My name is Bruce Marks. I am Chief Executive Officer of the Neighborhood Assistance Corporation of America (NACA), a non-profit housing services and advocacy organization. NACA is known for its "Best in America" mortgage program which offers low and moderate income Americans home mortgages with low interest rates, no down payment, and no closing costs. Perfect credit is not required.
Through the NACA program thousands of Americans have realized the dream of home ownership. NACA provides prime loans for "sub-prime borrowers." NACA has 21 offices across the country with $3.8 Billion committed to the best mortgage in America. The current interest rate for NACA mortgages is 7.5% fixed for 30 years with no down payment, no closing costs, and no fees. In addition, NACA provides comprehensive housing services at no cost to the borrower. It may sound too good to be true but it is the reality for thousands of working people. People can call NACA at 1-888-302-NACA to participate in this incredible program.
NACA is also known for its advocacy campaigns against predatory lenders. As the committee is no doubt aware, there are predatory lending companies out there who use misleading sales tactics to take advantage of those who, through little or no fault of their own, have been excluded from mainstream credit institutions. NACA has worked in the street, in boardrooms, in statehouses, and in this building to fight these exploitive lending practices with a great deal of success. However, despite our efforts, these practices continue.
Mr. Chairman, you are absolutely correct in focusing your attention on the GSEs and in particular Fannie Mae. With over a Trillion dollars in assets, they set the standards in this country for access to home ownership for working people. For too long there has been virtually no scrutiny of the GSEs. As you know, the GSEs determine what is a conventional loan and what is considered a sub-prime loan. A conventional loan is considered to be one that meets Fannie Maes criteria and is known as a Fannie Mae loan. Non Fannie Mae loans are considered sub-prime loans and have become synonymous in the minds of many as predatory loans. The GSEs are market makers. All the billions of dollars the government spends on housing programs pale in comparison to the impact the GSEs can have on home ownership opportunities. This is particularly true for low and moderate income families.
There is no question that at one time the GSEs provided an important function. They provided liquidity to mortgage lending and standardized mortgage lending. They now need to declare victory and compete on the same level as other non-government entities. The GSEs have provided an extraordinary return for their stockholders but have failed in their mission of providing affordable mortgage access to low and moderate income people.
It is ironic but true that the private sector, with no government subsidy or support, is providing good, affordable loans to working people who the GSEs refuse to lend to. While there are numerous examples, we want to highlight a particular case, Lawrence Massachusetts.
In the early 1990s, Lawrence was going through tough economic times. Arson for profit was prevalent and only a limited base for home ownership existed. However, beginning in l995, NACA began providing home mortgages to the hard working people of Lawrence. Many of these borrowers worked two and three jobs and always paid their rent on time. NACA felt that peoples intense desire for home ownership would provide the foundation to revitalize Lawrence. NACA offered families a mortgage with no down payment, no closing costs, no application fees, at a below market rate. They did not need perfect credit to participate in NACAs program. Over the next six years NACA enabled 600 families to buy their own homes in neighborhoods all over Lawrence. This map identifies the homeowners. While people were able to purchase beautiful homes that required no renovation for less than $30,000 in l995, today homes in the same area sell for over $125,000 and additional funds are required to make necessary repairs in this tight market.
Lawrence is now a revitalized community. Hundreds of NACA homeowners have taken back the neighborhoods from gangs, drugs and violence. Malden Mills, the regions major employer, which received national media attention as a model of corporate responsibility after a massive fire destroyed most of its operations, has now been rebuilt and is extraordinarily successful.
The question is Where was Fannie Mae? Fannie Mae determined that Lawrence was a "declining value community". They would not purchase loans made to working people in Lawrence regardless of their income, credit, assets, etc. Fannie Mae redlined Lawrence and many other communities. Major private lenders stepped up, but this GSE, whose mission is to make home ownership possible put out the notice, "Lawrence is off limits".
NACA stepped in where Fannie Mae, the GSE, chose not to. Look at the results: of 583 loans that NACA has provided over five years there have been only two foreclosures. Currently there are 13 delinquencies, 8 of which are only 30 days late. These results speak for themselves, demonstrating that, given the opportunity, working people that are provided prime loans to purchase their homes will become the bedrock that every strong neighborhood needs.
NACA provides Prime loans for subprime borrowers. The NACA home owners in Lawrence are typical of the thousands of home owners in the NACA program. Over 65% of NACA home owners have a FICA score of less than 620 and almost half have a score of less than 580. Fannie Mae considers borrowers with FICA scores less the 620 to be too risky. In addition, 75% of NACA home owners have less than $4,000 in assets, 37% are single head of households, and the vast majority are the first generation of home owners in their families. They are stabilizing communities nationwide.
The GSEs have learned from this experience and are working to extort profit from these borrowers. The GSEs understand that the working people participating in the NACA program do not have perfect credit but pay their mortgage and do whatever it takes to pay their mortgage. The GSEs now want to lend on a massive scale to working people who have good but not perfect credit. But, instead of recognizing the commitment and credit worthiness of working people, they want to exploit them with sub-prime loans.
