Week of 6.27.08
Transcript: Subprime Solution?
More From NOW: Subprime Solution? | The Candidates on Predatory Lending | From Homeless to Homeowner | In Your State: Housing Help | A Friendly North Korea? | Feedback Forum | TranscriptBRANCACCIO: The Senate spent the week fighting long and hard over what to do about the mortgage crisis...the solution on the table there is to force you and I the taxpayer take the risk and foot the bill: if this becomes law, the government will buy from banks many of the bad mortgages. But dealing with foreclosures is only part of the problem. What happens to America's communities if homeownership becomes something only for the rich? You should know there's an innovative system to help entry-level borrowers buy and stay in homes..while avoiding the terrible pitfalls of the subprime market. Alexandra Haggiag Dean produced this report on social entrepreneurs at work, part of our series we call "Enterprising Ideas."
John Rodriguez, a cable TV and phone technician, grew up here in sunny Ventura, California, and says he never wants to leave. But some days he says he feels like the whole community is collapsing under the weight of the recent housing crisis. Foreclosures here are up about 160-percent this year and even his very next door neighbor's house was recently repossessed by the bank.
BRANCACCIO: You're saying that around the neighborhood? Places where people have had their houses foreclosed upon?
JOHN RODRIGUEZ: There's definitely an increase in foreclosures and quick sales - signs all over town.
BRANCACCIO: By now you know how it happened: across the country families with low credit scores were steered into subprime mortgages that turned out to have exploding interest rates. Their loan payments keep soaring as house prices decline and already over a half million families are losing their homes to the bank.
As Congress deliberates over how to react, banks have blamed "reckless" low income folks who, they say, knowingly bought houses they couldn't afford.
Warren: Oh God...if the take away from this crisis is that low income people don't deserve to own homes, and they've just proven it to us, then we have gotten this message one hundred percent wrong. What the message really should be is that products that are loaded with tricks and traps can be sold to unsophisticated people, and they will ultimately bring them down, and ultimately bring down our whole economy.
BRANCACCIO: But what if there were a system that offered families with low credit scores, a low, fixed rate loan, with no tricks and traps? Would they succeed? Well that's what happened to John and Lupe Rodriguez.
So what does it feel like you run around the neighborhood, occasionally run across the foreclosure signs?
JOHN RODRIGUEZ: Well, you know, you could have been one of them.
BRANCACCIO: John Rodriguez very nearly was one of them. Back in 2006 he went into a subprime lender who told Rodriguez he could afford a $600,000 house if he'd lie on his application...you know, inflate his income.
JOHN RODRIGUEZ: He was basically was telling me to you know, make up other sources of income that were just not there.
BRANCACCIO: Make up other sources of income, well, like what?
JOHN RODRIGUEZ: Well you know what if, you know, you can get somebody to write you a certified letter that you do handiwork on the side and you make about $4,000 a month combined, we can get you into that—into that loan.
BRANCACCIO: That gave Rodriguez the creeps, so he got out. But his daughters didn't stop pestering him for a home of their own.
JOHN RODRIGUEZ: "Dad, when can I paint my room?" Sorry, we can't paint your room.
BRANCACCIO: Cause it's a rental?
JOHN RODRIGUEZ: It's a rental. "Well I want to paint my room blue. I'm a Dodger fan."
BRANCACCIO: One day he and his wife Lupe saw this $400,000 house...
LUPE RODRIGUEZ: I'm thinking, "Why are we even seeing this house? We're never gonna get a house like that. There's no way. There's—you know, you go and you see these houses, you're just like—it's like just dreaming. There's no way we're ever going to own a house like this, ever."
BRANCACCIO: But not wanting to lose the dream they made a bid. Then they had a stroke of luck. John found a monthly homebuyer's workshop.
Here, a counselor enrolled him in a new lending program tailored for people who might otherwise have been sucked into a subprime loan... it's called Just Price Solutions, or JPS.
