Homeownership Done Right

Amid all the reports of the nation’s ongoing tsunami of foreclosures that resulted from the excesses of the mortgage lending industry, it’s good to come across a reminder of the successes that have been achieved by responsible, community-based programs to promote affordable homeownership.  And so I’m happy to recommend the article in the current issue of Shelterforce magazine that describes the accomplishments of the Massachusetts Affordable Housing Alliance (MAHA).   (Full disclosure: I’ve been a proud member of MAHA’s Board of Directors for many years.)

MAHA has played a key role in advocating for the creation and subsequent expansion of the state’s SoftSecond Loan Program, a program that has enabled over 13,000 lower-income families to become homeowners since the program began in 1992.  These include Roslyn George, pictured here on the porch of her new home, whose story is featured in the Shelterforce article.

The philosophy and nature of the SoftSecond program stands in stark contrast to the approach of the subprime mortgage industry.  First, the program stresses affordability.  It achieves low monthly payments by providing an interest rate lower than the prime market rate; a “soft” second mortgage, for 20% of the purchase price, that is interest-only for the first ten years; and reduced closing costs.  In contrast, subprime lenders charged interest rates well above the prime market rate, ostensibly to compensate for the greater “risks” posed by lower-income and minority borrowers.

Second, the program stresses sustainability, having recognized from its earliest days that there was no value in turning renters into homeowners unless they could sustain that status by making timely mortgage payments and meeting the other financial obligations of homeownership.  Thus, the SoftSecond program requires completion of an extensive homebuyer education course (MAHA’s “homeownership university” has more than 10,000 graduates, although the SoftSecond Program accepts any accredited course), strongly encourages program participants to enroll in a post-purchase homeowner education class, closely monitors loan performance, and provides prompt counseling assistance to borrowers who encounter trouble in making their monthly payments.

In contrast, subprime lenders lost interest in their borrowers ended once the loans were made and their fees were earned; if the borrowers were unable to make their monthly payments, the lenders didn’t view that as their problem – in fact, it might offer them an opportunity to earn another round of fees by refinancing the unaffordable loans.

The SoftSecond program’s attention to affordability has paid off.  In the first three quarters of 2008, only 2.2% of SoftSecond loans were delinquent, far below the rate for 4.4% delinquency rate for prime mortgage loans in the state and only about one-tenth the delinquency rate for subprime loans.  And as of this March, only 48 of 12,721 SoftSecond loans made during the entire history of the program had ended with foreclosures.

Want more information about the Massachusetts SoftSecond Loan Program?  See this paper that MAHA Executive Director Tom Callahan and I presented to a 2001 Federal Reserve research conference, this 2007 report by me on the communities and borrowers that received the loans during the program’s first fifteen years and on loan performance during that period, and this section of the website of the Massachusetts Housing Partnership, a quasi-state agency that administers the program.

(Photo Courtesy of NHI/Shelterforce)