Post-purchase counseling: An EMHI strategy to close homeownership gaps

A previous edition of Community Dividend (Issue No. 2, 2005) focused on the State of Minnesota's Emerging Markets Homeownership Initiative. The following feature is a condensed version of an article that examines a principal strategy in the initiative's business plan. For the full text of the article, visit www.minneapolisfed.org/community/publications_papers/pub_display.cfm?id=3226.

The State of Minnesota's Emerging Markets Homeownership Initiative (EMHI) seeks to boost homeownership rates among Minnesota's minority and immigrant households, or "emerging markets," as a step toward closing the large homeownership gap between those groups and the state's non-Hispanic white population.

Many of the implementation strategies in the EMHI Business Planaddress general barriers to homeownership and should increase the number of emerging market households that become first-time homeowners. EMHI doesn't stop there, however. It also recognizes the need to sustain homeownership after initial purchase, in keeping with growing evidence that the cliché "once an owner, always an owner" is far from true, especially for minority and low-income households. In particular, the EMHI plan includes the following strategy:

Develop and implement a post-purchase services network to assure that emerging market homeowners have access to information and services pertaining to predatory lending and foreclosure prevention that will enhance their prospects for successful, sustainable homeownership.

Recent research findings from the housing industry, in combination with a favorable climate in Minnesota, indicate the state is in a good position to use post-purchase support programs (PPSP) to pursue EMHI's goals by reducing the incidence of foreclosure and helping low-income households sustain homeownership.

Easing housing burdens; preventing foreclosure costs

Despite its many attractions and advantages, homeownership brings financial and maintenance burdens that can challenge many families. The burdens tend to be more demanding for families with low or moderate incomes and other socioeconomic disadvantages, and currently those disadvantages are more prevalent among emerging market households.

When the burdens become too heavy and families fail to meet their mortgage obligations, the costs can be substantial. For borrowers, foreclosure brings emotional distress and the double losses of home and personal wealth. For lenders, foreclosures can cost $50,000 or more, according to a recent study by researchers J. Michael Collins and Rochelle Nawrocki Gorey. 1/ In addition, the public shares the losses associated with foreclosures. A study of foreclosures in Chicago found that in cases where a foreclosed property sits vacant for an extended period, direct municipal costs can reach tens of thousands of dollars. 2/ Vacant properties can also depress property values in their neighborhoods.

PPSPs can help ease housing burdens by offering homeowners training on home maintenance or household budgeting. They may also offer counseling on emerging debt or mortgage payment issues, and, in some cases, financial assistance such as low-cost, short-term loans that can help a homeowner reinstate a defaulted mortgage and prevent foreclosure. (PPSPs encompass foreclosure prevention, which is discussed in the accompanying article by Sandy Gerber.)

PPSPs are often offered by nonprofit community organizations, with funding from financial institutions, foundations, governments, and individual contributors. Many lenders and local governments also offer PPSPs. Building on an existing network of Minnesota providers, EMHI's PPSP strategy is designed to hold down the incidence of foreclosures, including those resulting from predatory lending, as a way of boosting homeownership rates for emerging markets.

Effects of pre- and post-purchase help on foreclosures

While there is ample anecdotal evidence that post-purchase training programs make homeowners more likely to meet their mortgage obligations, few rigorous studies exist. However, housing researchers Abdighani Hirad and Peter M. Zorn make the case that quality pre-purchase training of homebuyers significantly reduces subsequent mortgage delinquencies. 3/ It seems plausible that post-purchase training could reinforce and extend these benefits, which provides a basis for including post-purchase training programs in EMHI's PPSP strategy. Nonetheless, EMHI participants should also plan a strategy for assessing the effectiveness of such training programs.

Even with effective pre- and post-purchase training, some households will fall behind in their mortgage payments. When that happens, post-purchase counseling and foreclosure assistance programs have the potential to prevent many delinquencies from turning into foreclosures. For example, counselors at the Twin Cities Mortgage Foreclosure Prevention Program, who have tracked counseling outcomes since 1991, consistently report that about half of the delinquencies they handle are known to be resolved without a foreclosure. 4/ The Homeownership Preservation Initiative (HOPI), a citywide program in Chicago, has reported 500 foreclosures prevented out of the 1,535 cases counseled through Neighborhood Housing Services of Chicago from April 2003 to March 2005. 5/ Another sign that counseling succeeds in reducing avoidable foreclosures is that lenders support it, both through their internal loss mitigation units and through financial and other support they provide to third-party counseling programs like HOPI.

