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Mortgage Reserve Accounts A Mortgage-Match Savings Initiative Reducing Default for Low-Income Homeowners

February 2020

Mortgage Reserve Accounts: A Mortgage-Match Savings Initiative

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MORTGAGE RESERVE ACCOUNTS February 2020

AuthorsPamela Agava Program Manager, Affordable Homeownership

Kate Davidoff Director Affordable Homeownership

Doug Ryan Senior Fellow Affordable Homeownership

Acknowledgements A special acknowledgement is extended to Homewise and Portland Housing Center, the organizations that participated in this project, for answering numerous questions, sharing data and permitting their names to be used in this Paper. In each case, senior management was interested and supportive in furthering a greater understanding of matched savings programs as a part of their overall desire to see low- and moderate-income Americans achieve and maintain their homeownership goals.

Thank you to our colleagues at Prosperity Now Lillian Singh, Austin Carrico, Baridilo Dube, Casey Foley, Roberto Arjona, Sandiel Grant and Lauren Treadwell for their contributions and feedback to the development of this paper.

About Prosperity Now Prosperity Now (formerly CFED) believes that everyone deserves a chance to prosper. Since 1979, we have helped make it possible for millions of people, especially people of color and those of limited incomes, to achieve financial security, stability and, ultimately, prosperity. We offer a unique combination of scalable practical solutions, in-depth research and proven policy solutions, all aimed at building wealth for those who need it most.

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Savings For Low-And Moderate-Income Households

The importance of savings has long been established: having an emergency savings cushion can help families weather emergencies and unexpected expenses, and even a small amount of savings can help households manage stress and get ahead. However, data shows that nearly 40% of Americans are liquid asset poor1—meaning those families don’t have enough in savings to make ends meet at the poverty level for three months if their income was interrupted. This problem is even starker when disaggregated by race: 31.7% of White households are liquid asset poor compared to over 62% of Latino and Black households.

For most households in the United States, buying a home is the largest purchase in their lives. Given that most homeowners finance their home purchase with a mortgage, buying a home is also one of their largest sources of debt, presenting significant risk. This became evident during the Great Recession, as millions of families went into default and lost their homes. A JPMorgan Chase Institute report “Mortgage Modifications after the Great Recession: New Evidence and Implications for Policy”, measured the impact of mortgage payment and principal reduction on default and consumption and found that a 10 percent mortgage payment reduction decreased default rates by 22%. This finding implies that short term liquidity was a key factor driving mortgage default.2 In their follow-up research to their Mortgage Modifications after the Great Recession report, they further examined the relationship between income shocks and mortgage default. They found that the relationship between negative income shocks and mortgage default held for homeowners across all levels of home equity and regardless of income level or total debt-to-income ratio (DTI) at origination.3 This makes the need for new homeowners to rebuild savings post-purchase evidently clear, but even more so for low-income households achieving homeownership.

Prosperity Now conducted a two-year pilot beginning in 2017 to incentivize to save for emergencies by providing $200 in matched savings through mortgage reserve accounts (MRA). We worked with two housing organizations to serve over 300 homeowners finding:

• Nearly 90% of the homeowners began or maintained savings. • Over a third of homeowners reported that they had previously been late on a mortgage payment. • Forty percent of homeowners who accessed their savings before the end of the pilot reported using

it to make a mortgage payment.

1 “Liquid Asset Poverty,” Prosperity Now Scorecard (Washington, DC: Prosperity Now, 2020). Data Source: Survey of Income and Program Participation, 2014 Panel, Wave 4. Washington, DC: U.S. Department of Commerce, Census Bureau, 2019. Data calculated by Prosperity Now. Retrieved January 30, 2020. 2 Farrell, Diana, Kanav Bhagat, Peter Ganong, and Pascal Noel. 2017. "Mortgage Modifications after the Great Recession: New Evidence and Implications for Policy." JPMorgan Chase Institute. 3 Farrell, Diana, Kanav Bhagat, and Chen Zhao. 2018. “Falling Behind: Bank Data on the Role of Income and Savings in Mortgage Default” JPMorgan Chase Institute.


