Weathering the Storm: Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure?

Abstract

This study provides the first evidence available on loan terms and foreclosure outcomes among individuals who purchased their home through individual development account (IDA) programs. Our results suggest that IDA homebuyers are more likely to receive government-insured loans and less likely to receive high interest rate or subprime loans than other low-income homebuyers. Further, we find that foreclosure rates for IDA homebuyers were one-half to one-third the rate for other low-income homebuyers in the same communities. Overall, the findings suggest that participation in an IDA program with its related services can improve homeownership outcomes for low-income households.

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Introduction

Homeownership rates among low-income Americans reached historic highs in the middle part of this decade, extending the realization of the American dream to millions more lowincome families than ever before. The rise in homeownership was widely viewed as a positive trend, largely because homeownership has traditionally been the primary means through which low-income households build wealth. Homeownership is also associated with a host of positive social outcomes relating to health and wellbeing, civic engagement, employment stability, and children’s educational performance.

But as the recent subprime and foreclosure crisis has shown, homeownership is by no means a risk-free proposition or a guarantee that individuals who become homeowners will remain homeowners and build wealth. Low-income homeowners have a high likelihood of returning to renting, and many factors come into play in determining whether homeownership is ultimately a wealthbuilding strategy (Boehm and Schlottmann 2004; Reid and Laderman 2009; Shlay 2006). In addition to length of tenure, other variables that appear to impact whether homeownership leads to wealth accumulation are the use of a down payment, the type of mortgage instrument used to finance the purchase, and the appreciation rate for the property over time (Bostic and Lee 2008; Schlay 2006; Turner and Luea 2009).

Individual Development Account (IDA) programs incorporate several elements that are associated with successful homeownership outcomes. IDAs are matched savings accounts designed to help lowincome families save and build assets. At the time of withdrawal, IDAs provide matching funds, typically $2 for every $1 saved, if they are used by the saver to purchase appreciable assets, such as a home, a business, or higher education. IDA programs for homebuyers include these elements:

• Savings incentives in the form of matching funds that can be used along with personal savings as a down payment,
• Financial education and prepurchase homeownership counseling, and
• Oversight and guidance in choosing affordable, nonpredatory mortgage products.

Congress has provided federal funding for IDAs in recent years after the passage of the Assets for Independence Act (AFI) in 1998. Since then, more than 6,000 individuals have used AFI funds to help finance a home purchase (U.S. DHHS, n.d., 53). This study examines whether IDA homebuyers have better homeownership outcomes than other low-income households. Our hypothesis is that IDAs help create sustainable homeownership opportunities because they provide the structure and the support necessary for low-income households to succeed. The research is designed to provide insight and answers to the following questions:

• What are the economic and demographic characteristics of IDA homebuyers? In what ways are they similar to and different from other lowincome homebuyers?
• What loan terms do IDA participants receive? How do these compare with loan terms for other low-income homebuyers?
• What are foreclosure rates among IDA homebuyers? How do these compare with foreclosure rates among other low- and moderateincome homebuyers?

To answer these questions, we worked with six IDA programs across the country to construct a dataset based on administrative records of 831 individuals who purchased homes with IDA funds between 1999 and 2007. We conducted property searches in March and April 2009 to verify the current homeownership status of the sample (e.g., if homebuyers were still in their homes, had defaulted on their mortgage, or had foreclosed). We compare loan terms and foreclosure outcomes for the IDA homebuyer sample to comparison groups of other low-income homebuyers who purchased homes in the same counties and during the same time period. The comparison groups are constructed from Home Mortgage Disclosure Act (HMDA) data and from mortgage performance data obtained from NeighborWorks America.

IDA homebuyers in our sample were significantly more likely to be minority and female than all low-income homebuyers who purchased homes in the same geographies over the same time period. Yet, the IDA homebuyers were much less likely to obtain high interest rate mortgage loans. Our most important result is that IDA homebuyers were far less likely to face foreclosure than the comparison group. Foreclosure rates for IDA homebuyers were one-half to one-third the rate for other low-income homeowners in the same communities.

The findings suggest that participation in an IDA program with its related services and restrictions can improve homeownership outcomes for lowincome households. One caveat is that since IDA participants self select into the program, IDA homebuyers are not a random sample of all lowincome homebuyers. That is, IDA homebuyers may be people who are more likely to be successful homeowners even without participation in the IDA program. While this is a possibility, our analysis shows that IDA homebuyers are more likely than other low-income homebuyers to be minority and female, two groups that generally have subpar rates of successful homeownership. Also, the magnitude of the difference in outcomes between IDA homebuyers and other low- and moderate-income homebuyers indicates that IDA participation contributed to better homeownership outcomes.

The remainder of this paper is organized into the following sections. Section 2 provides an overview and conceptual framework that explains the design of IDA programs. Section 3 introduces the study methodology and the datasets that are used in this research. Section 4 presents the research findings and analysis for each of the main research questions, and section 5 concludes the paper with a further discussion of the findings and implications for policy.

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