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Oct. 22 (UPI) -- A decade after the subprime mortgage crisis, thousands of potential home buyers with poor credit are lining up for zero down, low interest home loans -- backed by one of the biggest banks in the business. Throughout this year, Bank of America and Boston-based non-profit brokerage Neighborhood Assistance Corporation of America are holding events nationwide offering mortgages to low and moderate income people and minority home buyers.
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Specifically, the groups are offering the loans to buyers with poor or rehabbing credit, which was one of the issues that contributed to the last meltdown -- buyers who couldn't afford the mortgages they had.
Bank of America and NACA, though, say they have a vetting system in place to help prospective home buyers who shouldn't be excluded by credit score alone.
NACA CEO Bruce Marks told UPI the organization has been working with Bank of America since the early 1990s when then-CEO Hugh McColl agreed to commit $1.5 billion in mortgage commitments after reviewing the program, a number that's grown to $10 billion today.
"We've been satisfied with how NACA has been able to educate home buyers and the loans that NACA brings us," Bank of America spokesman Terry Francisco told UPI. "The borrowers that NACA brings us have performed well over the nearly 20 years we've been involved with them."
Marks hailed the mortgages offered through the program as the "best in America," touting no foreclosures on loans distributed over the last six years.
After the subprime lending market had largely cooled in the years following the housing crisis of the early 2000s, banks have slowly begun making these kinds of loans again with a greater focus on ensuring they can be repaid.
"The definition of a subprime loan has changed. What we're calling a subprime loan today, there's probably a fair amount of overlap between what we called subprime loans in 2006, but some of the practices from 2006 like the no documentation, no income verification loan are not really happening at the same rate as they were before," NYU Asst. Professor of Sociology and Public Service Jacob Faber told UPI.
"Character-based" lending
NACA and Bank of America offer 15- or 30-year fixed loans with interest rates below market average, coming in at about 4.5 percent. They also offer no-down payment, no closing costs, no fees and no requirement for a credit score to initiate the loan.
Rather than focusing on a borrower's credit score, Marks said NACA engages in "character-based" lending.
"We don't consider people's credit score, we look at their payment history that they control. So that means that if someone has a low credit score because they're late on their medical bills and they can't control it because they have to go to the emergency room or things out of their control, we don't consider that," Marks said.
Borrowers are then required to provide full documentation including bank statements, W-2 forms, tax returns and other information to construct a comprehensive budget that is used to determine the borrower's mortgage payment will be.
"We base their payment on both their budget and what they pay in rent that they can afford," Marks said.
One way NACA ensures that potential home buyers can afford the mortgage is demonstrating they can handle the "payment shock" -- the difference between what they're paying now and what they will pay with the new mortgage.
"Let's say they're paying $1,000 a month on a mortgage payment but I want a $1,400 payment, they have to save at least $400 every month for six months to demonstrate to themselves and to NACA that they can afford that higher payment," Marks said.
Once the process is complete, Bank of America reviews borrowers that have been subjected to NACA's vetting process and determine whether or not they will underwrite the loan.
Francisco said NACA's process has been effective at producing qualified borrowers, providing the bank with high quality loan applications that are approved more than 90 percent of the time.
"Normally there's a very good coordination between the loans that come in and the loans that are approved because the folks at NACA are very good at explaining to homeowners what the requirements are in regard to their income, in regard to their FICO scores, in regard to their credit performance over the last several years," he said.
Francisco added the program has also been beneficial for the bank, as NACA provides them outreach to customers they might not have access to otherwise.
"It helps us reach out to borrowers who may have thought they weren't qualified to become homeowners and reaches out to them and brings in a lot of new customers to us," Marks said.
Mitigating risk
The housing crisis a decade ago was characterized by banks making predatory loans to buyers they shouldn't have -- buyers who, in many cases, qualified for prime rate loans but didn't fully understand the terms of the deal.