Sustaining homeownership and closing gaps

EMHI is betting that PPSPs can significantly lower the incidence of foreclosure in Minnesota. Implicitly, it also assumes that PPSPs will help close the gap in homeownership rates between Minnesota's emerging markets and its non-Hispanic white population. Recent research suggests they might.

Minnesota's homeownership gaps are indeed large. According to the Minnesota Housing Finance Agency (MHFA), 77 percent of Minnesota's non-Hispanic white households were homeowners in 2000, compared to 32 percent of African American households, 49 percent of American Indian and Alaska Native households, 52 percent of Asian American households, and 43 percent of Hispanic households. The resulting homeownership gaps of up to 45 percentage points are larger than most corresponding national figures. The EMHI business plan and supporting documents discuss some of the factors behind these gaps. Whatever explains the gaps, EMHI's goal is to reduce them by boosting emerging market ownership rates.

Since minority households are less likely to become homeowners than non-Hispanic whites, partly due to lower incomes, housing programs that help low-income and minority households achieve first-time homeownership make sense as a strategy for reducing Minnesota's emerging markets homeownership gap. Such programs traditionally include information dissemination, enforcement of antidiscrimination laws, homebuyer education, downpayment assistance, repair of credit problems and other approaches.

However, recent studies confirm that households differ significantly not only in attaining homeownership, but also in sustaining it. Using data on a sample of households from 1976 to 1993, 6/ researcher Carolina Katz Reid found that 40 percent of renters who bought a home between 1976 and 1989 returned to renting at least once by 1993. 7/ The odds of exiting homeownership were higher for low-income households; 36 percent exited homeownership within two years, and 53 percent exited within five years. Katz Reid's research also showed that within each income group, minority households were more likely to exit homeownership in any given post-purchase year. Over 40 percent of low-income minority homebuyers were no longer owners after only two years, compared to less than 30 percent of low-income non-Hispanic white households.

Researchers Donald Haurin and Stuart Rosenthal reached similar conclusions based on a sample of individuals followed from youth (ages 14 to 21) in 1979 to middle age in 2000. 8/ Over the sample period, 63 percent of the African American individuals owned a home at some point, but only 34 percent still did as of the final year, 2000. The comparable figures for non-Hispanic whites were 88 and 69 percent. Although the eventual incidence of exits for first-time homeowners was roughly equal across racial and ethnic groups (45 percent left homeownership at some point), the total duration of homeownership differed. The study estimates that first-time homeownership for non-Hispanic whites typically lasted 16.1 years, while for African Americans it typically lasted just 9.5 years. On average and over time, differences in the duration of first-time homeownership result in significant homeownership gaps between minorities and non-Hispanic whites. Like Katz Reid, Haurin and Rosenthal also find that the odds of exiting homeownership are highest in the early post-purchase years, peaking at 10.5 percent in the first year for first-time buyers. They conclude, "policies that lengthen existing ownership spells also will raise the national ownership rate." 9/

Katz Reid, Haurin and Rosenthal all identify factors that increase the likelihood of a household exiting homeownership: low income; low education; low levels of general knowledge (as indicated by the Armed Forces Qualifying Test, a standardized test that measures general knowledge retained from elementary and high school); relative youth; being single, divorced or separated; and living in a central city or rural area. 10/ The research cited here supports the idea that if EMHI could target its PPSPs according to these risk factors, the programs would tend to reduce Minnesota's homeownership gaps.

A well-positioned state

Minnesota is in a good position to implement EMHI's PPSP strategy, for at least three reasons.

First, Minnesota is nationally recognized for the quality of its existing PPSPs. The Minnesota Housing Finance Agency coordinates the statewide Foreclosure Prevention and Assistance Program, which was recently featured in an analysis of U.S. foreclosure prevention programs. As part of the statewide effort, the Home Ownership Center (HOC), recently cited in a review of the "essential components" of model PPSPs, 11/ coordinates the Mortgage Foreclosure Prevention Program in the core cities of Minneapolis and St. Paul. Under this program, three agencies—the City of St. Paul, Twin Cities Habitat for Humanity (for South Minneapolis) and the Northside Residents Redevelopment Council (for North Minneapolis)—have provided foreclosure prevention counseling for over 10 years and, in the process, assembled one of the nation's best databases on counseling cases and outcomes. Based on this data, the Twin Cities-based Family Housing Fund (FHF) has sponsored innovative research on the effects of foreclosure prevention counseling.

