Video – Preview of Facing the Mortgage Crisis

July 14, 2008

Ruth Ezell previews the upcoming program, “Facing the Mortgage Crisis,” which airs July 15 and 22 at 7 p.m. on Channel 9. Viewers can email their mortgage questions in advance to mortgage@ketc.org.

Mortgage Crisis Hits 2 Million U.S. Children

July 14, 2008

Originally published by OneWorld on July 8, 2008:

By Caitlin G. Johnson, OneWorld US

Children’s advocates say the impacts of the housing and foreclosure crisis are being felt in K-12 classrooms and communities across the country.

“Our homeless education liaisons are noticing increases in the number of students who are homeless, not just in high-poverty families but also those who have typically been middle class and facing this for the first time,” says Patricia Popp, state coordinator for homeless education in Virginia.

Under federal law, school districts are required to have homeless education liaisons to identify and assist homeless students.

Kathy Kropf has served as the homeless liaison in Macomb Intermediate School District in suburban Michigan for 14 years. “Our numbers are the highest they’ve ever been this year,” she says. This school year, the county served 514 homeless students, a 33-percent increase over last year. At least 50 of those students were made homeless by recent foreclosures, according to Kropf.

The national data on homelessness during the 2007-08 school year will not be available until the Fall, but preliminary evidence suggests a rise.

In April, the National Association for the Education of Homeless Children and Youth, a grassroots membership and advocacy organization, surveyed over 1,000 school districts about the impact of the foreclosure crisis. Those districts reported serving a total of about 250,000 homeless students as of April 2008. With two months left in the school year, that number was already almost equal to the number of homeless children served the previous year.

The districts reporting the highest increases in homeless students appear to match those currently leading in foreclosures — namely, areas in California, Florida, Texas, Michigan, and Ohio, says Barbara Duffield, the organization’s policy director.

“At least 300 districts that responded to the survey said that the foreclosure crisis was having ’some or significant impact’ on homelessness. Others weren’t sure why the numbers were going up, whether it was due to foreclosures or the economy, or both,” says Duffield, who cautions that the numbers are not nationally representative, but do make the case for further study.

STABILITY HELPS KIDS

Frequent moves have been shown to take a toll on children’s learning, behavior, and health. Elementary school students who change schools twice or more in a year show poorer reading than their peers who do not change schools, according to the National Assessment of Educational Progress, called the Nation’s Report Card. The Government Accountability Office finds similar negative impacts on math performance.

An increase in housing instability may have consequences for a nation struggling to improve its 70-percent average high school graduation rate, which dips to 50 percent in many of the largest U.S. cities. School and residential changes can cut a student’s chances of graduating by more than half, according to data cited in the First Focus report.

Other studies have found ties between attending several different elementary schools and higher rates of behavior problems and violence.

Stable housing, on the other hand, has been linked to better health outcomes, according to the Center for Housing Policy.

“Absenteeism, a drop in performance, and students who were normally active participants suddenly being withdrawn — these are all warning signs,” First Focus’ Phillip Lovell told One World.

Adds Duffield: “Once you lose your housing, you often find…that shelters are full or don’t take older boys, or you end up in motels or hotels, which eat into any savings you have, or the families get split up among several relatives and friends.”

SCHOOLS AS FIRST RESPONDERS

Veronica Peterson, a divorced mother of four in Columbia, Maryland, knows the warning signs first-hand.

As the area’s economy slowed, Peterson’s business slowed with it. She fell behind on her mortgage payments, and Washington Mutual eventually foreclosed on the house.

Peterson’s housing worries are compounding the strain of the family’s recent divorce. “I manage to shield my kids from much of the housing issue, and my 10- and 11-year old don’t really know — but my 16-year-old daughter has to be responsible and kick in more, and I rely on her more. She ended up messing up in school. She was kicked out for fighting,” Peterson says. Her daughter is receiving counseling.

