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28 October 2003Remarks by Susan V. Berresford at the Fannie Mae/Ford Foundation/Self-Help Event
I am pleased to be here to celebrate the accomplishments of the partnership between Self-Help, Fannie Mae and the Ford Foundation. When we formed this partnership just over five years ago, our goal was to help low-income families buy homes and to test new lending practices that would make it easier for banks to reach households not served by conventional mortgages.
Let me describe how this partnership, called the "Self-Help Initiative," works. Commercial banks and credit unions make loans to low-income households, with a focus on minority households, that have not been able to obtain a mortgage. Self-Help purchases the mortgages from the lenders and resells them to Fannie Mae. The Ford Foundation provided a grant of $50 million to Self-Help to guarantee the mortgage loans Fannie Mae purchased.
This grant helps to cover the risks involved in testing how the new mortgage products work in building the assets of disadvantaged people. We set a target of $2 billion worth of mortgages to be purchased over a five-year period.
Because of the unprecedented nature of this effort to build financial assets for low-income people, the Ford Foundation also funded a study of the initiative by researchers at the University of North Carolina. This research is measuring the ability of the borrowers to pay their mortgages and the effect that homeownership is having on their financial and other assets.
If we can demonstrate that low-income households previously thought to be uncreditworthy can manage monthly mortgage payments, the initiative could have the long-run effect of opening up lending practices across the nation. And thousands of other low-income families now considered high risk could own their own home.
Self-Help has exceeded the five-year target of $2 billion in mortgage purchases by $200 million. Although many of the loans have been outstanding for only a few years, the Self-Help Initiative has achieved remarkable results. Let me mention some of the key findings.
One: Thanks to the creativity and hard work of the staffs of Self-Help, Fannie Mae and the 22 participating lenders, the demonstration has spawned a variety of innovative and flexible mortgage products. They have enabled more than 27,000 households in 48 states, who traditionally would not have qualified for conventional loans, to become homeowners. The participating lenders, such as Bank of America and Chevy Chase Bank, who are here with us today, customized their mortgage products to fit the needs of families that lacked money for an adequate down payment, or had insufficient cash reserves, or had non-existent or blemished credit histories. For example, more than 49 percent of the borrowers obtained loans with down payments as low as 3 percent of the purchase price, while another 13 percent did not make a down payment at all. The vast majority of these borrowers were not required to obtain mortgage insurance, a significant departure from normal practice and a saving to families on tight budgets. In addition, more than 42 percent of the households had no credit scores or scores below the threshold (660) usually required for a conventional mortgage. Without the Self-Help Initiative, these families might have had to turn to the subprime market for financing, paying a higher interest rate and big fees for their mortgage loans.
Two: Flexible underwriting standards have enabled the lenders and the initiative to serve a population—minorities, rural residents, female-headed families—often shut out of the homeownership market. More than 45 percent of the borrowers come from minority groups (21 percent African-American, 17 percent Hispanic, and 7 percent Asian, Native American and others). This is a much higher percentage than has been served by conventional mortgages. More than 50 percent of the borrowers had incomes at the time of home purchase that fell below HUD's eligibility requirement for federal housing subsidies—60 percent of their area's median income. 22 percent were earning less than $25,000 annually. Nearly 40 percent of the households were headed by a single woman and 35 percent lived in rural areas.
Three: The purchase of a home is leading to creation of meaningful wealth for households that historically went from paycheck to paycheck. The median annual appreciation rate in the value of the homes financed in this demonstration and with mortgages still outstanding is 5.3 percent, a rate that exceeds both the average annual increase in the Dow Jones Industrial Average and the average six-month CD rate for the period between 1998 and 2002. Significantly, less than 1percent of the homes decreased in value. This growth in the value of the homes means that household wealth—the single largest component of financial assets for low-income people—also has increased. The current median value of the homeowner's equity—in other words, the current value of the home minus the outstanding balance of the mortgage—for all borrowers whose loans remain active is $25,239. Purchase of a home clearly has been a successful investment for these families.
The analysis performed by the research team at UNC indicates that even households with incomes below $20,000 have been able to increase a small down payment into an impressive nest egg. For example, the median initial equity of $1,770—the down payment—for borrowers with annual incomes below $20,000 has increased by $19,900 to $21,670, more than a ten-fold increase. This is a very impressive growth in wealth for low-income households, which historically have lacked meaningful financial assets. This growth in financial assets, if it persists, should help increase household stability and promote upward mobility in the future. The UNC research team will be tracking these potential effects for more than 3,500 borrowers over the next five years.
Four: Overall, delinquency rates are higher for the initiative than for conventional mortgages, but lower than for loans insured by the Federal Housing Administration. For example, as of June, 2003, 9.22 percent of the initiative mortgages were delinquent for 30 days or more, compared to 2.79 percent for conventional loans and 11.92 percent for FHA mortgages. Although these delinquency rates appear high, there are some promising findings about mortgage delinquencies. The higher initiative delinquency rates have not translated into unusually high losses. Less than 1 percent of the loans (261) have been foreclosed, resulting in a loss of only $1.9 million. To put this in perspective, the incidence of foreclosures (.7 percent) and the severity of the losses (25.7 percent) are significantly below the assumptions for the demonstration. In other words, the initiative mortgages are performing better than expected.
This pattern of higher than typical delinquency rates but lower than expected foreclosures, which indicates a "cure" rate that is higher than the industry average, may reflect two factors. Self-Help has been very proactive in trying to convince mortgage servicers to help borrowers prepare work-out plans to avoid loss of their home. This may have prevented losses that otherwise might have occurred. Second, higher rates of delinquency, but not foreclosures, may be "normal" for this population because they face numerous demands on their resources, making it difficult to pay all of their obligations on a timely basis.
Finally, another piece of good news about delinquencies is that the higher delinquency rate for initiative loans appears to result from difficulties faced by a subset of the borrowers. A large majority of the borrowers—80 percent—have perfect repayment records, including 67 percent of the borrowers with the highest credit risk, those with credit scores below 660. Based on their credit scores alone, these borrowers would not qualify for a conventional loan. This is an important finding, because it indicates that, in addition to building financial assets, most low-income borrowers also have demonstrated that they are good credit risks and can, at least so far, and contrary to prevailing expectations, repay their mortgages in conformance with the standards of the prime lending market.
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