Preventing a Future Foreclosure Crisis

We know that the combination of the popping of the housing bubble and the Great Recession has produced a wave of foreclosures, defaults, and left many homeowners underwater owing more on their homes than they are worth.

Monica Potts of the America Prospect shines some light on a pretty revealing study that examined foreclosure rates among lower-income borrowers. The report is authored by Janneke Ratcliff of the Center for Community Capitalism at UNC-Chapel Hill and David Abromowitz of the Center for American Progress. They found that for those lower-income families that bought homes after participating in a program that included some housing counseling, financial education, or other support services, the foreclosure rates are much lower than the national average.

And interestingly, it did not matter if the program was a downpayment assistance, savings, or other assistance program. When there was some third party mediation and provision of information, it made a difference. This is a very relevant finding, especially as we turn our attention to preventing a future repeat of recent economic performance.

Potts takes issue with the popular narrative of the recession that lower-income families caused the financial crisis by taking out mortgages they could not afford. I agree. This argument is rubbish on a number of counts, particularly because it holds harmless the peddlers of predatory mortgage products that were sold to consumers who did not understand their basic terms. And now we have evidence that when there was financial education and counseling that went along with the home buying process, the results were much better. Basic financial education and support in the homebuying process turns out to make a big difference.

As Potts notes, “The problem wasn’t one of poverty, but one of financial literacy. The best homeownership programs for lower-income families tackled that problem. Those families are still in their homes, and show that the type of financial homeownership programs can still serve as a way to build assets for low-income families.”