Evaluation of the Michigan Links to Homeownership Home Purchase Program Final Report September 26, 2003 Prepared for Michigan State Housing Development Authority 735 East Michigan Avenue Lansing, MI 48909 Prepared by Christopher E. Herbert Jennifer Turnham Michelle Wood Christopher N. Rodger Abt Associates Inc. 55 Wheeler Street Cambridge, MA 02138
Executive Summary The Links to Homeownership program began as a collaborative effort between the Michigan State Housing Development Authority (MSDHA) and the Michigan Family Independence Agency (FIA). In January 2000, the FIA approached MSHDA to suggest ways to improve the housing opportunities of low-income families using federal funds received by the State through the Temporary Assistance to Needy Families (TANF) program. FIA and MSHDA decided to focus the available resources on increasing homeownership among low-income families and created the Michigan Affordable Housing Fund (MAHF) to meet this goal. The availability of funding through the MAHF provided MSHDA with an opportunity to expand its services to low-income homebuyers and increase the number of families served. Since 1991, MSDHA has used funding from the federal HOME program to make down payment assistance of up to $5,000 available to qualified purchasers in the form of a zero-interest deferred payment loan. Buyers under this program received homebuyer education from a network of MSHDA-approved counselors. The Links to Homeownership program increased the maximum amount of down payment assistance to $10,000 and offered this aid as a forgivable loan over five years. Links also made homebuyer education available to all income-eligible families and added individual counseling and financial management education, home maintenance training for new homebuyers, and financial assistance for property inspections and credit repair. 1 The Links to Homeownership program design, which couples down payment assistance with intensive education and counseling services, was intended to extend MSHDA s homeownership programs to lower income buyers while at the same time managing the greater risk of loan default. Both the down payment assistance and the education and counseling services were intended to fulfill a dual role of helping families to purchase homes and to sustain homeownership over the long term. MSHDA contracted with Abt Associates Inc. to conduct a three-year evaluation of the Links to Homeownership program. The purpose of the study was to assess the results of the home purchase component of the Links program and to evaluate its success in helping lower income families achieve and maintain homeownership. The evaluation draws upon five main sources of data: interviews with MSHDA staff; focus groups and interviews with Links program participants; interviews with the counseling agencies providing Links services statewide; interviews with lenders; and administrative data maintained by MSHDA on program participants, as well as data from Rural Development and individual credit reports for a sample of clients. This report is the third of three reports produced under the evaluation. The first two reports, produced in February 2002 and May 2003, focused on documenting the process of implementing the program and measuring program outcomes. This report integrates these findings with new research on program outcomes to summarize the lessons learned from the program thus far. The report covers the period from January 2001, when the full array of Links home purchase services became available, 1 In order to be eligible for Links to Homeownership program, the prospective homebuyer must have a related child in the household, including children under age 18 or age 18 and a full-time student. Pregnant women were also eligible for assistance. In addition, household income must not exceed 60 percent of the state or area median income adjusted for family size, whichever is higher. Abt Associates Inc. Executive Summary i
through June 2003. The findings of the report fall into three main categories: program implementation; achieving homeownership; and sustaining homeownership. Program Implementation Overall, MSHDA has been successful in implementing a complex new program featuring a broad array of services in a short period of time. At the end of three years of operation, the Links program is actively serving clients in nearly every county of the state. A counseling network that covers all areas of the state is well established and provides a range of Links services to prospective homebuyers. MSHDA involved many different departments within the agency as well as experienced homeownership counselors in the design of the Links program. This gave stakeholders with varying priorities and goals the opportunity to voice their opinions and to help shape the design of the program. MSHDA has also devoted considerable resources to training counselors. Four days of training are provided for new counselors, who must pass a certifying test after training to become a Links counselor, and annual refresher trainings are held each year for existing counselors. The effort expended on training appears worthwhile, as most counselors have been satisfied with the training and the opportunities they are given to provide feedback to MSHDA staff. MSHDA has not made a concerted effort to market the Links to Homeownership program to prospective homebuyers. Instead, responsibility for recruiting program participants has rested with the counseling agencies, who have tended to focus their marketing and outreach broadly rather than conducting targeted marketing campaigns specific to the Links program. The result is that most Links participants hear about the program through word of mouth or from lenders and realtors once they have begun the purchase process. Some counselors would like to see more effort by MSHDA with respect to marketing, but others prefer to take the lead in outreach activities. In general, most counselors report there is ample demand for the Links program among prospective homebuyers in their area, although some have been disappointed in the number of families who have used Links down payment assistance to purchase homes. For most counseling agencies, Links funding represents a relatively small proportion of their overall agency budget. Smaller agencies typically serve fewer clients, resulting in less funding from Links. In 2002, only five agencies had Links revenues greater than $10,000, and most of these were large agencies with many other larger sources of funding. Between January 2001 and June 2003, a total of 5,543 families received assistance through the Links homebuyer program. Of these, 751 purchased homes using Links down payment assistance. The most widely used Links services have been pre-purchase homebuyer education and individual credit counseling. Approximately 4,600 families have received homebuyer education and just over 2,000 have received individual credit counseling. The other Links services, financial management training, credit repair funding, pre-purchase home inspections, and home maintenance training have been used less frequently, although the use of financial management training has increased rapidly over the past year. ii Executive Summary Abt Associates Inc.
