IDA Homebuyers Less Prone to Foreclosure, Predatory Loans
We know all too well that many low- and middle-income homebuyers fall victim to mortgages with unreasonably high interest rates and risk losing their homes to foreclosure, which strips owners of hard-earned investments. It can also devastate a community, leaving behind vacant houses that drag down property values for surrounding homes and drain tax dollars from cash-strapped local governments. Strategies that promote homeownership and deter foreclosure, such as Individual Development Accounts (IDAs), can break this cycle.
A 2010 joint study by CFED and the Urban Institute, Weathering the Storm: Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure?, worked with six AFI grantees to determine the relationship between IDA program participation, loan terms, and homeownership success, as measured by foreclosure rates. The participating AFI grantees were Foundation Communities (Austin, TX), Opportunity Fund (San Jose, CA), La Casa of Goshen (Goshen, IN), New Hampshire Community Loan Fund (Concord, NH), New Century IDA Program (Forsyth County, NC), and WECO Fund (Cleveland, OH). The researchers tracked 831 homebuyers in 17 states who purchased homes using IDAs between 1999 and 2007 and compared their mortgage interest rates and foreclosure rates to other low-income homebuyers who purchased homes in the same communities and over the same time period.
The study found that IDA homebuyers were two to three times less likely to lose their homes to foreclosure. Compared to 20 percent of the broader sample, only 1.5 percent of IDA homebuyers obtained high-interest mortgage rates. These findings are consistent with the researchers’ hypothesis that the bundle of services and features of IDA programs (e.g., matched savings, financial and homebuyer education, and oversight of or guidance regarding loan products) enable low-income populations to obtain affordable mortgages and experience successful and sustainable homeownership outcomes.
The matched savings component of IDAs is influential in enabling the IDA accountholders to make larger down payments on home purchases than they would without an IDA. This is particularly noteworthy because of the far-reaching effects an initial down payment can have on building assets through homeownership. IDA accountholders are in a position to attain more initial equity when purchasing their homes. This can lead to more affordable loan terms and thus fewer delinquencies and foreclosures.
The financial education component of IDAs is required and generally covers topics related to credit building and repair. IDA programs focusing on homeownership may also require homebuyer counseling, which generally covers the steps involved in purchasing a home and qualifying for a loan. These educational pieces help reinforce savings behavior and provide IDA accountholders with the crucial information and guidance for navigating home purchasing and obtaining loans. Amy Kennedy, HOC Compliance & Reporting Manager for La Casa of Goshen, says the financial education component truly empowers accountholders during the home-purchasing process, helping them to thoroughly understand the entire process and all of the players involved. It “teaches them to be in the driver’s seat,” she says. Robert Schordock, Executive Director of WECO Fund in Cleveland, emphasizes that through financial education, his organization teaches IDA accountholders to not only understand all of the steps involved in buying a home but to also “look beyond the closing date, 2–3 years into the future,” in order to fully understand what it means to own a home. Schordock says understanding all of the expenses that come with homeownership (e.g., utilities, property taxes) contributes to IDA homebuyers’ ability to make informed decisions both during the home-buying process and afterward.
The program oversight component of IDA programs monitors particular aspects of how matching funds are used specifically in regard to loan types and terms. As witnessed through the six IDA programs studied, some programs have explicit restrictions on what types of loans and other conditions (e.g., fees, housing price and location) will be accepted when using IDA funds to purchase a home. This is to ensure that the loan terms and other related conditions are affordable and not predatory. Other programs steer IDA accountholders to lenders and other homeownership assistance programs and products that present wise and affordable options for them. Furthermore, IDA programs require that accountholders have their loan terms reviewed and approved by IDA program staff before matching funds are released. This provides an important additional layer of program oversight that can contribute to IDA accountholders securing affordable loan terms and making them less prone to foreclosure.
The CFED-Urban Institute study provides a compelling contribution to the growing field of research uncovering a positive relationship between IDA programs and homeownership success. The specific financial, educational, and monitoring components offered by IDA programs enable IDA accountholders to make well-informed decisions throughout the home purchasing process and, as a result, steer them on the path toward building wealth.
This article originally ran in the IDAresources.org Update Newsletter on 02/10/11 and is available for archival purposes.