Fixing the Sub-prime Fallout

In “Subsidizing Disaster” (NY Post, 10/31/07), Thomas Sowell suggests that the sub-prime mortgage fallout cannot be fixed by innovative policy solutions since it is the result of past policy solutions.

Foremost in Sowell’s piece is the belief that “Government laws and policies, especially the Community Reinvestment Act, pressured lenders to invest in people and places where they wouldn’t invest otherwise.”  This is simply untrue.  The Community Reinvestment Act (CRA), was enacted to prevent redlining, which is the practice of denying or increasing the cost of services, such as banking, to residents in certain, often racially determined, areas.  Perhaps Sowell thinks home loans should not be provided to certain parts of town.  To further that line of logic, perhaps we should also not provide supermarkets or gas stations in those parts of town either.

In addition, the CRA encourages banks to meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods.  While some might, from a free market perspective, suggest that the CRA effectively provides preferential treatment to low- and moderate-income family, this policy has been in effect since 1977.  Why, after 30 years of effective implementation, is the CRA to blame for our current crisis?

The truth is, the mortgage crisis is the result of an overzealous mortgage lending market.  As interest rates fell to historic lows and investors reappointed their traditional stock earnings into housing stock, the mortage industry competed to get a larger share of the money-lending pie.  As competition increased, companies began making riskier and riskier lending decisions, such as offering loans with reduced down payment requirements, low-doc funding, and encouraging irresponsible home equity refinancing.  Additionally, lenders attracted more high-risk buyers, wooing them with initially low, adjustable rate mortgages and then instituting usurious pre-payment penalties.  The mortgage lending market failure has resulted in a public policy conundrum as millions of families struggle with housing debt and the foreclosure rolls are piling up across the nation.   Rather than turn our backs on innovative policy solutions, we need to work together to figure out the best way to assist and protect those who have or will lose their homes and prevent predatory lending practices from again disrupting the national economy.

-Lonny Stern | Communications & Outreach Director

On “Moving Ahead on Mortgages”

In “Moving Ahead on Mortgages” (NY Times, 10/28/07), it seems like the easiest way to avoid a mortgage crisis is to enable courts to modify loans in order to allow those with adjustable rate mortgages (ARMs)to stay at their introductory rate. The idea is to ensure current loan holders can continue to pay in order to provide lenders the ability to leverage those who are expected to default. Still, one can’t help but wonder whether the issue of ARMs needs to be re-evaluated altogether.

- Lonny Stern | Communications Director

Pre-K Benefits Middle and Upper Class Kids, Too

In her article on the Universal Pre-K movement, Ann Hulbert (“What Every Child Needs,”  New York Times Magazine 10/27) explores the class dynamics of early childhood education (asserting that wealthier families often prefer a “whole child” pedagogy to the classic ‘ABC’ reading, writing and math-focused model of Pre-K) , and suggests that traditional Pre-K could benefit kids from affluent families as well.

On “The American Dream in Reverse”

This Editorial, “The American Dream in Reverse” (NY Times, 10/8/07) suggests a policy window has opened for restructuring loans headed for foreclosure.  Right now, courts cannot modify repayment terms on home mortgages for primary residences.  Instead, when a family cannot pay, a property goes into foreclosure, providing the lifeblood of investors standing on courthouse steps across the nation.  Rather than leave real families to the short-sell and flipper wolves, we need to truly consider what are acceptable lending terms for high-risk borrowers.  In addition, what role should the government  play in enabling more people to becoming homeowners?  Certainly, building equity begins with a place of one’s own.

Lonny Stern | Communications Director

Democrats Divided?

In a recent op-ed in The Washington Post, Harold Meyerson points out that the Democratic Party is in conflict, naming opposing sides “Wall Street Democrats and Main Street Democrats.”  What these names are intended to represent is a division between where party members stand on financial issues.  The “Wall Street Democrats” are a new era of Democrats, siding with the usual social and world policies of Democrats but conservative when it comes to business regulation.  “Wall Street Democrats” tend to be the younger Democrats who believe that there needs to be less government regulation in financial matters.  Specifically, Meyerson points out that there is a divide within the Senate Democrats to designate two new Democratic members of the Securities and Exchange Commission.  “Wall Street Democrats” are now looking for advocates representing brokers and banks instead of consumers.  More or less, Meyerson claims that if the seats go to these advocates then there will be two parties representing Wall Street, pushing mainstream Democratic views out the window.

