Bank of America offer 15- or 30-year fixed loans with interest
rates below market average, coming in at about 4.5 percent. They also
offer no-down payment, no closing costs, no fees and no requirement for a
credit score to initiate the loan.

Rather than focusing on a borrower's credit score, Marks said NACA engages in "character-based" lending.

"We don't consider people's credit score, we look at their payment
history that they control. So that means that if someone has a low
credit score because they're late on their medical bills and they can't
control it because they have to go to the emergency room or things out
of their control, we don't consider that," Marks said.

Borrowers are then required to provide full documentation including bank
statements, W-2 forms, tax returns and other information to construct a
comprehensive budget that is used to determine the borrower's mortgage
payment will be.

"We base their payment on both their budget and what they pay in rent that they can afford," Marks said.

One way NACA ensures that potential home buyers can afford the mortgage
is demonstrating they can handle the "payment shock" -- the difference
between what they're paying now and what they will pay with the new

"Let's say they're paying $1,000 a month on a mortgage payment but I
want a $1,400 payment, they have to save at least $400 every month for
six months to demonstrate to themselves and to NACA that they can afford
that higher payment," Marks said.

Once the process is complete, Bank of America reviews borrowers that
have been subjected to NACA's vetting process and determine whether or
not they will underwrite the loan.

Francisco said NACA's process has been effective at producing qualified
borrowers, providing the bank with high quality loan applications that
are approved more than 90 percent of the time.

"Normally there's a very good coordination between the loans that come
in and the loans that are approved because the folks at NACA are very
good at explaining to homeowners what the requirements are in regard to
their income, in regard to their FICO scores, in regard to their credit
performance over the last several years," he said.

Francisco added the program has also been beneficial for the bank, as
NACA provides them outreach to customers they might not have access to

"It helps us reach out to borrowers who may have thought they weren't
qualified to become homeowners and reaches out to them and brings in a
lot of new customers to us," Marks said.

Mitigating risk

The housing crisis a decade ago was characterized by banks making
predatory loans to buyers they shouldn't have -- buyers who, in many
cases, qualified for prime rate loans but didn't fully understand the
terms of the deal.

"I think there's a reality that we don't really want to acknowledge
which is that really no one understands mortgages and for most people
they'll take whatever mortgage is presented in front of them," Faber

"If you are kind of a bad actor in this space, the inability of people
to fully understand the terms of the mortgage allows for exploitation,
which is what we saw during the housing boom."

NACA and Bank of America said they were able to avoid some of the
pitfalls of the subprime lending crisis of the 2000s by ensuring their
borrowers were working people who were properly informed about the
conditions of their loan, and were locked in at a fixed rate.

"If you look back on some of the mistakes that were made before the
financial crisis, it had a lot to do with people who just simply didn't
understand the complexities of a mortgage -- didn't realize that you
need to have available funds if there's an income interruption,"
Francisco said.

Marks said borrowers through the program are required to go through
comprehensive counseling to understand the restrictions of their monthly
budget, and more counseling through NACA's Membership Assistance
Program to establish payment agreements and financial assistance to help
borrowers delinquent on home payments avoid foreclosure.

"Educating people about those issues -- helping them budget, helping
them understand they need a rainy day fund -- all of these are key
elements of becoming a homeowner," Francisco said. "What NACA does is
they actively reach out to people and educate them about those issues,
and that's something that a lot of people didn't understand before the

Marks said another factor in the mortgage meltdown were "teaser"
interest rates that eventually doubled or tripled on borrowers over the
life of their loan.

"It wasn't that the wrong people got houses, it's that they were set up
for failure. It was a homeownership deception scheme," he said. "Because
they could afford their initial payments but if payments double or
triple, they're going to lose their homes."

He added that NACA eliminates the issue by offering all borrowers the
same fixed loan, plus counseling to ensure they can afford it.

"Even during the mortgage crisis, our loans performed very well because
it's full documentation and it's a fixed rate, that means the payments
don't change."

Marks also dismisses criticism that no-down-payment loans make it easier for owners to walk away from the property.

"Who's got more skin in the game? Someone who, this is where their
family lives, this might be their first time as a homeowner with an
affordable payment -- who's gone through the NACA comprehensive
counseling," he asked. "They've got more skin in the game than someone
who is putting some money down, who looks at the home not as an
investment for their family and the community but their real estate

Still risky business

While NACA and Bank of America boast a strong track record of successful
lending, Faber warns that outside factors can still make subprime loans
a risky endeavor.

"Taking on a mortgage is a huge risk, even at a prime rate fixed 30-year mortgage is a big risk," he said.

"Even if you fully understand the terms and the responsibilities of
taking on that financial risk today, you might not know what your life
and your finances are going to be like in a few years."

For example, Faber and Peter Rich of Cornell University published a
study this year that found families with children in college faced an
increased risk of foreclosure during the housing crisis.

"A lot of people effectively got surprised by having to pay mortgage and
tuition at the same time and didn't really anticipate that," Faber
said. "People's finances change, so even if you understand what your
finances are today, you might not be able to anticipate what they're
going to be in just a couple years."

Faber said although standardizing interest rates over the life of a
mortgage can mitigate much of the risk associated with subprime loans,
the housing crisis shows their value is still at the mercy of the
housing market.

"The plummeting value of people's homes and the homes around them was a
bigger driver of foreclosures than either borrower characteristics or
loan characteristics," he said. "We have to acknowledge the fact that
these large financial risks are tied to a lot of things that we may not
be able to anticipate.

"Simplifying the payment structure is going to be great for a lot of
people but there are a lot of ways that people can be connected to
foreclosure risk that we don't always anticipate."

Lastly, Faber said, efforts by the Trump administration to repeal the
Dodd-Frank Act -- major Wall Street reforms passed by the Obama
administration to mitigate chances of a similar crisis in the future --
could eliminate some valuable safeguards.

He said it was "incredibly dangerous" for the Trump administration to
remove portions of Dodd-Frank that required virtually all lenders to
report to the federal government information on every single loan
application they received, in order to identify when lenders are

"All of the evidence is pointing toward discriminatory practices and
without any tools at all to identify those practices ... I see no reason
why they're not going to return."

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