MICHEL MARTIN, HOST:
I'm Michel Martin and this is TELL ME MORE from NPR News. We're talking about the effects of those across the board budget cuts caused by the sequester. We've been particularly interested in education, and today we're going to hear about the effect on Head Start. That's a program that helps low income kids get ready for school. That conversation is later in the program.
First, though, we want to talk about a related issue, which is how the effects of the most recession are dragging on and on - especially for people of color. According to a new report by the Urban Institute, Hispanic families lost 44 percent of their wealth between 2007 and 2010. African-American families lost 31 percent of their wealth in that time, and that compares to an 11 percent decline for whites.
Much of those losses can be traced to the collapse of the housing market, and many public policy analysts argue that avoiding another bubble means tightening the standards for lending. But our next guest says that's exactly the wrong approach. Jim Carr is a housing and urban policy expert with the Opportunity Agenda. That's a progressive think tank. But he's been studying housing and housing finance for more than 30 years and he's with us now from St. Louis Public Radio. Jim Carr, thanks so much for joining us.
JIM CARR: Thank you, Michel.
MARTIN: Before we get to your solution, I want to look more closely at the problem. Why is it that the housing crash seemed to affect people of color so profoundly? Why are these groups hit so hard?
CARR: What was happening in the housing market was an experiment in unregulated markets in which lenders were peddling loans that were literally designed to fail. And when you say that, a lot of people say, well, no one would design a loan to fail. But they did. They designed loans to trigger unaffordable payments so that the borrowers would be forced to come back to the table in another three years and refinance.
And with that refinance they got lots of fees collected. And they were able to do that as long as house prices were rising, because effectively what the lenders were doing was just taking away the accumulated housing equity and starting that game all over again. Elizabeth Warren, who led the charge for a consumer financial protection bureau and is now a senator, actually coined those mortgages exploding mortgages.
MARTIN: Were these groups more vulnerable because they were first-time home buyers? Or were they specifically targeted in your opinion for this? I think a lot of people would ask, you know, why would these particular groups be particularly vulnerable to them?
CARR: These lenders targeted people of color, particularly African-Americans and Hispanics, knowing that they were less familiar with how the mortgage finance system worked and took advantage of their lack of information. A lot of people say, well, no, the foreclosure crisis was a failed government experiment in, you know, trying to expand homeownership to people who couldn't afford it.
But less than 10 percent of those sub-prime loans that were at the epicenter of the foreclosure crisis were for first-time homeownership. This was a refinancing game and it was refinancing aimed directly at people of color.
MARTIN: This is something that's been argued rather sort of intensely over the last couple of years as this crisis, if we could use that word, has kind of dragged on and on. There are those who argue that this was overreach by home buyers, people whose - as my mother would say, whose eyes were bigger than their stomachs, who were buying too much house with too little money and were irresponsible or didn't take the time to be well informed. I mean what would you say about that?
CARR: We've had more than 12 million foreclosure filing since 2007. So within that, certainly there were some people who got in and, you know, were speculating and they got burned. But to go from housing being the safest, most reliable asset for nearly half a century and then all of a sudden to just instantly have this foreclosure crisis, it wasn't a change in mentality of the American public.
You know, and all of a sudden people becoming irresponsible and reckless. It was a change in the types of mortgage products that were being offered and a failure by federal regulatory agencies to purge those products. It was not only predictable, Michel, it was predicted by many research organizations, including the one that I'm affiliated with.
So there was no surprise when this foreclosure crisis came. Everyone had been talking about it for more than a decade leading up to it. And Michel, I'll just give you one point of reference. The state of North Carolina was dealing with this issue so significantly that way back in 1999 they passed a statewide law to ban these loans.
And the federal government set that law aside to allow, you know, basically saying that federal law in this case was the predominant law. And those loans just continued.
MARTIN: If you're just joining us, we're talking about the loss of wealth, particularly among people of color, since the collapse of the housing market. Our guest is economic analyst Jim Carr. We've been talking about the roots of the issue. Now, Jim Carr, you have a very different perspective on the way to address this, because we know that, you know, policy seems to be moving toward tightening lending standards.
You say that that's the wrong approach.
CARR: Absolutely. Because low down-payments and credit scores did not cause this crisis. It was reckless, irresponsible lending of loans that were never designed to succeed. Use the credit score as an example. The Federal Reserve Board itself estimated that in 2006, more than 60 percent of the borrowers in the sub-prime market, which again was that failed market, more than 60 percent had credit scores eligible for a prime loan.
So this wasn't about low credit scores and it wasn't about low down-payments. We have a history of sustainable loan down-payments. It was reckless lending. And so what we need to do now is we need to better regulate the markets. And we've taken a good step in that direction with the establishment of the Consumer Financial Protection Bureau.