"I think there's a reality that we don't really want to acknowledge which is that really no one understands mortgages and for most people they'll take whatever mortgage is presented in front of them," Faber said.
"If you are kind of a bad actor in this space, the inability of people to fully understand the terms of the mortgage allows for exploitation, which is what we saw during the housing boom."
NACA and Bank of America said they were able to avoid some of the pitfalls of the subprime lending crisis of the 2000s by ensuring their borrowers were working people who were properly informed about the conditions of their loan, and were locked in at a fixed rate.
"If you look back on some of the mistakes that were made before the financial crisis, it had a lot to do with people who just simply didn't understand the complexities of a mortgage -- didn't realize that you need to have available funds if there's an income interruption," Francisco said.
Marks said borrowers through the program are required to go through comprehensive counseling to understand the restrictions of their monthly budget, and more counseling through NACA's Membership Assistance Program to establish payment agreements and financial assistance to help borrowers delinquent on home payments avoid foreclosure.
"Educating people about those issues -- helping them budget, helping them understand they need a rainy day fund -- all of these are key elements of becoming a homeowner," Francisco said. "What NACA does is they actively reach out to people and educate them about those issues, and that's something that a lot of people didn't understand before the crisis."
Marks said another factor in the mortgage meltdown were "teaser" interest rates that eventually doubled or tripled on borrowers over the life of their loan.
"It wasn't that the wrong people got houses, it's that they were set up for failure. It was a homeownership deception scheme," he said. "Because they could afford their initial payments but if payments double or triple, they're going to lose their homes."
He added that NACA eliminates the issue by offering all borrowers the same fixed loan, plus counseling to ensure they can afford it.
"Even during the mortgage crisis, our loans performed very well because it's full documentation and it's a fixed rate, that means the payments don't change."
Marks also dismisses criticism that no-down-payment loans make it easier for owners to walk away from the property.
"Who's got more skin in the game? Someone who, this is where their family lives, this might be their first time as a homeowner with an affordable payment -- who's gone through the NACA comprehensive counseling," he asked. "They've got more skin in the game than someone who is putting some money down, who looks at the home not as an investment for their family and the community but their real estate business."
Still risky business
While NACA and Bank of America boast a strong track record of successful lending, Faber warns that outside factors can still make subprime loans a risky endeavor.
"Taking on a mortgage is a huge risk, even at a prime rate fixed 30-year mortgage is a big risk," he said.
"Even if you fully understand the terms and the responsibilities of taking on that financial risk today, you might not know what your life and your finances are going to be like in a few years."
For example, Faber and Peter Rich of Cornell University published a study this year that found families with children in college faced an increased risk of foreclosure during the housing crisis.
"A lot of people effectively got surprised by having to pay mortgage and tuition at the same time and didn't really anticipate that," Faber said. "People's finances change, so even if you understand what your finances are today, you might not be able to anticipate what they're going to be in just a couple years."
Faber said although standardizing interest rates over the life of a mortgage can mitigate much of the risk associated with subprime loans, the housing crisis shows their value is still at the mercy of the housing market.
"The plummeting value of people's homes and the homes around them was a bigger driver of foreclosures than either borrower characteristics or loan characteristics," he said. "We have to acknowledge the fact that these large financial risks are tied to a lot of things that we may not be able to anticipate.
"Simplifying the payment structure is going to be great for a lot of people but there are a lot of ways that people can be connected to foreclosure risk that we don't always anticipate."
Lastly, Faber said, efforts by the Trump administration to repeal the Dodd-Frank Act -- major Wall Street reforms passed by the Obama administration to mitigate chances of a similar crisis in the future -- could eliminate some valuable safeguards.
He said it was "incredibly dangerous" for the Trump administration to remove portions of Dodd-Frank that required virtually all lenders to report to the federal government information on every single loan application they received, in order to identify when lenders are discriminating.
"All of the evidence is pointing toward discriminatory practices and without any tools at all to identify those practices ... I see no reason why they're not going to return."
