The American Dream of Homeownership: From Cliché to Mission - PDF

The American Dream of Homeownership: From Cliché to Mission Presentation by Angelo R. Mozilo Chairman, President and Chief Executive Officer, Countrywide Financial Corporation & Chairman, Countrywide Home

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The American Dream of Homeownership: From Cliché to Mission Presentation by Angelo R. Mozilo Chairman, President and Chief Executive Officer, Countrywide Financial Corporation & Chairman, Countrywide Home Loans, Inc. The Joint Center for Housing Studies of Harvard University John T. Dunlop Lecture Sponsored by The National Housing Endowment Washington, DC February 4, 2003 National Housing Endowment The leadership of the National Association of Home Builders (NAHB) created the National Housing Endowment to provide long-term, reliable funding for areas targeted as critical to: Promote a healthy and prosperous housing industry; Safeguard the future of safe, decent and affordable housing; Elevate housing to a lasting national priority in the minds of the American public and at the core of government policy. The National Housing Endowment uses interest earnings on the endowment fund to make grants for projects that strengthen our ability to meet America s housing needs. Joint Center for Housing Studies The Joint Center for Housing Studies analyzes the ways in which housing policy and practices are shaped by economic and demographic trends, and provides leaders in government, business and the non-profit sector with the knowledge and tools to formulate effective policies and strategies. The Center produces the annual State of the Nation s Housing report, and is a collaborative unit affiliated with the Harvard Graduate School of Design and the Kennedy School of Government. The Joint Center for Housing Studies is grateful to the National Housing Endowment for its continued support of the John T. Dunlop Lecture. Each year the Dunlop Lecture presents an address by a housing leader to highlight the importance of housing as a policy and research area at the university and in business. The annual lecture honors the work of Professor John T. Dunlop, Lamont University Professor, Emeritus of Harvard University. John T. Dunlop John T. Dunlop is the Lamont University Professor Emeritus, Harvard University. He was Chairman of the Economics department and Dean of the Faculty of Arts and Sciences. Professor Dunlop was United States Secretary of Labor during the Ford administration. He has had a lifetime career in mediation, arbitration and dispute resolution. A commitment to the nation s construction industries and housing has also marked his work. He was chairman of the Construction Industry Stabilization Committee, He played a role in the establishment of the National Institute for Building Sciences. The National Association of Home Builders made him a member of the National Housing Hall of Fame in He also serves on the board of the National Housing Endowment. In 1971, Professor Dunlop played a key role in establishing the Policy Advisory Board of the Joint Center for Housing Studies. Angelo R. Mozilo Chairman, President and Chief Executive Officer, Countrywide Financial Corporation Chairman, Countrywide Home Loans, Inc. Angelo R. Mozilo, who co-founded Countrywide Financial Corporation (NYSE: CFC) in 1969, is Chairman, President and Chief Executive Officer. He also serves as Chairman of Countrywide Home Loans, Inc., the Company s main subsidiary. Countrywide, a global leader in residential finance and related services and a member of the S&P 500, Forbes 500 and Barrons 500 maintains more than 520 offices across the country, with a work force of more than 29,000 employees. Mozilo is active in all aspects of Countrywide s businesses. While he reviews all financial and operational activities, his central focus is on overall business growth and strategic direction. Mozilo was the President of the Mortgage Bankers Association of America (MBA), which represents approximately 3,000 member firms involved in every aspect of mortgage and real estate finance. He continues to serve on the MBA Board of Directors. Mozilo is a member of the Board of Trustees for the National Housing Endowment and is on the board of the Joint Center for Housing Studies of Harvard University. continued on next page continued from previous page Other activities include serving as a member of the Boards of Trustees at Fordham University in New York City, Gonzaga University in Spokane, Washington, and St. Francis High School in La Cañada, California. These are some of the awards received by Mozilo: The American Dream of Homeownership: From Cliché to Mission National Association of Home Builders Hall of Fame. Boy Scouts of America, James E. West Fellowship Award. Ellis Island Medal of Honor, which is held by all living U.S. Presidents. Albert Schweitzer Award for his work with the youth of America. Special Achievement Award for Humanitarian Service from the National Italian American Foundation. Jane Wyman Humanitarian Service Award from the Arthritis Foundation. Mozilo received a bachelor of science degree from Fordham University in 1960 and holds an honorary doctor of laws degree from Pepperdine University. 2 3 T hank you, Nic, for that introduction. I want to first thank Nic Retsinas, the Joint Center for Housing Studies, the National Housing Endowment, and the Honorable John Dunlop for the opportunity to address you this evening. But the one thing that hasn t changed is what George Washington spoke of during that inauguration it was what he called the experiment entrusted to the hands of the American people. It is an incredible honor to be with you today both on a personal level and on a professional one. It s a personal honor because over 34 years ago my partner and I founded Countrywide with the objective to lower the barriers and open the doors to homeownership. We wanted to make the American Dream of Homeownership something tangible something to which people could do much more than just aspire. We wanted We wanted to make the to make it something they could access, afford and American Dream of achieve. We wanted to prove that our company Homeownership something could and would succeed by offering home loans tangible something to to hard-working families of all races and of all which people could do much more than just aspire. We ethnic backgrounds. wanted to make it something In other words, it has