«Mixed Messages on Mixed incoMes Volume 15, Number 2 • 2013 U.S. Department of Housing and Urban Development | Office of Policy Development and ...»
While some parts of the LTAH sector developed during the first half of the 20th century (most notably, LEHCs), the sector saw its most significant growth during the latter part of the 20th century with the emergence of CLTs and governmental deed-restricted and inclusionary housing programs (Davis, 2006; Sazama, 1996). The number of LTAH programs has grown markedly since the 1990s, greatly increasing the number of permanently affordable homeownership units.
Rough estimates of the different LTAH models include 450,000 LEHC housing units; 10,000 units One major goal of LTAH is to provide “workforce” housing for people in occupations such as teaching or firefighting, who often cannot afford to live in the neighborhoods in which they work.
See http://www.affordableownership.org for a description of the Cornerstone Partnership’s mission and activities. See http://www.cltnetwork.org for a description of the National Community Land Trust Network’s mission and activities.
spread across 260 CLTs; and between 250,000 and 450,000 long-term-affordable, deed-restricted, homeownership units created and overseen by state and local governments (Davis, 2012, 2006).5 Two significant studies of LTAH performance and outcomes have recently been conducted. A study by the Urban Institute analyzed seven large LTAH programs across the country and found that homeowners built wealth, sustained homeownership successfully, rarely became delinquent or entered foreclosure proceedings, and frequently moved into market-rate homes after selling their resale-restricted homes. The study also found that these programs were achieving the durable affordability part of their mission by preserving the ongoing affordability of homes resale after resale (Temkin, Theodos, and Price, 2010).
The Lincoln Institute of Land Policy has also published multiyear, national survey results showing that mortgages held by owners of CLT homes outperformed mortgages held by homeowners in the conventional market during the peak years of the foreclosure crisis. The most recent study found that conventional homeowners were 6.6 times more likely to be at least 90 days delinquent and 10 times more likely to be in foreclosure proceedings than CLT homeowners. At the end of 2010, the 90-or-more day delinquency rate for CLT homeowners was 1.30 percent versus the 8.57 percent for loans in the conventional market reported by Mortgage Bankers Association. Notably, the rate for FHA loans was 8.46 percent (Thaden, 2011).
In addition to these studies, a number of analyses by leading shared-equity authorities estimate that long-term affordable homeownership programs can assist 2.0 to 3.5 times as many households during a 30-year period compared with conventional downpayment or other subsidy approaches (Jacobus, 2011).6
HUD and the Long-Term Affordable Housing Sector:
LTAH “Under the Radar” The LTAH sector has not been the focus of significant support from HUD, despite its continued growth and its close relationship to HUD’s mission, with four exceptions.
The first exception is the Section 213 co-op mortgage financing program and later HUD subsidized multifamily programs. This program provided support for LEHCs, but it was not intended as a program for lower income families and did not include any affordability terms.
The second exception arose through an amendment in the National Affordable Housing Act of 1992, which adapted some core aspects of the CLT model as the basis for the HOME program’s Community Housing Development Organizations (CHDOs). Under the HOME program, local program Although LEHCs are promoted as a vehicle for homeownership and asset building for lower income families, it is not known how many of the estimated units in existence are actually owned by lower income families; many such co-ops are not intended for this income group. The Section 213 program, described in the following section, provides no subsidies and imposes no income limitations on families.
See also Jacobus and Sheriff (2009) and Jacobus and Lubell (2007).
250 Policy Briefs The Federal Housing Administration and Long-Term Affordable Homeownership Programs grantees must set aside at least 15 percent of its funding for local nonprofit housing organizations meeting certain requirements regarding board structure and capacity. This legislative mandate— enabling CLTs to qualify as CHDOs—came about largely through the efforts of then-Representative Bernie Sanders of Vermont (Davis, 2012). HUD issued provisional guidance in 1993 and more extensive guidance in 1999 to implement this legislative requirement (HUD, 1999, 1993).
The third exception to HUD’s lack of engagement with the LTAH sector comes in its community development programs—Community Development Block Grants, the Neighborhood Stabilization Program (NSP), and the HOME program. The decentralized nature of these programs has enabled local governments to use these funds largely without HUD’s taking policy cognizance of them in program policy or administration. NSP regulations do state that “shared equity” is an eligible use of funds, and some communities have used CLTs as an integral part of their neighborhood stabilization plans. HUD does not track the number of CLTs involved in NSP-funded activity, however, so the extent of NSP-supported activity is not known.
The fourth exception occurred in 1994 in Mortgagee Letter 94-2 from the FHA. This letter issued guidance on how LTAH programs and organizations could access FHA single-family mortgage financing.7 Mortgagee Letter 94-2 did allow for some exceptions to FHA’s policy of prohibiting restrictions on the transferability of FHA mortgages.8 This guidance set out requirements for resale price restrictions, sales to income-qualified buyers, fair return on investment, and maintaining the housing unit as a principal residence.
Mortgagee Letter 94-2 has served as FHA’s only policy guidance on the subject since it was published. Advocates for LTAH were not happy with the guidance, with one such advocate calling the guidance “too narrow, incomplete, and fussy to allow [LTAH] programs to utilize FHA without compromising the integrity and workability of the local programs” (Institute for Community Economics, personal communication, 2012).
The FHA guidance did not open up FHA financing for LTAH programs on a major scale, and the restrictiveness of the policy may have been a major impediment.9 Local LTAH programs continued to rely on banks and state housing finance agencies to provide the bulk of mortgage financing for LTAH housing during this period. This situation changed dramatically with the housing crash of
2008. At that time, conventional mortgage lending withered. The mortgage market retrenchment made FHA much more relevant for the entire housing market, including the LTAH sector, which in turn affected (1) lenders’ comfort with FHA’s guidance on the deed-restricted sector and (2) the vigilance with which FHA interpreted the guidance found in Mortgagee Letter 94-2.
