Partners (Fall 1996)

Using Partners
with First Time
by Stan Fitterman

Stan Fitterman is a Technical Assistance Specialist with the Florida Housing Coalition. His article reviews the Federal Reserve Bank of Atlanta's Partners Software. The software is free and can be ordered from the FRB at 404/498-7358, or can be downloaded from the Internet. It may be helpful to have the software on hand before reading this review. The article has been reprinted from the March-April issue of the 1996 Housing News Network with permission.

When fed the right software, computers can be a terrific help to people administering first-time buyer and other home ownership programs. Plug in some information, and the computer can do the number-crunching to determine if an applicant is qualified for a program, and if not, what steps can make her eligible. One piece of software that can perform some helpful tasks is Partners, a software package developed by the Federal Reserve Bank of Atlanta. The good news is that it is free—and that you get a lot despite it being a freebie. Partners is easy to use even for the computer-phobic.

Partners bills itself as a learning tool and development aid for "community development practitioners interested in providing home purchase loans to low and moderate income persons." The purpose of this review is to show where it lives up to its claims and where it has drawbacks.

Program Structure

Partners is divided into several components. It is not necessary to use or even to understand each component to benefit from the use of this software. Therefore, this review will evaluate each screen separately, noting the ways that it can be used with a first time buyers program.

The Test Screen: How Much House Does the Applicant Qualify For?

This can be a very useful tool for the first-time buyer program administrator. This screen allows you to calculate how much financing for which a particular buyer can qualify, given user inputted applicant data and lending criteria. Often first time buyer applicants walk in to SHIP program offices having no idea for what price range home they can qualify. This screen allows you to input applicant specific data to determine that applicant's financing potential. For this review, the applicant and underwriting criteria used is outlined in the box below. In our example, for instance, this screen informs us that the maximum amount of financing for which our applicant could qualify is $41,839. Using this screen, the SHIP program administrator can quickly and easily inform an applicant in what price range he or she should be looking.

The Main Screen: Can the Applicant Afford This House?

The main screen of Partners calculates whether or not a potential applicant can qualify for a mortgage on a certain priced home, given user inputted lending criteria. Once this information is entered, and the user clicks on the "compute" button, the program calculates the applicant's present status, and if the applicant cannot qualify, possible options that can be used for qualifying the applicant. The applicant's present status shows the amount of money available for the monthly principal and interest payment. The program calculates this amount by using the front and back ratios to determine the maximum monthly payment for which the applicant can qualify, and then subtracts from that amount, the monthly taxes and insurance payment. This leaves the total amount available for principal and interest.

In our example, the applicant has $295.00 available for principal and interest. This is $53.54 short of the monthly amount needed to qualify for the $50,000 house. Next come our options. In this scenario, Partners informs us, this applicant could qualify if the price were reduced to $44,031.98. Or, if the applicant reduced other debt by $53.54 per month to $271.44, or if the down payment could be increased to $9,796. All in all, Partners lists 10 options for qualifying the applicant.

Lending Criteria and Applicant Info:
For this review the following information was used, except where otherwise noted:

Lending Criteria

Front Ratio 28% Back Ratio 36%
Interest Rate 8.00% Term in Months 360
Loan to Value Ratio 95%
Applicant Info:
Monthly Income $2,000 Price of House $50,000
Down Payment $2,500 Taxes & Ins. $100
Other Debt Payments $325

Applicability to First Time Buyers Programs

The Main screen can assist many First Time Buyer program administrators. It offers a quick way of determining whether an applicant can qualify for a certain priced home. Several SHIP programs around the state of Florida are designed to provide first time buyers with a subsidy that is equal to the amount needed to qualify for a certain mortgage amount. Often, the calculation of the subsidy amount is left to the lenders. This Main screen gives the SHIP administrator an easy to use tool for determining this subsidy amount.

What if you want to provide the first time buyer with a subsidized loan that will be repaid at the same time as the first mortgage? Partners also calculates this amount, allowing you to have this subsidized loan calculated at any given interest rate. The most attractive feature of this option is that it is calculated to ensure that the combined first and second mortgage payments do not exceed the front and back ratios that you have established. This is important for all lenders, but is critical if you plan to work with the secondary market. In our example, an $11,741.17 second mortgage at 0% interest would be needed for our applicant to qualify. Partners went on to inform me that given this scenario, the payment on the first mortgage would be $262.39, and payment on the second mortgage would be $32.61.

The Deposit Option: How Can Interest Subsidies Be Used?

There are three predominant methods in which first time buyer assistance is provided in Florida: 1) The money is given entirely as a grant; 2) It is provided in the form of a no interest, due upon sale loan; or 3) It is provided as a due upon sale loan that is forgiven after a certain number of years. The Deposit Option screen offers an interesting alternative to these methods. This feature recommends depositing a certain amount of money into an interest bearing account. These funds are then used to subsidize the first time buyer's monthly payments on a declining basis for 10 years.

In our example, we have already determined that increasing the down payment by $7,296 to $9,796 would qualify this applicant. However, an alternative to a straight grant or deferred loan of these funds would instead be to deposit $3,082.24 into an account earning an interest rate of 4 percent. This account would then be used to subsidize the buyer's monthly payment so that he can qualify for the mortgage. As you will recall, our applicant needed an additional $53.54 per month to qualify for a loan. Using the calculations of this feature, the $53.54 is subsidized for the first year. In subsequent years, the subsidy amount is reduced by 10 percent per year. The rationale behind this is that the applicant's income is expected to increase over the loan period, allowing him or her to make a higher monthly payment.

