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The gift of a lifetime.

An experiment in Des Moines has brought homeownership into the hands of low-income families. It took five players as varied as the Des Moines Public Housing Authority, Fannie Mae and the Federal Home Loan Bank, but the bottom line is it worked.

ONE OF THE MOST VISIBLE PUBlic policy problems facing this country today is the lack of homeownership opportunities for low- and very low-income families. Homeownership has ceased being an option for a growing segment of our population. And it is this very segment of society that, as a nation, we need most desperately to weave into the fabric of our society. The costs of failing to do so are very high indeed.

It's no secret why homeownership has slipped from their grasp. The primary problem is affordability. Either family income is insufficient to handle monthly mortgage payments without ongoing assistance in the form of payment subsidies, and/or there is a lack of down payment money. In either case, the alternative for the poorest of these families is a lifetime spent amid the graphic debris of lives spent struggling with the most chronic and vexing social problems of our times.

Because this high-stakes public policy problem is so widespread and complex, it is difficult to make even a slightly visible dent in it. However, that's not to say no one is working successfully at tackling this problem.

In one such positive initiative, five housing-related organizations came together in Des Moines and created an innovative solution that is providing homeownership for low-income families. It has come to be known simply as the Des Moines Program, and yet patching it together from the layers of different federal and local government programs was no simple task.

The participants that made it come together were Allied Group Mortgage Company (AGMC), West Des Moines, the Des Moines Public Housing Authority (DMPHA), the Federal Home Loan Bank of Des Moines (FHLB), Fannie Mae and HUD. The bottom line of this coordinated effort was that the program proved successful in assisting low-income families achieve homeownership. It also helped families move off public assistance and helped them build self-confidence, self-esteem and pride of ownership.

You might say that the initial groundwork for the Des Moines Program was laid when the Des Moines Public Housing Authority was created in 1965. Traditionally, the DMPHA, according to a pamphlet distributed by the public housing authority, "has participated in the public housing mission, building or rehabilitating acquired properties since its inception." However, the pamphlet notes, "DMPHA has come to recognize a broadening of its mission. The original public housing program viewed its goal as helping residents gain independence by providing decent and safe housing. Similarly, DMPHA believes that its overriding goal is to help residents achieve a state of self-sufficiency so that they no longer require assistance."

Typical clients of the public housing authority are single parents, couples with children, elderly individuals aged 62 or older, handicapped or disabled individuals. All must have incomes below the federal income limits.

Des Moines Program

The Des Moines Program uses a section of the federal HOPE program that makes government-owned properties available for low-income homebuyers. These properties, owned by HUD, the Veterans Administration (VA), Farmers Home Administration, the Resolution Trust Corporation (RTC), or a state or local government, include scattered-site, single-family public and Indian housing. (The Des Moines Program developed as part of the federal program known as HOPE 3.) HOPE 3 applicants (in this case the Des Moines Public Housing Authority) are required to provide $1 for every $3 in federal funds.

Participants must be first-time homebuyers who are not required to pay more than 30 percent of their income in mortgage payments (PITI). According to information on the HOPE programs provided by DMPHA, "Instead of simply ameliorating the symptoms of poverty, HOPE builds a ladder of opportunity so poor people will be better able to pull themselves out of the poverty trap to live a life of dignity, independence and self-sufficiency. If there is one overriding theme of the HOPE initiatives, it is to empower people to take control of their lives, their homes and their destinies."

Since its inception, the public housing authority in Des Moines has acquired properties that it maintains and rents to its clients. Among those properties are 142 scattered-site, single-family housing units, which were acquired over the last 10 years throughout Polk County, Iowa, which includes Des Moines. These single-family homes were acquired by the DMPHA with grant money received from HUD that was specifically earmarked for scattered-site acquisitions and new construction through HUD's Section 8, 5H Program. These 142 properties formed the foundation of the Des Moines Program.

Launching the program

The Federal Home Loan Bank and the public housing authority in Des Moines had initial discussions about low-income homeownership in terms of initiatives in which both entities were participating. They explored how the DMPHA might utilize a HOPE ownership plan, and then they approached a new nonbank member of the FHLB, Allied Mutual Insurance, to see if it would be willing to sponsor an FHLB grant of $25,000 for a pilot program funded under the HOPE initiative.

At this point, it was decided that the Des Moines Public Housing Authority would sell its scattered-site homes to resident clients in accordance with federal guidelines. Resident buyers would not be required to pay more than 30 percent of their gross income in PITI on houses that would be sold at their appraised value.

