Article

Microlending for housing in the United States. A case study in colonias in Texas

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Abstract

Applying the concept of microlending to housing is gaining momentum as a practical alternative for those who are on the margin of mainstream financial services. Microlending has been widely researched in the context of developing countries, but less is known about how – and if – it works on marginalized groups in developed countries, specifically in relation to housing. Using the case of South Texas colonias, this paper explores a microlending program for home improvements and its capacity to impact the local economy. Basic data comes from the Nuestra Casa lending program database (609 clients) and from face to face interviews with a randomly selected sample of 138 clients. Our findings show that this program targets and serves clients from the unbanked population, who do not have access to other lending alternatives; further, 70% of the current clients are living below the poverty threshold; defaults rates are found to be low, indicating a capacity to pay loans based on income-to-debt instead of loan-to-debt ratios; and finally, it positively impacts the local economy, since labor and materials necessary to implement the improvements, are purchased locally. These findings should give us policy guidelines to evaluate lending programs that attached to local economies and are suited to serve the target populations.

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... Following the popularity and widespread use of micro-lending in the developing world, the State of Texas, and certain non-profit organisations such as the CRG, have recently begun promoting the provision of micro-loans to assist with the financing of self-help home improvements. As Giusti and Estevez (2011) illustrate, although such micro-loan programmes are successful in extending credit to colonia homeowners, given their low incomes, even limited borrowing of this sort places certain financial and social burdens on households. ...
... 16 This is partially due to the fact that more households have sought micro-loans provided by the CRG (or by finance shops), since these loans are typically between US$2000 and US$4000. Nevertheless, as research by Giusti and Estevez (2011) suggests, even the smaller loans provided by the CRG can impose significant financial burdens on households, and may be insufficient to allow homeowners to complete home improvements in a timely fashion -in certain instances, the authors report that participants acquired micro-loans in order to purchase materials but were unable to complete the planned home improvements until having acquired a second loan from the CRG. ...
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This paper builds on earlier data presented in an Urban Studies paper for a major household survey in 2002 that evaluated the impact of title regularization intervention among low-income homeowners in ten colonias in Starr County, Texas. In 2011 the research team returned to those low-income households, oversampling more than half of them in order to compare and analyse the extent and nature of housing improvement, levels of overcrowding and access to home amenities, and the methods of financing for home improvement and extension. Significant improvements and investments were observed totalling an average of almost US$ 9000 over ten years, mostly financed out of income and savings, although an increasing trend to seek loans from the formal market was observed. Correlation analysis explores how self-help and self-managed dwelling environments are adapted to family and household dynamics over the life course. Awareness of 'green' housing applications and sustainability is discussed.
... Following the popularity and widespread use of micro-lending in the developing world, the State of Texas, and certain non-profit organisations such as the CRG, have recently begun promoting the provision of micro-loans to assist with the financing of self-help home improvements. As Giusti and Estevez (2011) illustrate, although such micro-loan programmes are successful in extending credit to colonia homeowners, given their low incomes, even limited borrowing of this sort places certain financial and social burdens on households. ...
... 16 This is partially due to the fact that more households have sought micro-loans provided by the CRG (or by finance shops), since these loans are typically between US$2000 and US$4000. Nevertheless, as research by Giusti and Estevez (2011) suggests, even the smaller loans provided by the CRG can impose significant financial burdens on households, and may be insufficient to allow homeowners to complete home improvements in a timely fashion -in certain instances, the authors report that participants acquired micro-loans in order to purchase materials but were unable to complete the planned home improvements until having acquired a second loan from the CRG. ...
Article
Full-text available
This paper builds on earlier data presented in an Urban Studies paper for a major household survey in 2002 that evaluated the impact of title regularization intervention among low-income homeowners in ten colonias in Starr County, Texas. In 2011 the research team returned to those low-income households, oversampling more than half of them in order to compare and analyse the extent and nature of housing improvement, levels of overcrowding and access to home amenities , and the methods of financing for home improvement and extension. Significant improvements and investments were observed totalling an average of almost US$9000 over ten years, mostly financed out of income and savings, although an increasing trend to seek loans from the formal market was observed. Correlation analysis explores how self-help and self-managed dwelling environments are adapted to family and household dynamics over the life course. Awareness of 'green' housing applications and sustainability is discussed.
... The region is also largely undereducated, with 35% of the population having an educational attainment level equivalent to or less than eight years (US Census 2019; Reininger et al. 2015). These socioeconomic disparities have been central to policy research on South Texas and highlight the urban and rural divide and colonias (unincorporated settlements) (Durst and Wegmann 2017;Giusti and Estevez 2011;Sullivan and Olmedo 2014;Ward 1999). While Latino urbanism provides a much-needed theoretical and practical approach to community development and planning for understanding how socioeconomic and political change affects the functioning of cities with large Latino populations, the bridge between the urban and rural divide is largely undertheorized (Sandoval and Maldonado 2012). ...
