At Slabbed we well remember the rollout of REACH Mississippi to great fanfare last year. Joe Spraggins was all over the airways touting the program but before those commercials ran details of the program were leaked to the press and it is there we begin for some background:
In 2007, the Gulf Coast Business Council created the Renaissance Corporation, a non-profit group charged with creating affordable housing options for south Mississippi hurricane victims. The Renaissance Corporation is about a month away from unveiling what it considers an ambitious affordable housing program.
Specific details about how two thousand south Mississippians could become new homeowners aren’t being released to the public just yet. However, the non-profit group recently did a test case with an Ocean Springs woman. And, Denise Baker’s moving into a new home because of the financial assistance she received from her boss and Reach Mississippi.
Last week, Baker got the keys to a house in Gulf Park Estates. She contacted a few friends, and got them to help her move in.
“It’s been exciting,” the new homeowner said. “Stressful. But exciting.”
Home ownership became possible for the single mother when her bosses at the Andover Company urged Baker to be a test case for a Renaissance Corporation housing initiative.
“It was a win-win situation for both of us, for my employer and for myself,” she thought.
Through a program soon to be called Reach Mississippi, Baker’s employer put money for her down payment. And the Renaissance Corporation used private contributions to make a three for one match. Just like that, Baker had a house in close proximity to her office. And she had a mortgage she could afford.
What the story does not mention is that Mr Spraggins was Ms Baker’s boss at Andover (the Andover website is down as I write this post but the Google Cache from last month is here and the wayback machine snapshot from March 2008 is here), which specialized in residential SIP Construction. The company had made a sizable investment in lots and spec houses in Diamondhead and their inventory of high-priced homes was not moving as the real estate market on the western end of the coast began to die in the fall of 2007. Undaunted by the unique circumstances that made the down payment assistance helpful in Ms Baker’s case the program was finalized and those commercial featuring Spraggins were made. The local media continued promoting the program because there is no better story than free money that gets people into houses after a major Hurricane. Curious about the program, I visited the REACH Mississippi website to look at the program criteria and ended up wondering if economically the numbers made sense. Anita Lee answered that question in Sunday’s Sun Herald as she reports the program was a failure:
The heavily promoted REACH program has fallen far short of helping 700 of the Coast’s lowest wage earners buy houses since Katrina.
Instead, only 130 applicants have closed on houses through the program, which matches employer contributions to give qualified buyers down-payment assistance. REACH also has failed to meet its quota of home buyers earning 80 percent or less of the area median income, said Kimberly LaRosa, executive director of the Gulf Coast Renaissance Corp., the nonprofit group that runs REACH.
Ms LaRosa cites a myriad of reasons for the program’s failure in Anita’s story all of which are valid. What caused me to question the program’s viability was one of the reasons she cited and as we’ll see the key reason in my opinion as we continue:
She said the national credit crunch hit about the time REACH was getting off the ground. Credit scores had to be higher for home loans, which knocked out some applicants. LaRosa said the high cost of homeowner insurance also hampered the program and forced buyers north of Interstate 10, while many jobs and Katrina’s devastation are south of the interstate.
In some cases, she said, insurance payments have been only 20 percent lower than the house payment, causing some applicants to drop out.
“It can drive the monthly payment up to where it isn’t affordable to the family,” LaRosa said.
The idea behind REACH was to provide workforce housing near Coast jobs. REACH offered down-payment assistance to municipal, county and school employees with employer matches.
This program was targeted at families with household incomes from around $50,000 a year down. When I ran the numbers in 2008 on a $140,000 house (typically on grade north of the interstate) and assuming the full $40K in down-payment assistance (with no closing costs) the monthly payment on a 30 year mortgage on the remaining $100,000 is close to $540/month. Without considering property taxes, grossing that up by 80% for insurance costs alone brings the monthly out-of-pocket to around $970. Simply put these numbers begin to stretch the household budgets of the target populace beyond affordability on a go forward basis which was what fueled my skepticism when the program was announced just from an insurance standpoint alone. Thrown in the financial crisis and REACH never had a chance as we continue:
Because of the economy, some employers were unable to participate in REACH. My Home, My Coast was developed to provide home-buyer assistance without employer matches.
For both programs, 51 percent of participants are supposed to be low-income. Instead, 68 percent are above the low-income cutoff in REACH and 60 percent are over in My Home, My Coast.
My Home, My Coast has 950 active applicants, LaRosa said, including those being transferred from REACH.
The Renaissance Corp. received $50 million in federal Community Development Block Grant funds for the programs; $33 million remains.
The federal rules governing both programs have slowed down real estate transactions, brokers say, a burden for buyers and sellers. The income quotas caused a hold on some applications, but environmental reviews also must be completed and recovery benefits checked with numerous federal agencies to avoid duplication.
Anita concludes her report with quotes from a local realtor that likes the program in concept as I attest from speaking with our own Steve who is 100% in favor of anything that might generate a close. The burden the new program must overcome is the continuing problems associated with the costs of ownership driven by out of sight insurance costs. Until that nut is cracked we will continue to witness the economics of “free money” without enough takers.