Peterson is working with ACORN, a housing advocacy organization, in an attempt to negotiate a mortgage modification. In case that doesn’t work, she has applied for public housing. She says the worst part about leaving is that her children would no longer be in this school district, which was the main reason she moved to the community 10 years ago.

Under federal law, her children would not have to change schools. The McKinney-Vento Act is designed to ensure that children can remain connected to their schools when a loss of housing forces changes in their residence status. But it’s not always practical to send children longer distances to attend school, especially for those struggling to make ends meet.

The U.S. Senate is currently debating an amendment to the McKinney-Vento legislation that would add $30 million in funds to school districts for services for homeless students, including education supports and transportation.

“SHAMED INTO SILENCE”

Peterson believes her loan was predatory and says that she was misled, but admits she “didn’t read the papers closely enough” when she signed them. “I think a lot of people are embarrassed and ashamed because they signed those papers, so they aren’t going to come forward when there’s a problem or a predatory situation, they’re just going to pack up and move.”

Indeed, many of the respondents to the National Association for the Education of Homeless Children and Youth survey said it was difficult to gauge the impact of foreclosures because some parents — especially those experiencing homelessness for the first time — are reluctant to share their stories or access services, hoping it is a temporary situation.

New data is expected to clarify the exact impact of the housing crisis on children as First Focus releases a follow-up to its May 2008 report in the coming weeks.

St. Louis Beacon – The Mortgage Crisis is Really a Savings Crisis

July 14, 2008

Originally published by The St. Louis Beacon on Wednesday, July 9, 2008:

By Mary Delach Leonard, St. Louis Beacon staff

The roots of the mortgage crisis reach back to the 1980s, when looser credit encouraged families to spend rather than save. A booming real estate market masked the problem – but only temporarily.

While it can be argued that all levels of the lending industry played some part in the sub-prime mortgage collapse, economist William Emmons of the Federal Reserve Bank of St. Louis adds another factor: household financial behavior.

Emmons believes the sub-prime mortgage meltdown was a long time coming and is linked to the downward trend in both U.S. personal and national saving.

“I think it goes back 20 years, and this is the manifestation,” Emmons said. “To me, the big story is we have a national savings crisis, and this goes back to at least the 1980s.”

In 2005, the U.S. personal savings rate hit zero and kept heading south — to a negative 0.4 percent, according to the U.S. Commerce Department. It’s called negative spending, a polite word for debt. 

“Saving is defined as ‘not spending’: income after taxes not spent. And we’ve now gotten down to the zero or negative rate. How do people do that? By borrowing. That’s how the growth of spending has been much faster than income,” Emmons said.

PUT IT ON MY TAB
Why have Americans been borrowing so much?

Emmons, whose research area includes banking, financial markets and financial regulation, points to financial deregulation that increased access to credit in a big way in the 1980s. Lower nominal interest rates opened the door to more borrowers by effectively stretching out payments and shifting the burden of repayment further into the future. So, more people were able to qualify for loans.

At the same time, advances in technology simplified the lending process. The simplicity of credit scoring, for example, gave lenders more confidence in lending outside their markets and lending to more people, he said.

But access to credit is still only half the story, Emmons believes.

“The other thing that has been instrumental and pernicious was asset booms,” he said. “When we think about asset booms we think first about the stock market boom, but that wasn’t as widespread because not as many people have large stock portfolios. And more important, you can’t borrow as much against stocks. But the housing price boom in this decade was widespread. Large dollars are involved, and it opened the door to borrowing.”

Emmons said that at the height of the boom, he talked to a cousin who lives in California about that state’s skyrocketing housing prices.

“He said, ‘It doesn’t matter what you pay, as long as you can get the financing. It doesn’t matter what the price is because it is going up. I’ll always make a profit,’ ” Emmons said. “So, in that sort of a market, price is sort of meaningless. The constraint is not the price but the credit access. You can not have a bubble without credit.”

And consumer credit seemed to be readily available everywhere.

“Everybody wanted to offer you financing,” Emmons said. “Everybody wanted to finance you whether it was furniture or automobiles. You can even borrow against home improvements, like a new door.”

