AFI 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. The homebuyers risk losing their homes to foreclosure, which strips owners of hard-earned investments. Forclosure 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.
Weathering the Storm: Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure?, a study by CFED and the Urban Institute, reports on the relationship between AFI IDA participation, loan terms, and homeownership success, as measured by foreclosure rates.
The participating AFI grantees included:
The researchers tracked 831 homebuyers in 17 states who had purchased homes using IDAs between 1999 and 2007. They researchers compared the participants’ mortgage interest rates and foreclosure rates to other low-income homebuyers who purchased homes in the same communities over the same time period.
The research findings are 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 hypothesis that the bundle of services and features of IDA programs (such as matched savings, financial and homebuyer education, and oversight of or guidance regarding loan products) enable families to obtain affordable mortgages and experience successful and sustainable homeownership outcomes.
The matched savings component of IDAs is influential in enabling 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 can obtain more initial equity when purchasing their homes. This can result in more affordable loan terms. The financial education component of AFI projects generally covers topics related to credit building and repair. AFI grantees that focus on homeownership may also require homebuyer counseling, which generally cover the steps involved in purchasing a home and qualifying for a loan. These educational pieces help reinforce savings behavior and provide accountholders with the crucial information and guidance for navigating home purchasing and obtaining loans.
Amy Kennedy, of AFI grantee 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, another AFI grantee, emphasizes that through financial education, his organization teaches IDA accountholders to understand all the steps in buying a home and 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 the expenses that come with homeownership (such as utilities, property taxes) contributes to IDA homebuyers’ ability to make informed decisions during the home purchase process and afterward.
AFI grantees monitor specific aspects of how the IDA matching funds are used specifically in regard to the loan types and terms. As witnessed through the six AFI-funded IDA projects studied, some projects have explicit restrictions on what types of loans and other conditions (e.g., fees, housing price and location) will be accepted when using IDA savings to purchase a home. This is to ensure that the loan terms and other related conditions are affordable and not predatory. Other programs help the accountholders identity lenders and homeownership assistance programs and products that present wise and affordable options for them. Furthermore, IDA programs require accountholders to have their loan terms reviewed and approved by staff. This provides an important additional layer of oversight, which can contribute to accountholders purchasing loans with affordable terms and making them less prone to foreclosure.
The study provides a compelling contribution to research that is highlighting a positive relationship between IDA programs and homeownership success. The specific financial, educational, and monitoring components offered by AFI-funded IDA projects enable IDA accountholders to make well-informed decisions throughout the home purchasing process and, as a result, lead them toward building wealth.
This article originally ran in the IDAresources.org Update Newsletter on 01/28/11 and is available for archival purposes.