Housing Complex

How Irresponsible is the City’s Loan Program?

Henson Ridge, where the city helped people buy "affordable" homes.

The Post's Debbie Cenziper just dropped the latest installment of her investigative series on the nation's subsidized housing foibles, with a particular focus on the District. This one zooms in on D.C.'s Home Purchase Assistance Program, which provides five-year loans with really low interest rates to bring homes within mostly first-time homebuyers' reach. Just like last time, it's worthwhile to ask: Is this a real scandal, or just mildly embarrassing?

Probably more on the latter side. Yes, Cenziper found that 18 percent of 1,300 people who got loans between 2005 and 2009—about 80 percent of the total number—are behind on their mortgages. That's more than double the national average, but it's to be expected: These were loans targeting low-income people already on the margin, for whom conditions often changed dramatically when the economy turned south midway through Cenziper's window.

Did some people buy houses that they really couldn't afford? Sure. Cenziper picks out one woman who spent $399,000 with a city loan in 2008, way more than loan officials estimated she could reasonably pay, and that was probably a dumb decision by both parties (meanwhile, of course, private mortgage lenders were up to much worse). But the average sale price was still $230,000—only $12,000 above city guidelines—which is pretty good considering it's really hard to find homes that cheap in D.C. these days.

There's clearly been a lot of homeownership cheerleading in the District: The view that paying rent is just wasted money if you could be gaining equity in your own house. That mentality resulted in the disaster of Randolph Towers, where tenants tried to buy their building and found themselves in way over their heads.

Still, I don't think Cenziper found evidence of gross mismanagement here. Just the same tragically misguided optimism that screwed over everyone else.

Photo by Lydia DePillis

  • danmac

    I agree with Lydia, I think the Post and others simply hate any attempt to bring some balance to the city in ownership of property.

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  • Dave

    Lydia thanks for your response. I do not work with HPAP but am familiar with the DC affordable housing market and I believe that the WP article is misleading, here's why:

    There are a four core critiques of the HPAP program in the article:

    1. HPAP buyers are accessing homes that are 'too expensive' (paying more than a city guideline for maximum unit price).
    2. That foreclosure rates for the program are high and outpace the market
    3. A questionable developer has built homes that were purchased by HPAP buyers
    4. That some HPAP buyers have had bad experiences

    Here, I quickly analyze each:

    1. HPAP buyers are accessing homes that are 'too expensive'

    There is a recurring critique that HPAP buyers are accessing homes that are too expensive. The author's focus on high home prices seems to be nudging at scandal, with some homes "topping $375K". She repeatedly refers to a "city guideline" that a family of 4 should be able to afford a $218,000 home. But the median home price in DC in 2009, at the time her study ended was $444,000 (and given the slight downward trend in DC housing prices over her study period of 2005-2009, this would likely be the nadir during that period). The median prices for family-sized units will tend to cost more than this $444K median price - HPAP is intended in large part to help families attain home ownership. I am not familiar with this $218,000 'guideline' and under what context it was developed, but I can say with experience that there is not a plentiful stock of habitable homes in the District that can be bought for under $218,000 that are appropriate for a family of 4 or more. (There will be still fewer homes for that price in neighborhoods with average-or-better crime rates, which home buyers might prefer.) Low income families are priced out of the DC market, which is why they need subsidy. It seems better journalism might have inquired as to the significance & context of the 'guideline' and, if it is of real import, assess whether the guideline set by the city is appropriate and realistic for the market (it isn't, bit then again I don't know really what the guideline is about, so I don't mean to impugn it). Instead she seems to take the unexplored guideline as reasonable basis on which to critique real world housing prices at which homebuyers bought units. (All that said, as you note, despite pointing out some hight prices, the average price of acquisition for HPAP homes was $230K, just 12K over the 'guideline'. The fact that this number is so low is likely driven by the volume of 1BRs and studios purchased through the program, which offset the costs of the larger family sized units.)

