When Tammi Phillips and her 11-year-old son Sean moved into their new house this fall, Sean got the room he wanted—the one with a phone jack, which enabled him to connect a computer to the Internet. That wasn't really an option in the house they'd been renting. But more importantly, Sean got a well-built, well-heated home. And his mother got an affordable mortgage.

The house into which Sean and his mother moved is one of 30 new homes built this year by Frontier Housing, a nonprofit agency based in Morehead (Rowan County), Kentucky. Tammi Phillips had applied to Frontier for help in becoming a homeowner even before their old, seriously dilapidated house was damaged by a chimney fire.

"I couldn't have provided Sean the home he deserved [without Frontier]," Phillips says. "If you're home cold, you can't concentrate on school. Kids will accomplish more and have a better attitude if they're in a decent home."

That's one expression of an idea that permeates every level of Kentucky's extensive program to help low-income and moderate-income families buy their own homes. Decent, affordable shelter is important in its own right, of course, but the Kentucky program stresses home ownership as a positive contribution to families and communities.

Understanding the Kentucky effort requires a look at three kinds of organizations: first, local organizations like Frontier; next, the Kentucky Housing Corporation, a state-level public corporation with almost three decades of experience in innovative housing finance; and, finally, the Federation of Appalachian Housing Enterprises, a coalition of these and other organizations whose special focus is advocacy for rural housing. All of these organizations have often been partners with the Appalachian Regional Commission (ARC).

The Local Connection

Local agencies like Frontier Housing work where the hammer hits the nail. That is, they arrange credit (and provide other services) for low-income families, and they hire crews that actually build houses. Frontier, founded in 1974, is one of the oldest of these local nonprofits. It serves seven Appalachian counties—Bath, Carter, Elliott, Fleming, Menifee, Morgan, and Rowan (all but Fleming are designated by ARC as economically distressed).

At least 10 percent of the houses in this service area were deemed substandard at the time of the last Census. The average per capita income in the area was projected at just under $12,600 in 1996, half the national average and less than two-thirds of the state average. As a result, 14 percent of homeowners and 36 percent of renters were classified as "cost-burdened," meaning that they paid more than 30 percent of their monthly income for housing.

Most of Frontier's clients come from hard-working but cost-burdened households, says Stacey Epperson, Frontier's executive director.

"We see a lot of women," Epperson says, "who work in nursing homes, day care, or fast-food service jobs. But we also get a lot of young couples who just need a break. The husband and wife are both employed, putting their kids through school."

For potential clients, the initial step is a "pre-application," followed by classes on home finance and rules governing state and federal housing programs, and guidance on home ownership issues (for example, taxes, insurance, and maintenance). This help is important, Epperson says.

"Half of our families make their mortgage payments in cash," she says. "Some don't have bank accounts. Just the job of servicing these loans for 30 years is a lot of work."

For applicants who stay the course and who appear to be qualified for financing, the Frontier staff help with everything from finding a suitable home location to putting together a financing package whose repayment schedule will fall between 20 and 29 percent of household income.

"Land is hard to come by in the price range we need," Epperson says. "We're always looking. If we see a 'For sale' sign, we jot the number down and call."

Frontier now receives roughly 500 pre-applications per year, and this year completed 30 new homes for families whose annual household incomes average only a bit above $12,000. The financing packages are highly creative, often involving two or more low-interest loans paid off at different schedules designed to keep initial payments as low as possible.

Throughout its 26-year history, Frontier has produced 400 homes. A drive on back roads with Epperson and Tom Carew, Frontier's former executive director, is punctuated regularly with Carew's comment, "There's a Frontier house!"

Frontier houses are designed to be competitive from a total cost perspective with mobile homes, which are low-income rural families' only other realistic option for home ownership. The average contract cost of a Frontier house built this year is $59,500. That's higher than the sticker price of many mobile homes, but it includes the cost of land, water and sewer service, and, of course, far more favorable financing than any commercial lenders can provide. Flexible mortgage terms keep payments under 30 percent of household income, and using heat pumps for heating and cooling in the snug, well-insulated homes helps keep occupancy costs down. Most importantly, Frontier houses will appreciate in value.

