Document View

Lending in the affordable real estate market segment demands creativity. Mortgage lenders in recent years have spawned mortgage programs that beat many of the money barriers keeping have-nots out of homes. Yet the real key has been partnerships, outreach, counseling and custom loans.

Steadily rising appreciation in most residential real estate markets has made finding affordable housing a stiff challenge-some even call it a crisis. This has forced lenders to become far more creative about financing in this market-especially in some of the nation's pricier cities.

To answer the demand, lenders have developed creative loan programs and partnered with community organizations. On top of that, lenders have shown they are willing to look at risk differently to expand their business into new markets and make the homeownership dream come true for more people.

According to the U.S. Census Bureau, there were 69.8 million homeowners in the United States in 2ooo. And while statistics about the number of those homeowners considered in the affordable-housing segment are hard to come by, indications from the government and lenders are that their ranks have been growing during the last io years.

One reason for more lending in the affordable-housing market is the stronger Community Reinvestment Act (CRA) requirements. This, coupled with low interest rates and a secondary market more willing to purchase more affordable-housing loans under special programs, has meant an increase in lending.

The U.S. Department of Housing and Urban Development (HUD) is one of those leading the effort to improve access to affordable housing by providing funding to community groups that educate and sometimes lend to people seeking low-cost funding. HUD's block grant, the HOME Investment Partnership Program (HOME), will have a fiscal-year 2002 budget of si.8 billion to help with local affordable-housing efforts.

"For fiscal year 2002, the Bush administration has proposed a number of new or expanded initiatives to improve homeownership rates among low-income and minority families," HUD Secretary Mel Martinez told the Veterans Affairs, Housing and Urban Development subcommittee of the Senate Appropriations Committee in June.

Enlarge 200% Enlarge 400%

These initiatives include down-payment assistance through HOME and Section 8 vouchers. In his testimony before the Senate panel, Martinez also discussed a proposal, the $1.7 billion Single-Family Housing Tax Credit, which would support the construction and refurbishing of approximately loo,ooo homes for purchase in low-income neighborhoods during a five-year period. "The program would subsidize up to 50 percent of project cost and benefit low-income families," Martinez said.

In addition to increasing its own affordable-housing efforts, a HUD study, The GSEs' Funding of Affordable Loans: A 1999 Update, shows that both Fannie Mae and Freddie Mac have increased the purchase of affordable-housing loans. In 1999, affordable-housing loans accounted for 12.3 percent of Fannie Mae's purchases and 12.5 percent of Freddie Mac's purchases, according to the study.

In 2001, HUD is requiring that 31 percent of the governmentsponsored enterprises' (GSEs) mortgage purchases represent loans from underserved neighborhoods, according to the HUD study. This has opened up the secondary market and offered lenders, particularly mortgage bankers, an avenue to sell more affordablehousing loans.

"[GSEs] are offering more loan programs to the affordable-housing segment than before," says Regina Lowrie, president and chief executive officer of Gateway Funding Diversified Mortgage Services LP, Fort Washington, Pennsylvania. "Before, the market didn't have any alternative loan programs."

According to the aforementioned HUD report, while both GSEs have improved their affordable-lending performance since 1992, it has not kept pace with their other activity in the conventional conforming market when it comes to funding mortgages for lower-income borrowers and for properties located in lowincome and high-minority census tracts or underserved areas.

Affordable-housing obstacles

Two of the most prevalent problems faced by borrowers in the affordable-housing mortgage segment are lack of a down payment and closing-cost money along with credit issues. Most conventional loans require a down payment from the purchaser of at least 20 percent of the purchase price of the home. However, federal loan programs such as those insured by the Federal Housing Administration (FHA) have helped people get into homes with as little as 3 percent down.

However, having enough cash to cover a down payment and closing costs remains a difficult obstacle for many to overcome. Along with not having the cash upfront, many potential homeowners in the affordable-housing market either have a bad credit history with bankruptcies, judgments or numerous late payments or have no revolving credit history at all.

Lenders have been quick to point out their successful efforts to step up affordable-housing lending-in some cases to answer charges of predatory lending in vulnerable innercity markets. In fact, the success of programs such as CRA may be at risk because of predatory lenders, says Judy Kennedy, president of the National Association of Affordable Housing Lenders (NAAHL), Washington, D.C. According to Kennedy, predatory lenders can destabilize a neighborhood by flipping low-income homeowners into higher payments or by stripping the equity out of their homes.

