While most lenders are overwhelmed by crushing caseloads of delinquent home loans and foreclosures, Habitat for Humanity International and their affiliates are telling a different story.
Habitat for Humanity is the Americus, Ga.-based nonprofit company that builds thousands of homes for lower-income Americans each year. Habitat also originates mortgages on the homes and, in most cases, holds the loans on its books. In 2010, it ranked as the one of the nation’s largest builders, constructing nearly 4,600 new homes nationwide. The group also fixed up and resold more than 1,400 homes.
Most of Habitat’s borrowers have household incomes below the median in their area — a population often at risk for foreclosure. But Habitat says foreclosures are minimal.
A recent study led by the Cox School of Business at Southern Methodist University, commissioned by Habitat’s Dallas branch, found that Habitat’s foreclosures in the Dallas market were less than 2% last year. Although the report looked only at the Dallas office of Habitat, the findings mirror those found in other Habitat offices across the country, the organization says.
As politicians and economists disagree on whether and to what degree low-income Americans should be encouraged to own homes — some even blame lenders’ outreach to low-income borrowers for the housing collapse — Habitat’s case indicates that these borrowers can receive mortgages without high default levels.
“They deserve to have the opportunity to build wealth through real-estate appreciation just like anyone else,” says Jack McCabe, a housing analyst with McCabe Research & Consulting in Deerfield Beach, Fla. “That’s been the American dream.”
But that doesn’t mean catering to families on tight budgets is easy. Cash-strapped borrowers need plenty of hand-holding and support. They need an easy way to get back on track when they slip behind because of emergencies or special occasions, says Lynette Pearl, director of homeowner and neighborhood support for the Dallas Habitat chapter.
In Dallas, worried homeowners are urged to call any time to discuss financial issues, and the organization can receive dozens of calls a day as troubled homeowners leave multiple messages.
“We don’t have a problem with our families getting behind, as long as they’re talking with us,” says Bill Hall, the Dallas Habitat’s chief executive.
Upfront screening could help
Becoming a Habitat homeowner is not easy. Applicants must show a solid work and credit history. Once selected, recipients complete homeownership education that covers the added costs of owning over renting, how to pay bills and home maintenance.
Habitat is known for requiring homeowners to help build their home. Although the demands differ in each market — the national average is 300 hours — Habitat says homeowners are less likely to walk away from homes they helped construct.
“Before they actually move into the house, they’re invested,” Pearl says.
In Dallas, homes cost between $80,000 and $100,000. Recipients receive interest-free mortgages for 30 years, and mortgage payments range from $500 to $800 per month, which includes taxes and insurance, depending on income.
The organization doesn’t build McMansions; it’s known for no-frills homes erected on free or low-cost lots. Local governments often donate land in ailing neighborhoods, hoping the new owners will help revitalize the community. The Dallas report estimates that every $1 the organization spends generates $3.18 of economic impact. Much of this impact is felt directly in troubled neighborhoods, stabilizing vales and preventing foreclosures.
Keeping tabs on homeowners
Unlike traditional lenders, Habitat checks back several times with new owners. The Dallas chapter noticed that its late payments spike in September, when families spend money on school clothes and supplies, and in the winter, when they shop for holiday gifts.
It partnered with a local nonprofit to distribute free supplies. The group also helps its families get free tax preparation: Delinquent homeowners often use their tax refund to catch up on missed payments.
That’s different from traditional lenders, who slap on late fee upon late fee, making it hard for the borrower to get back on track. Of course, Habitat’s late payers don’t get off entirely. The Dallas Habitat, which sells its loans to a local bank, covers any missed payments and tacks on a late fee of 4% of the principal: The average payment is $8 for each late month.
“It’s only meant to remind them that they’re late. It’ not meant to punish them,” Hall says. We aren’t here to knock you down and foreclose. We’re here to help you through it.”
Large lenders, and servicers including Bank of America and JPMorgan Chase, don’t have the time or manpower to field calls every time an owner misses a monthly payment. But they could learn from Habitat’s business model: Screen buyers, educate in advance, make homeowners work for their down payment and get them to pay what they can, when they can.
“These are practices that I think any bank should implement, particularly after looking at the foreclosures in the last five years,” says Paul Hendershot, lead author of the Dallas Habitat report and an adjunct professor at the University of North Texas.
By Dawn Wotapka of The Wall Street Journal