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Our findings show that low- and moderate-income families who recently purchased a home are willing and able to save, and the importance of that savings to potentially stave off mortgage defaults and home foreclosure.

Mortgage Reserve Accounts Pilot

Mortgage reserve accounts (MRAs) are a mortgage-matched savings account similar in design to individual development accounts (IDAs). They are designed to incentivize low-income families to save towards a targeted amount, ideally between 1-3 months of their mortgage payment, by providing a match and other support in their savings efforts. As with IDAs, homeowners with MRAs are provided a match when they reach savings targets. While IDAs promote savings for low- to moderate-income families to purchase a home (or, in some programs, to start a business or pay for education), homeowners use mortgage reserve accounts after they purchase a home to rebuild their savings. The amount and rate for the match for both programs depend on the source of funds available for such programs.

Prosperity Now partnered with two nonprofit housing organizations, Homewise in New Mexico and Portland Housing Center (PHC) in Oregon, to offer $200 in matched savings to recent homebuyers who completed the requirements of the program. Both organizations are community development financial institutions (CDFIs) who serve primarily low- and moderate-income families by offering multiple services and products that equip potential borrowers with knowledge and financial skills including financial coaching and counseling as well as credit counseling. In addition, they provide pre-purchase homebuyer counseling, offer lending products and service home loans for many of their clients. Homewise also develops some homes for low- to moderate-income families.

Homewise launched its MRA program, Savewise, in January 2018. PHC launched its Boost program one year later. Homewise and PHC tailored their program to fit the needs of their existing clients, leading to slightly different program designs. Homeowners in both programs received a $200 match when they saved $200 and completed a financial well-being survey. Recruitment and program administration varied slightly between the programs.

Homewise staff regularly contacts borrowers after closing and recruited eligible homeowners for the pilot during these check-ins. The majority of borrowers in Homewise’s Savewise program purchased their home within the prior year. They were eligible to include savings prior to the start of the program and shared bank statements with program staff to show progress. Homeowners received the $200 match when they shared bank statements for their existing savings accounts with counselors, showing they saved $200 over 90 days.

PHC offered MRAs to all clients who had participated in their IDA program, which are not offered at Homewise. Like Homewise, PHC recruited homeowners through email and marketed the programs through flyers in their office. While Homewise allowed homeowners to include savings that were accumulated prior to the start of the pilot, PHC homeowners documented savings from the start of the program moving forward. Homeowners were required to save $200 for their existing savings accounts at least one month from the start of the program.

Both organizations required homeowners to complete a survey (Appendix A) prior to receiving the match to assess the homeowners’ feelings about their increased savings as well as their overall financial well-being.

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They both offered one-on-one meetings with homeowners, and program staff periodically checked in with homeowners to determine if they accessed their savings, and if so, for what reasons. These meetings were ad-hoc or a needs-based response to the client. Clients shared with program staff information about their overall financial well-being and not solely on their participation within the MRA pilot.

Program Homeowner Data

A total of 323 homeowners participated in the MRA program: 220 in Homewise’s Savewise program and 102 in Portland Housing Center’s Boost program.

Of the 220 homeowners enrolled in the Savewise program, 164 successfully collected their savings match and 56 did not qualify for their match. Over half (54.1%) of homeowners in Savewise program were Hispanic/Latino, about a third (37.7%) of the homeowners were White and about 8% identified as other. This is a major distinction from the Boost program, where the majority of homeowners (54.9%) were White. The majority (62.3%) of homeowners were female. About a third (35.5%) of homeowners were single adults, followed by female-headed single-parent households (23.6%). Over 60% of homeowners had incomes between 50-100% of the area median income, which roughly $2,000-$4300. About half of the homeowners included their monthly mortgage amount with a median payment of $713 per month.

