Vanita Kalra, Senior Project Manager, Self-Help
For three decades, Self-Help has been a leader in expanding the availability of mortgage lending to underserved populations by creating and protecting ownership and economic opportunity for people of color, women, rural residents, and low-wealth families and communities.
Now this North Carolina–based community development lender and real estate developer is showing nonprofit organizations and lenders across the nation a strategy to help those who can’t qualify for conventional mortgage loans. Self-Help helps aspiring homebuyers with a lease-purchase program that allows them to live in homes they want to own, while they develop the financial requirements to buy them.
Self-Help is headquartered in Durham and has offices across North Carolina and in Oakland, California, and Washington, D.C. Self-Help provides direct mortgage lending in North Carolina, California, and Washington, D.C., through its community development credit union. Self-Help provides secondary mortgages for home loans to lower-income families through Self-Help Ventures Fund, a certified community development financial institution that works in partnership with Fannie Mae.
Unable to qualify for conventional loans, many served by Self-Help might otherwise have become caught in the subprime mortgage crisis. Studies have shown that Self-Help borrowers have generally defaulted at lower rates than subprime borrowers.
In the late 1990s, Self-Help partnered with Fannie Mae and the Ford Foundation to develop a secondary market facility for mortgage loans to low- and moderate-income borrowers who do not meet traditional underwriting standards from Fannie Mae-approved sellers and servicers. This partnership features a specialized loan product that provides higher loan-to-value loans without the financial burden of mortgage insurance.
Since then, Self-Help’s secondary market program has facilitated more than $4.5 billion in affordable mortgage loans with lenders around the country, helping more than 50,000 families. Fannie Mae packages these loans into mortgage-backed securities that meet Community Reinvestment Act qualifications.
Self-Help buys mortgages made to lower-income borrowers or to moderate-income borrowers in lower-income census tracts from federally regulated mortgage originators that are qualified sellers and servicers with Fannie Mae. Self-Help sells these mortgages to Fannie Mae, but Fannie Mae retains recourse to Self-Help for credit losses on the mortgages. The Ford Foundation enabled this arrangement through a $50 million grant to Self-Help, which served as the initial capital pool from which Self-Help could cover potential losses on the mortgages.
Becoming Homeowners through Lease-Purchase
Self-Help’s new lease-purchase initiative brings Fannie Mae’s lease-purchase product, developed in the 1990s, together with Self-Help’s secondary mortgage market operations. The lease-purchase product helps nonprofit organizations that acquire and rehabilitate foreclosed properties to stabilize communities. The program allows potential home buyers who are unable to qualify for conventional mortgages to live in homes while they build up the financial resources and credit profiles necessary to buy them. Self-Help is piloting the product in targeted geographies. The diagram illustrates the structure of the lease-purchase initiative and the roles played by the different participants.
The lease-purchase program is designed for buyers who can’t afford down payments and who don’t have adequate credit profiles. To qualify for the lease-purchase program, participants must document 12 months of work history and show they can afford the monthly lease payment. Participants must also have 38 to 50 percent front- and back-end debt payment-to-income ratios.
Through this secondary market program, the lease-purchase mortgage is originated to a nonprofit organization that is responsible for the full monthly principal, interest, taxes, and insurance for the property until the mortgage is assumed by a qualifying tenant-buyer. The lease payment covers the principal, interest, taxes, and insurance and costs associated with property management and home-buyer counseling, a loan requirement. A portion of the lease payment is set aside each month during the lease period to build the tenant-buyer’s savings toward the down payment and closing costs. The initial lease term may be as long as five years. Once the participant has achieved a credit score of 620 and debt-to-income ratios of 38 to 41 percent, he or she may assume the mortgage from the nonprofit organization that holds the mortgage.
Developing a National Initiative
Self-Help hopes the lease-purchase initiative proves successful so that it can be expanded to help more communities. Self-Help plans to develop pilots across the nation with local nonprofit partners willing to use established strategies to help potential home buyers through financial education, home-buyer counseling, and post-purchase counseling. Partners would have developed relationships with financial institutions with significant real estate owned (REO) inventories.
After the nonprofit organization prepares a borrower to shop for a home, and the borrower selects a home from the available REO inventories, a lease-purchase loan agreement is executed. Any Fannie Mae–approved seller-servicer institution can originate these mortgages, retain the servicing rights, and pass the mortgage through to Self-Help.
Self-Help’s pilot program in the Peachtree Hills neighborhood of Charlotte, North Carolina, is operated by its Self-Help Community Development Corporation. Self-Help is expanding the initiative to Atlanta and Chicago.
The lease-purchase product helps stabilize communities in several ways:
- Those who have lost homes to foreclosure have the chance to become homeowners again. The product’s five-year lease term is equivalent to the five-year waiting period Fannie Mae requires borrowers to go through after foreclosure and before obtaining new, conventional mortgages.
- Low- and moderate-income aspiring homeowners unable to qualify for traditional mortgages may obtain REO properties at lower costs than other housing stock. During the five-year lead period, lease participants save for down payments, improve their credit scores, and prepare to buy homes with conventional mortgages.
- Neighborhoods are revitalized and REO properties are transformed into affordable homeownership opportunities.
There are, however, challenges to using this product for community stabilization:
- The product does not eliminate market risk for the nonprofit organizations that own the mortgages, so it is critical that the properties financed with these mortgages must be able to support the lease-purchase mortgages at competitive market rents. This way, should the tenant-buyers move or fail to qualify to assume mortgages, nonprofit owners of the properties can bring in new tenants and continue collecting rents on properties.
- Nonprofit organizations must have the ability to effectively manage leased homes. Management of scattered-site, single-family housing is more costly than management of a multifamily building. Just as one of the community benefits of the product is the ability to bring occupancy to otherwise vacant properties, one of the downfalls could be that poorly managed properties do not stabilize neighborhoods.
- Borrowers and lenders unfamiliar with the lease-purchase may hesitate to participate because they are reluctant to take on additional risks.
Addressing and minimizing these risks is critical to a national rollout of this initiative. Through the work of its pilot program in North Carolina and by expanding slowly in select market areas, Self-Help hopes to raise consumer and lender awareness of the lease-purchase option and to prove the product’s value as a community stabilization strategy.
Looking Forward: Self-Help’s Goals and How Banks Can Help
With the lease-purchase product Self-Help hopes to expand homeownership to targeted consumers and to help stabilize communities with significant REO inventories. The lease-purchase program increases the pool of potential buyers of REO properties by enabling nonprofit organizations to collaborate with lower- and moderate-income, credit-impaired borrowers to purchase and occupy REO properties. This is a win-win-win scenario, as families are able to move along the path to homeownership, financial institutions are able to productively dispose of REO properties, and communities are strengthened as vacant properties become homes once again.
Self-Help seeks partners to help expand awareness of the lease-purchase product by identifying nonprofit organizations as potential owners and managers of lease-purchase–financed properties and financial institutions to originate and service lease-purchase mortgages.
For more information, e-mail Vanita Kalra or visit the Web site.