A Better Approach to the Foreclosure Crisis

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By: Robert Friedman
April 27, 2010

Among the casualties of the foreclosure crisis--bankruptcies, homelessness and distressed neighborhoods--we may soon add our waning faith in homeownership. A recent poll by Fannie Mae showed that while most Americans still want to buy a home, they increasingly view it as a risky proposition.
And why not? A surge in foreclosure rates and a congressional watchdog's critical report on the federal plan to head off another wave of loan defaults added to the discouraging news this month. While we look for interventions to help families in imminent danger of losing their homes, ultimately we must find more prudent and proactive approaches to homeownership, particularly for working families.

Proven programs, include one in the Bay area, could yield some lessons for doing so. A recent study looked at a group of homeowners--most of them women and minorities with a median income of about $25,000 a year--who turned out to be two to three times less likely to go into foreclosure than buyers in the same communities with similar incomes, loan amounts and credit scores.

What is their secret? They all bought homes using 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 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. And, it comes with oversight: Counselors then review loan terms, steering buyers away from predatory lending and toward high quality loans and consumer-oriented 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, according to the study, released this month by the Corporation for Enterprise Development and the Urban Institute.

Ultimately, 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.

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 two years ago. A single mom, she hopes to one day give the house to her two daughters. The study included 132 IDA savers who bought homes in the past decade through the Women Leading Change IDA program Knox used.

 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. The recent poll by Fannie Mae showed that more than half Americans blame borrowers, not banks, for the mess we're in.

But the IDA savers, among the poorest homebuyers in the nation, managed to 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 neighborhood, and the communities that are home to these IDA savers.

The CFED study underscores the need for increased consumer protections and financial education. It also affirms the value of the IDA and other matched saving plans that allow working families to build nest eggs.

Many Americans have this opportunity through the 401(k) and similar plans offered by their employers. But low-wage workers generally don't have the kind of jobs that offer that benefit.  Many of them are what we call "asset poor," meaning that if they lost their jobs, they wouldn't have enough of a financial cushion to support themselves for three months at the federal poverty level. Shockingly, 22.5% of American households are asset poor.

The federal government backs IDA programs, and President Obama's current budget proposal includes $24 million for the Assets for Independence program. That sounds like a lot until you consider how much money the federal government gives up every year to allow pre-tax savings on retirement accounts. The latest CFED analysis puts that figure at $80 billion, most of which accrues to wealthier taxpayers.

Simply put, the federal government should expand its investment in matched savings accounts for working families. There are several ways to do this: expand IDAs; reform the Saver's Credit to provide a match for the retirement savings contributions of all low-income families [and simplify rules permitting loans for homeownership and college uses]; and encourage employers to give workers automatic access to IRA accounts. States can get involved, too:  21 states now have an IDA program and others are considering such plans.

What's more, Congress should approve consumer protection legislation that eliminates predatory lending practices, bad financial products and outright discrimination, all of which contributed to the current foreclosure crisis.

Expanding homeownership has been a policy goal of every administration since World War II. And it's been the primary path for working families to build wealth and move into the middle class. We can't let foreclosure scare people away from homeownership. We need to focus instead on strategies that will help people buy and hold on to their piece of the American dream.

Bob Friedman, Founder and Chairman of CFED (Corporation for Enterprise Development), a nonprofit group that works to expand economic opportunity by developing and testing new ideas for wealth creation and advocating for taking good ones to scale. Weathering the Storm: Have IDAs Helped Low-Income Homeowners Avoid Foreclosure? is available online at www.cfed.org.

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This page contains a single entry by Ernest Roberts published on April 28, 2010 4:52 PM.

Discrepancies Detailed in Minority Foreclosures was the previous entry in this blog.

Bank on D.C. Opens for Lower-Income Populations is the next entry in this blog.

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