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Loans that promote health and community

Vanessa Stringer knows homeownership can change people.

As executive director of the Seventh Ward Community Services Corporation Inc. in New Orleans, she remembers the day an ex-convict came to her saying he wanted his two children to have a place to call home. While he had cleaned up his act, traditional mortgage lenders weren't willing to take a chance on him and he thought he was out of luck.

But thanks to the "At Home In New Orleans" initiative, which helps city officials refurbish old properties and get new buyers into them, the man became a proud homeowner earlier this year. It's one of a growing number of "social engineering" mortgages across the country -- so called because they benefit both new homeowners and social goals.

"It's worth it to see this guy, who didn't have a lot going for him, to get his life together, to move in with his children," she says. "We're creating stable families.

"It made us feel good."

The New Orleans program stems from the efforts of several groups, including the city's Division of Housing and Neighborhood Development, Standard Mortgage Corp., Stringer's 7th Ward organization, the AFL-CIO and Freddie Mac. Beginning in 1997, they started working on a plan to clean up neighborhoods, promote union labor and boost low- to moderate-income homeownership.

Under the program that resulted from those discussions, the city repossesses homes that have fallen into neglect or buys them if it can locate the owners. The 7th Ward group takes out construction loans on the properties with Standard Mortgage and solicits bids for the rehabilitation work they need from contractors, who must be union-affiliated and pay union wages. Once the contractors finish, the 7th Ward group finds willing and qualified buyers, who move in, assume the group's loans and start making payments. Freddie Mac, meanwhile, buys the loans from Standard Mortgage and sells them to the AFL-CIO's investment arm.

"The blight was a big problem here and fighting that is a job in itself," Stringer says. "To actually buy these properties, rehab them or demolish and newly construct them and put qualified people in these neighborhoods to own a home, it's a big project, but it's worth it."

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More than a local fancy
Stringer isn't the only one who feels that way, and 7th Ward isn't the only program out there.

Fannie Mae, Freddie Mac, large lenders, local governments, home-builder groups and others sponsor mortgages around the country that do more than just get borrowers into homes.

Just like the federal tax code, which promotes homeownership by allowing owners to deduct a portion of the mortgage interest they pay, these loans serve a "social engineering" function by trying to shape consumer behavior for the benefit of society. They also typically come packed with incentives and subsidies, giving borrowers a way to save money and help out their fellow humans.

"You should check all the options if you're looking for a loan, and they may well be a good option for you," says Jack Harris, research economist with the Real Estate Center at Texas A&M University in College Station. He adds that Fannie Mae and Freddie Mac have pushed socially responsible lending aggressively because it opens up new markets and bolsters their public image.

"They have been trying to increase the homeownership rate by changing their underwriting so more loans can be made to first-time home buyers and what you would consider the underserved markets -- inner-city areas, minorities and perhaps younger people who are having difficulty getting loans."

Life-affirming loans
Social-engineering mortgages come in all shapes and sizes. Like the New Orleans loans, many promote the purchase and rehabilitation of homes in low- and moderate-income neighborhoods. These mortgages tend to have low down-payment requirements, flexible underwriting standards and additional perks.

A borrower who purchases a 7th Ward home, for instance, can get a "soft second" from the city to help foot the bill. The $10,000 to $25,000 second mortgage covers the difference between the home's purchase price and the first mortgage Standard Mortgage is willing to extend against it. While the customer has to make payments on Standard's first mortgage, nothing is owed on the second until the borrower moves out or sells the home. If that doesn't happen for 10 years, the city completely forgives the loan.

"It's designed to take government and industry and try to meld in together an effort to revitalize areas that are in decline," says Jo Ann Crow, vice president of residential lending with New Orleans-based Standard Mortgage.

Other programs try to encourage certain workers, such as teachers and police officers, to live in the communities they serve. Then, there are loan programs that target certain groups, such as the disabled, with benefits designed to meet their specific needs.

A Fannie Mae mortgage in Mississippi makes it easier for borrowers to qualify for loans if they have to care for disabled family members or need additional money to make their homes handicapped-accessible.

It takes a village ...
The only common trait among the programs? They usually rely on input from several interest groups. In an effort to promote so-called "green building," for example, Fannie Mae teamed up with the Home Builders Association of Central New Mexico, the city of Albuquerque and local developers to come up with the "DREEM" mortgage.

The loans allow people to put less money down, but can only be taken out against environment-friendly homes located within five miles of Albuquerque's central business district. Underwriters for the mortgages are also permitted to give customers credit for the money they're likely to save on electricity, water and other utility bills because their properties are more energy-efficient. That credit works like an income boost, helping borrowers qualify for larger loans and homes than they otherwise would.

To qualify as green, a home has to include features such as low water-use toilets and insulation-wrapped water heaters. The builder must also use environmentally friendly materials such as water-based duct sealant and reduce waste by recycling scrap metal, lumber and cardboard.

"This program is out to make everyone understand that if you really work at trying to help the environment -- if you work at finding a home that is better for the environment and that has been built safer for the environment -- you can actually be rewarded for it," says Lindsay Chism, community services manager with the local builders' association.

"This should be something that everyone expects," she adds. "All builders should build this way. All buyers should buy this way. There's nothing to lose this way. There's only things to gain."

Tracking down socially responsible loans does take longer than finding a conventional mortgage. Not every lender offers them and many programs can only be used in certain geographic areas or by specific types of borrowers. Consumers who are interested should start by contacting Fannie Mae and Freddie Mac since the two agencies are the ultimate source of funds for many of the loans. They can also get in touch with both city and state housing agency officials and local nonprofit groups to see what's available.

But while these loans require extra effort on both the borrower's and lender's part, experts say they're worth it.

"This is a project that you don't take on because it fits into your regular scheme of production," says Crow, the New Orleans lender. "It doesn't fit into anybody's scheme of production.

"You do this for one reason and one reason only -- because you are interested in the improvement of the community as a whole."

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See Also
Appraisers can bust your bubble by inflating the value of your home
Targeted home loans help buyers boost neighborhoods (4/1/99)
Being a prudent home buyer -- set your own standards (3/25/99)
More mortgage stories
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