EQUITY Special Section
Affordable Home Ownership Done Right
by Robert Friedman
Too often the "subprime crisis" is blamed on the carelessness or overreaching of the low-income homeowners who are assumed to be the primary market for subprime mortgages. New evidence suggests it is lack of financial education, savings, and the terms of lending that bear the greatest responsibility for this crisis. If affordable home ownership is done right – that is, with savings, financial education, and equity rather than just debt – the foreclosure rate on even very poor new homeowners is negligible.
CFED has recently completed a survey of community based organizations working with low-income working families who bought their first homes in the last five years with the help of Individual Development Account (IDA) programs, which provide savings matches, financial education and mortgage product guidance. The astounding finding: only one of 650 new homeowners so assisted was foreclosed, delinquencies were negligible, and almost all used fixed-rate mortgage products, eschewing subprime loans.
Twenty-seven IDA programs from across the country were surveyed regarding the rates of foreclosure, delinquency, mortgage products experienced by their home-owning IDA recipients, and their thoughts about the reasons for those results. Initial responses (we are continuing to collect and add responses) were received from programs in five states – Delaware, New York, Arkansas, Missouri and Washington – serving 650 first time homeowners.
Two key findings emerged from these initial responses:
- Only one foreclosure was reported among all 650 IDA-backed low-income new homeowners; there were no reported delinquencies.
- Of the 422 recipients with available loan term data, 412 (98%) received fixed-rate mortgages.
Program managers credited three things for the phenomenally low foreclosure, default and delinquency rates: restrictions on the loan terms accountholders were allowed to accept; financial education; and the actual savings and investable assets the new homeowners were able to acquire before their purchases. First State Community Loan Fund, which administers 190 IDAs in Delaware, disallowed subprime and variable rate mortgages for IDA recipients and reports that this restriction "combined with the financial education, development of regular savings habits, and housing counseling, is the explanation for our low foreclosure rates."
The Family Conservancy in Kansas City reaffirms those findings by identifying two main reasons for sub-national foreclosure rates: "1) financial education and 2) strict standards for allowing home purchases.” All programs surveyed included some component of financial education and loan term restrictions that empowered IDA recipients to, in the words of The Southern Good Faith Fund in Arkansas, go "into their home purchase with knowledge and understanding of the process which helped them understand if they were/were not getting a good rate." There was universal consensus among survey respondents on the importance of limits, restrictions and/or oversight of the types and terms of loans received by IDA recipients. United Way of King County (Washington) "adopted IDA mortgage guidelines in 2003 that required a HUD-approved counselor to review and approve all loans." The New York Association for New Americans emphasized the same fundamental point saying, "I think it is a combination of financial education and the fact that several of the down payment assistance programs require that the mortgages are from banks that are members of the New York Mortgage Coalition."
Further research is likely to expand on these findings and should be pursued. But even the preliminary lessons gleaned here suggest that with the appropriate set of supports – matched savings programs to enable low-income working families to amass a nest egg for a down-payment and unanticipated costs; financial education both basic and specifically for home purchase; and guided use of fixed rate and reasonably priced and structured mortgage products – we can not only enable working families to buy homes, but to keep them. While there is certainly a role for non-predatory and well-designed mortgage loan products for low income working families, it should be clear that many such families deserve and should use conventional 30-year mortgages. Above all, we should not let the excesses, fraud, lack of underwriting standards, weakness of credit risk, the sloppiness of credit markets and the greed of predatory lenders be blamed on working families struggling to realize their American dreams.
CFED will be publishing a new study this summer verifying foreclosure rates of homeowners who purchased their home through an Individual Development Account. Look for the new findings to be released in the next few months on www.cfed.org.
EQUITY would like to thank Robert Friedman and CFED for permission to reprint this article.