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Sustaining Home Ownership for Low Income People
Introduction
Is the well-intentioned effort to help more low-income people become homeowners "forcing people into failure"? That was the charge of Yvonne Scruggs-Leftwich, an officer of the Black Leadership Forum, at a recent Fannie Mae Foundation conference on housing affordability. Changes in federal policy and the private mortgage markets during the past decade have clearly helped to overcome one of the key obstacles to homeownership: lack of funds for down payment and closing costs. By taking advantage of new mortgage products, households with enough income to make monthly mortgage payments can buy a home with little or no cash up front. But the new homeowner may be unprepared for the ongoing responsibilities of ownership and could end up losing the home.
As reported in The State of the Nation's Housing 2001, mortgage loans to low-income home buyers "shot up 97 percent between 1993 and 1999, increasing their share of total home purchase loans from 26 percent to 32 percent." By comparison, lending to high-income borrowers increased by 47 percent during the same period. The homeownership rate for low-income households has reached 52 percent (compared with the overall rate of nearly 68 percent).
There are a variety of reasons for the low-income homeownership boom, stemming from market and regulatory factors. Mortgage lenders have liberalized their underwriting standards in search of a broader market and in response to regulatory pressures. Advances in technology have facilitated the lending process through automated underwriting, credit scoring, and sophisticated risk-based pricing. Federal government regulators, seeking to expand homeownership, imposed "goals" or quotas on the government-sponsored enterprises (GSEs) in the secondary mortgage market (Fannie Mae and Freddie Mac) requiring them to make more of their mortgage lending capital available to lower-income home buyers. To comply with the goals, the GSEs adjusted their loan purchase policies, in effect trickling down the regulations to mortgage lenders that sell loans in the secondary market.
The Community Reinvestment Act (CRA) is another policy development that supports expanded mortgage lending. CRA?enacted in 1977 but not widely enforced until the 1990s?requires banks and other lenders to serve all areas from which they draw deposits. The goal is to ensure that lower-income communities receive adequate services and investment. Lenders that fail to comply can be penalized through the regulatory system.
While these developments have allowed many more Americans to purchase their homes, Ms. Scruggs-Leftwich is not alone in her concern that homeownership may not be sustainable for many low-income households. In a series of issues forums conducted for Fannie Mae Foundation by the Joint Center for Housing Studies of Harvard University (November 2000 - January 2001), community leaders expressed concern about the phenomenon that the Joint Center characterizes as "homeownership at the margins." Equity in a home is the primary source of wealth for most Americans, but even with rising home values and increasing homeownership rates, home equity as a share of home value fell by 10 percentage points during the 1990s.
"Rising home prices and falling interest rates prompted many homeowners to tap into their home equity through refinancing and lines of credit. The median age of loans refinanced in the first quarter of 2001 was 1.6 years?the lowest quarterly figure ever reported." ? The State of the Nation's Housing 2001
With the wealth benefit of homeownership being less certain, many advocates are reexamining the push for homeownership and recommending a balanced focus on both affordable ownership and rental housing options. This is not to suggest that low-income people should not be homeowners, but it does suggest that far more attention needs to be given to preparing such households for the responsibilities of ownership and providing ongoing support.
Cost Burden
Although homeowners are less likely than renters to have serious cost burdens, about 10 percent of owner households spend more than 50 percent of their incomes on housing. Also, according to The State of the Nation's Housing 2001, a disproportionate share of low-income households lives in housing with serious structural problems.
Why Do Low-Income Homeowners Get Into Trouble?
There are a number of factors that can turn the American dream of homeownership into a nightmare for low-income households:
Loss of Household Income. After going into the home purchase with sufficient income to make monthly mortgage payments and cover other housing expenses and non-housing expenses, a household might experience a decrease in income because of a job loss, decrease in number of hours worked, disability, or divorce or separation.
Home Maintenance, Repair, and Utility Costs. A household that can afford the mortgage but has no financial cushion can be in trouble when the furnace goes out, the roof begins leaking, the refrigerator gasps its last breath, or an extra-cold winter sends the heating bill soaring. Many low-income buyers purchase older homes?because they are often more affordable than newer ones?that may have deferred maintenance problems. Even if the home is in good shape at the time of purchase, it may deteriorate over a few years because the owner cannot afford repairs after paying the mortgage.