No equity required

The most unique aspect of the program was that borrowers/homeowners were not required to have any cash investment in the transaction. For each of the first 10 homes, the FHLB will provide $2,500 toward borrowers' costs. (The FHLB grant covers only the first 10 homes because that was the amount of funds initially applied for by DMPHA and the FHLB. They will apply for more funds in the future if available. If there is not money available in the future from FHLB or other sources, then the public housing authority will pay the costs that are currently being covered by the $2,500 grant per loan.) A second mortgage in favor of the Des Moines Public Housing Authority was made to cover the remaining portion of the selling price, as well as the closing costs. Half of this second mortgage would be forgiven if the homeowner stayed in the house for five years, and the remaining balance would be forgiven at the rate of 10 percent per year during the next five years, as long as the borrower continued to own the home.

The parties have obtained a commitment from HOME, Inc. of Des Moines, a local housing nonprofit company, to counsel potential borrowers on homeownership and related credit matters for six months, with access to HOME, Inc., on an as-needed basis after that.

The first part of a two-part plan is to be funded through sales proceeds. Later, HUD will finance the program. The way it works is that the proceeds of the individual houses will cover initial counseling. Then HUD will finance additional counseling if necessary. The program is currently still in the initial phase of the two-part plan.

The Des Moines Public Housing Authority and the FHLB had a meeting with Allied Mutual Insurance, and it was decided to approach Allied Group Mortgage Company, West Des Moines, (AGMC), an affiliate of Allied Mutual, to see if it would be interested in assisting in obtaining end-loan financing.

AGMC analyzed the program and decided it had considerable merit. It offered homeownership potential for low-income renters. It provided increased stability in neighborhoods, improved self-respect for participating homebuyers and reduced taxpayers' costs in providing housing for low-income families by transferring maintenance and up-keep of properties to the homebuyers. AGMC believed the program would fit within Fannie Mae's low-income housing finance objectives. There was only one area of the program that would be unfamiliar, or at least unusual to Fannie Mae, but AGMC believed this could be overcome. This one departure from standard Fannie Mae practice was that borrowers would not have out-of-pocket cash in these transactions.

Because the borrowers would not have any of their own funds in these transactions, AGMC called Fannie Mae's low-income specialists in Chicago to discuss the program prior to formally requesting a commitment. AGMC advised Fannie Mae that the borrowers would receive credit counseling from HOME, Inc., for an indefinite period, as needed.

In the request for a commitment, AGMC projected how long it would take HUD and FHLB to approve their participation in the program. A number of different approval processes needed completion before the actual homebuying portion of the program could proceed. First, there was the time needed for the FHLB approval for its $25,000 in grant money. Second, there was HUD approval needed for the program because the properties were bought by DMPHA using grant money provided by HUD. AGMC, the mortgage lender, then made its request for a commitment from Fannie Mae and at that time advised Fannie Mae that HUD approval for these transactions would be required, as well as approval of the grant expected from the FHLB board. Knowing all this in advance helped Fannie Mae in establishing a time frame for issuing its commitment to AGMC.

AGMC requested that Fannie Mae issue the commitment on a nonrecourse basis with the following underwriting exceptions:

* Maximum loan-to-value ratio (LTV) of 67 percent (with borrowers being expected to have no funds in these transactions).

* Qualifying debt ratios of 30/41 percent.

* For LTV ratios in excess of 67 percent, private mortgage insurance coverage will be provided, reducing the exposure ratio to 67 percent.

* All purchasers will be first-time homebuyers or displaced families.

The commitment AGMC got from Fannie Mae contained almost all the desired terms, except the agency did not accept loans in excess of 67 percent even with private mortgage insurance coverage. However, if there are extenuating conditions, AGMC, based on experience, believes that Fannie Mae would reconsider each on a case-by-case basis.

The qualifying debt ratio was limited to 30/38 percent, but these guidelines may be exceeded if there are strong compensating factors. (Such an increase in ratios might be allowed if the borrowers in the past have experienced higher percentages of their income going toward housing and related expenses.) Fannie Mae also waived the two-month payment reserve requirement and limited income of applicants to 115 percent of the area median income.

This was not seen as a potential problem because individuals originally had to have incomes not exceeding 50 percent of the area median income in order to become clients of the Des Moines Public Housing Authority. However, many of these families have lived in their homes for five or more years, and their income levels may have improved since originally becoming program participants. This fits very well with the DMPHA's objective of assisting people to grow beyond the need for public assistance and to become self-sufficient.

Home repair training

During the commitment process, AGMC worked with the public housing authority as it prepared its application to the FHLB for the $25,000 grant from its affordable housing program. In the interim, the public housing authority in Des Moines also decided to provide home maintenance training for each buyer and family by having its maintenance staff provide "in-home" training and counseling. Participants believe this will be a great benefit to the program in helping new owners make minor repairs without the expense of hiring contractors.