Of the 102 Homeowners enrolled in the Boost program, 58 received their savings match and 44 did not meet requirements for their match. Unlike Homewise, homeowners in the Boost program had to demonstrate savings moving forward rather than show previous savings. This meant that homeowners had to save $200 regardless of the amount already saved in their account, so it was expected that fewer homeowners would complete the program in comparison to Homewise, which allowed homeowners to include savings they had prior to enrollment of the program. Over half of the homeowners in the Boost program (54.9%) of homeowners were female. About a third (36%) of homeowners were single adults, followed by married with dependents (21%) and female-headed single-parent households (20 %). PHC documented Boost homeowners’ monthly incomes rather than a share of AMI. Almost 50% of homeowners reported a gross income of between $2,500-$3,500 per month ($30,000-$42,000 per year). Due to the way the data was collected, we do not have the monthly mortgage amounts for homeowners.

The Savewise program opened in January 2018 and enrolled its first homeowners in April 2018; allowing participation until September of 2019. The majority of homeowners were able to complete the program within one month, but over one-third required six weeks or more. The longest time to completion currently was 358 days. Additionally, 121 homeowners also completed an exit survey upon completing the program. Of those homeowners, 90% (n=109) said that the Savewise program was an incentive to start or continue a savings habit. To receive the match, homeowners shared their bank statements to verify that they saved $200 over 90 days. The majority of homeowners were eligible for their match within one month, but over one-third required six weeks or more.

Almost 60% of homeowners (n=58) had completed the Boost program as of December 2019. However, the earliest homeowner enrollment for Boost was not until January 2019. Furthermore, homeowners in the boost program have needed at least four weeks to complete the program, and about 70% (n=40) needing between six and sixteen weeks. All but one of the 58 homeowners who completed the Boost program’s exit survey agreed that the program was an incentive to start or continue a savings habit (see tables below).


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The exit survey from both programs included a measure of homeowners’ financial well-being, or FWB, as developed by the Consumer Finance Protection Bureau (CFPB). Financial well-being scores were determined by tallying responses to a series of statements. Savewise homeowners’ scores were taken from the standard 10-part questionnaire, and Boost homeowners’ scores were drawn from the abbreviated 5-part questionnaire.

The table below compares the distribution of these scores to the national distribution of scores from the CFPB’s Financial Well-Being Survey. This distribution of scores suggests that successful program homeowners generally have less difficulty making ends meet and are less likely to experience material hardship than the general US population. However, because financial well-being scores were only taken after successful program completion, it is impossible to determine whether the Savewise program had any effect on homeowners’ financial well-being. Evaluating pre-program well-being should be a component of future designs.

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Lessons Learned

While overall the programs at Homewise and Portland Housing Center were successes, as demonstrated by the use of funds saved by the majority of homeowners to make at least one mortgage payment, we did make several observations and experience several challenges along the way that we can anticipate and plan for in the future. Throughout the technical assistance process, we learned some key lessons in the design and implementation work.

• Design of matched savings programs is a collaborative process that should include all pertinent

actors. Frontline staff of housing counseling agencies and financial capability partners are often in communication but, in order to tie data collection with other processes, staff from the lending team, finance and operations may need to brought in to ensure that there is continuity of processes and data collection. Stakeholders can provide feedback on key program features, whether the proposed program will meet clients’ needs and how the administrative model will work in practice. Homewise and PHC’s initial designs were coordinated primarily by one staff member with minimal input from other stakeholders. The logic behind this was to increase efficiency without affecting implementation of the program. Lack of efficiency was a challenge of IDA programs under the now-unfunded Assets for Independence program (AFI), so both programs sought to proactively address that issue. However, as the organizations experienced staffing changes, the MRA programs were left with reduced support and client interaction. Organizations also need to secure client buy-in for MRAs, regardless of prior relationships between program staff and homeowners. Our initial expectation was that the match itself was enough to incentivize participation. However, both organizations reported slow uptake in program enrollment due to concerns about the validity and safety of the program. Including client feedback in the design can ensure that the right program incentives are included.