Counseling agencies have exhibited flexibility in their approach to providing Links services. For example, although the approach to homebuyer education has been fairly consistent across the state, agencies have made local modifications such as offering a combination of group and individual sessions and inviting local lenders to serve as guest speakers in order to make the program more effective. Agencies have shown still more innovation with financial management, adapting the model course schedule and format to match the needs of individual clients and to respond to the level of demand for the service. Although the Links counseling network is extensive and covers the state quite effectively, the involvement of lenders in the program has been less consistent. Lenders have originated Links loans in only 30 of the state s 83 counties. As a result, many counties with active Links clients have not had any buyers who have used MSHDA loans. In some areas, there appears to be a lack of lenders who originate MSHDA loans; in other areas, lack of communication between counseling agencies and lenders has limited the use of MSHDA loans by Links clients. Lenders play a particularly important role in making sure buyers are aware of loans and down payment assistance available through MSHDA; without a strong lender involvement, Links clients may well use other sources of financing to purchase a home even if these options are not as attractive as MSHDA s. Achieving Homeownership As of June 2003, 751 families, 13.5 percent of all families receiving Links assistance, had purchased homes using Links down payment assistance. However, this rate of home purchase somewhat underestimates how successful the program has been in supporting homeownership. First, a significant number of Links clients have received services in the past year and may be in the process of searching for and purchasing a home. Second, the Links program is not the only avenue through which families may purchase a home. For example, based on data provided by Rural Development (RD) on its lending program for low income buyers in rural areas, we learned that an additional 61 Links families, or 1.1 percent of all clients, had purchased a home using RD financing. In order to estimate how many Links clients might have purchased homes using financing sources other than MSHDA or RD, we reviewed the credit reports of Links clients served by a sample of 12 counseling agencies. In doing so, we found that 27 percent of Links clients in the sample who received counseling services between September 2001 and August 2002 had purchased a home by August 2003. Unfortunately, there are no good benchmarks for evaluating whether this rate is higher or lower than might be expected. The ideal purchase rate achieved by a program depends on the share of clients that are nearly ready for homeownership. If most clients are close to being ready to buy a home, then a high purchase rate would be expected. On the other hand, if clients are likely to have a history of credit problems and little savings, then a relatively small share of clients would be expected to purchase in the near future, even if the counseling services help increase the chance of becoming a homeowner in the long run. A recent mail survey of clients counseled in 2000 through the Neighborhood Reinvestment Corporation s Campaign for Homeownership found that 72 percent of respondents had purchased a Abt Associates Inc. Executive Summary iii
home about two years after counseling. 2 However, due to a very low response rate to the survey, the study s authors note that the purchase rate could be as low as 24 percent. This lower bound estimate of the purchase rate is close to the rate achieved by MSHDA s counseling network in our sample. Thus, in comparison to Neighborhood Reinvestment s experience, MSHDA s purchase rate seems somewhat low. However, this may not be due to differences in the effectiveness of counseling, but rather may reflect differences in the degree to which clients are ready to purchase. Information from individual credit reports suggests that a high share of Links clients have fairly poor credit. Among those who have not yet purchased a home, only 15 percent had credit scores of 620 or higher, 87 percent had an open collection, and 52 percent had monthly recurring debt that was more than 12 percent of their income. Even among those who had succeeded in purchasing a home with non-mshda financing, only 48 percent had credit scores above 620, 56 percent had an open collection, and 58 percent had recurring debt that was more than 12 percent of income. The relatively poor credit quality of Links clients certainly contributes to the fairly low purchase rate to date. It may be that there are important social benefits from the Links counseling services even if the share of clients purchasing is low. For some clients, the education and counseling received may make a significant contribution to the chance that they will some day become homeowners. Others may benefit from deferring a home purchase until it is more likely that they will succeed as owners. But since MSHDA s explicit goal is to promote homeownership, a key question is whether the authority is willing to invest resources in so many clients who will not purchase in the near future. Perhaps equally important for MSHDA is that only about half of Links clients who purchase a home use MSHDA financing. The most effective way to raise the share of clients purchasing homes may be to target clients who are nearly ready for homeownership. Counseling agencies with higher home purchase rates among their clients were found to have made some efforts to screen incoming clients to see whether they were