Thomas M. Callahan – Proved a point
More than a decade ago, a scathing report on racial disparities in home mortgage lending threw banking officials and consumer advocates into a dizzying feud of name calling and finger pointing.
The result was a promise of more community investment and one lasting initiative for low-income borrowers: the Soft Second Program by the Massachusetts Affordable Housing Alliance.
On Saturday, Feb. 10, MAHA will host a 10th anniversary gala for the program, which has helped numerous families buy their first homes.
The chain of events leading to the program’s inception began when a Federal Reserve/BankBoston study was leaked to the press on Jan. 11, 1989. The findings showed what was termed “racial disparities” occurring in mortgage lending on the part of Boston banks, said MAHA Executive Director Thomas M. Callahan.
“That was a pretty stark study and it kicked off about a year-and-a-half-long campaign by community groups to try to engage the banks in addressing some of the problems they had identified, in terms of lack of presence, lack of lending in low-income minority neighborhoods in the city of Boston specifically,” he said.
While the talks led to, among other things, a $400 million statewide reinvestment agreement between community groups and lenders, it also led to the Soft Second Program.
“Our organization, in the middle of that campaign, negotiated an agreement with three lenders – Shawmut, BayBank and Bank of Boston – to start the Soft Second Program,” he said. Each bank made a one-time commitment to $4 million.
“That was the humble origin of the Soft Second Program, but the program was seeded both by our organization and the banks as an attempt to respond to what we would call a redlining pattern and what they reluctantly agreed to was a pattern of disparities that the federal study found,” he said.
Today, nine banks have entered into five-year funding agreements with MAHA.
Rooting for Recession
The program provides a “soft second” mortgage, generally for 20 percent of the purchase price of a home for a first-time buyer. The homeowner obtains the first mortgage for 75 percent of the purchase price from the lender. The borrower then pays the entire principal and interest on the first mortgage. The principal on the second mortgage is deferred for 10 years. The benefit is the borrower doesn’t private pay mortgage insurance.
Some of the eligibility requirements include completing a homebuyer education course and meeting the requirement that the borrower earn 80 percent or less of median income for the area in which he or she wishes to borrow. Additionally, the home must be within certain price limits, generally no more than $165,000 for a one-family home depending, on location.
“What we usually say to people is ‘while it’s a little more complicated than the standard program, it’s the most affordable program in the state,'” said Callahan.
Lately though, even families with mid-range incomes in the Boston area have found it difficult to afford a home. So, while economists are wary of a slowdown, MAHA looks forward to one.
“It is interesting that sometimes in the affordable housing world, we feel that we’re the only ones rooting for a recession,” joked Callahan. “There’s more demand than ever before; more of those people than ever before are frustrated by their search for affordable homes. So if the market softens a little bit and this product is still around, we’re going to have a better success rate of getting the people into homes,” he said.
Even if the economy softens, the program should fare well, he said. “This program is very adaptable. It can respond in an overheated market because it has a flexible amount of subsidy. If people need more subsidy they can get it. They can’t get an unlimited amount, of course, but they might be eligible for a slightly higher subsidy if the prices and rates are slightly higher,” he said.
The program has helped the perceived redlining problem in the city. “Seventy-three percent of buyers in Boston were people of color, so it really has met its target. It was designed as a program to help target redlining and it has done that. It’s also been the leading program; more loans have been done under this program than any other targeted program in the city,” he said.
The first person to receive a loan through the program was Florence Hagins, who is the honorary co-chairwoman of the gala and has since become director of homebuyer education for MAHA.
Hagins attended the first meeting and was excited about the program even though it had not yet been cleared by the city and state. Shortly thereafter she was denied a loan not by the bank but by the PMI company, she said. “It was on a Wednesday that I got the denial letter, and on Friday I got a call from one of the organizers here at MAHA, and she told me that the Soft Second [program] was up and running. I called back the bank and had someone in my house on Sunday night from Shawmut,” she said. She was approved. “I was thrilled,” she said of purchasing her Dorchester home.
Subsequently, she began volunteering her time with MAHA, telling potential homebuyers that if she, a single mom, could buy a house, they also could do it.
In 1996, after establishing a career in healthcare, she decided to accept an employment offer from Callahan mostly because she wanted to give something back to the community.
“It was a good feeling when I would see people again and they would say ‘I just bought a house.’ It was almost like me buying my house all over again. It’s such a great feeling to think that you actually helped somebody. Then, as a homeowner, seeing the difference in your own community; the stabilization of your own community makes a big difference,” she said.
Part of what makes the program a success is its low 2.4 percent delinquency rate, compared to a statewide average of 2.8 percent, said Callahan. In addition, the program has found new allies in loan originators who have found a new market to serve.
“People [in the program] are paying their mortgages at a better rate than everybody else in the state pays them. I think the banks consider that a very good success,” said Callahan. About 200 loans are serviced annually through the program, up from the 30 that closed at the end of the first year.
“In the early days, I think they [banks] felt they couldn’t lend responsibly to lower-income folks because the delinquency rates and the foreclosure rates would be too high and the banks would not make money on those programs. That hasn’t been true in our experience at all, and that’s what we set out to prove 10 years ago,” said Callahan.
There are still a few tables left for the anniversary celebration. The proceeds will be used by MAHA to purchase the single-family home it uses as headquarters. Renovations to the home will allow MAHA to hold homebuyer classes and meetings in its own facilities.
