"Right now we can tell a story and stand by it that says HFA loans perform better than the same loan made through a non-HFA lender with the same demographic profile," MassHousing's Gleason said. "The challenge is how to maintain quality as we get bigger."
Wormald, the plumber, makes about $80,000 a year, $4,000 more than the average income of MassHousing borrowers. His credit score of 720 is below the average of 741. In rare cases the agency makes loans to people with scores below 660, the industry standard for subprime mortgages.
MassHousing's mortgages are backed by Fannie Mae, which raised its minimum downpayment to 5% in November. Fannie Mae guarantees 3% down mortgages from the state agencies because of their low default rate.
MassHousing and other HFAs also benefit from Fannie Mae's risk-sharing program, which allows them to avoid requiring mortgage insurance. The program, which Fannie Mae limited to less than a total of $3 billion in mortgages last year, saves borrowers hundreds of dollars in monthly payments.
Agencies that participate in the program—including those in Colorado, Idaho, Minnesota, Rhode Island, Virginia, Wisconsin and Wyoming—must repurchase loans that become delinquent within the first year. Gleason said MassHousing has only had to buy back one loan.
The Illinois HFA goes further than MassHousing, providing borrowers up to $10,000 in downpayment and closing cost assistance. Borrowers bring as little as $1,000 to table. The group's average credit score is 695.
"Obviously somebody with a lower score is deemed to be more risky," Mary R. Kenney, the executive director of the Illinois group, said. "With the right loan product and proper underwriting and education for the borrower, that risk can be managed."
The Idaho HFA, which didn't pull back from first-time buyers during the housing bust, completed a record $727.9 million of mortgages in fiscal 2013, up 53% from a year earlier. The Idaho group gave about 80% of loans to first-time buyers, said Gerald M. Hunter, the agency president.
"They can benefit from a lot of the services we offer, and lacking that support, many of those people are not going to become homeowners," Hunter said.
HFAs supply only a small fraction of mortgages today. They have funded 3 million mortgages since the early 1970s through the sale of tax-exempt revenue bonds—and more recently—mortgage-backed securities, according to an analysis by associate professor Moulton. After peaking at 126,611 loans in 2007, volumes fell to 41,857 in 2009 before rising to 87,848 in 2012, the most recent data available from the National Council of State Housing Agencies.
"These laboratories will get bigger and there's a potential here to innovate and find a responsible path to homeownership," said Christopher Mayer, real estate professor at Columbia Business School in New York. "Over time, others will learn and develop best practices."
Gleason said HFAs across the country are talking about creating a national mortgage product that would be more attractive to large lenders, which tend to shy away from niche state offerings. A national product would also allow for bonds with more geographic diversity and better hedging of credit risk, he said.
Wormald considers his home, a fixer-upper built in 1910, his most valuable asset. He recently finished a five-year plumbing apprenticeship and hasn't been able to save much money.
"I'm working my way up to having more money," Wormald said. "I want to get ahead in life. This loan gave me the chance I needed."