JOHN RODRIGUEZ: They ran my credit. They looked at my income. And they said, "Look, you gotta take care of all these things. You need to come up with a down payment? There's things that you can do on your own. But there's certain things that, you know, we'll help you out with."
BRANCACCIO: In the end, the counselor showed them how the online wizardry of JPS would get them a loan at a low, fixed rate. Sounds too good to be true, right? How come nobody's heard of this?
So far, it's mostly used by local nonprofits. But what has backers interested is big growth potential, and an impressive pedigree... it was a Federal Reserve Board Governor Edward Gramlich, who thought up the program.
GRAMLICH: While homeownership rates are at record highs, some people are still being left out.
BRANCACCIO: He was the guy who tried to warn to Alan Greenspan about the coming subprime crisis back in 2000. What people don't know is that when Greenspan essentially ignored him, Gramlich called for a new technology to improve the lending system. In 2004, he sat down with Brian Cosgrove, a founder of internet banking:
COSGROVE: Towards the end of the dinner, he—he said to me, "You know, you've had an interesting background. The very life you enjoy, other people created. Now what did you ever do to give back for that?" And I was, you know, I—I didn't have a good answer.
BRANCACCIO: Cosgrove was inspired to create a new life mission. He quit his lucrative banking job, enlisted tech savvy colleagues from around the globe, and started up Just Price Solutions, a nonprofit.
COSGROVE: We said, "How can we remake mortgages so that—so that we don't have to use sub-prime, if you will in that process? How can we redo this and come up with something that's sustainable and works and pays everybody that's involved in the process?" We're really redefining how you make a first time homeowner loan now...:
BRANCACCIO: Cosgrove didn't start from scratch. He's working hand in hand with a small government outfit called neighborhood Housing Services of America, whose loans are surprisingly successful.
While subprime mortgages shot up to an 11 percent foreclosure rate this year, neighborhood housing services loans had a foreclosure rate of 1 percent. What's their recipe for success? One, they only give out fixed rate mortgages, and two, each borrower is matched with an independent counselor.
COSGROVE: If there was somebody in that neighborhood, what we called 'boots on the ground.' The chances of that borrower being successful just went up dramatically.
BRANCACCIO: JPS streamlines the neighborhood housing services loans, which were localized, slow and paper-heavy...
COSGROVE: If you've never seen one of these things they get a lot thicker.
BRANCACCIO: They are striving for the online efficiency of subprime, with none of its pitfalls. For starters, JPS doesn't penalize folks for having poor credit scores, instead it helps improve their credit rating. The Rodriguez's had a low score of around 500, mainly because they didn't have enough credit cards and loans.
JOHN RODRIGUEZ: Years ago we had filed for bankruptcy. And we—after that happened we kind of stayed away from the credit at all. We just like, "Okay, we want nothing to do with this until we know that we can be financially set." And throughout the years we just kind of avoided it.
BRANCACCIO: So it's the irony that you go to buy a house and its like, "Well you haven't been using your credit cards. I'm not sure what your credit is."
JOHN RODRIGUEZ: Right.
BRANCACCIO: Lucky for them, the JPS software had a built in solution.
JOHN RODRIGUEZ: They went with the—a different form of a credit which was getting—references from everybody that we pay bills to.
BRANCACCIO: JPS has supercharged what's called thin file lending, instead of looking at how consumers pay back loans and credit cards, it looks at how well they pay their regular bills.
COSGROVE: Long before we had computers, this is how we actually did make mortgages.
BRANCACCIO: You mean, the old days.
COSGROVE: In the old days, yeah, you and I would sit down, and I would write this out on a piece of paper and I would write—David, where are you renting right now? Who is—and I would write that down and later someone would go verify it.
BRANCACCIO: Today, JPS can verify those bill payments online. For Rodriguez, this innovation meant that within three months he owned his dream house, at a low fixed rate mortgage. We got the tour. Remember his daughter the baseball fan? With help from neighborhood housing services, Cosgrove has pulled in over $17million in grants and loans from Fannie Mae and other big corporations. By selling the software to banks Cosgrove wants JPS to sustain itself and grow, over time, the plan is to scale up and help millions.
