Saturday, September 27, 2008

A Model Program Avoids Foreclosure Pitfalls

No money down. Low interest rates. No credit checks. No income verification required.

Those were some of the teasers to encourage people with no credit or poor credit to buy homes that they had no business ever doing. They bought homes and the banks lent them exorbitant amounts to do so, figuring that the market would continue going up and the music would continue running.

Well, the music stopped, and the banks were left holding a bunch of toxic paper.

Many affordable housing programs and their proponents are to blame for this mess, including ACORN.

However, there's one notable example of an affordable housing program that has avoided the foreclosure fate thus far.

That would be New York City's Nehemiah program. The program started about 30 years ago by several church groups in the Bronx who saw row after row of desolation and sought to change it.

The groups set forth strict income guidelines to make sure that the homeowners had a sense of ownership over the homes and that they would fulfill their obligations. Those guidelines mean people are less likely to get in over their heads:

In the 27 years since the program started, fewer than 10 of the 3,900 households have defaulted on mortgages, a rate that is close to zero, said Michael Gecan, a senior organizer with the Metro Industrial Areas Foundation, one of the forces behind the program.

“We demanded down payments,” Mr. Gecan said, “and we resisted government attempts to have us waive down payments. Over the last six or eight years people kept suggesting various programs with zero down. We kept saying, ‘That’s ridiculous — that’s how you get into mass foreclosures.’ ”
In other words, even the housing advocates for affordable housing could see that this was a disaster waiting to happen, and the lenders - forced by Congress to open up lending to uncredit worthy borrowers, were more than happy to do so while home prices appreciated.

Over time, the program has expanded from the Bronx into other parts of the city, including Brooklyn and Queens. They've gone from building on site to using pre-fabricated units. The program has gone national and international, but through it all they run a tight ship on who was eligible for assistance and who was qualified for the program. Everyone benefits from this since the neighborhoods created remain stable as families are able to afford living there, the developers and groups that build the homes see a return on investment that enables them to build additional units within the program, and families that thought they were incapable of owning a home can do so.

How were so many people aided by this program? How does it work? Here's a good summation:
A Nehemiah corporation solicits initial funding via zero-interest loans and gifts from faith-based communities and other sources. These funds help finance the construction of housing units that would otherwise depend upon conventional construction loans from banks.

Community groups function as “developers” of the housing, and forgo the usual fees, all in an effort to drive down the cost of individual units so that they are truly affordable. Since the housing units are usually pre-sold and conventional mortgage financing has been arranged before the first construction loan disbursement, financial risk to each lending church is minimized.

At the end of the typical five-year period, construction will have been completed and
these lending churches can get their loan funds returned, or alternatively, choose to lend again to finance additional housing.
A house built under Nehemiah would cost a fraction of what a traditional developer's home would cost. That provides the basis on which the affordable housing is made, not in tricky and gimmicky financing of mortgages. The mortgages here are conventional 30 year mortgages and the people in the program are preapproved. The people buying homes under the program were counseled by the Church group and knew what they were getting into. Predatory lending didn't apply.

The program is not without its critics or scandal. There were questions over how the organization could achieve the goals, especially with municipalities like NYC dragging its feet on providing the vacant land on which to build. Now, there has been criticism over the tactics that the program's proponents engaged in to assist its efforts, and some had likened the tactics to those promulgated by the radical leftist Saul Alinsky.

Still, after reviewing the program and what it has done, using sound lending practices and conventional mortgage products is actually provide affordable housing without the risks that blew up the credit markets. That's a lesson that has yet to be learned - by the politicians, the financial companies, or the public.

UPDATE:
Instapundit links. Thanks!

I've since gotten in contact with a source who is familiar with the New York City program, and what has happened nationally. The New York City program started with the Church group members who applied to purchase. There were no flippers or speculators and all participants were required to take a course on homeownership training. Original purchasers paid $43,000 in 1982 with houses being sold for $140,000. City provided a $10,000 subsidy and land for free.

At that time, the City ended up with a serious amount of land on its hands because of delinquency, and the urban blight of the 1970s that left vast parts of the city looking like a war zone. The city would provide the land at little to no cost (a hidden subsidy), but in the end you got the land on the tax rolls and created a community in the process.

The national program succumbed to some of the same problems we're seeing with subprimes, precisely because they strayed from the stricter standards set by the NYC program. It's a shame, because home ownership is difficult enough without wondering whether you can afford the next payment because interest rates are going to jump through the roof when they readjust or that there are hidden fees or charges and the buyer simply has no understanding of the process.


 


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