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... While incremental housing construction is outside mainstream American planning practices, research finds that it is a viable, workable approach to providing housing for very low-income communities and for bringing nonconforming, underprovisioned housing into conformance and providing it with services such as electrical, plumbing, and sanitation systems (Giusti and Olivares 2012). An informa-PAS 593, CHAPTER 5 tive case study in Texas observed that lenders working with homeowners of self-built incremental housing found that these borrowers had a higher-than-average repayment record (Giusti and Estevez 2011). ...
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... Flip transactions are almost always likely to be just the lot, and where a dwelling structure exists, it is likely to be removed by the putative owner (relatively easy if it is a camper or trailer home), or cannibalized and carried off-site if it comprises a shack or more permanent structure that cannot readily be moved to another site. While our method takes into account third party loan providers, they in fact show up in very few title transactions, further confirmation that -as in the case of colonias -formal or traditional bank and mortgage financing is little used in MSs (Giusti and Estevez 2011;Durst and Ward 2014). ...
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... Just as is the case in colonias, many owners are wary of the risks associated with formal lending, and in particular with leveraged borrowing using the property title as collateral (Durst & Ward, 2014), but given their low incomes, most residents would not qualify for traditional bank loans. Thus the prevalence of self-help among residents in model subdivisions, and the lack of borrowing for home improvements, suggests that microfinancing of the sort offered to residents in some colonias (Giusti & Estevez, 2011) may be in even greater demand in these newer model subdivisions where owners have yet to complete the construction of the home. ...
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... For those purchasing from developers, many of whom would have done so by an unrecorded CFD for purchases prior to 1996, 71 percent of owners in the survey stated that they had purchased before 1996, with 1991 as the median year of purchase (N 5 351). financing, are less vulnerable to external "shocks" and housing market conditions than are formal residential markets with their heavy reliance on bank financing (Lyndon B. Johnson School of Public Affairs 2000, 111-13;Ward, Giusti, and de Souza 2004;Giusti and Est evez 2011). Until legislation was adopted in the 1990s, colonia developers in Texas sold land largely off the radar screen of public officials and throughout the history of colonias, only a small fraction of buyers have used formal lending services of banks and mortgage providers to acquire their lots. ...
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... Noah J. Durst 8 Recognizing the significant need of many colonia residents, and drawing upon insights learned from housing policy in Latin America, the state of Texas, along with various nonprofit organizations, has taken steps to promote and support housing production in colonias. Much of the emphasis has focused on assisted self-help, in which the state (see Table 1) or a nonprofit (Giusti & Estevez, 2011) provides financing (typically in the form of either microloans or grants) or technical support for homeowners engaged in the selfhelp process. A number of nonprofits in the border region have also undertaken significant efforts to cover all or a portion of the cost of constructing new housing, often with economic and environmental sustainability in mind. ...
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... Colonias are low-income, informal settlements located primarily along the US -Mexico border, which have historically lacked basic infrastructure and utility services. Researchers have focused extensively on the characteristics of the owner-occupied housing market in colonias, highlighting the socio-political antecedents that led to the growth of these settlements; the different housing types and conditions that predominate; the use of exploitative land sale practices and informal titling mechanisms by developers, and the subsequent prevalence of 'clouded' titles; and the nature and extent of the self-help home improvement process and how such improvements are financed (Giusti & Estevez, 2011;Larson, 1995;Ward, 1999;Ward et al., 2004Ward et al., , 2012. Fewer authors have explored the nature and extent of the rental market, and the majority has done so only tangentially Ward & Peters, 2007;Ward et al., 2012). ...
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Using data from the Federal Reserve Board's two most recent Surveys of Consumer Finances, this article provides a detailed picture of changes in the financial condition of U.S. families between 1995 and 1998. The financial situation of families changed notably in the three-year period. While income continued a moderate upward trend, net worth grew strongly, and the increase in net worth was broadly shared by different demographic groups. A booming stock market accounts for a substantial part of the rise in net worth, but the data also suggest that improvements in financial circumstances extended to many families that did not own stocks. The indebtedness of families grew, but less rapidly than their assets. Nonetheless, compared with 1995, debt repayments in 1998 accounted for a larger share of the income of the typical family with debt, and the proportion of debtors who were late with their payments by sixty days or more in the year preceding the survey was also higher.