GRAMLICH: This is a very impressive effort indeed
BRANCACCIO: In late 2007, the man with the big idea, former Federal Reserve Governor Gramlich, died of leukemia. By that time, it was clear his warnings to Greenspan were correct, as you'll have noticed, America's in a major housing crisis. That's changed everything for JPS. As credit standards tighten, many more families need the system.
Two years ago, Devon and Stacey Wilson could have had their pick of safe mortgages, but today most banks won't consider them.
BRANCACCIO: Why not just rent?
STACEY WILSON: As home prices are dropping the rent is raising - like our rent just went up another $200. We just want to get something with a big backyard.
BRANCACCIO: Unlike the Rodriguez's they have a strong credit score, over 700. But they're young, and they don't have much of a down payment...
DEVON WILSON: Half the battle right now is getting a pre-approval for a loan, banks want 20-percent, they want a down-payment, it's not like before when you can walk up and sign a paper and get a loan approval for a house.
BRANCACCIO: So the Wilson's went to a loan counselor who hooked them up to Just Price Solutions.
VEGA: You would also qualify for $40,000 of our down payment assistance.
BRANCACCIO: With a couple of strokes on the keyboard, the computer approves them for $150,000 in local and federal grants and private loans. And then pre approves them for a house twice the size they thought they could buy. Cosgrove says the magic is in the funding mix.
COSGROVE: What we've done is we've created a way where people who historically couldn't play together now can. Cities can play with private sector people. Employers can contribute to these things. All those sources of financing can come in and help make a transaction affordable for people.
VEGA: $270,000 is the loan amount that you will be making payments on,
BRANCACCIO: But bigger mortgages carry higher rates, so JPS allows borrowers to divide them up. The Wilsons will pay two mortgages with a combined fixed rate at about 6 percent.
VEGA: Showing on paper: Total payment 2,269.
BRANCACCIO: That's just over what they're now paying in rent. Elizabeth Warren says this system has potential.
WARREN: People who pay down that mortgage live in the one asset you can buy that over time tends to appreciate. Umm you know the number one retirement plan in America is pay off your house and live off your social security.
BRANCACCIO: This approach does have its critics. Dean Baker, economist at the Center for Economic and Policy Research, points out that even if a mortgage costs people the same as rent, they can still lose money.
BAKER: Let's say that your house is gonna fall from $200,000 in value to $180,000 in value over the next two years. Well, you're not gonna end up better off in that story.
BRANCACCIO: And he questions the judgement of housing counselors that recommended anyone buy in a bubble inflated area like California.
BAKER: When we're talking about low, moderate income people, they don't have a lot of money to throw around. So if we're talking about spending more money on housing costs than necessary, that's coming at the expense of health care for their kids, of, you know, getting good food, child care.
BRANCACCIO: But the way Brian Cosgrove sees it is that homeownership is about more than individual families, it's about maintaining communities...especially now, when we're facing a mortgage meltdown.
COSGROVE: When a community breaks, it's just as important for those of us who are lending in there to step in and say, look, I don't want all the capital to come flying out of here. Let me find another borrower and bring them into the community.
BRANCACCIO: In fact, today, the foreclosure crisis is the problem Cosgrove urgently wants to fix. The JPS team is working flat out on a new tool that will work to keep people in their homes. As always counselors are involved: and they're saying the new technology is desperately needed.
COUNSELOR JULIE FAWCETT: We offer guidance. We want to basically hold your hand through this process...
BRANCACCIO: Nancy Tomhave, came to this foreclosure prevention seminar in Ventura four months ago looking save her home.
TOMHAVE: So if you walk away from something like that and it belongs to the lender, they can sell it for market value can't they?
BRANCACCIO: Tomhave's not a subprime borrower, but she recently lost her job at a bookstore. She's training for another, higher tech job, but in the meantime she's struggling to make mortgage payments on the apartment she owns.
