Mortgage analysts say 1 in 5 homeowners could lose their home, make case for new approach to policy

Most everyone knows that the foreclosure crisis is severe, but just how bad is it? Analysts from the Amherst Securities Group recently released their estimates of how bad the crisis could get, barring new government interventions—and the numbers are chilling: “Over 11 million borrowers are in danger of losing his or her home (1 borrower out of every 5),” the report states. The analysts declare that this “conservative estimate” is “a [politically] impossible number.”

The analysts propose some policy solutions, noting that both supply- and demand-side policies are necessary—an opinion shared by the Regional Home Ownership Preservation Initiative, which focuses both on promoting policies to keep families in their homes when possible and on addressing the pervasive glut of vacant properties that continues to grow.

While we do not necessarily agree with all of the analysts’ policy prescriptions—for example, incentivizing investors to buy distressed properties could contribute to neighborhood decline if proper safeguards are not in place—many of their recommendations are cogent. The analysts stress the importance of a loan modification program with a better success rate than the Home Affordable Modification Program (HAMP). We agree that, given the high proportion of homeowners who are underwater, the “success rate on mortgage modifications can be raised by making greater use of principal reductions.” The Amherst analysts recommend a mandatory principal reduction program, saying bluntly, “voluntary programs won't work.” Given the discouraging track record of existing voluntary programs like HAMP, their assessment seems to be spot-on.

Our recent research documented how widespread the problem of damaged credit is in Illinois—and how highly concentrated the problem is in communities of color. Over half of people in Illinois’ predominantly African-American communities likely would not qualify for low-cost, prime credit. The Amherst report echoes these findings, reporting that 17 percent of borrowers have a “seriously compromised credit history,” not counting the millions of seriously underwater borrowers likely to default in the future. Between the large number of potential borrowers with damaged credit histories and increasingly tight credit standards, analysts say that “borrowers with less than pristine credit are currently finding it very difficult to get a mortgage.” Left unaddressed, that will pose a serious problem to absorbing the large number of vacant homes on the market.

Policymakers must pay greater attention to prudently increasing the pool of potential homeowners if they want to contribute to the revitalization of the hardest-hit communities.  Increasing support for credit-building programs and targeting them for areas with concentrations of low credit scores can help potential homeowners qualify for lower-cost mortgages, while the accompanying counseling can prepare them for the financial demands of homeownership. Allowing reporting of positive payment for services such as utilities and phone bills rewards positive behavior and builds credit for borrowers who have low credit scores because of a thin credit history.

Financial institutions should take a broader view of creditworthiness when working with borrowers from hard-hit communities. Relationship-based underwriting looks beyond credit scores to include factors such as work history and repayment history on services that do not report to credit bureaus. Support for  financial education, financial coaching, and matched savings programs such as Individual Development Accounts can increase the chances that first-time homebuyers will stay current on their mortgages.

The potential effects of letting the foreclosure crisis continue unchecked are sobering. We encourage policymakers and financial institutions to enact bold policies that  help homeowners stay in their homes and increase  educated consumer demand for homes in neighborhoods that desperately need it.