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The impact on planning of one major land title regularization program in Starr County colonias in the Texas-Mexico border is discussed. This program, which ended in 2002, was undertaken by the Community Resources Group (CRG) and resulted in about 1,000 titles being cleared and formally assigned to their proper owners. To analyze this program we used a comprehensive approach involving new empirical data. In this paper we present data gathered from a survey of 260 households and interviews as well as focus groups organized with affected residents in colonias. The data revealed that the new legal owners expressed in many different ways the positive results in terms of their self-worth, sense of belonging, and feeling of being respected citizens as they pay property taxes. We also found that colonia residents are choosing (either freely or determined by fragile markets) to stay and live in these communities, thereby exercising the use value of their property and not its exchange value. We also observed that the implications of this intervention are limited. New owners are not entering financial markets due to their new ownership. Residents worked hard to buy their lots and make improvements and they are not willing to risk losing them through the financial system. Besides, "titled" colonias do not differ dramatically from "untitled" colonias: they still lack basic infrastructure and are still isolated communities. New owners are still low-skilled workers who have no access to financial markets. Proper ownership is a positive policy but it alone can result only in limited impact in colonias. There is an urgent need for a comprehensive planning approach in the whole border region to allow colonias and their residents to continue improving their communities with more institutional and legal support.
Article
In his seminal work, Stegman contended that creative finance is an inefficient means of financing low-income housing production. As evidence, he cited the high transaction costs associated with the complex financing structures that make a low-income hous-ing development feasible. In this article, we extend Stegman's work by examining the impacts of creative finance over time. We rely on data gathered as part of an evalua-tion of 36 housing developments sponsored by nonprofits. The data indicate that most of the developments in our study remained financially viable in part because of their reliance on creative finance. We find evidence supporting three positive impacts of creative finance: the establishment of long-term partnerships, the increased community acceptance of low-income housing developments, and the im-proved technical skills of organization staff. We also find that none of the long-term negative impacts are inherent in creative finance and offer four suggestions on mini-mizing them.
Article
How do we conceive of law if litigation does not aim to settle conflict, if it is a means to perpetuate and obscure rather than resolve disputes? In this essay, I shall demonstrate the power of an unsettling norm: The Brazilian legal system aims neither to solve land conflicts justly nor to decide their legal merits through adjudication. My argument stresses intention and norm because land law in Brazil is so confusing, indecisive, and dysfunctional in its own terms that one suspects that the cause of these characteristics is not incompetence or corruption alone but rather the force of a set of intentions concerning its construction and application different from those aimed at resolution. Thus, I argue that Brazilian law regularly produces unresolvable procedural and substantive complexity in land conflicts; that this jural-bureaucratic irresolution dependably initiates extrajudicial solutions; and that these political impositions inevitably legalize usurpations of one sort or another. In short, land law in Brazil promotes conflict, not resolution, because it sets the terms through which encroachments are reliably legalized. It is thus an instrument of calculated disorder by means of which illegal practices produce law and extralegal solutions are smuggled into the judicial process. In this paradoxical context, law itself is a means of manipulation, complication, stratagem, and violence by which all parties—public and private, dominant and subaltern—further their interests. It therefore defines an arena of conflict in which distinctions between legal and illegal are temporary and their relations unstable.
Article
Using the Surveys of Consumer Finance from 1989 to 2001, this study expolres households’ reasons for not having a checking account. Reasons havechanged over time, shifting away from account features and toward human capital and institutional reasons. We also find that reasons for not having an account are related to income, race/ethnicity, marital status/gender, planning horizon, education, previous account experience, and credit history. We suggest potential responses for community educators, firms, and policy makers.
Article
In advanced industrialized countries, ‘housing’ has become a product delivered complete to families by a sophisticated network of lenders, developers, title companies, and other organizations. In developing countries, 70% of housing investment occurs progressively—that is, households acquire land through purchase or invasion, and gradually improve the structure and legal tenure, and lobby for basic services. A useful approach for housing in this context: (a) offers a wider range of low-cost solutions, rather than just complete new units; (b) joins small loans at market rates (rather than long-term traditional mortgages), with family savings, and—sometimes—a small subsidy; and (c) has Government set the rules of the game and the private-sector directly produce and finance housing. The paper compares the “product” approach of industrialized countries with the progressive housing of developing countries, and profiles three types of program interventions that form an emerging housing practice in Latin America relevant to other developing regions: (a) housing microfinance; (b) low/moderate-income land development; and (c) direct demand subsidies.
Article
In developing countries, microfinance has been the darling of the development community, and in developed countries, microfinance fits well with Third Ways ideas. What are the challenges and opportunities for the attempt to replicate microfinance in the United States? This paper attempts to sketch some answers. Two factors color much of the discussion. First, compared to the Third World, the structure of the U.S. economy makes the hurdles to starting small-businesses much higher in the United States, and, second, the microenterprise sector itself is much smaller. The two aspects combine to make business training a far more important component in the United States than in the Third World. They also limit potential demand for microfinance and drive up costs. With costs well above revenues, U.S. programs are far from achieving financial self-sufficiency. With continued reliance on donors, U.S. programs will have to work toward justifying their place among other subsidized anti-poverty interventions, including education and community-building initiatives. This suggests that serious, regular cost-effectiveness analyses should become a much higher priority than it has been. Our second broad conclusion is that developing inexpensive saving services for the "unbanked" appears to have greater potential for cost-recovery in the United States, and this could open up opportunities for millions of poor households that are poorly served by existing for- profit and non-profit financial institutions. The current focus on microlending in the US echoes the initial focus on lending in Third World programs, but those programs are increasingly recognizing the importance of also developing facilities for safe, convenient savings.