But we need not to sort of forget what happened. The low down-payment mortgages are really an important tool in the mortgage market. They didn't cause the collapse and we need to get back to it. As well as recognizing that not everybody has a high credit score, but a lower credit score does not mean you're not capable of managing a loan. It simply means that you manage your finances differently.
Maybe not as well as some others, but there's a difference in you're not perfect at managing your finances versus you're irresponsible for homeownership.
MARTIN: Obviously the predicate of your point here is that wealth needs to be rebuilt through housing because that is the way that most middle class people build their wealth. So what would a credit structure look like that would do that without creating another disaster?
CARR: When you're doing underwriting, for example, underwriting is complicated. And so when you look at what are the contributors to a loan defaulting, you have credit. Your credit history is important. Your down-payment is important. But the loan product type is more important than either of those.
So if you have a loan, for example, that's adjusting upward every single year, clearly just intuitively you know that's a more dangerous loan that is fixed over a period of 30 years. Your debt-to-income ratio is important, etc. So my point is not - you don't focus on one thing like a credit score or a down-payment in isolation. You look at the full characteristics of that loan and you put a responsible loan in place.
And we have, you know, we've known for years what constitutes a good solid underwritten loan. And low down-payments are a good part of a good, well-underwritten loan. Verifying the information, for example, from a consumer is really important. So all these things are important and they have to be taken together.
MARTIN: Why housing, though? I mean there are those who argue that this country in general is overly invested in housing, that we're just housing crazy. I bet you if you were to stop five kids on the street and say what does the American Dream look like, it would be a house.
MARTIN: But there are people who argue that that's just the wrong mentality, that it kind of ties people to neighborhoods. It makes the labor market less fluid. That, you know, maybe we should just change our whole thinking about this. You disagree?
CARR: Totally. Because housing is the single most important asset to the American family for some very powerful reasons. The first is which, you know, if you're investing in an alternative vehicle like the stock market, you are still going to have to pay rent. The beauty of a house is that you're able to invest in the place where you're living. And so you're owning. You're renting from yourself.
That's the first, most powerful thing. The second is that you are able to buy a house on high leverage, and with the right products it's a safe high leverage. So, for example, if you're buying a home for $100,000, and you pay 10 percent down, you get the return on the full $100,000 value of that home. That's hard to beat.
There is no comparable asset that most people can buy into that will allow them to actually pay their rent simultaneously with building income and, at the same time, have a high leverage. The idea that housing locks you into a neighborhood it's just, you know, annoys. The fact is that in a robust, healthy housing market, if you have to move, you will sell your home at a reasonable appreciated value. And you will gain some wealth in the process. And if you're moving that quickly, you know, next year or two years from now, you shouldn't be a homeowner.
And the other thing, Michel, that's important. People should not be speculating on homes and buying more than they can afford. But my point is that we had almost 60 years of history to show housing is the most reliable, safest and important investment for the typical American household. And I don't think that we should use a period of failed regulatory oversight to then all of a sudden start rethinking what has worked for more than half a century.
MARTIN: You've obviously pointed to a number of policy changes that would need to take place to put this into practice. Short of that, is there anything that individuals can do now to try to address this?
CARR: It's time to fix the housing market because the housing market is broken. In terms of individuals what they can do, they can be very assertive in looking for affordable homeownership opportunities. And remember, that there is also FHA which still does allow for low down payments. And it's more flexible with respect to its underwriting criteria, including credit history. I would say this is a good opportunity, particularly in the markets that have been depressed and are starting to come back, that individuals might want to look for homeownership opportunities.
MARTIN: And finally, before I let you go, why should people care about about this?
CARR: They should care particularly on the race/ethnicity issue because, you know, we used to say, Michel, that in another 40 years or so, America will be a country whose largest share population are people of color. But as of a couple of years ago, the largest numbers of babies born in America are now people of color. And so, it's really important to have people of color being able to build wealth and to be viable players in the economy of America because it's essential not just to those families, but it's essential to America's overall competitiveness in the future.
And again, I just keep coming back to housing is that one asset that is equally shared across all American families, unlike the stock market which is heavily and disproportionately held by the wealthy.
MARTIN: Jim Carr is a distinguished scholar at the Opportunity Agenda. He's a senior fellow at the Center for American Progress. We caught up with him in St. Louis at St. Louis Public Radio in St. Louis, Missouri.
Jim Carr, thank you for speaking with us.
CARR: Thank you, Michel.
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CARR: Coming up, Head Start is meant to do exactly what the name implies: Give kids from low income backgrounds a jump on their education. But federal budget cuts are taking a toll. We'll find out just how big a toll in just a few minutes. And we'll also talk more about the push for early education. That's ahead on TELL ME MORE from NPR News. I'm Michel Martin. Transcript provided by NPR, Copyright NPR.