By: Jonnelle Marte
April 1, 2010
With the subprime market in ruins, affordable housing advocates are looking at new ways to promote responsible homeownership for low and moderate income families. While many policy makers would resign low and moderate income families to rental housing, a new study makes a case for keeping the door open to homeownership at all income levels.
Low-income home buyers who purchased homes through a program that often required them to have their mortgage loans reviewed and approved, were two to three times less likely to lose their homes to foreclosure than families with similar finances.
Researchers looked at home buyers who received matching federal and private dollars for every dollar they put away in an Individual Development Account or IDA. Most programs offered a two-to-one match; but some allow for a four-to-one match or greater.
But before participants can receive a matching grant, they're required to complete financial literacy courses and their mortgage loans must sometimes be approved by counselors, who advise clients against risky loans. Often, they're steered toward home-buyer assistance programs or certain lenders who can help them get government-insured loans.
"I think the fact that they're saving toward a goal, they're required to have financial education... and they're getting counseling along the way-I think all of these things work together," says Andrea Levere, president of the Corporation for Enterprise Development.
CFED found that IDA savers had a foreclosure rate of 3.1% as of April 2009, compared to about 7% for other home buyers with loans lower than $390,000. About 1.5% of IDA savers had loans with high interest rates, compared to nearly 20% of the broader sample of homeowners.
The study analyzed data from nearly 260,000 home sales, including 831 homebuyers who participated in IDA programs to purchase homes between 1999 and 2008. The IDA savers came from California, Indiana, New Hampshire, North Carolina, Ohio and Texas and they had a median income of $25,400 a year. Nearly three quarters were women and two-thirds were racial or ethnic minorities. They were compared to home buyers with similar incomes, loan amounts and credit scores.
Several groups who offer IDAs also report low foreclosure rates among participants. Of the 100 people who purchased homes with matched savings programs through Earn, a nonprofit in San Francisco that focuses on helping low income families save, Earn says only three have gone into foreclosure. Only one of the 168 homes purchased by participants in New Hampshire's IDA program between 2001 and 2008 went into foreclosure.