In our example, our applicant's monthly payment would increase by $5.35 during years 2-10. With this scenario, our buyer's income would need to increase by less than 1.4 percent per year in order to continue to maintain the qualifying ratios.

There are both benefits and drawbacks to implementing this deposit option. If a home is sold during the 10 year time frame, a portion of the subsidy amount will be returned to your program. If your current program is designed to provide the subsidy amount as a grant with no repayment, this is a way to provide some form of recapture. It also enables you to provide a much lower subsidy to a buyer, enabling you to stretch your dollars. If, however, you are currently providing your first time buyer assistance as a due upon sale loan, this option would decrease the amount of money being returned to your program. Another downside of this option is that it will result in an increased monthly payment on an annual basis. One of the benefits of home ownership is that it is a hedge against inflation, especially for very low-low income families (think how long it usually is between increases in the minimum wage). By designing a program that has an escalating monthly payment, you are reducing this benefit of home ownership.

Ron Zimmerman was given special recognition in July by the Board of Governors of the Federal Reserve System for his contribution to the System through the creation of the PARTNERS model for home mortgage lending. Pictured above, from left to right, are Chairman Alan Greenspan, Board Governor Lawrence Lindsey and Ron Zimmerman, Vice President of the Federal Reserve Bank of Atlanta.

The Refund Option: How Can Non-Profits Help Applicants Qualify for Loans?

The Refund Option offers an alternative for non-profits who sell their homes at cost, or slightly over cost. While usually well below market, the sales price may still be too high for very low income buyers. This option recommends that the home be sold above cost but still less than market value. The amount that is above the non-profit's normal sales price is used to set up a deposit account, which is then used to subsidize monthly payments in the same manner as the previous example.

There are several advantages to this approach. Selling homes at a higher value can help eliminate the argument that the selling of lower priced homes may depress the appraisals and sales prices of surrounding homes. The deposit account can offer additional security for the loan, lowering the effective loan-to-value ratio. One disadvantage to this type of arrangement is that lenders are often wary of seller concessions. Also, the buyer's monthly payments will rise on an annual basis, raising the same concerns as those discussed above in the Deposit Option.

Amortization Schedule and Equity Buildup Screens

The amortization schedule lists the starting balance, principal paid, interest paid, and ending balance for each monthly payment. For instance, in our example, the first monthly payment will result in $31.87 going toward the principal, and $316.67 toward interest. After this payment is made, the ending balance will be $47,468.13. By the time the 175th payment is made, $101.28 is going toward the principal, with $246.59 being paid in interest. The ending balance after the payment is made would be $36,987.85.

The amortization schedule has limited use other than illustrative. It does not allow the user to input actual payment dates, so it cannot be used to track actual loan balances. It does show total interest to be paid over the life of the loan, as well as the total amount of interest paid each year. This could be useful if a potential buyer is attempting to determine the tax consequences of purchasing a home. My experience with first time buyers is that this is usually a minor concern.

Similar to the amortization schedule is the screen that calculates the equity buildup from monthly payments. This screen calculates the amount of equity built up as of the end of each year. In our example, at the end of year one, the homeowner will have paid a whopping $397 toward principal. By the end of year nine, $5,018 will have been paid toward the principal. While once again largely illustrative, this screen can give the potential buyer an idea of the amount of equity he or she will have after a certain period of time. It can also be used to estimate when an applicant will have enough equity in the home so that a sale will result in enough proceeds to cover a second mortgage.

Tax Abatement and Sale Screens

Occasionally a local government will offer tax incentives for purchasers of homes in certain neighborhoods. The Tax Abatement screen calculates the impact of property tax abatement on a buyer's ability to qualify for a mortgage. The amount abated begins with the minimum amount needed for the applicant to qualify, with this monthly amount declining to 90% of the amount needed in year two, 80 percent in year three, etc. In our example, this option calls for the monthly payment to increase by $5.35 annually in years 2-10.

The sale screen has very limited use for a Florida SHIP administrator. It calculates the sale price that should be received for a loan that is going to be sold on the secondary market.

Beware of Garbage In, Gospel Out

"In using Partners, please keep in mind that, while the various options presented will 'work' mathematically, sound judgment is needed to decide whether use of any of these options is practical and in the long term best interests of an individual applicant." In other words, just because this program lists something as an option, it is not always a viable one. If we change the monthly income from $2,000 to $1,000, leaving everything else the same, Partners informs us that one option is to "buy at a lower price - $3,901.57." Not the most practical of solutions. Partners' goal is to inform you of your options; it is your job to decide whether they are feasible.

Other Things to Keep in Mind

Partners will not allow you to save a file. Instead you must print a copy of the information that you need. Remember this before you exit the program and lose your data. It is also recommended that you enter the applicant's name or application number on each form that you print to avoid confusion in the future.

Computers do what you tell them to do, not what you want them to do. Partners is no different. If one inputs 80.0 percent for an interest rate instead of 8.00 percent, it suggests increasing the front ratio to 163.33 percent and the back ratio to 179.58 percent as an option for qualifying an applicant. Careful attention must be paid to the user inputted items. If the results on the main screen appear out of line, check the applicant and lending criteria. Chances are something was entered incorrectly.

Partners is an excellent tool for use with first time buyer programs. While Partners has many features, the software allows you to use only the options most useful to your program. It provides a quick, easy and technically sound way for determining applicant eligibility, subsidy amounts, and options for qualifying applicants.

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