By: Andrea Levere
April 23, 2010
(April 23) -- Among the casualties of the foreclosure crisis -- bankruptcies, homelessness and distressed neighborhoods -- we may soon add to the list our waning faith in homeownership.
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 ways to help families in imminent danger of losing their homes, ultimately we have to find better approaches that reduce the risk of foreclosure in the first place, particularly for working families.
Proven programs could yield some lessons for doing so. A recent study the Corporation for Enterprise Development and the Urban Institute looked at a group of homeowners 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. Most of them were women and minorities with a median income of about $25,000 a year.
What's 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. Savings can be used to buy a home, start a business or pursue higher education.
The IDA also comes with customized financial education required for all participants before receiving matching funds. And, it comes with oversight: Counselors 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 percent of the IDA homebuyers received a high-interest-rate loan, compared to 19.6 percent of similar buyers, according to the study.
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 couldn't say which factor -- the matched savings, the financial education or the loan oversight -- contributed the most. But the results made clear that people in all income brackets can save money and hold onto their investments if given the right financial incentives, good advice and access to fair financial products.
Many Americans have the opportunity to save money through 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. They are "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 percent of American households are asset poor.
There are several ways the federal government can help. Right now, it backs IDA programs, and President Barack Obama's budget calls for $24 million for the Assets for Independence Program. That sounds like a lot until you consider that the federal government gives up $80 billion every year to pre-tax retirement savings on retirement accounts, most of which goes to wealthier taxpayers.
It can increase this effort by expanding IDAs; reforming the Saver's Credit to provide a match for the retirement savings contributions of all low-income families; and encouraging 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.
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.
Andrea Levere is president of the 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. Its study, "Weathering the Storm: Have IDAs Helped Low-Income Homeowners Avoid Foreclosure?" was released in early April.