My point, is this really so bad?  Will mainstream Democratic views really disappear if these “Wall Street Democrats” succeed in filling the open seats in the Securities and Exchange Commission?  I don’t think so. Instead of criticizing this new emergence of ideas, we should embrace it. For too long, policies have been made strictly by two sides – Republicans and Democrats.  So what about all of the people who, more and more today, represent themselves by saying “I am socially liberal, but fiscally conservative?”  They are now developing a new identity by trying to solve problems economically and socially.  They want business opportunities as well as opportunities for individuals.  I say bravo to these “Wall Street Democrats” for walking a line between both parties, and for really thinking about issues on an individual basis rather than siding with a policy solely based on their assumed party.  The public has noted for some time that it is unfortunate that America has only a two party system that ultimately cannot see eye to eye; maybe this is a chance for change.
Courtney Haynes | Fellow

Same Old Story on College Costs

History really does repeat itself. Yesterday, the College Board announced that college costs are still rising way ahead of inflation. I wrote about this issue at the same time last year in this blog post. I wish I could say that things have changed, or at least slowed down, but they haven’t. So what’s the damage this year? Tuition to attend a four-year public university rose 6.6 percent, to an average of $6,185 a year. The average cost to attend a private 4-year institution rose 6.3 percent, to a whopping $23,712 per year. Meanwhile, students are still being forced to turn to riskier private loans to finance their education because financial aid is not keeping up with the costs.

At the risk of sounding like a broken record, making college accessible and affordable to more Americans is clearly critical to the future economic health and advancement of our country. And yet, as the presidential primary season heats up, very few candidates are addressing this issue with real ideas or initiatives. The College Cost Reduction and Access Act, which was recently passed by Congress and signed into law by President Bush, will help expand financial aid, specifically Pell Grants, to needy students. It will also cut the interest rates of student loans in half, from 6.8 percent to 3.4 percent. The passage of this bill is a resounding success, especially considering that it was supported by a clear bipartisan majority of both houses.

Nonetheless, this victory will be short lived if the cost of college continues to rise at its current pace. The amount of the Pell Grant, which will increase to $5400 by 2012, will barely make a dent if the cost of attending a private University hits the $30,000 mark that same year (as it is expected to). How can our youth ever be expected to get ahead if they are strapped by enormous debt from college? Let’s make sure that as long as college costs rise, financial aid does, too.

Amanda Levinson | Director of Policy Programs

Are Silent Loans Exposing Cities to the High-Risk Lending Pool?

While 67% of American households currently own their own homes, homeownership remains out of reach in many urban centers.  The result of “Smart Growth”-fueled enthusiasm for city life is “gentrification,” a condition in which urban redevelopment leads to the displacement of existing residents.  One way to prevent urban renewal from leading to gentrification is to increase home ownership in redeveloping urban areas.

Some cities, like Los Angeles, are making use of so-called “silent” loans, as mentioned in Diane Wedner’s “A Chance for First-Time Buyers” (LA Times, 10/21/07).  This tool allows a city to determine how much of a family’s monthly income can be dedicated to mortgage payments.  The family then provides a down payment and traditional financing for a first mortgage.  Finally, the city provides a “silent” loan for the remainder of the house price, which will be tacked onto the home purchase, but will not be payable until the house is sold or refinanced.  Surely, it seems a great way to make housing affordable for families who could not otherwise become homeowners.

Of course, there is a dark side.  “Silent” loans are predicated on the belief that housing prices will continue to rise in the near future.  This makes sense in a quickly gentrifying neighborhood, but does not make sense in a more established area in which housing prices are flat or dropping.  Instead, by offering “silent” loans, cities are actually exposing themselves to the high-risk lending pool and are perversely encouraging additional pricing ramp-ups in the future.

Surely, these programs are intended only for those without the means to otherwise buy homes, but in cities such as Los Angeles homeownership is outside the reach of the lower and middle classes alike.   The median housing price in the Los Angeles-Long Beach area is just shy of $500,000.  A traditional, 30-year fixed rate loan at 6.5% would require a family to pay $3,160.34 per month.  Since it is commonly recommended that no more than 30% of one’s income be dedicated to housing costs, a family would need a combined annual income of $126,500 in order to purchase a house in the Los Angeles area.  According to the City of Los Angeles, the median family income in Los Angeles County was only $53,000/year.  This data suggests that the City of Los Angeles may have cause to provide such assistance to a very large portion of Los Angelinos.

If the goal is affordability, cities should encourage the development of additional housing stock, not subsidize the cost of over-priced real estate.

