A Better Approach to the Foreclosure Crisis

By Andrea Levere

They are the first group of homeowners you might expect to see lose their homes in the national wave of foreclosures, given that their median income hovers around $25,000. Yet, new research by CFED (the Corporation for Enterprise Development) and the Urban Institute shows that they are far less likely to face foreclosure than similar families in their communities.

What is their secret? They all bought homes with money saved through a financial tool called the Individual Development Account or IDA. It’s a matched savings account for low-income Americans—something like a 401(k) plan except that the matching dollars come from a nonprofit, philanthropy or government agency, rather than an employer.

The IDA also comes with customized financial education required for all participants before receiving matching funds. Those buying homes get special workshops on mortgages and loans. Counselors then review their loan terms, steering them away from predatory lenders and toward high quality loans and consumer-orientated financial institutions. This may well explain why only 1.5% of the IDA homebuyers received a high interest rate loan, compared to 19.6% of similar buyers.

The study, Weathering the Storm: Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure?, tracked 831 IDA savers who bought homes between 1999 and 2008. Researchers, using federal and market data, compared the group’s experiences to those of buyers in the same communities with similar incomes, loan amounts and credit scores.

The results were striking:  The IDA savers had a foreclosure rate of 3.1 percent as of April 2009, compared to 6.5 to 6.7 percent for other homebuyers with loans lower than $390,000 and 9 percent for those with loans lower than $130,000.

The researchers can’t say which factor—the matched savings, the financial education or the loan oversight—makes the biggest difference. But the results do make a few things clear. Namely, people in all income brackets can save money and hold onto their investments if given the right financial incentives, good advice and fair treatment by lenders.

Too often in the current foreclosure crisis, the borrowers get the blame—for agreeing to high interest rates or risky loan terms in the first place, or for being unable to qualify for anything better. But the IDA savers, among the poorest homebuyers in the nation, did qualify for good loans with reasonable interest rates.  Most of them managed to stay in their homes, despite a tough economy. This outcome benefits us all—the families, the neighborhoods and the communities that are home to these IDA savers.

These include people like Michelle Knox who earned a nearly 4-to-1 match on her $5,000 savings to buy a home in San Jose, Calif., two years ago.  A single mom, she hopes to one day give the house to her two daughters. Nearly three quarters of the IDA homebuyer sample were women, and two-thirds were racial or ethnic minorities—demographics typically hardest hit in the foreclosure crisis.