A three-year-old program in Arizona called Home to Own is bringing homeownership to some very low-income people. It's the product of a unique alliance between a lender, community housing advocates and the secondary market.
The Arizona Affordable Housing Alliance rolled out a pioneering low-income mortgage program called Home to Own in June of 1993. Developed in a unique cooperative arrangement between First Interstate Bank of Arizona, Fannie Mae and a group of community-based affordable housing advocates, the program offered an innovative approach to low-income mortgage lending that proved unusually successful. Today, more than three years after Home to Own's launch, the program is beginning to serve as a model for programs in other communities.
Those who set out to create the program had one primary goal: to extend mortgage credit to Arizona's creditworthy - yet historically underserved - very low-income households. At this they succeeded [ILLUSTRATION FOR FIGURE 1 OMITTED]. Nearly half of the program's $10 million in loan originations during the first 27 months of production went to families earning less than $13,700 annually (50 percent of the state's median income). Fully two-thirds of the loans were to families making less than $16,500 (60 percent of median). One loan even made homeowners of a family of four earning just $8,500 annually. After the program's first 15 months of operation, the program's average loan amount was just more than $41,000.
Considering these extraordinarily low incomes, it is not surprising that Home to Own produced highly satisfied borrowers. In postpurchase interviews, new homeowners positively glowed with pride of ownership. Their comments included: "I feel more independent." "My son has a place to play." "I'm no longer throwing money away on rent." "It's unbelievable being able to put our kids out in the front yard." One borrower from Tucson summed up his sentiments this way: "Having your own home is like having a savings because ...it's my children's inheritance."
What might come as a surprise, however, is that the lender that participated in the program came away highly satisfied as well. One reason is that as of early 1996 both delinquency and default rates on Home to Own loans were below industry averages.
"Our objective was to establish guidelines that would provide homeownership for very-low-income households without compromising credit quality," explained John Salgado of First Interstate Bank, Arizona. "This market should not be viewed as high risk; it should be seen as a viable business opportunity."
How did this innovative low-income mortgage program manage to succeed with both borrowers and lender? In 1994, one year into the program's operation, researchers at Arizona State University's Morrison Institute for Public Policy were asked to conduct an in-depth program evaluation to answer that question. Based on extensive interviews, surveys, reviews of low-income mortgage portfolio and community-based programs, and a study of loan production data, the researchers concluded that Home to Own was successful because of its unique combination of strong community support, flexible underwriting guidelines and highly effective one-on-one prepurchase counseling. In sum, the program's strengths suggested that Home to Own could well serve as a model for community-based low-income mortgage lending in other markets and regions.
Developing the program
The process that led to the creation of Home to Own was complex and characterized by compromises on all sides. It began in April 1992 when William Randall (then CEO of First Interstate Bank of Arizona) invited a diverse group of community-based housing practitioners and nonprofit organizations to a meeting to discuss both borrower and lender barriers to low-income mortgage lending in the state. Attending the meeting were representatives of the National Council of La Raza, U.S. Department of Housing and Urban Development, Chicanos Por La Causa, Housing America Corporation, Phoenix Community Housing Resource Board, the City of Phoenix, Local Initiatives Support Corporation, Arizona Department of Commerce and First Interstate Bank.
With the support of the bank, this diverse assembly - which eventually called itself the Arizona Affordable Housing Alliance, or more simply the Alliance - decided to take an unusual tack in approaching the problem of low-income mortgage lending. The Alliance decided to focus not only on the many familiar borrower impediments to homeownership (such as lack of down payment and difficulty in establishing credit history) but also on what many in the group considered one of the primary lender impediments to affordable mortgage programs: the lack of a secondary market for loans originated to households below 80 percent of median income.
When the Alliance came together, it sensed that Fannie...