TOMHAVE: I'm a single mom. And I've had plenty of financial hard times. But there's never been a time in my life where I feel like the roof over my head had been threatened. And I feel that way now. So, in many ways, it's much worse than—some of the other stuff I've gone through.
BRANCACCIO: Tomhave's bank, Citimortgage, sent her what's called a "workable solutions" form. That's how she's supposed to tell them her problem...and ask for help.
But she can only fax it in, and though she's tried a half dozen times from different machines, the fax is always lost or rejected.
TOMHAVE: I mean, I can't even explain how it feels. It's like bein' in the Twilight Zone. And it just can't be real.
BRANCACCIO: To get help, Nancy Tomhave is regularly meeting a foreclosure prevention counselor... but they're not having much success.
COUNSELOR JULIE FAWCETT: How many times have you and I contacted CitiMortgage together?
TOMHAVE: Six or seven times at least
BRANCACCIO: So Tomhave's counselor decides they should try the hope line. This is the government solution to the foreclosure crisis. Hope Now works with an alliance of some of the largest mortgage lending institutions in America. The Bush administration is promoting an 800 number that promises direct access to their loan servicers.
BUSH: 999 1 800, H.O.P.E.
SCHWARTZ: Our goal is to reach out to homeowners at risk, communicate with them, and look at all the options and explore options to avoid foreclosure, and bring them into the servicers, or if not through the servicers, through counselors, to help them explore all their options.
BRANCACCIO: Faith Schwartz is the executive director of Hope Now and she admits that the system has had some growing pains, but she points to some numbers that show it's working.
SCHWARTZ: We have significant outreach to borrowers. And in fact, a million six borrowers have been helped to avoid foreclosure since July of 2007. So we're—we're making great progress in keeping people out of foreclosure. But it's a tough effort, and it's a tough environment.
BRANCACCIO: Is hope now working on the ground? After a few seconds on the line with a hope now operator Nancy Tomhave and her counselor are put on hold.
TOMHAVE: I never thought I would have my loan mortgage number memorized - music plays...
BRANCACCIO: And then...
COUNSELOR JULIE FAWCETT: Hello can you hear us? They disconnected us.
BRANCACCIO: They keep trying the Hope line but they never do get through to a loan servicer. It's back to plan a, dial Citimortgage directly. This time they get through.
COUNSELOR JULIE FAWCETT: this will be the 4th fax transmission for the very same document.
You're telling me if we fax it in it will be denied?
BRANCACCIO: The irony runs thick. He says Tomhave's not in enough trouble to take action.
VOICE: We have other options, they don't kick in for 3 months
COUNSELOR JULIE FAWCETT: She mails in her mortgage statement for May - she's going to be one month behind. What's going to happen w/ that one month behind when we are requesting a workable solution?
VOICE: Well we're going to deny her because she's one month behind.
BRANCACCIO: Confused, Tomhave's counselor decides to go ahead and fax Citi's foreclosure prevention form, that "workable solutions" thing, one more time. But ....well you guessed it. Busy.
COUNSELOR Julie Fawcett: Third times a charm?
BRANCACCIO: It does get through... a small victory in a day of repeated disappointments. Like Citigroup, most of the banks in the Hope Now alliance rely on faxes, so I wanted to know.
What's with the faxes? I mean, who faxes any more? It seems an odd—way to—to base this system in.
SCHWARTZ: Well, you know, you're dealing with people that might have two—two or three people in their office, or not even—some may—may or not have PCs and computers. So you have a lot of different technologies out there. And we're looking to see how can we make everything efficient?
BRANCACCIO: But around the country lenders, swamped by delinquent mortgages, are struggling to cope. This April attorneys general in 11 states published this report, they've been tracking Hope Now's numbers independently, and they point to some alarming trends:
First so the system is severely strained...because banks don't have enough loan servicers to deal with the rising tide of foreclosures. That means seven in ten homeowners who need help still aren't on track to get it. And importantly for JPS, the report says the level of paperwork required by the banks "is a barrier" to stopping unnecessary foreclosures.
