Except for the past several years, Baltimore has always been an affordable town, and a town of homeowners. One reason was the savings and loan industry, which was brought over by East European immigrants. In the old ethnic neighborhoods, on every block you had a pub on one corner, and there would be a little saving and loan, or building and loan association, up on a second floor of a house. The men on the blocks could get together and pool their resources. They did it so that their children could buy a house in the neighborhood. It was a wonderful concept.
One reality in cities like Baltimore is that for the past 40 years, we as a community have not built enough rental housing for low- and moderate-income families – especially two- and three-bedroom houses for families. That has put tremendous pressure on tenants who are living in abominable rat-infested, roach-infested housing and can’t find decent rentals. This is part of the reason so many people were susceptible to getting into these bad deals. They knew they couldn’t afford the loans, but they were so desperate to get out.
One theme that has come up in the election is blaming the Community Reinvestment Act (CRA) for the current financial situation. CRA came out of Congress in the ‘70s, and there were good, valid reasons to put pressure on banks to lend in areas where they weren’t lending. In the ‘80s Congress gave the law some by creating a rating system to evaluate how banks were doing on their CRA, and then banks had to take it seriously. They worked at getting outstanding ratings, and that was a good thing for a lot of neighborhoods that hadn’t seen private investment in years. But here’s the key thing: no one in the community development movement ever asked a banker to make a bad loan. Blaming CRA for the current housing crisis is really a crock of b.s.
For years, ordinary working people in Baltimore bought homes through FHA. FHA controlled 40 percent of the real estate market. Besides having low down payments, FHA loans had protections for buyers. All loans had to be reviewed and approved by the FHA. The FHA inspectors were tough, and they insisted on sellers making all the repairs before they approved the sale. The FHA also had a barrel of appraisers that were approved.
Then two things happened. In the late 1980s, the banking community got permission from Congress to underwrite FHA loans. In other words, FHA didn’t review them anymore. That led to a lot of new lenders making FHA loans. FHA kept one control, though – they still had the appraisers. But in the mid-‘90s, the banking community went to Congress and got permission to choose their own appraisers. Suddenly the number of FHA appraisers in Baltimore grew from 40 to 100, and a lot of the bad guys abused the FHA system.
That led to the flipping scandal, and to lots of foreclosures on FHA homes. It also forced a six-month moratorium on foreclosures. FHA tried to clean up its act by making its regulations stricter. But that only led more sellers and lenders to go outside of FHA. Six years ago, FHA’s share of the Baltimore market dropped from 40 percent to about 3 percent. And, it led directly to the crisis we’re in now.
Ironically, as a result of the current crisis, FHA sales are back up to 40 percent of the Baltimore market. For low-income and even middle-income families, the only way you can buy a house today is through FHA.
If there is a silver lining to the current mess, it is that we have regulations again. Buyers have protections, and lenders are more conservative in determining who can buy a house.