    2. Foreclosure rates for the program are high and outpace the market

    The author suggest that the foreclosure rate for the program (1.8%) compares unfavorably to the 2.2% rate representing the DC region's total foreclosure and delinquency rates. I think the best numbers on DC foreclosures originate from the Urban Institute's recurring studies them. Their latest update is here: http://www.urban.org/uploadedpdf/412383-DC-Foreclosure-Monitor-Summer-2011.pdf They show a 2.6% rate of foreclosures in the region and 6.8% delinquency. The author provides no info about her source, but seems far off the Urban Institute's well-researched numbers. Furthermore, given the nature of the DC real estate market with multiple and distinctive micro-markets, a cross-region comparison of foreclosure rates is probably not appropriate anyway. Foreclosures in Georgetown (where I imagine no HPAP homes exist) are vastly lower than east of the river, where a plurality exist. A close look at the map on page on page 3 of the UI study shows that the zip codes most likely to have HPAP homes, are all dark blue or medium, representing foreclosure rates of over 5%, or of 3% to 5%, respectively. Assuming the 1.8% figure for foreclosures on HPAP homes that the author cites is correct, is extremely likely that HPAP owners substantially outperformed their communities in terms of housing stability (ie, lower rates of foreclosure). In which case an different article with an entirely different conclusion could be writte.

    So I decided to look into this a bit more: A typical measure of foreclosures is the number of units with foreclosure starts (notice of foreclosure sent), in foreclosure, and foreclosure sales. I imagine when the author says "units in foreclosure" these hare the three statuses that make up the categories. Here is a snapshot of foreclosures in 2008, in the middle of her study: http://www.neighborhoodinfodc.org/housing/DCHousingMonitor_2009_2/#9

    It is a safe bet that over 90% of HPAP homes are purchased in Ward 1, 4, 5, 6, 7 and 8. You will see in the chart that in those wards, adding up the bars in each each status of foreclosure these wards average about 4% foreclosure rates. It's likely a substantial majority of HPAP homes are in 4, 5, 7,& 8; where the foreclosure rates are at around 5-6% or more. (I suggest that these Wards are most likely to have HPAP homes both based on conversations with experts and based on the fact that average housing prices in the other wards (2&3 - and much of 1 and 6 - are too high for even the $77K HPAP subsidy create affordability that would make it possible for any HPAP buyer to qualify for the necessary first mortgage loan (ie, a $77K subsidy will not help a low-mod buyer purchase a $750K home)).

    In general, and without having the luxury of doing a detailed analysis, it seems quite conservative to say that HPAP home owners were less than half as likely as their neighbors to be foreclosed on.

    What accounts for this success? My assumption is that there are two primary factors: (1) HPAP insured that home buyers used convenional first mortgage financing, rather than subprimes, which were very common in low income neighborhoods of DC according to The Reinvestment Fund and others), and (2) HPAP demands that all buyers receive home buyer education, which consistently linked to more successful outcomes. Still, the period of time she chooses to study, 2005-2009, would be the most likely to show high rates of foreclosures in general. And, it is true that HPAP went up from 40K to 77K for a period during this time, when markets were hot, home prices were rising rapidly, the city's budget was flush, and there was political will to hold on to affordability. The market collapsed, and some of these buyers ended up underwater, which may in part explain some of the foreclosures. That phenomenon, however, is hardly unique to DC or the HPAP program and, in fact, as the numbers above indicate, if anything HPAP likely mitigated the negative impact of the foreclosure crisis on its buyers as compared with that experienced by the the broader market.

    3. A questionable developer has built homes that were purchased by HPAP buyers

    The author makes reference to a developer, Jack Spicer, who seems to have engaged in some illegal practices in the past that are unrelated to the HPAP program. After his punishment, he seems to have returned to developing and selling housing in low income neigborhoods (those that most frequently attract HPAP buyers). I don't defend Spicer and I am not familiar with him, but it is not surprising that he returned to his profession after his punishment. The author makes much hay that Spicer purchased units and 18 months or so later sold them for twice as much as he purchased them. This is entirely consistent with an acquisition-rehab business model for any developer. It is not at all uncommon for a developer to buy a dilapidated building and spend more restoring the building than he or she did to purchase it. In order to break even on the combined expense of acquisition and restoration, the price will often be over twice as much as acquisition alone. A conventional-mortgage lending bank's appraiser would ensure that the price was appropriate for the market. The author's incomplete reference to what is standard practice obscures the issues. Despite Spicer's past, there is nothing unusual about this business practice in this instance. It seems the author is creating smoke where there is no evidence of fire - by pulling Spicer into the picture, she seems to only to distract from the core question about HPAP, making it harder for a casual reader to come away with a fair judgement. Moreover, HPAP is a buyer driven program - this means the HPAP buyers, using realtors they have selected are finding Spicer's homes (which he markets on MLS, etc, I imagine) and then buying them. I suppose HPAP could create a list of banned developers. Spicer has served is mandated time. I am not sure if such a policy would be legal, though if so, it would increase administrative costs in order to weed out a few developers and complicate the buyer experience ('you can buy any home in this price range, but if it turns out to have been developed xyz developer (a fact that is not typically obvious through an real estate listing), then you can't buy it'). Lastly, the article reports no issues with construction quality of Spicer's units, which would be the most legitimate question around a developer in this case. HPAP, I know from experience, ensures that all properties are very thoroughly inspected for quality and compliance before a home can be purchased. Their standards are stricter than banks alone - if anything this is a common critique of HPAP since it slows the purchase process.