always been our intention to they could access, afford be more than a corporation that makes mortgage and achieve. loans; we wanted to be a force in making positive differences in people s lives. Our goal was and still is to demonstrate that there is a unique role for the private sector in public service. That goal is, in essence, the John Dunlop example. And for that reason, being asked to deliver this lecture tonight is a great source of personal pride. As I mentioned, it s a profound professional honor to be here in Washington, as well. Let me relate why this is such a professional honor by recounting for you some history that took place on this very day. On February 4 th, 1789, all 69 presidential electors, who were able to cast their votes, unanimously elected George Washington to be the first President of the United States. Things were a little different then. After Washington was notified, he actually had to leave this area and his home in nearby Mount Vernon so he could be inaugurated in what was then the capital, New York City. Back then, an inauguration speech was a muted affair, a quiet speech delivered solely to the Congress. He knew that the American experiment and our young Nation would face many great challenges. And he knew that those challenges would be met and could only be met not by executive power or one individual s actions, but by the collective hands of all the American people. In other words, the key to our success be it the year 1789 or 2003 is, has been, and always will be partnership. Nowhere is that more true or that partnership more vital than when it comes to providing more families with the opportunity to realize their American Dream by becoming homeowners. That s why it is such an honor for me to be here and to be surrounded by so many talented people and partners dedicated to housing and to the housing finance industry. Our partnership has done nothing less than help countless families own homes, develop personal wealth, create strong communities, and build their futures. Whether you represent government agencies or GSEs, non-profits, faith-based groups or industry associations, communities or even Countrywide competitors, we together have secured the future for many families in this great Country. For the people in this room, the American Dream of Homeownership is not cliché. It s our cause. It s our mission. The past few years have been remarkable ones for our industry. Lower interest rates, the push for greater diversity in homeownership, and massive immigration into the U.S. have created both challenges and opportunities. However, despite the fact that approximately $2.5 trillion in mortgage loans were made in 2002, the gap between low income and minority homeownership, and what is classified as white homeownership, remains intolerably too wide. Therefore, expanding the American Dream of Homeownership must continue to be our mission, not solely for the purpose of benefiting corporate America, but more importantly, to make our Country a better place. Let there be no doubt, the experiment entrusted to the hands of the American people has come a long way not just since George Washington s time, but also since Franklin Roosevelt s. He, with help from Congress, established the Federal Housing Administration in 1934, providing federally backed insurance for long-term amortized mortgages. 4 5 Our Nation took another important step in 1938 in fact, 65 years ago this week when Fannie Mae was created to buy those FHA loans, and as a result, the secondary mortgage market was born. We took a few more giant steps in the 1940s with the G.I. Bill in 1944 and the Housing Act of 1949, which stated the goal of a decent home and a suitable living environment for every American family. We witnessed the Fair Housing Act in the 60s, the creation of Freddie Mac in 1970, the expansion of Fannie Mae s activities, the Community Reinvestment Act in the 70s, the introduction of adjustable-rate mortgages in the 80s, and more recently, the National Affordable Housing Act of It started with the New Deal, and now, we re in a new century. But through it all, one thing has remained, more or less, constant. This constant is our challenge. And this challenge is to increase the access to affordable housing. And in order to do this, we must close the homeownership gap that still exists. Mortgage Debt Outstanding Has Grown Continuously, Increasing Over 300 Times 1945 s Debt We have traveled so far thanks to a mortgage-finance system that remains the envy of the world; thanks to a constant stream of creative and innovative mortgage products, and efforts directed at encouraging the offering of loans to those who have been previously shut out; and simply put, thanks to housing being an enduring public policy objective and the lasting commitment to that objective symbolized by our partnership. We have transformed from a Nation of renters to a Nation of homeowners. The overall U.S. homeownership rate, which was at 44 percent in 1940, hit 68 percent by the end of the third quarter of Historically low interest rates along with new, creative and flexible underwriting techniques are continuing to fuel a record period of growth for our industry. According to the Federal Reserve, the amount of overall mortgage debt outstanding is nearly $6 trillion. And, increasingly, the sub-prime Transforming from a Nation of Renters to a Nation of Homeowners market is boosting that number and the industry as a whole. During the first nine months of 2002, sub-prime originations rose an estimated 26 percent over the same period in 2001 outpacing the overall market. Source: Federal Reserve Sub-Prime Mortgage Originations Growing Faster than the Overall Market + 13% + 26% All told, according to the Joint Center s The State of the Nation s Housing report, the housing sector saw the sale of 6.2 million new and existing homes in And this past year was substantially more productive. Source: Economic Benefits of Increasing Minority Homeownership by HUD 10/2002; U.S. Census Bureau Source: Inside Mortgage Finance Source: Inside Mortgage Finance 6 7 As President Bush said last October: THE HOMEOWNERSHIP GAP WHY IT EXISTS 8 Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That s a homeownership gap. It s a gap that we ve got to work together to close for the good of our Country, for the sake of a more hopeful future. We ve got to work to knock down the barriers... While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 