Increase in Property Taxes. Increasing home value is generally considered one of the benefits of ownership, but property taxes often increase as value rises. Rising property taxes can hit low-income homeowners especially hard in gentrifying areas, where the residents may have owned their homes for many years and previously experienced modest and stable tax rates. Gentrification can cause significant increases in property taxes.
Increase in Nonhousing Expenses. A family that is living paycheck-to-paycheck can experience financial disaster when faced with car repairs, medical bills, or the need to pay for travel to deal with a family emergency.
Poor Financial Management Skills. A homeowner who lacks savvy about money management can get into serious trouble by incurring unnecessary consumer debt, using high-cost financial services rather than conventional services, or failing to manage cash flow properly to meet financial obligations.
Predatory Lending. Predatory lenders target vulnerable homeowners?the elderly, minorities, and women?and try to convince them to refinance their mortgage, often with a promise of extra cash and lower monthly payments. Even if the homeowner could benefit from refinancing, a predatory loan is, by definition, not in the owner's best interests.
One of the benefits of homeownership is the option to refinance the mortgage, which can help the household get through a financial crisis by tapping into equity for cash to meet immediate needs or by lowering the monthly payment. But closing costs on the refinance loan increase the owner's debt, and some refinance loans result in negative equity. If the homeowner's financial problems are ongoing rather than temporary, refinancing may only compound the problem. Refinance mortgages and home equity lines of credit are readily available and heavily marketed to most homeowners, and low-income owners may take advantage of such offers without having a clear understanding of the long-term consequences. Even loans that would not be considered predatory can be poor choices for many owners.
An additional concern is that low-income homeowners can be trapped if they need to sell the home and property values in the neighborhood are stagnant or decreasing; in that case, the owner may be unable to sell the house for a high-enough price to pay off the mortgage.
Consequences
The American dream turns to nightmare when the homeowner is faced with foreclosure and consequent loss of the home. Or, in what might be considered a cruel twist of fate, the family could stay in the home without owning it: A monthly magazine, "American Foreclosures and Auctions," recently expressed concern about foreclosed homeowners ending up renting from speculators who bought their home in a foreclosure sale.
Even if the owner does not lose the home, the household can be trapped in debt for years. And when foreclosures occur, there are negative consequences not just for the homeowner but also for neighborhoods on the margins of stability. A handful of foreclosures can start a downward spiral of decreasing property values and eventual housing neglect and abandonment.
Solutions
A multipronged strategy is necessary to sustain low-income homeownership:
* Pre- and postpurchase counseling
* Mortgage foreclosure prevention programs
* Curbing predatory lending
* Home maintenance and repair programs
Many programs that provide direct subsidies and other incentives for low-income households to buy homes incorporate some form of counseling. Such programs usually include basic personal finance education and explain the responsibilities of homeownership. Most counseling programs focus only on getting people ready for and through the process of buying a home, and only occasionally include any postpurchase follow up to assist the new owner. Further, most "affordable" mortgage loans are not made through programs that require counseling, but rather through banks and other lenders that are only in the mortgage business.
Mortgage foreclosure prevention programs are uncommon, but appear to be increasing as lenders recognize the need to protect their investments and community organizations see the human need. Such programs intervene at the point where a homeowner is already in jeopardy of losing the home after falling behind on mortgage payments. Some anti-predatory lending efforts provide legal assistance to homeowners who have fallen victim to predatory lending. A few nonprofit organizations provide assistance regardless of the cause.
The Mortgage Foreclosure Prevention (MFP) program in Minneapolis and St. Paul, Minnesota, was started in 1991 and has a successful track record. It was funded by a local foundation and the Family Housing Fund, a nonprofit organization that works to preserve and expand affordable housing opportunities for families with low and moderate incomes in the Twin Cities metropolitan area. A 1998 evaluation of the MFP program, sponsored by the Family Housing Fund, found that about 60 percent of the homeowners who received foreclosure prevention counseling and/or emergency assistance (loans) through the program had their mortgages reinstated. About 50 percent of them were still current on their mortgage payments two years after entering the program.
