Homebuyers Using Alternative Financing Face Challenges Coming Out of the Pandemic

Federal housing assistance focuses mostly on mortgage borrowers and renters

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Homebuyers Using Alternative Financing Face Challenges Coming Out of the Pandemic
People march through the streets in support of an extension to the rent moratorium witch is to expire at the end of the week, on January 15, 2022 in New York City, USA. New York State Governor Kathy Hochul announced that the eviction and foreclosure moratorium will expire as the state has run out of money and has so far spent  2.4 billion dollars in federal funding for emergency rent relief. Additional 27 million is expected which is a portion of one billion sought from the Federal Government. Tenants can opt to file an application with the state to show their financial hardship resulting from the pandemic. (Photo by John Lamparski/NurPhoto)
The Associated Press

The economic turmoil created by the COVID-19 pandemic threatened millions of American families when lost jobs or reduced wages meant many people could not afford their housing bills. As part of the response, the federal government took unprecedented action to help them stay in their homes. Between 2020 and 2021, Congress and the executive branch established rental assistance funds, allowed federally backed mortgage borrowers to pause payments with forbearances, and placed moratoria on some evictions and foreclosures.

But a survey by The Pew Charitable Trusts highlights how homebuyers who used alternative financing arrangements—including seller-financed mortgages, land contracts, lease-purchase agreements, and personal property loans—were less likely than renters and homeowners with mortgages to qualify for, apply for, and receive housing assistance during the most challenging days of the public health crisis. About 7 million people—around 1 in 15 home financing borrowers—currently use alternative financing, and these borrowers generally have lower incomes and are more likely to be Black or Hispanic compared with homeowners overall.

Pew’s survey, done in mid-2022 by Ipsos Public Affairs, suggests that although homeowners with alternative financing needed housing support as much as other families, they were excluded from many federal relief programs that were designed exclusively for renters or mortgage borrowers.

These exclusions on assistance funding and forbearances left some alternative financing borrowers facing eviction, according to legal aid attorneys and news reports. And the disparities in who is more likely to use alternative financing to buy homes may mean that ineligibility for aid disproportionately affected some of the families hardest hit by the economy’s troubles.

Few borrowers with alternative financing qualified for federal help

To be eligible for the federal forbearance programs established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, families had to live in a home that was financed by a federally backed mortgage—whether borrowed by a homeowner directly or by a renter’s landlord. Federal backing includes insurance or loan guarantees by the Federal Housing Administration, the U.S. Department of Veterans Affairs, or the U.S. Department of Agriculture, as well as loan securitization by Fannie Mae or Freddie Mac, the government-sponsored enterprises focused on housing finance.

But the requirements meant most borrowers with alternative financing were not eligible. Almost no personal property loans receive government backing; and few seller-financed mortgage or land contract transactions are federally backed because no third-party lender is involved. Still, some lease-purchase landlords may have federally backed mortgages, allowing them or their lease-purchase homebuyer to qualify for aid.

Since 2021, new federal aid programs have expanded eligibility to include certain alternative financing borrowers. For example, the eligibility criteria for the federal Emergency Rental Assistance (ERA) program are more inclusive than those of programs established by the CARES Act. Extending funds beyond typical tenants, lease-purchase homebuyers can qualify for ERA during the lease phase of their agreement, while those in manufactured homes who rent their land are also eligible even if they are buying the home with a personal property loan.

Further, the Homeowner Assistance Fund (HAF) became one of the first programs to provide aid for some land contract and personal property loan borrowers when applications opened in 2022—at least one year later than most other assistance programs. The U.S. Department of the Treasury’s guidance in August 2021 defined mortgages broadly; as a result, most states included land contract and personal property loan borrowers in their plans to distribute HAF money.

Alternative financing borrowers applied for housing aid at low rates

The Pew survey of alternative financing borrowers was conducted April 28-May 19, 2022, and includes 1,284 borrowers, of whom 733 had used an alternative financing arrangement between 2020 and 2022. The results give a sense of who these borrowers are and the difficulties they faced during the pandemic.

Only 8% of alternative financing borrowers applied for assistance between the springs of 2020 and 2022, according to the survey. In comparison, the U.S. Census Bureau’s spring 2022 Housing Pulse Survey shows that 13% of renters had applied for emergency rental assistance. Meanwhile, Pew’s analysis of data from the May 2022 Black Knight Mortgage Monitor report and the Census Bureau’s 2021 American Community Survey indicates that 16% of mortgage borrowers received forbearances. Still, not all forbearances are related to federal programs because non-federally backed mortgage borrowers may also be eligible for forbearances through their loan servicers.

In addition, applications to housing assistance programs by alternative financing borrowers were likely constrained by the eligibility criteria for many programs, especially early in the pandemic. And 15 states were not yet accepting HAF applications when the survey was launched.

Eligibility criteria excluded many low-income and minority households

Households that had used alternative financing may have had greater financial needs than other homeowners—though possibly lower than renters, considering the incomes and racial and ethnic composition of each group and the demographics of families in need of aid.

Pew’s survey shows that alternative financing borrowers earning less than $50,000 were two times as likely to have applied for assistance as those earning $50,000 or more (12% versus 6%). And Black (14%) and Hispanic (11%) alternative financing borrowers were more likely than White borrowers (4%) to have applied for assistance.

As a previous Pew survey showed, lower-income borrowers are more likely than higher-income ones to use alternative arrangements to buy their homes. And the more recent survey confirms that families with alternative financing have lower incomes than homeowners overall, but higher incomes than renters. (See Figure 1.)

Alternative Financing Households Have Lower Incomes Than Homeowners Overall, but Higher Than Renters. Percentage of households by total income in 2022

Pew’s new survey found that 67% of alternative financing households earned less than $100,000 in 2022, in contrast with 80% of renter families and 56% of homeowners overall. Using income as a proxy for need during the pandemic, families with alternative financing likely needed financial assistance at rates between those of renters and homeowners.

In addition, previous Pew research found that Hispanic homebuyers are more likely than their White counterparts to have ever used alternative financing. Adding further details about alternative financing borrowers, the new survey finds that greater shares of alternative financing borrowers are Black or Hispanic compared with homeowners overall, although those shares are smaller when compared to renters. (See Figure 2.)

Racial Composition of Families With Alternative Financing Falls Between Homeowners and Renting Families. Percentage of households by race and ethnicity

In particular, the survey indicates that 20% of alternative financing families in 2022 were Hispanic, compared with 29% of tenant and 14% of homeowner families. In addition, 16% of families with alternative arrangements were Black, in contrast to 20% of renting and 8% of homeowning families.

Although greater shares of alternative financing households than homeowners overall represent groups that encountered financial hardship during the pandemic, the narrow eligibility criteria for federal relief programs did not initially include families with such arrangements. Disadvantaged homebuyers therefore could not access needed support, leading some to face housing instability.

To reach families most in need of support, policymakers should seek to continue the momentum of ERA and HAF in taking a more inclusive perspective on the many ways people pay for their housing.

Ryan Canavan and Linlin Liang are senior associates and Tara Roche is a director with The Pew Charitable Trusts’ home financing project.

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