Community Land Trust Lending Update, Part 1
By Jeff Bounds | January 26, 2016
(Editor's Note: This is the first of a two-part article. Click here for Part 2).
People with low and moderate incomes may soon have choices when taking out financing for a form of affordable housing, thanks to Fannie Mae improving a product that automates the underwriting of mortgages for sale into the secondary market.
Starting last August, lenders could use Desktop Underwriter® to underwrite loans involving Community Land Trusts, or CLTs for short. Typically set up in non-profit form, CLTs create permanently affordable housing in areas where market prices are too high for low- and moderate-income people to purchase homes.
CLTs sell homes at affordable prices to limited-income borrowers, while simultaneously leasing to those borrowers the land that the houses sit on. This financing structure allows the CLT to control what happens to the home going forward, ensuring the property remains affordable and well preserved for future generations.
But only a relatively small number of banks and other lenders provide CLT-based home loans. Although several factors play into why this is the case, part of the issue historically has been that lenders have faced difficulties in shifting their CLT-based loans into the secondary market.
Selling to Fannie Mae
Fannie Mae made that shifting process significantly faster, easier and less expensive by upgrading Desktop Underwriter to handle CLT loans.
Fannie Mae previously required manual underwriting of these loans, owing to differences in factors such as determining the sale price of the home and in appraising the value of the property.
“What would take weeks to process and underwrite loans can now be done in days,” says Paul Barretto, senior product manager for Fannie Mae’s Single-Family Business. “Lenders serving the CLT market were required to retain subject matter experts and resources that understood CLTs and the manual underwriting requirements.”
The net result, experts say, is that more lenders may see the value in making CLT loans, both because of these loans’ relatively strong performance and their potential ability to advance Community Reinvestment Act goals.
“It would be nice for borrowers to have a choice in the type of loan they receive,” says Lisa DeBrock, director of the Homeownership Division at the Washington State Housing Finance Commission, which for years has purchased and pooled CLT loans in that state along with Fannie Mae.
With a little help from Desktop Underwriter, they soon may.
How the CLT Model Works
Although the first CLT was established in Albany, GA in 1969, the movement began in force in the late 1970s and early 1980s, according to Emily Thaden, research and policy manager at the National Community Land Trust Network, a trade group that is consolidating operations with the Cornerstone Partnership.
The number of CLTs climbed “exponentially” in the 1990s and mid-2000s, Thaden says. “The recent economic recession set back growth, but now we are seeing a surge of communities across the country interested in adopting the model due to mounting housing security and affordability issues.”
While precise numbers on CLTs are unavailable, the Land Trust Network estimates there are more than 200 with land or residential units, and another 40 to 50 groups working to start one.
Extrapolating from Land Trust Network data, Thaden estimates that CLTs have around 15,000 homeownership units, an additional 1,500 limited housing cooperative units and 20,000 rental units. CLTs also get into work involving commercial spaces, urban agricultural sites and conserved natural lands, she says.
Land trusts provide affordable housing in large measure by essentially making a substantial down payment on behalf of the homeowner.
The capital for the down payment typically comes from public programs, Thaden says. Those programs include:
- The federal government (such as the HOME Investment Partnerships Program and Community Development Block Program);
- Quasi-governmental programs (affordable housing programs from the Federal Home Loan Bank); and
- State and local sources (Housing Trust Funds, city-CLT partnerships through inclusionary zoning practices).
The down payment the CLT provides eliminates the need for mortgage insurance by reducing the purchase price to less than 80 percent of the market value of the home, according to Michael Brown, a partner at Burlington Associates in Community Development, a national consulting cooperative that serves organizations like CLTs that use shared equity homeownership strategies.
The low loan-to-value ratios of CLT loans are attractive for lenders, because this improves the likelihood the loan will be repaid, Brown says.
CLTs make the odds of repayment even better by using their ground-lease model to stay involved with the homeowner once the purchase is complete, Brown notes.
In addition to taking out a conventional 30-year loan on the house, homeowners in CLT transactions sign 99-year leases for the ground upon which the structures rest.
The leases contain expectations about how homeowners will use and occupy the house, ranging from ensuring compliance with local zoning and laws to the performance of maintenance, carrying sufficient insurance and payment of real estate taxes, Brown says.
And when a homeowner wants to sell, the CLT’s lease will ensure the house remains affordable for the next person or family who moves in.
“By retaining ownership of the land and leasing its use to the homeowner, the CLT – on behalf of the community it serves – is able to control the future use, disposition and affordability of the home located on that land for a very long time,” says Brown.
Jeff Bounds is a freelance writer based in Dallas. He has been writing about financial topics since the early 1990s.