Mortgages with high loan-to-value ratios, common among low-income homeowners, usually require private mortgage insurance. The Family Housing Fund's evaluation of the MFP program reported that the average cost to help a homeowner reinstate a mortgage is $2,800, while average costs to a mortgage insurer in a foreclosure range from $10,000 to $28,000. Because of the cost savings associated with foreclosure prevention programs, some mortgage insurers and mortgage companies help fund such programs.
While mortgage foreclosure prevention programs can help a family keep its home, it is obviously preferable for the homeowner to avoid getting into that fix in the first place. Postpurchase contact with new homeowners at the margins can help to keep them out of trouble, but such programs are only beginning to gain popularity.
Prepurchase counseling for prospective home buyers has been shown to be effective, but the type of counseling varies widely, ranging from home study and telephone consultation to classroom education and one-on-one counseling. A recent study "A Little Knowledge Is a Good Thing: Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership Counseling," found that mortgage borrowers who received counseling had, on average, a 19 percent lower delinquency rate than noncounseled borrowers. The researchers also found variations in the effectiveness of different programs. One-on-one counseling was found to be the most effective, followed by classroom and home study programs. Counseling by telephone was found to have no effect.
The Family Housing Fund suggests a continuum of homeownership support services ranging from prepurchase counseling through help at purchase with affordable financing to postpurchase counseling, training, and support and finally to the last resort of foreclosure prevention counseling and assistance.
The NeighborWorks network is a nationwide program that has a reputation for successfully implementing the continuum approach, offering the full range of support for homeownership, from prepurchase to postpurchase. NeighborWorks is "a national network of 220 community-based organizations that helps low- and moderate-income families rent, purchase, and maintain safe, affordable homes." The NeighborWorks "full-cyle" approach includes a strong emphasis on home repair and rehabilitation, for which NeighborWorks organizations make low-interest loans to homeowners.
Some independent community-based organizations have adopted the continuum approach also. A successful postpurchase program is operated by the Little Haiti Housing Association (LHHA) in Miami. The organization helps low-income people become homeowners and then maintains relationships with them. LHHA's extensive postpurchase support activities include visitation, informal counseling, and a homeowner's club, as well as comprehensive neighborhood initiatives to ensure neighborhood stability.
Another way to help low-income homeowners is through programs that provide various types of renovation or maintenance assistance. Such programs include everything from classes in home maintenance and repair to low-interest loans for major repairs and rehabilitation to programs that actually perform repairs for low-income owners. Rebuilding Together?formerly known as Christmas in April?is a nationwide organization with local affiliates that perform home repairs and renovations for low-income homeowners, mostly the elderly or disabled.
With increasing awareness of the need to provide ongoing support for homeowners "at the margins," programs to help them are increasing. For example, Neighborhood Housing Services of New York City (a NeighborWorks organization), in collaboration with the New York Housing Partnership, is developing a homeownership curriculum for first-time home buyers that includes a major focus on home maintenance education. (This program is funded by a Fannie Mae Foundation grant.)
Some city governments have programs that provide low-cost home repair or rehabilitation loans using federal Community Development Block Grants or HOME program funds.
While the needs of low-income homeowners are often complex, community organizations have found that there is at least one simple, inexpensive way to lend a hand: Several NeighborWorks organizations have established "lending libraries" of tools for simple maintenance, such as lawn mowers, hammers, saws, ladders, and drills.
Challenges Ahead
Counseling and other assistance programs to sustain low-income homeownership are expanding in an effort to catch up to the gains in low-income homeownership attainment. Significant challenges remain, however?in particular, there is a tremendous need for more postpurchase efforts and for standardization of counseling programs.
Other issues that have been raised include whether "zero-percent down" mortgages are a good idea, since home buyers who make no down payment investment may have little incentive to avoid foreclosure. Additionally, questions have risen about who should pay for counseling programs.
While homeownership can provide tremendous benefits, it is important to make sure that low-income people go into homeownership with their eyes wide open. If homeownership is not the best option for a family, they should not be "set up for failure."