This home maintenance training, along with the counseling provided by HOME, Inc., should be an immense benefit for program participants. Many past attempts at assisting low-income families in obtaining homeownership have failed because the new homeowners were not provided with this type of assistance and had no cash resources to pay for help and repairs.

Those involved in the Des Moines Program believe it could serve as a model for fostering low-income homeownership throughout the nation. It is unrealistic to assume homeownership can be successfully provided to low-income citizens without some portion of the upfront costs being assumed by society. As the mayor of Des Moines, John "Pat" Dorrian said, "We have the houses. But we need a system that enables people to buy and maintain them."

The political and social importance of putting homeownership within reach of those of modest means was underscored in a brief note from Senator Tom Harkin (IA-D) to John Evans, chairman of the Allied Group. Senator Harkin wrote: "Providing financial assistance to Iowans who would otherwise not be able to purchase homes is an important economic and social investment that should not be underestimated." Even with the widespread political awareness of the importance of homeownership to maintaining the social backbone of our society, many will labor a lifetime without ever enjoying a home of their own.

The institutional participants in the Des Moines Program recognize that the lack of low-income housing stock is not the primary problem causing the lack of affordable housing. The term "affordable housing" can be misleading because it oversimplifies the difficulties inherent in maintaining housing for low-income families.

Low-income families have insufficient disposable income for down payments, monthly housing payments, normal housing maintenance and payments for housing repairs. Many low-income families must live in neighborhoods dominated by housing that is owned by absentee landlords (who may not properly maintain their properties). These neighborhoods also tend to be where roads, sewers, yards and the like are not well maintained, as well as areas where police enforcement is lacking. To provide adequate, safe and liveable housing to low-income families in these communities requires efforts targeted at overcoming all these obstacles.

The primary Fannie Mae contact in the development stage of the Des Moines Program was Bill Foster, affordable housing account executive for Fannie Mae's Chicago office. Foster praised DMPHA and the manner in which it had purchased scattered-site, single-family residences with its HUD grants. This was the intended use of the grants. However, many housing authorities have not employed the money as effectively as they could have. Most of the Des Moines housing authority's homes are in well-maintained neighborhoods, and facilities for continued counseling and training in-home maintenance for the participants are available and are being funded.

Many people and families are not able to assume homeownership through normal channels. Thus, other types of more traditional low-rent housing programs are necessary to provide them with adequate housing. Yet many are able and willing to assume the responsibilities of homeownership and, with assistance, can accomplish that significant social goal. By providing real homeownership opportunities to low-income families, their self-worth is raised dramatically, and they become stable members of the community with a stake in their neighborhoods.

With the advent of such homeownership programs, and with commitments from local governments to provide quality services, we believe neighborhoods need not decline, but can grow and prosper. This was dramatically illustrated by the real-life examples that emerged from the Des Moines Program. The first two borrowers participating in the program, Jo Adcock and Mary Smith, were very excited about the prospect of homeownership. Adcock commented on the cosmetic improvements she intended to make after moving in. (Tenants of the Des Moines Public Housing Authority are not permitted to make changes to properties, and because they don't own the property, they have little motivation to do so anyway.)

Smith was equally excited because she would now be able to get her son the dog he really wanted. (Pets are not allowed in Des Moines public housing.)

The ingredients are here for a successful homeownership program that will improve neighborhoods and reduce financial costs to the taxpayer. Additionally, there are financial rewards accruing to homebuyers after succeeding in homeownership for five years or more. They come in the form of tax deductions, potential future equity in the property and a forgiven second mortgage. Cities and suburbs are interested and willing participants in neighborhood revitalization. Finally, Fannie Mae and FHLB want programs like this to be successful.

The program was kicked off on March 23, 1993, at one of the first houses to be sold. "I believe it |the Des Moines Program~ will have an effect on neighborhoods simply because when you own a home, you have a stake in what happens in your neighborhood," proclaimed Floyd Gardner, acting executive director of the DMPHA.

Displaying the City of Des Moines' enthusiasm for private initiatives for low-income homeownership was Des Moines Mayor Dorrian. But it took a partnership at all levels of government, along with the support of private enterprise, to make the program really get off the ground. It's only one small step, but it's one well worth repeating.

Rolland K. Riley is president of Allied Group Mortgage Company, West Des Moines.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:homeownership program in Des Moines, Iowa
Author:Riley, Rolland K.
Publication:Mortgage Banking
Date:Aug 1, 1993
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