Lonny Stern | Communications Director

Memories of Manual: Avoiding the Pitfalls of Radical School Reform

The recent news that all of California’s 6,063 public schools serving poor students will need to be restructured by 2014 if they cannot comply with standards set by No Child Left Behind is distressing. The New York Times reports that New York City is trying to avert this fate by breaking up failing schools into smaller ones, but the question remains of how we can avert sending our schools, students and communities into chaos by forcing massive overhauls or closures.

I went to Manual High School in Denver, a public school that should be a cautionary tale of standardizing school reform. At the time, the school, located in an impoverished area of the city, was one of the top performing high schools in the state, boasting high test scores and students who went on to attend some of the most elite universities in the country. Because of court-ordered busing, the school was a mix of poor, working class, middle class and wealthy students, and although student performance was mixed, our school was largely considered to be successful.

A couple of years after I graduated, Manual ended busing, and nearly overnight the school became the lowest ranked high school in the state as exceptional teachers and wealthier students went to other schools, and poorer neighborhood kids remained. What has happened since then is enough to dispel with the myth that there can be a one-size-fits all solution for failing schools. Over the next few years, Manual underwent a series of experimental, top-down reforms as it tried in vain to regain its former eminence. It cycled through different principals and was split up into three separate schools. The Denver Public Schools Board finally shuttered the school in 2006 when it became clear that something had gone dreadfully wrong: at the time of its closing, only 1 in 5 students were graduating. Manual, once a great success story, became a national emblem of failed public school reform, chronicled in detail by the Denver Post and profiled by the New Yorker earlier this year.

After Manual closed it became clear that hundreds of students would drop out by default unless someone could persuade them to enroll in new schools. Over the course of a long and arduous campaign, the Superintendent of DPS and a number of staffers went door-to-door through the neighborhood, knocking on doors to convince students and their parents to commute to schools in different areas of the city. In the end, only 70 percent of displaced students showed up on the first day of school.

This fall, Manual has reopened its doors to ninth graders, with the intention of adding an additional grade for the next three years. It has a new principal and a new approach to education that borrows techniques used by some most successful private and charter schools in the area. The community is understandably excited about reviving the school’s potential for excellence, and I am, too. I can only hope that this time, the story told about Manual will be of a school risen from the ashes to become a symbol of successful educational reform. While districts in New York and California may be tempted—or forced—to close or split up poorly performing schools, the impact on the kids and their communities should be carefully thought through to avoid Manual’s fate.

Amanda Levinson | Director of Policy Programs

Turning Teaching into a Sought-After Profession

The single most important driver in attaining high student achievement is a good teacher.  At the school-level, the principal is the most crucial factor in promoting performance. Empirical and anecdotal evidence clearly point to the importance of human capital in preparing our children to enter the 21st Century workforce.  Yet previous efforts to attract and retain this essential human capital pipeline through pay-for-performance schemes have met with great obstacles, mainly because individual teacher/principal performance is so difficult to measure, benchmark and compare.

Teaching is to a large extent based on teamwork and collaborative work, an important nuance that the New York Public School System, under the leadership of Mayor Bloomberg, has understood and integrated into a new Teacher Merit Pay system that shows a great deal of promise.  By allocating funds to high-performing schools rather than to individual teachers, the program is incentivizing teachers and principals within schools and communities to work together to achieve greater results.  In the 2008-9 school-year, about 30% of all schools in the system will have annual bonuses available to them, equaling to about $3000 per educator, which will be allocated by a four-member compensation committee at each school.

This agreement goes far beyond planting the roots for a more dynamic incentive structure, but, more importantly, it establishes the foundations for the professionalization of teaching overall.  By rewarding performance and teamwork, regardless of seniority, New York City is helping to create an environment that strives for excellence and provides its educators with advancement prospects and support.  We need more steps like these to turn teaching into the most sought-after profession in the nation.

Arian Hassani | Program Associate

Hope Street Group Recommends Universal Preschool

In HSG’s recent “Investing in America’s Future: Harvesting the Returns of Quality Preschool” (www.hopestreetgroup.org, 10/18/07), the Early Childhood Education Policy Team recommends establishing a federal fund to expand preschool access to the entire nation’s 3- and 4-year-old children. Currently, 2.8 million 3- and 4-year-olds are in programs that do not adequately prepare them for kindergarten, and an additional 3.2 million do not have access to preschool at all. Quality early childhood education programs are not just good for kids, but deliver real benefits to society as a whole, including economic returns of 10-16% per year – about double what the stock market delivers.

Lonny Stern | Communications & Outreach Director