November 07, 2007
Good Mortgages Still Going to Good People
by Anne Moore Odell
Community development financial institutions and their customers across the country are disproving
the idea that low-income people are mortgage risks.
Homeownership is the backbone of the American dream. As the dishonest loan practices that preyed
on the poor are being more widely disclosed, little has been made of the many low- and mid-income
families who have successfully bought homes through a local community development financial
CDFIs in every area of the country are quietly
doing what they have been doing successfully for years: helping lower income people find fair
mortgages and supporting homeownership in communities that have been traditionally underserved by
banks. Their innovative, yet solid, lending strategies are proving their worth despite this year’s
subprime mortgage crisis.
"In each of our programs, we take the responsible, long-term
view — ignoring the boom and bust cycles, the fads and the quick fixes," said Peter Carey of
Self-Help Enterprises, in Visalia, CA. "We know that the real result of our investment in
homeownership is seen in the lives of our participants, the future of their children, and in
stronger, more productive communities."
Self-Help Enterprises (SHE) offers prospective homeowners an array of
financial products and services. For example, SHE offers mutual self-help housing, a program that
enables low-income families to qualify for financing on special terms through USDA Rural
Development or California Housing Finance Agency. This program includes a mutual exchange of labor
among these families to build each others' houses, which reduces the cost of the home and lowers
the threshold to homeownership.
Hundreds of CDFIs around the country work to bring capital
to the low-income areas they serve by providing banking, credit, and other services to people who
might not have access to mainstream financial institutions. CDFIs can take several forms, including
community development banks, credit unions, and loan funds.
CDFIs support their clients by
offering technical assistance, below market rate loans, and other programs and mortgage products
along side of traditional banking services. CDFIs themselves are supported through a combination
of federal programs and tax credits from the US Department of Treasury and private sector
investments and donations. CFDIs rely on thousands of donors and investors including foundations,
churches, businesses, community groups, partners, and individuals.
Although investments in
some CDFIs are not federally insured, most CDFIs are backed up by risk reserves created by the
institutions to reduce the possibility of losses to their investors. With the mortgage scandal
boiling over, it is important to note that CDFI created mortgages are not being hit by the same
default rates as mortgages made by "sub-prime lenders."
To put default rates in
perspective, the US Federal Reserve lists the
default rate in residential mortgages for the first quarter of 2007 as 2.07% for loans through all
banks. A report by Friedman, Billings, Ramsey, an investment bank with offices in Arlington, VA,
states that as of August 2007 default rates on adjustable-rate sub-prime mortgages had reached
One of the most well known CDFIs is Self-Help Credit Union, with headquarters Durham, NC, (not to
be confused with Self-Help Enterprises of San Joaquin Valley) had a foreclosure rate of 0.62% as of
the end of September 2007, which mirrors many CDFIs’ default rates.
Enterprises, which is not designed as a CDFI, holds mainly secondary loans, and the majority are
deferred loans. Of the 145 deferred and 22 amortized loans in Self-Help’s own portfolio ($2.5
million), none are in default. Of the 1100 partner community loans that Self-Help manages, less
than 1% are in default at any time.
One reason for the low default rates is that CDFIs
know that the decisions around homeownership are not to be taken lightly. These organizations
stress that the first step in having mortgage payments paid on time is creating a reasonable
mortgage for all parties involved.
For example, the Berea, KY-based Federation of
Appalachian Housing Enterprises (FAHE), has been
successfully offering lower income people mortgages for over twenty years. FAHE targets families
with incomes averaging $15,000. While the target used by federal government allows housing costs
to account for up to 33% of a family’s income, FAHE has a 25% target. This helps make mortgages
more affordable to their low-income population. FAHE almost exclusively uses 30 year fixed
mortgages, which means there are no bait-and-switch repayment schedules like those that have
crippled the sub-prime market.
"The only changes with our mortgages are with the
families’ situations, for example, their employment or family size," said Jim King, President of
FAHE. "We are consistent. We treat the mortgage payment like it is the most important payment to
make every month."
SHE is similar in this regard. It does not allow adjustable rate
mortgages (ARMs), option ARMs, interest only and other creative mortgages. As a result, SHE’s track
record has been excellent with delinquencies and foreclosures primarily limited to those who have
subsequently taken on additional debt or refinanced away from favorable terms in order to capture
SHE also offers education and training to all households participating in its
homeownership programs, as well as education and counseling to the broader sector of the low-income
population in its lending area.
Another strategy used by CDFIs is financial counseling. In
the Boston area, Aura
Mortgage was launched this year by the CDFI Boston Community Capital helps educate its clients by
working closely with them on determining how much they can borrow, it then lets the clients use the
information to shop around at other mortgage companies.
"We believe this helps borrowers
become better informed consumers by strengthening their financial acumen," said Richard Olson,
President Aura Mortgage Advisors. "Our debt planning specialists are compensated in a way that
ensures they are able to take the time necessary to educate their borrowers without feeling the
need to ‘close the next deal.’"
Aura can reach populations that might otherwise be
underserved with a staff that can speak English, Spanish, Portuguese, Cape Verdean, Wolof, and
French to reach the broadest number of people possible. Aura believes that by putting the financial
needs of the customer first, they can disrupt the subprime market in a way that forces lenders and
brokers to re-think the approach to serving clients
The current subprime mortgage meltdown
will certainly make it more difficult for low-income people to buy homes by tightening credit and
underwriting. Yet there might still be a silver lining to the meltdown.
credit and underwriting is not entirely a bad thing, since so many people have been led into
unsustainable situations," Self-Help’s Carey told SocialFunds.com. "I think we've seen the
greatest risk coming from secondary lenders who capitalized on increasing property values and made
it so alluring to cash out equity and compromise long-term security of the homeowner."
Aura Mortgage’s Olson agrees that the news about the sub-prime mortgages scandal is not all
negative for lower income people: "With property values declining there are new opportunities for
homeownership in communities that have been priced out of the reach of many first time home buyers.
The tightening of the credit markets has nearly eliminated some of the "specialty" products that
got homeowners into trouble."
Olson continued, "Pending legislative action and the market
collapse have started to push out the rogue players that created the crisis. We are starting to see
some product and practice innovations that are beginning to address the challenges of current
homeowners in trouble."
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