Another key component of the statewide programs is the high-quality training and certification provided to Minnesota's foreclosure prevention counselors through the Minnesota Mortgage Foreclosure Prevention Association (MMFPA). Minnesota also has excellent models for post-purchase training programs, such as those offered by Neighborhood Housing Services of Minneapolis. In addition, the Twin Cities has an award-winning Don't Borrow Trouble campaign that offers guidance and referrals to help homebuyers avoid predatory lending and mortgage financing problems. Don't Borrow Trouble Minnesota, administered by FHF, has a strong coalition of over 60 partners, more than 20 of whom help fund the campaign, and a referral network of 14 housing organizations. Many other examples could be listed.

Second, Minnesota can take advantage of innovations that have emerged in other parts of the country. The review by Collins and Nawrocki Gorey provides several examples. One is the Pennsylvania Housing Finance Agency's Homeowners' Emergency Mortgage Assistance Program, which has over 20 years' experience in providing financial assistance to delinquent borrowers according to specified hardship and recovery criteria. In Chicago, the HOPI effort has promoted stronger working relationships among national mortgage lenders and servicers, local foreclosure prevention programs, and local governments. 12/

Lastly, EMHI provides a framework for building upon the existing strengths of Minnesota's PPSP network. The HOC has been selected as the lead convener for implementing EMHI's PPSP strategy. Assisting as primary conveners will be the FHF, the Greater Twin Cities United Way and MMFPA. Additional participants already enlisted include the Mortgage Association of Minnesota and the Federal Reserve Bank of Minneapolis. Details are available in the EMHI Business Planat www.mhfa.state.mn.us/about/EMHI_Business_Plan.pdf. The HOC expects to convene the initial strategy implementation meetings in late 2005 or early 2006.

1/ J. Michael Collins and Rochelle Nawrocki Gorey, "Analyzing Elements of Leading Default-Intervention Programs," White Paper, Policy Lab Consulting Group, 2004, p. 2.

2/ Neighborhood Housing Services of Chicago, The Chicago Home Ownership Preservation Initiative: A Learning Laboratory, 2005, p. 13–14.

3/ Abdighani Hirad and Peter M. Zorn, "A Little Knowledge Is a Good Thing: Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership Counseling," Low-Income Homeownership Working Paper Series, Harvard University’s Joint Center for Housing Studies, August 2001.

4/ Minnesota Mortgage Foreclosure Prevention Association, 2003 Annual Report, p. 3.

5/ Neighborhood Housing Services of Chicago, p. 4–5.

6/ The Panel Study of Income Dynamics is a longitudinal study of a representative sample of U.S. individuals (men, women, and children) and their family units. The study is conducted at the Survey Research Center at the University of Michigan’s Institute for Social Research.

7/ Carolina Katz Reid, "Achieving the American Dream? A Longitudinal Analysis of the Homeownership Experiences of Low-Income Households," Center for Studies in Demography and Ecology, University of Washington, Working Paper 04-04, April 2004, p. 20.

8/ Donald Haurin and Stuart Rosenthal, The Sustainability of Homeownership: Factors Affecting the Duration of Homeownership and Rental Spells, Office of Policy Development and Research, U.S. Department of Housing and Urban Development, December 2004.

9/ Ibid., p. v.

10/ Reid, p. 21–25, Haurin and Rosenthal, p. vi–viii.

11/ Christi Baker, “Report 3: Essential Components of Post-Purchase Program Models” (based on the work of Lucy S. Gorham, Roberto Quercia and William Rohe of the Center for Urban and Regional Studies at the University of North Carolina at Chapel Hill), Fannie Mae Foundation, July 2004.

12/ "Neighborhood Housing Services of Chicago Home Ownership Preservation Initiative," Profitwise News and Views, Federal Reserve Bank of Chicago, May 2004.