While Emmons acknowledges that credit is a good thing, the question became: Is this too much of a good thing?

“Economists would always say that more choice is better, but at the same time, do people understand their options? Do they understand how to make good financial decisions? Which loops back around to financial literacy,” he said.

RISKY BUSINESS
Responsible borrowing can make it possible for people to buy homes, or fulfill important needs, such as health care or transportation to get to work. But things got out of hand when the mentality of got-to-have-it-now trumped saving-for-the future, analysts say.

“If it’s medicine, that’s a need. But if it’s a durable good, a large purchase — a house — the timing is the question. Do you buy it today, tomorrow, or two years from now?” Emmons said.

“The sub-prime market has always existed on a small scale, but the modern sub-prime market is very different,” he said. “One of the major effects of the sub-prime market was to accelerate home ownerships. It wasn’t that certain people should never buy a house, but before this current market it was more difficult. You had to wait longer, build up a larger down payment.”

In the end, it was all about risk, explains Yuliya Demyanyk, an economist and colleague of Emmons at the Federal Reserve Bank of St. Louis.

“It used to be that when a bank loaned you money, you owed the money to the bank. In the case of default, the bank would lose the money,” she said.

As new loan products arrived on the market and access to credit improved, banks could diversify their risk. Sub-prime mortgages were sold and pooled.

“Any particular loss as long as there was no massive default, was not the bank’s loss,” Demyanyk said. “On one hand, that’s an overall improvement in the financial market because you could share the risk. It was a bad thing for you if you were to lose your home, but in the opinion of the bank it was no loss. So, they didn’t need to be scrutinizing borrowers to the same extent, and there is a cost associated with screening borrowers.”

That lack of scrutiny proved costly in the long run, Emmons points out.

“The flaw on the investor side was they thought they could get this risk pooling without affecting the risk. But, in fact, the incentive for the loan originator had changed, and underwriting quality seemed to decline. So, this logic of spreading the risks still holds, but there was a lot more risk being put into this pool than the investors originally thought,” he said. “That’s the big mistake made on the investors side — Wall Street, the rating agencies, the ultimate investors were naive in thinking they did not change the nature of the risk by opening up this huge pool of capital to the mortgage markets.”

With those investors out of the market, the result has been a credit crunch.

“That’s the big question mark: Whether those big investors will come back,” Emmons said.

The process to create mortgage pools was elaborate and complicated and won’t just snap back, he said.

“Investors have to have confidence in every link in the chain. And each of those links has been discredited, whether it is mortgage brokers, appraisers, securitizers, rating agencies, bond insurers. All have been through the wringer,” Emmons said.

IT WAS LIKE A VIRUS
Demyanyk says her research on sub-prime loans indicates that when housing prices stopped rising, it didn’t cause all the mortgages to become bad all of a sudden.

“Those mortgages were bad, even when the house prices were rising,” she said. “But the mortgage had an escape: The house market is wonderful; you could always sell. The market was hot — you could get away with a bad mortgage situation. The crisis was in the quality of the mortgages.”

She believes the industry didn’t see the collapse coming because it was masked by housing prices.

“It is like a virus feeding in your body during the incubation period. You do not see it. You do not know it’s there. It is ready to show signs, but before it does, you would not go to the doctor and start checking on different things because you feel so well,” Demyanyk said. “After the first sneeze, then you start getting it. What happened? You have a lot of sneezes in 2006, and boom we’re in a crisis.”

She also speculates that the bust was inevitable, given the mindset of the market.

“Knowing there will be a crisis won’t necessarily spurn the crisis but could make it happen sooner,” she said. “If you were told two years ago, when things were going great, that if everyone takes the equity out of their houses to buy boats there will be trouble two years from now. Would you not do it? You might say, ‘I need to do it sooner, while I still can. I need to do it faster because I need that boat.’ “

We are you – Amy Shaw at KETC tells her story

July 14, 2008