Sub-prime lending or as it used to be referred to "LOANSHARKING" has always been a part of the economy. In the past we had local institutions that understood the credit realities of working people and provided them with conventional affordable loans (i.e. Savings and Loans, Thrifts, local banks, and credit unions). People who had severe financial difficulties went to the loansharks who would "lend" on outrageous terms for a short period of time. The borrowers understood that the loan must be paid. They sacrificed everything to pay it off. But after this short-term period most were able to move themselves and their families forward (a few did not move at all).
The subprime industry began as a means to provide short-term financing to those with major financial difficulties. It was not there for good credit borrowers nor was it meant to devastate the finances and lives of hard working people. This, however, is exactly what this sub-prime industry has become.
The GSEs have created this $300 Billion sub-prime market and now want to profit from it. The vast majority of sub-prime borrowers are considered A- or B+ borrowers. They are hard working people who should absolutely meet the criteria of a conventional borrower. They may not have substantial savings, but they always pay their rent and mortgage. The GSEs want to make 100 to 200 basis points (one or two percent) on these borrowers who should be treated as the best and most reliable borrowers. In the mortgage business this is a huge spread. It is insulting and worse to call these borrowers sub-prime. The GSEs pay brokers thousands of dollars to originate these loans and make it worse by encouraging pre-payment penalties and other terms that further exploit the borrowers.
Predatory lending has become a major national issue as it should. NACA has been in the forefront of taking on predatory lenders and was instrumental in passage of HOEPA. The focus at that time was Fleet Finance. When NACA had over 500 Fleet borrowers from around the country participate at the Senate Banking committee, Senators from both parties pushed through this legislation. Everyone understood that it did not solve the problem but was a first step. NACA has continued the fight against these predatory lenders. However, once one is defeated others will appear like roaches until the market and profit for these loans is substantially reduced.
GSEs, which are subsidized by the American taxpayer, are the major cause of predatory lending. If the majority of the sub-prime loans are correctly evaluated as conventional, the abuses will be dramatically reduced. But the GSEs will not do so because there is too much money in it for them. Why lend to a family at 8% when you can get 9%, 10% or more? The most galling aspect is that the GSEs charter calls for lending to low and moderate income buyers not exploit them.
As has been clearly documented by HUD and other testimony, the GSEs fund a lower percent of loans to low and moderate the people than to upper income borrowers. For example in l997, the GSEs purchased 39% of all owner-occupied and rental property available during the year while it purchased only 30% of the units purchased by low and moderate income families. It is an outrage that Fannie Mae and Freddie Mac, with over $10 Billion in subsidies, do less for working people than the for-profit lenders. Their public relations prowess and utilization of their financial resources to squelch dissent is legendary. There is so little fact and substance to their commitments to lend to working people that it is almost incomprehensible. NACA has offices in one-third of the areas where Fannie Mae has Partnership offices . NACA provides hundreds of mortgages with excellent results in each of these cities to working people who Fannie Mae deems too risky. All the while Fannie Mae officials work their public relations machine. The GSEs will not reform without Congressional action.
H.R. 3703 would not in itself stop all of the inequities created by Fannie Maes underwriting system. It would, however, point us in the right direction. The creation of a Housing Finance Oversight Board that would be both interdepartmental and bipartisan would mean that there would be, for the first time since privatization, meaningful oversight of Fannie Mae and the other GSEs. This oversight would be particularly significant since the legislation also requires public disclosure of information by each enterprise as the Board deems necessary. While the H.R. 3703 does not specify what information each enterprise will need to disclose, one would hope that such information would include the salaries of each enterprises directors and officers, the amount of money spent on public relations, lobbying, and campaign contributions, and the extent to which the support provided by these enterprises is actually used to help those in need of it.
It is hard to understand why GSEs, which were created with government funding and have continually relied on government subsidies, oppose having to reveal information to the government about what they do with their money. It is also ironic since non-government supported entities subject to the recently passed Sunshine Act are forced to disclose extensive information to the government merely because they may have once discussed the CRA with a bank they have a relationship with.
H.R. 3703s requirement of prior board approval of new activities is also significant and something that advocates of fair housing should get behind. Without such controls Fannie Mae will continue to expand its reach into the subprime market and might itself become a predatory lender. The committee would also be in a position to control the GSEs participation in potentially profitable but also potentially risky investments schemes. Participation in these schemes by GSEs pose potential risks for the housing and banking industry and for the economy in general.
Of particular significance is the bills effort to cut treasury department guarantees and other subsidies to Fannie Mae. As prior testimony has shown, Fannie Mae and Freddie Mac received a subsidy of 10 billion from the federal government of which 3.5 billion was for the benefit of stockholders and management. Government created and has supported Fannie Mae, Freddie Mac, and the other entities in order to bring stability to the secondary mortgage market and make it possible for ordinary Americans to own a home, not to enrich their executives and bondholders.
This deviation from the mission brings me to my final point. While there are many provisions of H.R. 3703 that NACA supports and maybe some parts with which we do not, it seems that the bills central thrust is to make Fannie Mae and the other GSEs accountable to the American working people whose taxes brought them into being in the first place. Fannie Mae is a government entity when it needs something from the government but a private corporation beholden only to its bondholders when it is asked to be accountable. This is corporate welfare at its worst. The American taxpayer is providing billions of dollars to private government chartered institutions that are exploiting and profiting from the intense desire of working people for home ownership. This situation needs to be changed and this bill is the first step.
I would like to thank the Chairman and the committee for inviting me.