As defined in 24 CFR Section 203.41. This guidance came about as a result of efforts from the predecessor to the National Community Land Trust Network—the Institute for Community Economics—to strengthen land trusts’ abilities to preserve the affordability of moderately priced housing into the future for income-qualified families.
Technically, the modifications created exceptions to FHA’s normal policy against restraints on free alienability or transfer of a property.
FHA does not maintain records on mortgages made with LTAH programs, but the evidence from local programs is that the use of FHA mortgages is quite limited.
Issues With FHA Policy on Long-Term Affordable Homeownership Given this increased reliance on FHA as it became virtually “the only game in town,” lenders working with various LTAH programs around the country began to more closely scrutinize what was allowed and what was not. This new reality of closer scrutiny and limited access to credit exposed the inadequacies and uncertainties underlying Mortgagee Letter 94-2 as the FHA framework for supporting the LTAH sector.
The following FHA policy issues are key for the LTAH movement.10
1. The requirement for a fair return to the homeowner on his or her investment. The FHA requirement calls for homesellers to receive at least 50 percent of the home’s increase in value.
The CLTs and local programs use a variety of resale formulas to achieve the dual objectives of protecting homeowner equity and preserving affordability for the next income-qualified family.
2. Prohibition on enforcement of local program requirements. Local LTAH programs want the right to enforce such requirements as (1) forcing the homebuyer to use the home as the principal residence (that is, not renting it out), (2) limiting refinancing, (3) limiting resale to incomequalified buyers, (4) preserving the program’s right to repurchase the house in the event of foreclosure, (5) requiring a lender to notify the program of homeowner default, and (6) taking any excess proceeds if the home is sold for more than the restricted resale price. FHA has been concerned that such requirements would undermine a lender’s security interest.
3. Misalignment of income eligibility. Mortgagee Letter 94-2 includes in its requirements that eligible programs have an income limit of 115 percent of AMI, which is less than the widely accepted 120-percent AMI cap used in other programs. Local programs suggest raising the cap to 120 percent of AMI to align it with other commonly used income caps.
4. Cumbersome program certification requirements. FHA does not allow communitywide efforts to be certified, or approved, to access FHA financing. Approval can be granted only for specific housing developments rather than for communitywide programs. The problem is that many local programs may consist of many separate developments. Thus, every new development containing long-term affordable homeownership units must be authorized case by case. Lenders are also required to certify that local program documents meet FHA requirements, but they may fear that FHA may later determine, after the loan has been made, that the lender misinterpreted the regulations.
5. Allow program affordability restrictions to survive foreclosure. Some local programs have the discretion to have program requirements (for example, owner occupation, income restrictions, and so on) to survive foreclosure. Fannie Mae permits the use of program requirements, but FHA does not. FHA strongly opposes the survival of any program restrictions and considers them a risk to FHA’s ability to recoup its investment in the event of foreclosure. This issue is See NCLTN (2012) for the National Community Land Trust Network and the Cornerstone Partnership’s enumeration of these issues.
252 Policy Briefs The Federal Housing Administration and Long-Term Affordable Homeownership Programs distinct from the second issue listed here in that it specifically refers to the enforcement of program requirements after foreclosure, not before. This issue is of particular importance for communities in high-income areas, where the removal of affordability requirements upon foreclosure will practically guarantee a loss of the unit.
FHA officials agreed to address these concerns and issue new guidance to replace Mortgagee Letter 94-2.11 FHA’s commitment to issue new guidance was reiterated by (then) Acting FHA Commissioner Carole Galante at the FHA-sponsored Affordable Homeownership Roundtable on May 8, 2012, in Washington, D.C.12 The Research Project In the summer of 2012, we interviewed LTAH practitioners and local government officials to learn how FHA mortgage insurance was used in this sector. In the 2011 National Community Land Trust Network (NCLTN) survey, 10 out of the 96 CLTs reported using FHA as a source of mortgage financing for program participants. We identified FHA lenders from local officials, other lenders, and other knowledgeable informants. In addition, we interviewed officials from HUD’s Home Ownership Centers (HOCs) who are responsible for reviewing and approving requests from communities to use FHA mortgages. In total, we conducted 26 interviews with local program staff, including both CLT and local government program officials (N=18) and HOC officials (N=8).
From these interviews, we have six major findings.
1. LTAH programs have difficulty gaining access to mortgage credit for their homebuyers.
Obtaining mortgage financing is a constant challenge for LTAH programs, and it became even more difficult with the collapse of the mortgage market, the effects of which continue. LTAH program access to financing seems to depend on establishing personal relationships with local banks or local representatives of lending institutions. There also appears to be wide variability in the number of banks working with local LTAH programs. Some may have only 1 or 2 lenders, but others may work with up to 10 lenders. Most program officials consider their current financing situation to be uncertain or unstable.
2. Inconsistent application of rules has significantly affected local programs. With no stated change in rules or regulation, several large LTAH programs in the Washington, D.C. metropolitan area suddenly lost access to FHA-insured loans. Both Montgomery County, Maryland’s Moderately Priced Dwelling Unit program and the District of Columbia’s Affordable Dwelling Units program lost access to FHA-insured loans after many years of unquestioned operation.
3. Local programs with access to FHA financing are operating under varying kinds of approvals or certifications. We identified only 10 programs that have ever had approval to use FHA financing.
Of the 10 programs, 6 had a current approval, but 4 had lost their status as an appropriate recipient of FHA insurance because of presumed noncompliance with FHA policy as contained See the National Community Land Trust Network (NCLTN) and Cornerstone statement on FHA rules on the NCLTN website at http://www.cltnetwork.org/Policy-Action.