Stewardship Strategies

Though they must be developed quickly, foreclosure recovery strategies also need to incorporate mechanisms that ensure the long-term viability and affordability of homes. The Housing and Economic Recovery Act of 2008 encourages using Neighborhood Stabilization Program funds for long-term affordability. It specifically provides “…to the maximum extent practicable and for the longest feasible term, that the sale, rental or redevelopment of abandoned and foreclosed upon homes and residential properties under this section [shall] remain affordable to individuals or families described in subparagraph (A).”

This stewardship requires effective management and oversight as well as housing types and tenures designed to maintain affordability. Nonprofit rental housing is one vehicle for ensuring that properties remain affordable over the long run. Over the past several decades, there has also been significant growth in shared equity homeownership models: forms of tenure that bridge rental and homeownership.

These programs balance individual wealth creation through home appreciation and continued affordability for future buyers. In so doing, they put homeownership – and the multiple benefits it brings – within reach of lower income families – and the security of tenure and wealth-building Models include deed restrictions, community land trusts and limited equity housing cooperatives.

Shared equity homeownership models also protect owners against foreclosure. The National Community Land Trust surveyed member CLTs and found that people living in community land trusts were six times less likely to go into foreclosure than market-rate homeowners. Three key policies are responsible for lower rates of foreclosures among shared equity homes:

• Review of mortgages or liens. The majority of co-ops and governments that impose deed restrictions maintain the authority to review and approve any mortgage or lien. As a result, experienced professionals are available to judge the terms of the loan and the qualifications of the owner and avoid predatory or unwise loans.
• Homeowner education. Most shared equity programs require homeowner education prior to sale or lease to ensure that the individuals understand what they are agreeing to and have the skills to be knowledgeable housing consumers.
• Alerts of delinquent payments. Shared equity programs often require the lender or owner to inform them of any delinquent mortgage payments so that they may intervene in a timely fashion and avoid foreclosure.

The following stewardship strategies can be incorporated into foreclosure recovery plans. For further information, see this paper by NCB Capital Impact, which provides model language to incorporate into NSP applications.

1. Establish or expand a community land trust to create permanently affordable housing.
2. Create a Deed Restriction Program to provide permanently affordable homeownership opportunities for low- and moderate-income households.

1. Establish or expand a community land trust to create permanently affordable housing.

A community land trust (CLT) is a nonprofit, community-based organization that owns real estate to provide benefits to the community, and particularly to provide secure, affordable access to housing for residents who cannot otherwise afford it. CLTs stabilize communities and preserve housing affordability. They do this by purchasing land within a designated geographic area with the intention of permanently owning that property, and then selling the homes that sit on the land to eligible homebuyers. In exchange for affordable, high-quality homes, residents agree to resell their homes to the land trust or to another low- to moderate-income household if they move, taking only a minimal profit. A contractual agreement—the long-term ground lease agreement—is signed that describes the rights and responsibilities of the CLT and the building owner. This contract provides the occupant with affordable housing and a fair return on their investment should they decide to sell, while preserving the affordability of the property in perpetuity. CLTs protect against foreclosure because community land trusts typically educate their buyers and advise against their acceptance of risky mortgage products. In addition, the trust stewards the land and supports the homeowner.

In addition to enabling housing affordability and greater control over local land use and development, CLTs have an organizational structure that is set up to be representative of the community. In the classic model, CLTs are membership organizations that consist of community members and are governed by a board of directors that comprises residents of CLT homes, other community members who live in the targeted area but are not CLT leaseholders, and local representatives from the government, philanthropy, and the nonprofit sectors.

CLTs are able to leverage public resources, commonly working in cooperation with government agencies. A number of states and municipalities have allocated funding, such as Community Development Block Grant and HOME funds, and land to CLTs. NSP funds can be used for CLTs and a number of states and localities are implementing or considering community land trusts as a method for increasing their stock of permanently affordable housing. The Rhode Island Community Housing Land Trust (CHLT-RI), for example is acquiring foreclosed properties in two Providence neighborhoods and selling them to homeowners using a community land trust model. See Case Study for further details.

In Oakland, the Urban Strategies Council, a nonprofit community building and advocacy organization, was recently awarded $5.025 million loan from the city’s NSP funds to create the Oakland Community Land Trust. Urban Strategies anticipates acquiring 200 properties for the CLT, providing permanently affordable home ownership for residents earning 50-80 percent of AMI. The land trust will be governed by a community board with significant resident participation. Financing and funding for start-up and operation would be provided through a combination of sources including banks currently holding the properties, private philanthropy, private investment and state and federal funds. The city predicts that the project will create an estimated 240 jobs.

2. Create a Deed Restriction Program to provide permanently affordable homeownership opportunities for low- and moderate-income households.

Deed restrictions are the most commonly used form of shared equity homeownership. Restrictions are placed on a deed to limit the resale price the home can be sold for in order to ensure that low- or moderate-income households can afford to purchase the house permanently or for thirty years or more. They restrictions are typically placed on properties that were built, rehabilitated or purchased with government subsidy or were created in response to an inclusionary zoning regulation that requires private developers to build a certain percentage of affordably priced homes within their projects. The goal is to protect the affordability that government subsidy has created and extend it to future generations, rather than allowing price appreciation to quickly bring the price of the home out of the range that low- and moderate-income households can afford.

Deed-restricted homes can take a wide range of forms of owner-occupied housing, from detached houses to condominiums. The specific legal documents involved in restricting affordability are: a covenant or agreement recorded with the homeowner’s deed, which details resale restrictions; various disclosures the buyer must sign as to the type of homeownership; and often a soft second or performance mortgage provided by the government, which asserts that as long as the owner adheres to resale restrictions, the second mortgage does not need to be paid. In addition, there may be a preemptive option for the government that is imposing restrictions to have the right to re-purchase the home at a defined price.