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Apr 1, 2010

New Research Shows that Low-Income Homebuyers Using Matched Savings Accounts Are Better Able to Avoid Foreclosure and Subprime Loans

Washington, D.C. — Low-income homeowners who participated in programs providing extensive financial education and matched savings on their down payments were two to three times less likely to lose their homes in the recent wave of foreclosure than similar families in the same communities, according to a study being released April 1 by the Corporation for Enterprise Development (CFED) and the Urban Institute.

The research, which analyzed data from nearly 260,000 home sales, also found that this set of homeowners—whose median income barely topped $25,000—were far less likely to be saddled with high interest rates or subprime loans than the broader sample. The study Weathering the Storm: Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure, is being released in conjunction with a panel discussion on homeownership April 1 at the Center for American Progress.

“The results demonstrate emphatically that risky financial products, not risky people, are to blame for the foreclosure crisis,” said Andrea Levere, president of CFED, a nonprofit organization that advocates for expanding economic opportunity. “When given the right financial incentives, good advice and fair treatment from lenders, low-income homebuyers are just as likely as their more affluent peers to succeed in their pursuit of the American dream.”

CFED researchers worked with the Urban Institute to track 831 homebuyers who participated in programs that used Individual Development Accounts, or IDAs, to purchase homes between 1999 and 2008. For every dollar that a working family saved, a government or nonprofit agency matched it, sometimes on a 2-to-1, or even 4-to-1 basis. The federal government is the biggest contributor to the IDA program through its Assets for Independence program, which includes $24 million in President Obama’s proposed budget.

The IDA savers came from programs in six states—California, Indiana, New Hampshire, North Carolina, Ohio and Texas. They had a median income of about $25,400 a year; nearly three quarters were women, and two-thirds were racial or ethnic minorities. Nationally these are the groups hardest hit by foreclosure.

Researchers, using federal and market data, compared the IDA homebuyers’ experiences to those of others in the same communities with similar incomes, loan amounts and credit scores. The results were striking:

• The IDA savers had a foreclosure rate of 3.1 percent as of April 2009, compared to 6.5 to 6.7 percent for other homebuyers with loans lower than $390,000 and 9 percent for those with loans lower than $130,000.
• About 1.5 percent of IDA savers had loans with high-interest rates compared to nearly 20 percent of the broader sample of homeowners.
• About 0.2 percent of IDA savers had subprime loans compared to 9.3 percent of the broader sample.

“This study provides the first evidence available on loan terms and foreclosure outcomes of IDA homebuyers,” said Ida Rademacher, CFED’s research director. “The findings show that the overwhelming majority of homebuyers in the sample accessed prime-rate mortgage products, and they’ve successfully retained their homes amid the foreclosure crisis.”

IDA programs require a broad swath of financial education, as well as specific instruction for prospective homebuyers. In addition, counselors advise clients about the dangers of predatory mortgage products and often won’t release the matching funds if the loan terms are unacceptable. Also, the programs often work closely with financial institutions and homebuyer assistance programs, such as NeighborWorks America program, to help clients get connected to good loans. In many cases that means government-insured loans, which come with lower down payments and interest rates.

The research does not tease out which factor contributed most to the positive outcome for IDA savers. But at a time when the White House is going to extraordinary lengths to protect homeowners from foreclosure, the study underscores the need for increased consumer protection and financial education. It also affirms the value of the IDA and other matched savings plans that allow working families to build nest eggs.

Policy implications include:

• Promote the IDA and other matched savings accounts on the federal, state and local level. The current $24 million federal investment in IDAs pales when compared to how much the government forgoes annually by allowing pre-tax savings for more affluent workers with 401(k) and other retirement accounts: $80 billion.
• Expand support for programs that offer homeownership education and counseling to ensure that buyers make better decisions about loans.
• Enhance consumer protections to ensure no homebuyers fall victim to predatory lending practices.

To view the full study, click here.

CFED expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children’s and own economic futures. We identify promising ideas, test and refine them in communities to find out what works, craft policies and products to help good ideas reach scale, and develop partnerships to promote lasting change. We bring together community practice, public policy and private markets in new and effective ways to achieve greater economic impact. Established in 1979 as the Corporation for Enterprise Development, CFED works nationally and internationally through its offices in Washington, DC; Durham, N.C.; and San Francisco, C.A.