Wells Fargo (WFC) is trying a new twist on long-controversial down-payment assistance programs, which give money to prospective borrowers who otherwise could not afford to buy homes.
Many blame the current foreclosure crisis in part on borrowers who could not ultimately afford the houses they bought, and on the banks who lent to them. But Wells Fargo is attempting to avoid repeating some of those mistakes. To prevent the high default rates that have scuttled down-payment assistance programs in the past, the San Francisco bank's new NeighborhoodLift program requires that participants attend financial education classes before receiving grants.
Jon R. Campbell, Wells Fargo's director of social responsibility, says he is aware of the controversy surrounding such programs. But he argues that this program is different, and that it will help reduce the number of distressed and vacant homes that can lead to neighborhood blight.
"Believe me, we were aware of some of the noise and poor experiences with down-payment assistance, so we had to be really thoughtful to ensure we were designing this the right way," says Campbell, a Wells executive vice president who regularly meets with community development officials.
"This is not a giveaway program," he says. "You have to qualify and prove you have the ability to repay - there's nothing easy about that part."
There are historical pitfalls. In 2007, the Department of Housing and Urban Development banned certain seller-funded down-payment assistance programs after the Federal Housing Administration found widespread fraud. Loans from such programs went into foreclosure at three times the rate of loans made to borrowers who supply their own down payments.
But Campbell says he is not worried about history repeating itself with Wells Fargo's new program.
"We believe these are sustainable homeowners," he says. "We're really worried about the stabilization of neighborhoods, because a huge supply of REO [property] with nobody living in the homes causes extreme problems."
Borrowers are required to attend eight hours of financial education classes through affiliates of the non-profit NeighborWorks America. Wells funds the grants to people whose incomes are 120% or less than the median income in their area, but the actual decisions of which borrowers qualify for the grants are made by NeighborWorks, not Wells.
Marietta Rodriguez, national director of homeownership and lending at NeighborWorks, says the down payments "helped to sweeten the pot a little bit," for homebuyers who are "mortgage-ready customers."
Last month, Well Fargo funded down-payment assistance grants of up to $30,000 each for more than 400 borrowers in Los Angeles, and arranged for prospective homebuyers to take tours of three neighborhoods with many foreclosed properties. In Atlanta, it funded grants for 236 borrowers, of up to $15,000 each, with a 60-day window to purchase and close on a home.
Last month, more than 2,000 prospective homebuyers attended Wells Fargo events in Los Angeles and Atlanta, where they took bus tours of three neighborhoods identified by city officials as having high inventories of foreclosed homes. The cities worked with local realtors and held 'open houses' at a variety of homes on the tour, so that prospective, qualified buyers could pick out a home on the spot.
At a similar event in Phoenix last weekend, 253 borrowers received a total of $3.8 million, which brought the total amount of down-payment assistance grants given by Wells to $31 million so far this year. It is the single largest philanthropic program ever by the bank, Campbell says.
The three cities were chosen for their high concentrations of foreclosures, delinquencies and REO properties, he adds.
Applicants who attend the events usually have been preapproved by Wells Fargo or another lender; NeighborWorks also takes loan applications and provides financing options. To insulate itself from the lending-decision process, Wells makes the grants directly to NeighborWorks, which approves or rejects applicants, and the funds are administered by the non-profit's local affiliates. Prospective borrowers are not required to get a loan from Wells and only a handful of the REO properties in each city are owned by Wells.
To reduce the potential for borrowers to flip the homes and make a quick profit, Wells forgives just 20% of the down payment grant each year, so the total is forgiven after five years.
Rodriguez says that many prospective homebuyers do not know how to appropriately shop for a home loan and need what she calls pre-purchase services, including counseling "to determine if they are ready."
"A financial institution is really not equipped to do that, since they're selling you something, and that's really not the space they're in," she says.
Rodriguez says NeighborWorks is seeing "record numbers of people interested in home-buying. Classes are at record capacity, but folks are coming in with a few more dings on their credit."
The program by Wells could be a sign that housing has finally hit bottom, she says.
"Eighteen, twelve, even nine months ago, we were not getting any bites from financial institutions on the homeownership side," she says.
Stagnant incomes and high down-payment requirements are likely to hinder a housing recovery in the years ahead, particularly in neighborhoods with high inventories of foreclosed homes. But down-payment requirements are a touchy subject right now in the mortgage industry, as new regulation looms.
Policymakers are entertaining several proposals that would raise the minimum down payment for loans backed by Fannie Mae and Freddie Mac, which typically require 5% minimum payments but will sometimes accept payments as low as 3%. Many mortgage industry members want Fannie and Freddie loans to require at most a 5% down payment, but some regulators have suggested raising those minimums to 10%.
Mortgage lenders have also objected to part of the Dodd-Frank Act that would require "qualified residential mortgage" borrowers to pay 20% upfront for loans that are exempt from the new regulations.