The HOPE Financial Dignity Center held its grand opening yesterday and hosted Federal Reserve Chairman Ben S. Bernanke as its speaker.  The Center, located next door to Ebenezer Baptist Church in Atlanta, is designed to equip community members with tools to manage finances and build lasting financial security through programs such as a 10-week Kaplan University course on personal financial management.

The Fed Chairman's speech focused on the recent history of housing, the fallout from the recent crisis and what government is doing to move forward.  He told the audience that the burdens of a weak economy and the benefits of economic growth are not always equally shared.  To be truly effective, policymakers must take into account how their decisions affect the least advantaged, not just the economy as a whole.

The housing boom and bust was among the principal causes of the financial crisis and the following recession, Bernanke said, and continued weakness in the sector with low rates of construction and continuing foreclosures has provided a powerful headwind to recovery.  There are improvements in housing markets but we are far from being out of the woods.  Among continuing problems are construction activity, home sales, and prices, 20 percent of mortgages underwater, and 7 percent seriously delinquent or in the process of foreclosure.  Meanwhile, the national homeownership rate has slipped nearly 4 percentage points from its 2004 high of 69 percent, and it now stands at a 15-year low. 

Lower-income and minority communities have, as often happens, be disproportionately affected by problems in the national economy, Bernanke said.  "Indeed, as a result of the crisis, most or all of the hard-won gains in homeownership made by low-income and minority communities in the past 15 years or so have been reversed. For example, among all income groups, between 2007 and 2010 homeownership rates fell the most for households with income of $20,000 or less."  "Over the period from 2004 to 2012, the homeownership rate fell about 5 percentage points for African Americans, compared with about 2 percentage points for other groups."

Homeownership rates fall when homeowners lose or leave their properties or barriers to homeownership increase; in recent years both have happened.  Foreclosures continue with lower-income and minority homeowners and communities often the hardest hit.  Communities suffer with reduced tax bases and increased vandalism and crime.  Homeownership rates have also declined because fewer households have chosen to been able to become homeowners.  Lending for first-lien purchase mortgages fell by more than half from 2006 to 2011 to its lowest level since 1995 with the contraction particularly severe for minority and lower-income groups.  Since the peak in 2006, the number of home-purchase loans extended to African Americans and Hispanics has fallen more than 65 percent contrasted to a 50 percent decline in lending to non-Hispanic whites.  Home-purchase originations in lower-income neighborhoods have fallen about 75 percent, compared with around 50 percent for middle- and upper-income neighborhoods.

Some of the drop in originations is due to a weakness in demand because of unemployment, income loss and concerns about the future.  The fall in home prices keep many homeowners from using equity to move up or, if their mortgages are underwater, from selling their homes. But, Bernanke said, tight credit remains an important factor as well.  Lenders began tightening mortgage credit standards in 2007 and have not significantly eased them since.  

Lenders say they originate fewer mortgages because of worries about the economy, the outlook for house prices and existing real estate loan exposures. They also mention increases in servicing costs, fear they will have to repurchase delinquent loans, difficulty obtaining private mortgage insurance, and some program-specific issues for FHA loans.  There are also indications that mortgage originations for new purchases may be constrained by processing capacity because of high levels of refinancing.  Importantly, Bernanke said, restrictive mortgage lending conditions do not seem to be linked to any either lack of bank capital or to a general unwillingness to lend.

While some tightening of credit standards was an appropriate response to the housing crash, it seems likely at this point that the pendulum has swung too far the other way, Bernanke said, and that overly tight standards might be preventing creditworthy borrowers from buying homes, thereby slowing the recovery in both housing the economy as a whole.  

Bernanke named a number of public and private efforts that have been initiated to mitigate the housing crisis such as programs to modify mortgages, refinance underwater mortgages, facilitate short sales and reduce the impact of vacant foreclosed homes. Policymakers have also taken steps to remove barriers to the flow of mortgage credit such as new rules to lessen lenders concerns about mortgage repurchases and regulators have worked with lenders to try to achieve an appropriate balance between reasonable prudence and ensuring that qualified borrowers are not denied access to credit.

To strengthen the overall economic recovery the Federal Reserve has sought to keep both short-term and longer-term interest rates historically low and recently announced it would continue to put downward pressure on longer-term interest rates until the outlook for the job market improves substantially.  The resulting historically low mortgage rates are directly supporting the housing market by putting homeownership within the reach of more people.

While the economic recovery and regulatory policy affect access to credit for all households, Bernanke said some potential borrowers may face the added burden of discrimination and two types continue to have particular significance to mortgage markets: redlining, in which mortgage lenders discriminate against minority neighborhoods, and pricing discrimination where minorities are charged higher loan prices than comparable nonminority borrowers. The Federal Reserve has been vigilant in identifying and stopping such abuses, the Chairman said, and remains committed to vigorous enforcement of the nation's fair lending laws.

Bernanke said that homeowners also have a role to play in the larger housing picture.  Effective financial education--aimed at both youths and adults--can provide people with the knowledge they need to become effective homeowners. "Some of the skills that prospective homeowners need are relatively basic--for example, knowing how to shop for the lowest interest rate and fees, understanding the difference between a fixed-rate and an adjustable-rate mortgage, and, very importantly, knowing how to find trustworthy information and advice. More generally, the decision to buy a home must be consistent with a family's longer-term objectives, needs, and resources. Good financial planning--including effective budgeting, adequate saving, and sensible investing--can help families maintain homeownership while also pursuing other important objectives, such as preparing for retirement or financial emergencies. And financially informed households will have a better chance to build wealth, reducing--in the case of minority households--the large wealth gap that exists between minorities and other groups."  He pointed to the role of HOPE and similar organizations in helping people gain that knowledge.

Acquiring basic information and skills about managing their money is important, he said, but there is another important advantage of financial education; an economy with financially knowledgeable households is likely to be stronger, more equal, and more stable. "As such, we all gain from efforts to increase financial literacy."

Still, it is not practical for everyone to be a financial expert.  Sometimes it is appropriate for an individual to seek professional advice. "For example, an individual may be involved in buying a home--a complex and intimidating experience for many people--only once or twice in a lifetime. That's why advice from a housing counselor at the right point in the process can make all the difference."  Nonprofit organizations can help prospective homeowners assess their readiness to purchase, provide useful information about how to search for a home, apply for financing, handle home maintenance, and prevent delinquency"We have also seen that counseling can help consumers who are facing delinquency or default. Borrowers in trouble who receive foreclosure counseling are relatively more likely to subsequently become current on their mortgage, receive a loan modification, and, ultimately, keep their home. 

Financial preparedness is not just for prospective homebuyers. It should be a lifelong undertaking, starting with children and teenagers. "Organizations around the country--including Operation HOPE--help people across a range of ages develop their skills. Despite, or perhaps because of, the broader economic challenges we face, it now seems to be a time of creativity and innovation in this field. We are seeing experimentation, knowledge sharing, public-private collaborations, 'bottom up' community-driven approaches, and state- and local-government efforts to promote family financial security and opportunity."

After a long and difficult period, Bernanke said, we are seeing welcome signs of improvement in the housing market which will in turn aid the economic recovery while strengthening neighborhoods and increasing the financial well-being of families. Our recovery must be broadly felt to be complete, and families and communities that were already struggling before the crisis must be included in that recovery. As Dr. King is widely quoted to have said, "We may have all come on different ships, but we're in the same boat now."