Seven out of ten facing foreclosure were not finding resolution.
SCHWARTZ: You know, it—it's kind of a complicated process. And the great thing about Hope Now is we have all the securitization market at the table. And they all have different rules around how you go through loss litigation and foreclosure processes, it doesn't just take a phone call. Typically, it's a lot of process involved in keeping people out of foreclosure.
WARREN: Hope Now has turned out to be a tiny little project relative to the size of the problem. It's... It's a spoonful of water on a big fire. And the idea of that this is the government's entire response... uh... tells me not only that home owners are at risk but that our whole economy and the whole world economy is at risk.
BRANCACCIO: Alarmed by the time it's taking for people to get through to their banks, Cosgrove has had his team scramble to perfect what they're calling the "best fit" software.
COSGROVE: So let's say that I have your loan and it's a problem loan. And I post it at the web. I could have a counselor, a banker, maybe even you log in and simultaneously look at it and say, I need to see David's latest pay stub. You know? No problem. We can take that and upload it to the web. And the banker can see it and act on it.
BRANCACCIO: But if this system is going to do more than nibble around the edges of the problem, Cosgrove and neighborhood housing services president, Mary Lee Widener need to sell it to states, government institutions and the banks of the hope now alliance.
Mary Lee Widener: This situation has to be turned around and it can be.
BRANCACCIO: Last month JPS got a couple of bites. Countrywide agreed to a test run in Chicago. And back in Ventura, Citimortgage is trying out the software.
Nancy Tomhave's file is one of the first loaded onto the software... and right away her counselors notice it's very different from Hope Now, they can offer their own judgement on how to change the terms of the loan.
COUNSELOR JULIE FAWCETT: We could propose for it to go to the current market rate.
BRANCACCIO: That suggestion was uploaded and went straight to Citibank. A week later, Citibank called Nancy. They heard we're covering her on this story and they apologized to Nancy but they declined our interview. They've offered her a temporary rate reduction to 6.5% —exactly what her counselor suggested - and if she makes payments regularly, they'll make the new rate permanent. Not everyone has been as lucky as Tomhave, but that big housing bill in Congress could change everything.
SENATOR CHRIS DODD: There is nothing as important as this bill for the country at this moment.
BRANCACCIO: The monster 300 billion dollar rescue package has been stalled in the senate all week, if it passes, and if the president signs it, lenders will be thrilled. Instead of haggling so much with borrowers, they'll be able to pass off four hundred thousand problem mortgages to the government, without taking a big loss. But to Elizabeth Warren, that sounds a lot like a bailout for banks, at the expense of regular Americans.
WARREN: The message is clear. Take your profits on the front end, and good people, American taxpayers will guarantee you full payment on the back end. We can't do that.
BRANCACCIO: Brian Cosgrove, however, is upbeat. If the legislation becomes law, banks will get a stampede of callers looking to convert scary mortgages into fixed rate government loans. And they'll want to push them through quickly. So they'll badly need software like, he's hoping, JPS. That could fund JPS for years to come... and means Cosgrove can manage more loans...loans that work.
COSGROVE: People are always amazed. They always say to me, "How come your loans are still paying? I mean, you—you made the loans in some of the same scary neighborhoods as all these other guys. And the folks are still paying." And it's like, well, it's because again, we're connected with them. It just produces a—a community. You know? It—it creates a community.
BRANCACCIO: Today, Brian is in Ventura visiting a community where several JPS borrowers already bought houses, and it's reminding him why he got into this in the first place.
COSGROVE: This makes me excited! This is the America we were talking about... works hard, does his—lives by the rules—and he lives—heck I wish I lived like this when I was a kid.
BRANCACCIO: Where do Barack Obama and John McCain stand on protecting homeowners? See their proposals, and share your own ideas on this week's feedback forum. It's all on our website.
And that's it for NOW. From New York, I'm David BRANCACCIO. We'll see you next time.