an increase of 40 percent the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation like an influx of new immigrants or continued reduction in the supply of affordable housing it has the potential to become far worse. So tonight, I want to discuss why that gap persists and how Countrywide is trying to address it. Then, I d like to concentrate on three specific structural obstacles that we must resolve together for the well-being of our industry and for the welfare of our Country. Specifically, those structural obstacles are: Minority Homeownership Has Increased + 40% Source: Economic Benefits of Increasing Minority Homeownership by HUD 10/2002 The Underwriting Process Predatory Mania, and A Lack of Proper Perspective. If we don t get a better handle on these issues, as I will discuss, I would argue that the homeownership gap will not only remain, but there is a good chance it will widen and the homeownership rates among low income and minority borrowers will continue to be depressed. Thus we run the risk of harming the very people we want to help. And finally, I will offer several reasons why I think it is vitally important that we address these issues with a sense of urgency. Let s begin with looking at why the homeownership gap persists. There are many reasons for the gap. Many are obvious and well-known. Others are more subtle and, therefore, more difficult to attack. But, ultimately, I believe the homeownership gap is a by-product of the following: the Money Gap or Wealth Gap, the Education Gap, and the Housing Gap. Homeownership Rates by Race/Ethnicity Source: U.S. Census Bureau The Money Gap is the obvious barrier created by the fact that there are those who have capital and access to credit, and those who don t. On the capital side, the down payment and closing costs remain, perhaps, the greatest barriers to homeownership. And simply put, but not surprising, minority and low-income families often lack the accumulated wealth and/or income to make these down payments and cover other closing fees. There is a cyclical and often unfair nature to the capital issue because homeownership is, as it has so often been proven, a vehicle for accumulating wealth. And that wealth is often used to help the next generation become homeowners. In other words, the children of parents who are not homeowners predominantly low-income and minorities begin the quest for homeownership several steps behind the children of homeowners. 9 10 When it comes to credit, there is a double-edge, as well. On one side is the fact that lenders are difficult to access because mainstream and reputable financial institutions are not always conveniently located near potential low-income and minority homebuyers. On the other side is the fact that many potential low-income and minority homeowners have questionable credit histories at least as measured by the standard underwriting models available today or no measurable credit history at all. Thus, even if they can access a lender, that lender can t or won t help. One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low income and minority borrowers. A report done for the Local Initiatives Support Corporation, otherwise known as LISC, found that over 40 percent of African American renters whose income was under $40,000 did not have banking relationships of any kind. If these families want to become homeowners, they are often rejected by traditional lenders in the loan process; and if that is the case, they frequently become easy prey for predatory and unscrupulous lenders. One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers. Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan. It is the willingness and the ability of a borrower to make monthly payments that are the determinants of loan quality. Over the past 50 years, I have personally interviewed thousands of potential homebuyers and in the vast majority of cases, the barrier standing in between them and the house of their dreams was the down payment. That barrier must be eliminated by offering customized programs to those borrowers who cannot meet the current down payment requirements. That brings me to the second issue that contributes to the overall homeownership gap namely, the Education Gap. There is a truth in our industry that determining who gets a mortgage and at what interest rate is often more an art than it is a science. Put another way understanding the home-buying process can be complicated and confusing, especially for lowincome and minority families. Not only are there dozens of documents to review and sign, but there are income ratios and a variety of loan options that a borrower must wade through. In addition, borrowers are faced with the complexity of understanding credit scores, commonly known as FICO, and the issue of how to improve these scores and ensure that the data contained by the credit repositories is accurate. We must make the process not just easier, but easier to comprehend. We must get information to potential homeowners in a manner and language that they can understand. We must educate the low-income and minority sector about their rights and the responsibilities of homeownership. Equally important, we must reduce the documentation required to make any and all loans; we should be able to approve loans in minutes, rather than days, and close loans in days, rather than weeks. Furthermore, we should streamline the title insurance process and we should replace the public recording of documents with book entry as is done with stocks and bonds. This will substantially reduce costs and improve affordability. If we fail to seek paradigms to simplify the process, accelerate the timing and reduce the cost of obtaining a mortgage, we will be left with two scenarios. One is that potential buyers will be too intimidated by the very process of buying a home to even attempt to move forward. The other is that for those who do have the fortitude to proceed, they can easily fall prey to the slick marketing schemes of predatory lenders promising an effortless process. All of the technology is in place today to both simplify and accelerate the process and the only issue standing in the way of change, unfortunately, is the fear of change. The final gap I d like to talk about is what I will call the Housing Gap. What I mean by the Housing Gap is that there is just not enough affordable and decent housing. Part of th
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