Frontier's loan qualification procedures encourage sound, long-term values by emphasizing the responsibilities of home ownership as well as its privileges. Applicants can choose between several basic floor plans, wall colors, and other features. But all buyers must contribute 200 hours of "sweat equity," either from themselves or from friends and family members.

Most new owners meet this requirement by installing trim, painting, or undertaking other projects that make their new homes more attractive. For example, new home owner Georgia Parish is painting and making curtains, and next year plans to have a garden at her Frontier house. She's paying $171 per month for a house located five miles away from where her parents grew up. She was paying $275 per month for a dusty, noisy apartment. But she emphasizes that, money aside, the new home is a source of pride. "Where I lived before," she says, "I didn't do much of anything but climb the walls. I'm going to wallpaper when I can find what I want. I'm picky now that I own it."

Frontier has a network of partners who help make the program work. For example, Proctor Caudill, a local banker, has joined with Frontier in many loans. He says that loans made in partnership with Frontier aren't intended to be serious money-makers for his bank, but they're never money-losers. How many borrowers default? "I couldn't give you a figure," Caudill says. "I don't think we've repossessed a house in the last five years. Maybe ten."

Building Wealth and Stability

The work of local-level groups like Frontier is in large part made possible by a state-level organization, the Kentucky Housing Corporation (KHC). The KHC is administratively part of state government but financially self-supporting. Since its creation in 1972, the KHC has helped finance home purchases for more than 50,000 low-income and moderate-income Kentucky families.

"I want everybody to have a mortgage at least once," says F. Lynn Luallen, the KHC's CEO, describing the goals of the state program. "This is usually a family's first shot at building any kind of wealth. Home ownership adds not only to the stability of the family itself, but [also to] the stability of the community. For example, families can use that wealth to borrow against for education at the post-secondary level and beyond. [By investing in housing] you are really adding to the economic base of the whole county and state."

The KHC began to take its present form almost three decades ago, based on a concept that then had been tried by only a few states. When the Kentucky General Assembly created the KHC, it authorized the corporation to sell tax-exempt mortgage revenue bonds in order to create a pool of money to be used for financing low-income and moderate-income housing. Its initial bond issue brought in $51.2 million, the re-investment earnings of which enabled the state to launch its Construction Loan Fund, then about $3 million.

Within five years, the KHC became self-supporting and repaid the state's initial appropriation to cover start-up costs. Today its home ownership lending pool exceeds $190 million annually.

Although its bond program remains by far the KHC's largest source of revenue, the organization also earns fees for administering federal low-income housing programs, including rental assistance, which annually helps more than 15,000 families find decent, affordable housing. Since 1998 the legislature has authorized state revenues from a portion of unclaimed state lottery tickets to flow into the KHC's Affordable Housing Trust Fund.

Luallen notes that ARC has been a long-time supporter of the KHC, primarily through funds for infrastructure, a critical element in developing new areas for both single-family and multi-family housing. Water and sewer lines, roads, and education programs make home ownership possible, he says, just as home ownership increases a family's stake in its community.

In January 2000, Carew, Frontier's then–executive director, became director of the KHC's Kentucky Appalachian Housing Program, responsible for helping the KHC allocate more resources in Kentucky's 49 Appalachian counties. Statewide, the KHC works with approximately 125 local agencies.

"We rely a lot on the local nonprofits to do their homework and tell us what the demand is," Luallen says. "They know their communities. They know their people. We trust their judgment, and we allocate our resources by a process of cross-fertilization between statistical research and what they tell us."

Advocacy for Rural Housing

Another important participant in the Kentucky housing effort is the Federation of Appalachian Housing Enterprises (FAHE). FAHE is headquartered in Berea, but it operates both within and beyond the borders of the Commonwealth. It's a coalition of about 30 community-based nonprofit housing organizations in the Appalachian counties of Kentucky, Tennessee, Virginia, and West Virginia.

