Self-Help turns 25: Part 3

Editor’s note: This is the third in a series of stories marking the 25th anniversary of Self-Help.

By Ret Boney

DURHAM, N.C. — With its small business lending program off the ground, the first step toward founder Martin Eakes’ dream 25 years ago of closing the wealth gap between minorities and whites, Durham-based community development bank Self-Help added a home mortgage program.

The goal of the program was to help more disadvantaged people buy their own homes and start building long-term wealth.

The median net wealth of white households is more than 10 times greater than the wealth of black families, whose median net wealth is $7,000, he says.

“That’s one-tenth of the way to equality,” Eakes says, and he believes increasing home ownership in the black community is the key to progress.

“It’s the primary repository for family wealth,” he says.  “It provides the narrow pathway out of poverty into the middle class.”

Currently, about three in four white families own a home, while only about half of black families do, which Eakes says is the “single-most unacceptable fact about our culture.”

But that is a statistic Eakes hopes to change through Self-Help’s residential lending program, started in 1988, which provides loans to people who don’t qualify for credit from traditional banks.

To date, Self-Help has provided almost 2,700 home loans in North Carolina worth $172 million, mainly to minorities, women and rural residents, many of whom are too high-risk for traditional banks, with a loss rate of less than 1 percent, about the same as traditional banks.

“If you make a loan to a family for a modest home, the payments aren’t that much more than an apartment,” says Eric Stein, chief operating officer of Self-Help. “Folks will do anything to keep that house.”

Three in four of those loans have been to minority families, and almost half to families headed by women, the vast majority of whom needed a kind eye and extra counseling to get the funding they needed.

Self-Help looks deeper than credit histories, it says, considering past and current circumstances and income before turning people away, and offering feedback, counseling and second chances to those they do.

Driven by its mission of achieving equality of wealth and a continual search for new ways to serve more people, Self-Help says, it entered the secondary mortgage market in 1994.

Normally, banks originate mortgages and immediately sell them to the “secondary market,” made up of other financial institutions in the business of managing debt, while the original banks service the loans themselves.

But changes in the Community Reinvestment Act, which requires banks to make “non-conforming” loans within their communities, left banks with more high-risk loans than they could unload, tying up their cash and preventing them from lending to more low-income families.

Self-Help saw an opportunity in that dilemma.

“We knew this market was larger than we could serve directly,” says Stein.  “But there are bank branches everywhere. They can reach these people.”

So in 1994, Self-Help bought a $20 million portfolio of about 1,000 CRA loans from Wachovia, making room for the larger bank to lend to even more disadvantaged people, and requiring that it lend the $20 million from the sale back into the same population as part of the deal.

Self-Help then sold the portfolio to Fannie Mae, the country’s largest mortgage purchaser, which recognized the loans fit its mission of helping underserved families, thereby freeing up capacity for Self-Help to buy more loans.

Hoping to expand the program throughout the U.S., Self-Help in 1997 received a $50 million grant from the Ford Foundation, money it used to cover any defaults on the loans it purchased, and paving the way for traditional banks to lend to even more high-risk people.

As part of the grant, Ford required that Self-Help use the money to leverage $2 billion worth of mortgages and create 30,000 new homeowners, goals it exceeded within the five-year timeframe required.

To date, Self-Help has provided $3.5 billion in secondary-market financing, helping more than 40,000 people in almost every state in the U.S. afford a home.

Losses to date have been “miniscule,” Stein says, and research on the program by the University of North Carolina at Chapel Hill says the homes people bought using the mortgages were increasing in value at about 5 percent a year, creating wealth of about $20,000 a year for each family, with defaults staying below 1 percent.

Stein hopes Self-Help’s mortgage work will show traditional banks that poor people are no greater a default risk than the general population, which could lead the market to “fill the gap,” freeing Self-Help to fill yet another niche.

Some think that might be happening.

“Self-Help has been the guinea pig, the demonstration project,” says Tom Lambeth, senior fellow at the Z. Smith Reynolds Foundation in Winston-Salem, an early funder of Eakes.

“They’ve had an impact on conventional financial institutions,” he says.  “Which may take some more risk than they would have taken before Self-Help because they’ve seen Self-Help’s record of default.”

Other stories in the series:

Part 1: Durham community development bank works to narrow wealth gap. 
Part 2: Building wealth by boosting small business, communities. 
Part 4: Protecting hard-earned wealth as important as creating it.

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