In an effort to help the lending industry move forward, groups such as NAAHL have created a dialogue among lenders about what they've done to create more affordablehousing lending. However, banks are not apt to share all their secrets for successful affordable-housing lending, for competitive reasons, Kennedy says.

"Banks are making progress by increasing capital and making sure there is access to funding on appropriate terms," Kennedy says. "Banks have made tremendous progress in serving people with low and moderate income by offering a mix of strategies and products."

Whether as a result of pressure from government regulations, or a better perception of risk versus profit in the affordable-housing market, lenders have created alternative loan programs to expand their lending.

Pointing to an April 2000 U.S. Department of Treasury report on CRA lending, The Community Reinvestment Act After Financial Modernization-A Baseline Report, Kennedy says the 31 percent to 35 percent increase in low- and moderate-income markets from 1993 to 1999 is evidence of financial institutions' efforts.

Mortgage lenders are also hiring employees who speak the languages spoken in some underserved markets in the hope of attracting more of those borrowers, Kennedy says. And other lenders are opening outlets in nontraditional locations, such as grocery stores, to attract more borrowers. These efforts are designed to improve confidence and trust in lenders on the part of some low- to moderate-income borrowers, which had not been there before, according to Kennedy.

Some lenders are dedicating a specific amount of funds per year to getting more people into affordable housing. Like those available through the federal government, these programs look at creating down payment and closing cost assistance and finding alternative credit sources.

Hard work

"It's a laborious process," says Lowrie, who has been in the mortgage industry for more than 25 years. Lowrie says her mortgage company has worked with people for six months or more in some cases to clean up credit records or "do some digging to show alternative credit, such as showing evidence that they pay their electric bill, car insurance and even layaway [bills].'

Washington Mutual Inc., Seattle, has committed $49.1 million to communities in the form of grants, sponsorships, in-kind support and other assistance, according to a May 2001 joint press release issued by the Neighborhood Reinvestment Corporation, Washington, D.C., and Washington Mutual. In fact, nearly half of the institution's corporate grants are dedicated to supporting affordable-housing initiatives, according to a release about the company's efforts with the nationwide NeighborWorks Group Inc., one of the thrift's community-based partners (see sidebar).

In 1999, Washington Mutual made a lo-year, $12o billion lending pledge to help underserved communities across the nation. The cornerstone of this commitment is to provide more than $81.6 billion in single-family home loans. Of this total, $30 billion will target low- to middle-income borrowers.

About one-third of Chicago-based LaSalle Bank N.A.'s total $2.6 billion loan volume last year was for affordable housing, according to Beth Witczak, first vice president and a community reinvestment officer for LaSalle Bank. LaSalle, a division of the Netherlands-based ABN AMRO Bank N.V, also partners with several neighborhood groups to provide funding as well as extensive education. There are some borrowers seeking affordable-housing loans who qualify for LaSalle's conventional programs because they have the required down payment and/or do not have negative credit issues.

"Right now there is more of a move by lenders-mostly through community groups-to educate borrowers, even during postclosing," says Witczak.

Education helps create borrowers who will not only be able to get into a home but avoid situations that would create a risk of losing the home, Witczak says.

Fannie Mae and Freddie Mac recognize the importance of homeownership education and require those borrowers who only make 3 percent down payments to take homebuyer classes.

According to a survey from HUD to be released later this year, about 4.3 million homeowners in the very-low-income (zero percent to 50 percent of the area median income) segment spend more than 50 percent of their income on their mortgage, according to HUD. Educating borrowers before they start looking for a home will ease the burden of everyone involved in the process, as well as reduce possible foreclosures, says Marcia Griffin, president and founder of Washington, D.C.-based HomeFree-USA, a communitybased organization focusing on preparing people for homeownership through education.

"People want to do well financially, but they need to have access to the programs that are out there," Griffin says.

The role of technology in affordable housing

Along with developing relationships with community groups and creating more loan programs, Lowrie says technology has improved the availability of affordable-housing funds.

"AU [automated underwriting] has helped expand homeownership, but affordable-housing borrowers do not always fit into those systems," Lowrie says. "With no credit history, the system is going to bounce the loan out and you're going to need a manual review."

However, AU systems have provided a level of analysis of all markets. "The ability to mine data from the GSEs and lenders' AU systems in order to track risk has led to better ways of getting a profile of risk," says Steve Hornburg, executive director of the Research Institute for Housing America (RIHA), Rosslyn, Virginia. "Technology has provided lenders with a better understanding of risk and made it possible to expand into different markets such as affordable housing."

