IDA's offer alternative to subprime loans
By Rachel Lippmann
St. Louis, MO –
There is pride in Umar Mamakhov's voice as he shows off the 1300-sq. ft., four-bedroom ranch house he owns in south St. Louis County.
In the backyard, Mamakhov installed a swing set for his two small children, and a vegetable garden for his parents, who live with him and his wife. Just two months after he moved in, Mamakhov had drywall and carpet installed in his basement. He's using it for storage now, but for entertainment later.
Mamakhov emigrated to the United States from Turkey four years ago. In July 2007, the beginning of the ongoing economic crisis, he secured a $165,000 fixed-rate mortgage.
"In an apartment, you're not feeling like this is yours," he said. "For me, it's important to have your own. It could be a small one, it could be a little bit, but it's yours."
Mamakhov got his loan with the help of a matched savings program administered by the International Institute of St. Louis, one of seven social service agencies in St. Louis offering the programs, known as individual development accounts.
Michael Sherraden, a professor at Washington University, came up with the idea after conversations with welfare recipients made him realize it was impossible for them to spend their way out of poverty.
"Even very poor families have to save at least small amounts of money and make investments if they're going to improve their lives," he said, whether that's buying a washer and dryer, moving to a better neighborhood, or owning a house. "Savings wasn't ever encouraged, it fact, it was penalized."
Accountholders cannot make more than 200 percent of the federal poverty level, about $44,000 for a family of four. The agency usually matches every dollar saved with $2 drawn from federal and local grants. The money is most commonly used to pay for the costs of closing on a home.
The federal law that funds the program also requires participants to take financial skills classes - which Umar Mamakhov found helpful.
"Some people, they don't think. They really like the house, the big house, and they would like to buy it, but they don't think, can they afford that? I was prepared for that," he said.
Mamakhov also appreciated the required class on home ownership. Though he was a homeowner in Russia, where he lived before going to school in Turkey and eventually coming to the United States, houses there are commonly purchased with a handshake and cash.
"You are like a newborn baby in the United States," he said. "I mean, I didn't know about buying points, how much you need to bring to the closing, or you can write the contract saying that the seller will pay for the closing. You don't know anything about that."
That education appears to have paid off. Between 1999 and 2007, about 6,000 accountholders nationwide became homeowners. An informal survey done last February found that most had gotten conventional mortgages, and very few had defaulted.
But 6,000 is a drop in the bucket compared to the 10 million or so families who are eligible. Experts like Sherraden, the Washington University professor say the current community-based system is too inefficient to manage a large number of accounts. He wants the federal government involved.
"Cost will certainly quickly come to the table, but we're spending well over now $400 billion a year for asset accumulation for upper and middle income households," he said.
Federal legislation that would give financial institutions a tax break for funding and administering the programs hasn't made it out of committee in nine years despite bipartisan support for the concept.
And there are other obstacles to using IDA's as a primary path to home ownership, said Cassandra Kaufman, the director of community investment at the United Way of Greater St. Louis, which oversees the region's IDA programs.
Housing prices vary widely across the country, she said, but the amount an accountholder can save does not. Funds that cover closing costs in St. Louis won't in California. "And now people based on the economic crisis and the mortgage crisis need to have a significantly higher credit score in order to be able to get a mortgage loan," she said. Added to that is the tenuous employment situation for many.
For now, Umar Mamakhov has a steady job working at the International Institute - but says he'll always find a way to make his loan payments.
Next on his list? A new deck, to enjoy the backyard.