Partners (Fall 2001)
Partners (Fall 2001)
Jessica LeVeen, Community Investment Advisor, is in the Nashville Branch and serves middle and eastern Tennessee.
In September 2000, HUD published the final regulation that allowed Public Housing Authorities (PHAs) to use Section 8 rental vouchers for homeownership assistance. HUD’s Section 8 program has provided rental assistance to low income families since 1974. However, in an effort to increase housing opportunities for low-income families, the new legislation allows PHAs to convert any portion of their Section 8 rental assistance to homeownership assistance. This program aims to promote self-sufficiency and empower lower income families, who can be brought into the economic mainstream through the benefits of homeownership.
HUD initially authorized 15 PHAs to develop pilot programs. The final rule requires that the programs contain certain provisions, including:
In addition, the rule provides several options for applying the Section 8 payment towards homeownership. The Section 8 payment the recipient is eligible to receive equals the difference between HUD’s Fair Market Rent and the 30 percent of the recipient’s income. The payment can either be deducted from the principal and interest payment on the first mortgage, it can be added into the recipient’s income, or it can be used to pay off a second mortgage on the home. Within these parameters, each PHA was allowed to develop individual program requirements and eligibility policies.
Nashville Pilot Program
Many of the PHAs have chosen to partner with nonprofit organizations to assist with the administration of their program and to provide the homeownership counseling. One of the pilot programs was developed in Nashville, TN through a partnership between the city’s public housing agency, Metropolitan Housing and Development Agency (MDHA), and Affordable Housing Resources (AHR), a local nonprofit. Neighborhood Reinvestment Corporation (NRC), HUD, Fannie Mae, and local financial institutions are also important partners in this program.
The MDHA/AHR program requires that participants be enrolled in the Family Self Sufficiency program or be referred by the Section 8 staff at MDHA. In addition, the participant must have an annual income of at least $15,000 and have been employed for a minimum of three years (with some exceptions). MDHA provides Section 8 vouchers to over 5,300 households. When the Section 8 recipients were first screened by the program criteria, over 1,800 recipients were identified as potential candidates for homeownership. The individuals were contacted, and after a second round of screening, approximately 200 participants were selected into the Section 8 to Homeownership program, at varying stages of homebuyer readiness.
Second Mortgage Program
MDHA and AHR chose to structure its program to offer a second mortgage to qualified applicants. The participant works with a traditional lender to qualify for a first mortgage where the monthly payment will be no higher than 29 percent of their income. The amount available for the second mortgage is determined by the sum of the participant’s current Section 8 payments, amortized over 10 years at the prevailing interest rate.
AHR sets the maximum house price the participant can afford based on the sum of the first mortgage, the available second mortgage, the participant’s required downpayment and any other available resources, minus the estimated closing costs. The second mortgage is provided by AHR, and MDHA pays the Section 8 payment directly to AHR for up to 10 years in order to retire the second mortgage.
All program participants are required to participate in AHR’s Fast Track Counseling program, which includes two hours of individual counseling and eight hours of classroom training. Participants in need of greater assistance are offered long-term counseling.
In order to implement this program, AHR capitalized a revolving loan fund to provide the second mortgages. The two largest contributors to this pool are The Neighborhood Reinvestment Corporation (NRC) and Fannie Mae. NRC provided $200,000 in capital grants, and Fannie Mae made an initial investment of $200,000, which was followed recently by an additional $500,000 investment. To date, AHR has loaned approximately $350,000 of this pool for the second mortgage program.
Since the inception of Section 8 to Home-ownership in early 2000, 186 individuals have been enrolled. Of those initial enrollees, 145 are still active. As of September 2001, 21 participants have closed on the purchase of their home, 22 were ready to buy, of which seven have homes under contract, and approximately 80 participants may be ready to buy within a year.
The typical participant in the program is an African-American female head of household, age 38. Most of these individuals have worked an average of five years, and the average annual income is $21,000. The average purchase price of the participant’s homes is approximately $80,000, and the homes have been purchased throughout the metropolitan Nashville area.
Key to Program’s Success
The Section 8 to Homeownership program developed by AHR and MDHA is recognized as one of the early national success stories. As of October 2001, HUD records indicate that the AHR program participants who have closed on the purchase of the their home account for approximately 25 percent of all of the new Section 8 to Homeownership home closings nationwide. NRC recently awarded $5 million to 20 affiliate organizations to develop programs utilizing a similar model.
Eddie Latimer, executive director of AHR, believes the appeal of the second mortgage model is the simplicity of the program for the homebuyer. “This is a simple model, which is easier to understand and comply with for a first time homebuyer. It is based on the historical precedent of homeownership, meaning the homebuyer makes one payment to the mortgage company, which won’t change as long as they hold that mortgage.”
“In addition, the one payment program is similar to paying rent, so it does not require a significant change in behavior. An additional benefit of this model is that there is no payment shock to the homebuyer when the Section 8 voucher expires after 10 years, as that portion of the loan will have been completely paid off.”
From a counseling perspective, Mr. Latimer said that the program is working well because the minimum requirements for the program participants automatically identify those who are stable in terms of employment and income. The second mortgage model also has widespread appeal to lenders as they are able to originate the first mortgages utilizing existing loan products and underwriting guidelines, with low loan-to-value ratios, and therefore relatively lower risk.
There are several other critical elements that have contributed to the success of this program. First, MDHA and AHR have a very strong working relationship. Each partner has clearly defined responsibilities and the capacity to fulfill these roles. A second key element is the support of the local financial and real estate community, which has been encouraged by educating all involved parties on the details of the Section 8 program. Lastly, the extensive counseling services provided to the program participants are essential to ensure that they are ready to both purchase and maintain an investment in a new home.
There are many options available for the structure of the Section 8 to Homeownership program, and each community has unique requirements. However, the initial success of AHR and MDHA program indicates that the model this partnership has developed provides a good framework for the development of future programs nationwide.