IDAs Increase Down Payment Cash, Reduce Foreclosure Risk

Low-income homebuyers who participate in matched savings plans (IDAs) and financial education are three times less likely to lose their homes to foreclosure than other low-income buyers in the same locale. Earlier this year, the Urban Institute analyzed data from almost 260,000 home sales, and found that IDA participating homeowners with median income of $25,000 were less prone to apply for high interest rates of subprime loans than other homeowners.

“The results demonstrate emphatically that risky financial products, not risky people, are to blame for the foreclosure crisis,” said Andrea Levere, president of Corporation for Enterprise Development (CFED), a nonprofit organization that advocates for expanding economic opportunity. “When given the right financial incentives, good advice and fair treatment from lenders, low-income homebuyers are just as likely as their more affluent peers to succeed in their pursuit of the American dream.”

CFED researchers tracked 831 homebuyers who participated in programs that used Individual Development Accounts, or IDAs, to purchase homes between 1999 and 2008. For every dollar that a working family saved, a government or nonprofit agency matched it, sometimes on a 2:1, or even 4:1 basis.

Researchers compared the IDA homebuyers’ experiences to those of others in the same communities with similar incomes, loan amounts and credit scores:

  • The IDA savers had a foreclosure rate of 3.1 percent as of April 2009, compared to 6.5 to 6.7 percent for other homebuyers with loans lower than $390,000 and 9 percent for those with loans lower than $130,000.
  • About 1.5 percent of IDA savers had loans with high-interest rates compared to nearly 20 percent of the broader sample of homeowners.
  • About 0.2 percent of IDA savers had subprime loans compared to 9.3 percent of the broader sample.

“This study provides the first evidence available on loan terms and foreclosure outcomes of IDA homebuyers,” said Ida Rademacher, CFED’s research director. “The findings show that the overwhelming majority of homebuyers in the sample accessed prime-rate mortgage products, and they’ve successfully retained their homes amid the foreclosure crisis.”

Utah Scores Win with Statewide IDA Network

Utah launched the Utah Individual Development Account Network (UIDAN) in 2004 under the direction of Martha Wunderli, state director. The program boasts a 96% savings rate.

“We feel strongly IDA is a financial product, not a social services product,” said Wunderli. She hires case workers with degrees and background experience in personal finance versus employees with skill sets  grounded solely in social work.

“Our emphasis is on personal and financial responsibility,” she said. “We have a continuum of services. We accept people who are ready to save. If they are not ready to save, we refer them to counseling until they are ready to save.

“We do not hold their hands,” she said. “We ask them to create new household budgets and we look at their credit report.” Credit reports are used for counseling, not scoring. A low credit score does not impact eligibility for the program, according to Wunderli.  Counselors work with participants to increase their scores and prepare them for mortgage readiness if a home is the participant’s “asset of choice.” IDA participants can use their savings and matched funds for education, small business, or home purchase.

“Housing is affordable now,” she said. “People are buying homes, paying less or the same as fair market rent.”

Wunderli credits a 96% savings rate to helping families creating a savings habit, providing thorough follow-up, and excellent contact management.  UIDAN matches participant savings 3:1.

Kate Hoffman, executive director of Live the Solution (Tucson), is creating a similar program in Arizona, using UIDAN as a model.

“Utah  takes a strategic approach to saving,” said Hoffman. “Participants in the program need to be ready to save and they need to be successful. They attend rigorous financial education upfront. Case managers have degrees in various levels of financial planning. Martha Wunderli has a high expectation in what case management produces.”

Hoffman said she will draw case management talent from the lending industry and a pool of Neighborworks certified foreclosure counselors and homeownership counselors.

Live the Solution IDA program expands upon the Utah model with a employer partnership program. Participating Arizona employers make the IDA program part of an Employee Assistance Benefits (EAP) package. Employer dollars are matched in Hoffman’s program.

(Read the full CFED report here: Weathering the Storm.)

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1 Comments For This Post

  1. Steven Lunetta Says:

    With FHA only requiring 3.5 percent down, I feel there should be no DPA programs.

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