ready for homebuyer education. Greater use of pre-screening would focus program resources on those more likely to become homeowners in the near future. In addition, maintaining contact with clients after they complete homebuyer education may increase the share of clients purchasing with MSHDA loans rather than other mortgage products. A large share of the buyers using non-mshda financing sources were those who purchased more than three months after counseling. Agencies that maintained contact with clients after counseling and encouraged the use of the Links home inspection option had higher shares of buyers using MSHDA financing. The relatively low use of MSHDA loan products and down payment assistance may also reflect a need for more involvement in the program by lenders. Those agencies with high shares of buyers using MSHDA financing generally had close ties with MSHDA lenders. Based on the counselor interviews, there appears to be strong competition among lenders and loan products for low-income buyers. Counselors described a number of programs offering assistance to potential Links clients, including efforts funded by local governments, area banks, and federal agencies. The extent to which MSHDA products can compete against these alternative products depends on the level of down 2 Individual and Neighborhood Impacts of Neighborhood Reinvestment s Homeownership Pilot Program, William M. Rohe and Roberto Quercia, The Center for Urban and Regional Studies, University of North Carolina at Chapel Hill, April 2003. iv Executive Summary Abt Associates Inc.
payment being provided as well as the interest rate, but also perhaps the extent to which MSHDA and counselors market the program to lenders and make it attractive for lenders to participate. Sustaining Homeownership While helping a lower income group of families achieve homeownership, the Links program was designed to mitigate the risk of mortgage default that might otherwise be expected from extending mortgage credit to more risky borrowers. However, our analysis of serious delinquency among loans originated through the Links program suggests that the delinquency rate among Links borrowers may be higher than for other MSHDA borrowers, even after taking into account their lower incomes, greater preponderance of single parent households, and greater use of FHA mortgage insurance. The Links program is found to be associated with a 4.5 percentage point higher share of borrowers that are seriously delinquent two years after origination. Borrowers with other MSHDA down payment assistance also have higher delinquency rates, but the magnitude of this effect is only about a quarter as large (1.2 percentage points). There is no clear explanation for why the Links program might have higher default rates. The most likely explanation is that the program is helping families to purchase homes who might not otherwise have been able to do so. In general, these families are at greater risk of loan default, and although the Links program may be lowering this risk, the level of defaults is still quite high. Furthermore, relatively few Links buyers have received the full range of Links services designed to reduce delinquencies and minimize the risk of loan default. Although most buyers have received homebuyer education, few have used Links financial management training, property inspections, and home maintenance training. It may be that if greater numbers of Links buyers had used these services, the delinquency rates of Links buyers would be closer to those of other MSHDA buyers. But there were simply too few buyers using these services to be able to evaluate their effectiveness. The rate of delinquency observed in the Links program thus far raises the question of whether any changes are needed in MSHDA s operation of the program. There is no evidence to date that borrowers using property inspections and home maintenance training have had lower defaults, but this may well be attributable to the limited number of buyers who have used these services. Nonetheless, encouraging greater use of these services might help mitigate these risks. At a minimum this greater use would give MSHDA a better opportunity to evaluate the benefits of these services. Greater information about the circumstances producing delinquencies among Links buyers would also help to inform possible responses to this problem. For example, MSHDA could work with its loan servicer to begin to collect information about the reasons for delinquency among Links clients. This information could be used both to enhance the educational component of Links for example providing buyers with more information on what to do if they can t make a mortgage payment and to develop loss mitigation strategies to assist buyers before they enter into default. Conclusion By creating the Links to Homeownership program, MSHDA has developed a counselor network and set of tools through which to offer counseling and education to a large number of prospective Abt Associates Inc. Executive Summary v
homebuyers across the state. Given the reported high quality of these counseling services, this outcome may be beneficial to a number of households, particularly as a long-term investment in their financial health. Nevertheless, continued program refinement may be needed to increase the number of families purchasing homes with MSHDA products, to target scarce program resources more judiciously, and to ensure the success of homebuyers after they purchase all of which would help ensure that Links is successful in achieving its dual mission of helping more families become homeowners and helping them to sustain homeownership once they purchase. vi Executive Summary Abt Associates Inc.