    4. Some HPAP buyers have had bad experiences

    Scattered throughout, the article describes a series of people, how much their home cost, sometimes their household income, and then the results (by my quick count: 2 are very happy, 2 are struggling, 2 are filing for bankruptcy, 1 was foreclosed on). I think we can safely assume that this is not representative of the entire HPAP purchasing population. Given the author's own statistics, the failure rate is not nearly as high as the rate of failure in the examples cited. That said, it is understandable the journalist would want to focus on the problems. Where the journalist fails is in giving any indication of what caused the unhappy cases. There is an implication that they were somehow improperly underwritten, though no evidence of this. It would have been very easy for the author simply indicate a debt to income ratio of the purchaser at the time of purchase and assess whether that was reasonable - whether it lined up with what is considered prudent. She fails to do this, perhaps because the HPAP standards for back-end ratios are in fact quite reasonable (the comparative success of the program, implications of the article notwithstanding, would suggest this is the case). Another reason people fall into foreclosure is life circumstances: children, illness/healthcare costs, refi's, taking on too much non-housing related debt, and job loss (note: unemployment rate east of the river is over 20%), among other causes. There is no real analysis of the cause in the failed cases cited - simply a correlation to HPAP participation. Yet in any population of people, HPAP-participants or not, there will be people who face unfortunate life circumstances. I will note that there is an reference to the monthly payment increase experienced by buyers at year 5, when amortization on the HPAP loan begins. This is a real issue with housing subsidy soft mortgages around the country, and one that has been grappled with substantially. Typically, it is expected that over a 5-year period, home owners' incomes will go up enough over 5 years to more than cover the impact of increased payment. In the one example given, the home buyer's monthly cost were going to go up by $160 at the end of year 5 once amortization kicked in. Thus, her after tax income would need to increase by $1,920 over 5 years to handle the payment increase, or, on average $324 each year. The buyers' income is not provided, so I can't say what percentage increase this would represent, but it strikes me as a manageable payment increase for a low income individual and comfortably in line with best practices.

    I don't suggest the HPAP program is perfect, and the author notes, the program is currently under review for enhancements.

    That said, article seems to lack depth of analysis, glaze over mitigating facts (as well as laudable successes), and drive to a predetermined conclusion.

    Thanks, Lydia, for respdonding to it.

  • Eric

    I agree as well. I started reading the Post article, but it quickly became clear that what was being written was more a commentary about the overall economy than it was about anything resulting from poor management and decision-making.

  • Chris

    Great analysis Dave. I thought the article was not too well written. I got a HPAP loan in 1990 to buy my house, where I still live. At that time I made 18,000yr, and was approved for a loan of $60,000, I looked for a year for a house I could afford in DC and finally found North Capitol Neighborhood Development, where with a $25,000 VPAP subsidy (very low income) I was able to buy my house. I have since paid back the VPAP in total. But 1990 was a very different time than the mid-2000's. I think HPAP is a great program. A few others on my block also used HPAP for purchase,most of them still live here.

  • http://ward3dc.com WardthreeDC

    There is another victim in this story and that is the Homeowner Association that EVERYONE Of these homes are located within. If they are not paying their mortgage then surely aren't paying their HOA fees.

    To compound this issue the District in their planning wisdom have not enacted a HOA ACT, which is very similar to the CONDO ACT, and without it there is no requirement to pay HOA Assessments, the is no requirement to show owners the books, there is no requirement to have open meetings.

    So without these there is little chance that the associations that are in need of these dues to fund obligations like common area ~ electricity, gas, water and (((street lights))). We know PEPCO and the other Utilities are now trying to cut off whole communities utilities this situation is about to get worse before it gets better.

    IMHO until the folks that run DC feel obligated to enforce disclosure of HOA's we all know it ain't going to happen. I have personally talked to every sitting rep save ward5 and not one sitting politicians has sought to do one thing about this issue which is forcing some HOAs into bankruptcy.

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