• A critical component of measuring the impact of matched savings programs is having strong data and evaluation procedures. Data collection and analysis are challenges that many organizations need support in—both financially and technically. Some organizations feel restricted by data-management platforms regulated by government agencies, others are looking for more specialized training to maximize the full extent of their platform’s capabilities. Other organizations, due to financial restrictions, use free or low-cost methods, like Microsoft Office. The data component can become extremely burdensome and is often pushed to the back burner as organizations continue to manage the day-to-day activities of their programs. Data collection and analysis is necessary, however, to properly assess each homeowner’s saving habits, as well as the whens and whys of homeowners’ access to savings. During our pilot, this became particularly challenging for information that was acquired through voluntary reporting to organizations. Not having clearly defined rules and indicators made it difficult to follow up with homeowners to get missing information, particularly after they had received their match.

• Implementation of matched savings is an intensive process. While appearing “low touch” on the surface, the processes needed to verify homeowners’ savings habits and gain a further understanding of how they access their savings requires a program strategy as intense as financial coaching or counseling. To develop this, organizations need a mix of individual check-ins, trainings and peer learning activities to understand what is required of the organization for implementation,


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clearly outline and document homeowner requirements and program regulations, as well as coordinate integration into existing financial capability programming for homeowners and staff. Because Homewise and PHC were well versed in providing financial capability services, it was expected that integration of their existing coaching and counseling services would not be a challenge. There was no formal requirement for homeowners to engage in financial capability services to receive the match, as both organizations were confident that they would be able to engage homeowners. However, there can be limited contact once homeowners purchase a home—often until they get into trouble or default on loans. This disengagement from homeowners made it challenging to garner participation in other financial capability services. In future iterations of this pilot, we would like to see homeowners engage financial capability services as a formal part of receiving their match.

• Improved financial capability takes time and sometimes stakeholders lose trust in the process,

become inpatient and disengage. Life brings many challenges for low-income families and priorities change, so having adequate staffing and financial support is very important to maintaining a successful program over time. For homeowners to save the desired one to three months of mortgage payments to reduce defaults, homeowners may need to save for at least six months, spreading out the match incentive. This allows them to access the savings for emergencies and still have an incentive to continue the savings behavior over time. This should be kept in mind as grant and program goals are determined.

In our pilot, while both organizations had previous relationships with homeowners, they both reported that some homeowners were hesitant to join the pilot. In some cases, homeowners reported that they believed the program was a scam. This was surprising because the program was promoted through a trusted source with whom clients had previously interacted. We believe that this highlights the need for ongoing interaction over time between the organizations and homeowners prior to the implementation of an MRA program.

Conclusion

One of the main goals of the pilot was to assess whether MRAs can help homeowners avoid defaulting on their mortgage payment. Through the survey, we found that 35% of all respondents reported being previously late on their mortgage payment and 42% of respondents who reported accessing their savings used it to make a mortgage payment. Yet, while the data shows that borrowers who save one to three months of mortgage payments show significantly reduced defaults, homeowners in the MRA program likely need to be saving for a longer period of time than the pilot allowed. Given a longer savings period, future iterations of this project may need to spread out the match to incentivize homeowners to keep saving.

Prosperity Now will continue to work will funders, researchers, lenders and nonprofits to develop mortgage reserve account programs in markets across the United States. Exploring best practices in design, outreach, matches and administration will be key to improving the programs and attracting new investments and partnerships. Prosperity Now will also work to integrate MRAs into mortgage underwriting and loan products, making them a permanent part of the sustainable homeownership toolbox.

As noted above, recent research supports the idea that cash reserves can help new homeowners make timely mortgage payments by offering them resources to weather income fluctuations, repairs and other

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unexpected expenses. Furthermore, Fannie Mae and Freddie Mac, as approved by their regulator, consider cash reserves a “compensating factor” to other borrower characteristics, such as credit scores and loan to value ratios.

Researchers, regulators and the market recognize that reserves help sustain homeownership. Prosperity Now is working with its traditional lenders to develop new loan products with built-in matched savings programs that can be scaled and accepted in the broader marketplace. Prosperity Now plans to continue to expand mortgage-match savings accounts in additional markets in the coming months.

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