How can the number of low-income persons who qualify for subsidized mortgage programs be increased?

Investing in credit education and repair programs while offering savings incentives for low-income homebuyers can increase the number and quality of loan applicants for available programs.

Background

The largest challenge to building housing in the Delta today is finding applicants who can survive the scrutiny of a loan underwriting process.⁵ Many nonprofit housing developers surveyed for HAC said that it is not unusual to be unable to qualify 97 out of 100 or more would-be applicants due solely to their inability to meet debt-to-income thresholds and/or their poor credit performance.⁶ Improving the ability of low-income persons to qualify for loans will mean increased economic impact in local communities from construction and improved quality of life for Delta families. Increased demand for low-income housing development will also pave the way for larger scale production by nonprofit developers.

Recommendation: Homebuyer Clubs

Community-based housing organizations and states should make credit training and remediation top priorities for a period of not less than a decade. Programs that support prospective low-income homebuyers should be designed and demonstrated using the following components:

• training that develops participants' financial evaluation skills so that they can make informed decisions about when to use credit, compare the costs of using various credit vehicles and understand the legal responsibilities of credit arrangements;
• counseling and assistance with debt management strategies and bad debt remediation;
• peer-based support structures for debt management and remediation, as well as saving for a home purchase; and
• Individual Development Account (IDA) matched savings programs to reward and assist potential homebuyers with accumulating funds for fees, downpayments, move-in costs or other costs associated with securing housing.

The following concept for homebuyer clubs is one illustration of how these features might be assembled to create a program that would encourage wise credit use and saving for homeownership.

Concept

Homebuyer clubs are formed to provide credit training, credit management and credit remediation to persons seeking assistance in purchasing a home. The clubs are vehicles that combine training for personal financial management and consumer credit use, access to information on how to purchase a home, opportunities to obtain information about one's creditworthiness and repair credit mistakes, and opportunities to save monies for home purchase downpayment. Homebuyer clubs incorporate peer support and goal-setting to encourage saving for homeownership.

Funding Sources

Funding sources for homebuyer clubs in the Delta could include HUD's HOME and Community Development Block Grant (CDBG) programs, foundations, public housing authorities, lending institutions complying with the Community Reinvestment Act, mortgage companies, real estate sales brokerage firms and other investors.

Administering Agency

State housing finance agencies or a public agency of the state's choosing (as in the case of Mississippi Home Corporation and the Mississippi Homeownership Initiative program) are potential administering agencies. The designated agencies could:

• design a training curriculum or assemble one using materials available nationally;
• develop a reimbursement formula for training and convening activities conducted by program partners;
• design and administer a Request for Proposals process to select homebuyer club program partners;
• train program partners to deliver the homeownership and debt reduction curriculum;
• monitor homeowner club performance;
• contract with local credit counseling service providers; and
• establish an IDA homebuyer account mechanism using HUD guidelines (Notice CPD-01-12).

Program Partners

Homebuyer clubs could be formed by nonprofit community-based housing organizations, Community Housing Development Organizations (CHDOs), local units of government, public housing authorities, credit unions and community colleges. These entities would contract with administering agencies to deliver the program components to prospective homebuyers. Program partners would be responsible for:

• identifying committed low-income persons with demonstrated potential to become homeowners;
• working with local public housing authorities, banks, employers and other service agencies to secure applications;
• learning and delivering the homeownership and savings curriculum;
• organizing dues collection and motivating participants to carry out debt reduction plans to pay off medical bills, utility bills and consumer credit cards;
• organizing and setting up HUD IDA dollar-for-dollar match accounts for potential homebuyers. Match sources might include local banks, employers, churches, foundations, utility companies, and other institutions; and
• working with local banks to establish trust accounts for IDA funds.

In addition, a credit counseling contractor is recommended as a partner for assisting clients with credit remediation. The credit counseling agency would:

• provide debt counseling and credit remediation plans;
• assist with mortgage placement; and
• monitor debt reduction progress of Homebuyer Club members.

Support

Homebuyer clubs could be primarily underwritten using HOME and CDBG annual allocations. Additional program support might come from public housing authorities, banks and other regulated lending institutions, foundations, local governments, employers and program fees.

In addition to any program fees, participant membership dues should be required for club members. These dues would not available to pay for program costs but would be used to pay down debts and accumulate savings for home purchases.

Desired Impact

As outstanding debts were paid and credit re-established, participants would reduce debt levels to program minimums, achieve creditworthiness and earn downpayment funds to purchase homes.

Delta Community Benefits

• Homebuyer clubs would help individuals build financial discipline and achieve creditworthiness.
• Less consumer debt for Delta households would mean more money available for home purchases.
• Homebuyer clubs could increase visibility for current housing initiatives and serve as a feeder mechanism for other programs.
• Improved creditworthiness of individuals may increase tax revenues and reduce costs of debt delinquencies.
• Homeowners make significantly more purchases than other resident groups, benefitting the local economy.

Delta Community Costs

• Program partners and states would invest time and money organizing, promoting, and maintaining a club.
• The process would require a minimum two-year commitment from participants to yield measurable results.
• Clubs would reduce the amount of public and HOME funds available for other programs.
• Managing clubs might require administering agencies to increase the size of their program budgets.

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