Community Land Trust Lending Update, Part 2
By Jeff Bounds | January 28, 2016
(Editor's Note: This is the second of a two-part article. Part 1 was published on Tuesday).
As mentioned in Part 1 of this article, Community Land Trusts, or 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 and ensure the property remains affordable and well preserved for future generations.
For CLTs, a major issue has been finding lenders that are up to speed on how to work with this financing model for shared equity homeownership, experts say.
The CLT financing model entails “a steep learning curve for loan officers, processors, underwriters and appraisers,” says Erika Malone, director of stewardship and homeowner engagement at Homestead Community Land Trust, which has an affordable portfolio of 194 homes in the Seattle area. “They also want to see a certain volume of loans to justify learning the unique program.”
As a result, many CLTs work with only a handful of lending partners, or only one.
“It’s difficult to know just how many lenders are originating CLT leasehold mortgage loans across the country,” says 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. “If I had to guess, I’d say there are likely no more than several dozen CLT lenders.”
One reason why lenders have often shied away from becoming involved in CLT transactions was Fannie Mae’s previous requirement that the lenders go through manual underwriting when trying to sell their loans into the secondary market.
Desktop Underwriter was updated last August to handle CLT loans.
Paul Barretto, senior product manager at Fannie Mae’s Single-Family Business, notes the system was previously unable to handle CLT transactions for three reasons:
- Determining the sale price;
- Valuing the property factoring in the ground lease; and
- Differences in how appraisals must be done for homes in CLT loans.
This meant lenders had to bring on experts who understood both CLTs and Fannie Mae’s manual underwriting requirements, he says.
Lending institutions were wary of providing the representations and warranties that manual underwriting entailed, adds 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.
In addition, manual underwriting increases the risk of human error, and that boosted the possibility of the lender having to buy back loans and keep them in its own portfolio. “Most lenders are not willing to take that very expensive risk,” says DeBrock.
How Desktop Underwriter Facilitates the Process
The August 15 enhancement to Desktop Underwriter dramatically streamlined the process lenders follow in shifting CLT loans to secondary purchasers, Barretto says. For instance, Desktop Underwriter can now:
- Provide a comprehensive credit risk assessment using the property’s appraised value. Previously, Fannie Mae required using the lowest of either the sales price or the appraised value for this calculation.
- Support loans with resale restrictions and Community Seconds®. The Community Seconds option combines a first mortgage that Fannie Mae purchases with a subordinate mortgage that Fannie Mae does not purchase. The subordinate mortgage can finance a down payment or closing costs, and can be funded through government housing agencies, non-profits or employers.
“This change benefits CLTs and other below-market-rate programs that apply re-sale restrictions that terminate upon foreclosure,” says Barretto. “The CLTs and programs that use re-sale restrictions surviving foreclosure still require manual underwriting or negotiated agreements to be sold to Fannie Mae.”
That disclaimer notwithstanding, the Desktop Underwriter improvement is a major step forward for lenders that serve CLTs, he notes.
Desktop Underwriter now contains a software-based engine that combines modeling and intelligence to help eliminate the barriers that manual underwriting presented, Barretto adds.
By compiling information and following forms, the Desktop Underwriter engine will rely on Fannie Mae’s Selling Guide and other tools to make a decision, Barretto said.
Lenders “enter data, rather than doing the analysis that manual underwriting would require,” he says.
Processing CLT loans with Desktop Underwriter lets lenders take advantage of the limited waiver of representations and warranties, says Emily Thaden, research and policy manager at the National Community Land Trust Network, a trade group that is consolidating operations with Cornerstone Partnership. “The changes in Desktop Underwriter should mean that more lenders can and will be willing to work with CLT buyers,” she says.
For lenders, a major benefit of working with CLT borrowers is that the financing model succeeds in helping ensure homeowners pay their mortgages.
A Land Trust Network analysis of data shows that serious delinquencies and foreclosure proceedings were dramatically lower in the years 2008 to 2010 for CLT loans than for the total population of home borrowers.
For instance, while serious delinquencies for the population at large ranged from 6.3 percent in 2008 to 9.67 percent the following year, the numbers for CLT borrowers ranged from 1.98 percent in 2008 to 1.3 percent in 2010, according to the analysis, which included data from the Mortgage Bankers Association.
“Lenders should be begging to work with CLTs,” Thaden says. “CLTs offer them really low-risk lending opportunities that advance CRA (Community Reinvestment Act) credit.”
But for now, many CLTs have wait lists of ready buyers who can’t get into homes because the CLTs simply can’t deliver them fast enough.
Homestead CLT has an “interest list” of 364 households that are “short-term approved,” Malone says. That means those households could probably buy a home within six months, should their financial situations stay the same or improve.
“There would be fewer people on our interest list if there were more affordable homes in Seattle,” she says.
Jeff Bounds is a freelance writer based in Dallas. He has been writing about financial topics since the early 1990s.