FAHE manages a Home Loan Fund that makes loans to very-low-income applicants at rates as low as1 to 3 percent, and a Construction Loan Fund that makes short-term, low-interest loans to member groups. Over the past two decades, FAHE's pool of lending capital has grown from $30,000 to approximately $22 million. FAHE also provides a wide range of technical assistance services.

In addition to mortgage lending and counseling, FAHE has partnered with the Central Appalachian Peoples Federal Credit Union (CAPFCU), which has recently become a member of the Federal Home Loan Bank System and a U.S. Department of Housing and Urban Development-certified lender. This enables CAPFCU to package loans for KHC. FAHE, CAPFCU, and the Human/Economic Appalachian Development Corporation recently created Appalbanc, a community development financial institution.

FAHE also plays a strong advocacy role that includes bringing to the attention of state and federal housing program administrators the special needs and problems of working in rural areas.

"I think," says Jim King, FAHE's chief operations officer, "that ARC is the only agency that really recognizes the importance of targeting loans to low-income rural areas."

Some programs, King says, determine low-interest loan eligibility by household income, typically 80 percent of median income for the county of residence. When an entire county is distressed, this means that a household's income has to be less than 80 percent of an already low figure.

Carew agrees, mentioning two adjacent Kentucky counties—one where median income is about $28,000, the other (thanks to one small city) where the same number is about $52,000. The result is actually an inverse relationship between need and eligibility. "If a family [with income of, say, $35,000] lives in the more affluent county," Carew says, "they can qualify for all kinds of assistance. If they live in a distressed county, we can't help them."

As another example, King notes that some U.S. Department of Housing and Urban Development loan programs require special permissions for financing houses within 3,000 feet of a railroad line. That makes sense in urban areas, where rail lines rarely run through areas desirable for residential development, but it's a major problem for small towns in Appalachia.

"Anybody who's ever been through Appalachia," Carew says, "knows that a railroad runs through every town with houses along the hillsides. That rule eliminates the whole town. All we're trying to do is help low-income people live where everyone else lives."

King adds that other programs, based on a well-intentioned goal of making financing easier for low-income families, may not demand enough of recipients, offering grants instead of loans. He applauds the work of groups like Frontier that demand sweat equity and require applicants to attend classes.

"It can sometimes be more difficult to use federal funds because we ask something in return," King says. "Federal programs that impose 'giftedness' rules rob families of self-esteem. We're trying to create an underlying ethic of responsibility."

"Once [money is] given away, it's gone," adds David Lollis, FAHE's executive director. "Appalbanc and FAHE have committed that we'll try to use that money over and over. It's a lot more labor-intensive, but I think it's much better public policy."

That's a message that resonates through every level of the Kentucky housing program.

Caudill, the banker who often partners with Frontier Housing, makes much the same point as King. "The thing that stands out in my mind," he says, "is the true, honest concern for people this organization has had and what it's done for our culture. It's good people helping good people."

"Almost three-quarters of the households in the Commonwealth hold title to their homes," says Jerry D. Johnson, special assistant to Governor Paul E. Patton and director of the governor's Office of New Appalachian Development, "but Governor Patton knows how hard it is for families in rural Appalachia to buy into this particular piece of the American dream. The Kentucky Housing Corporation and its many local partners are doing a wonderful job in helping low-income families—good, hard-working people—become homeowners. When they do that, they're building more than houses; they're building a solid foundation for these families' futures."

Tammi Phillips is proof of that. Mostly she emphasizes what a safe, warm home will mean for her son's future. But her own pride of home ownership is obvious. Her new house is in a hollow closely flanked by tree-covered hillsides. Phillips mentions that her new lot covers three acres. When a visitor remarks that it doesn't look quite that large, she laughs and points to one of the hillsides. "Three acres!" she repeats. "It's all hill. But it's my hill."

Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.