Article
Option-based models of mortgage default posit that the central measure of default risk is the loan-to-value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic option model to existing multifamily and commercial mortgages is that key variables in the option model are endogenous to the loan origination and property sale process. This endogeneity implies, among other things, that no empirical relationship may be observed between default and LTV. Since lenders may require lower LTVs in order to mitigate risk, mortgages with low and moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk endogeneity and its empirical implications, we examine the default experience of 495 fixed-rate multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) during the period 1991-1996. The extensive nature of the data supports multivariate analysis of default incidence in a number of respects not possible in previous studies. Consistent with our expectations, we find that LTV evidences no relationship to default incidence, while the strongest predictors of default are property characteristics, including three-digit ZIP code location and initial cash flow as reflected in the debt coverage ratio. The latter results are particularly interesting in that they dominated the influence of postorigination changes in the local economy. Copyright 2002 by the American Real Estate and Urban Economics Association..
Article
This paper investigates differences in default losses across income groups and neighborhoods, in an effort to see if there are significant differences between default experience on loans to low-income households or low-income neighborhoods and other loans. We find that while defaults and losses are somewhat higher in low-income neighborhoods, default behavior is similar in the sense that responses to negative equity are similar across neighborhoods, and remaining differences are small and might be explained by omitted variables such as those measuring credit history. Copyright American Real Estate and Urban Economics Association.
Article
In this working paper, Quercia, McCarthy, and Stegman use data obtained on 874 low income, rural borrowers participating in the Section 502 Home Ownership program administered by the Farmer's Home Administration (FmHA), and apply two multivariate proportional hazard models in order to analyze default decisions among these borrowers over time. The authors cite two key findings relating to default literature: (1) that contrary to prior findings, the size of the mortgage payment relative to borrower income plays a significant part in the default decision; and (2) borrower characteristics traditionally deemed risky (including minority status or being a female head of household) had no significant effect on borrower default. Rather, borrower-related factors--such as a change in marital status or the exodus of children from the household--played a larger part in the default decisions of borrowers participating in the FmHA program.
Article
This paper presents the first data on performance of mortgages on residences located in lowand moderate-income neighborhoods of U.S. cities. It provides new data on delinquencies and foreclosure provided by a sample of lenders who are members of the National Association of Affordable Housing Lenders and who have lending programs established pursuant to the Community Reinvestment Act. Sample mortgages on multifamily dwellings perform comparably with national sample data, whereas sample mortgages on single-family mortgages perform much better than comparable national sample data. The findings of this paper demonstrate clearly that lending programs in lowand moderate-income neighborhoods can be viable. The findings do not, however, help to settle the issue as the racial or gender discrimination in mortgage origination.
Article
This paper presents a unified model of the default and prepayment behavior of homeowners in a proportional hazard framework. The model uses the option-based approach to analyze default and prepayment and considers these two interdependent hazards as competing risks. The results indicate the sensitivity of default to the initial loan-to-value ratio of the loan and the course of housing equity. The latter is a measure of the extent to which the default option is in the money. The results also indicate the importance of trigger events, namely unemployment and divorce, in affecting prepayment and default behavior. The empirical results are used to analyze the costs of a current policy proposal -- stimulating homeownership by offering low downpayment loans. We simulate default probabilities and costs on zero-downpayment loans and compare them to conventional loans with conventional underwriting standards. The results indicate that if zero-downpayment loans were priced as if they were mortgages with ten percent downpayments, then the additional program costs would be two to four percent of funds made available -- when housing prices increase steadily. If housing prices remained constant, the costs of the program would be much larger indeed. Our estimates suggest that additional program costs could be between 74,000and74,000 and 87,000 per million dollars of lending. If the expected losses from such a program were not priced at all, the losses from default alone could exceed ten percent of the funds made available for loans.
Article
This paper analyzes the determinants of homeownership in immigrant households over the 1980-2000 period. The study finds that immigrants have lower homeownership rates than natives and that the homeownership gap widened significantly during that period. The differential location decisions of immigrant and native households, as well as the changing national origin mix of the immigrant population, helps explain much of the homeownership gap. The evidence also indicates that the growth of ethnic enclaves in major American cities could become an important factor in increasing immigrant demand for owner-occupied housing in many metropolitan areas.
Microcredit programs in the United States: the challenges of outreach and sustainability
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Fulfilling the potential of the U.S. microenterprise strategy
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