Hornburg says that while technology has "automated the loan process and brought down the cost of a mortgage in transactions and servicing and made them more available, the natural reaction and concern is whether the formulas used are fair."

An even broader issue, according to Hornburg, is whether the information used in rendering an AU decision is, in some way, discriminatory information or has a discriminatory impact. But despite this concern, he says, AU systems have given loan professionals the freedom to process loans faster and spend more time on loans that are more difficult. This time reduction, in turn, is passed on to the consumer in the form of cost savings.

"There are systems being used in this market [affordable housing] that are not as sophisticated as those for A loans," Hornburg says. "But as long as borrowers are getting a fair shake, what's wrong with that?"

RIHA plans to research the issue of automation and affordable housing to find out whether it is easier for borrowers in this market to be approved through automation or manually, and what to do with information that is not easily automated-such as rental payment history. Hornburg says the possible creation of a database of such information would make it easier for some loans to be processed through AU systems. Affordable-housing availability

Despite the efforts of lenders to provide the programs and funds to increase lending in the affordable-housing market, in some locations across the country the more pressing matter is an actual lack of housing.

"It's becoming a real crisis," says Lowrie. In the Philadelphia area, which her company serves, affordable housing would range from $70,000 to $80,000. Lowrie says there is very little inventory of homes in this range that do not need major repairs. "A lot of these families do not have the extra income or reserves to make major home repairs," she says.

But there are efforts by other groups, including the National Association of Realtors (NAR), National Association of Home Builders and the U.S. Conference of Mayors, all based in Washington, D.C. Lowrie says these groups are beginning to meet to discuss what can be done to create affordable housing.

Lenders, too, are stepping up to the challenge of providing special loans to developers and organizations to allow them to build more affordable housing. For instance, J.P. Morgan Chase & Co. (JPMorgan Chase), New York, is working with the New York Mortgage Coalition and Neighborhood Housing Services in New York and with the Association of Community Organizations for Reform Now (ACORN) and the National Urban League offices across the country, to create more affordable housing in New York and Texas (the focus on Texas is because of the proactive groups and the availability of land there).

In its efforts to duplicate successful lending programs across the country, JPMorgan Chase is finding different local issues apply to affordable housing needs. For instance, in New York, where there is limited real estate, the bank is creating financing for limited-equity co-ops that would allow borrowers to get into a unit with a minimum down payment. The bank also offers programs that allow borrowers to use Section 8 vouchers toward down payments.

In Texas, where there is still plenty of room to build, JPMorgan Chase is working with a group of ministers-the African-American Pastors Coalition and Pyramid Community Development Corporation-to provide funding for the construction of more than 700 units of affordable, single-family housing. These efforts are successful because of the bank's "network of support from nonprofit organizations," says Mark Willis, executive vice president of JPMorgan Chase Community Development Group.

Lenders have come a long way in learning how to make a difference in the affordable-housing market. By creating flexible loan programs and developing partnerships with community groups to serve this market, lenders now have success stories to share. And as lenders continue to work on ways of increasing affordable-housing lending, borrowers are benefiting from increased emphasis on homeownership education and are becoming better-prepared to own a home.

"Affordable housing has been an area of particular innovation over the last io years," JPMorgan Chase's Willis says. "We have a team of people who know how to put this kind of financing together, and they are committed to making these deals work."

[Sidebar]

The NeighborWorks Network, Washington, D.C., is an organization made up of community-based entities within NeighborWorks Group Inc., under the umbrella of the Neighborhood Reinvestment Corporation,Washington, D.C., which was created in 1978 to revitalize old, distressed communities.There are 230 groups in the Network, which serve 1,800 communities in 49 states. NeighborWorks Network is close to the end of its Campaign for Home Ownership 2002.This initiative has $2.6 billion in investments from lenders and other nonprofit organizations for closing costs and down-payment assistance programs for borrowers across the country.The campaign goal is to help 40,000 families get affordable housing by the end of 2002-so far, 29,000 families have been helped.

NeighborWorks offers full-cycle lending, which is the "comprehensive approach to getting people in homes and keeping them there," says Doug Dylla, national coordinator for NeighborWork's Campaign for Home Ownership 2002. Toward this end, the group tries to build housing rehabilitation cost into the loan from the beginning, which Dylla says ends up being less expensive for the borrower than trying to pay for rehab