Written By: Joel Palmer, Op-Ed Writer
The cost of housing is among the largest barriers to homeownership. Properties in the lowest tiers of affordability are in short supply and inventories have shrunk in recent years, especially in the nation’s largest markets.
In December, Fannie Mae and Freddie Mac released their final Duty to Serve Underserved Markets plans last week, as required by the Housing and Economic Recovery Act of 2008.
Each of the plans contains a list of initiatives aimed at three areas identified as key to making housing more accessible: affordable housing preservation, rural housing, and manufactured housing.
In the area of affordable housing preservation, both Fannie and Freddie have indicated that shared equity programs will be key to making single family home ownership more accessible.
Shared equity programs typically use subsidies from a nonprofit or government entity to enable the purchase of homes at below market prices.The entity will require capital gains restrictions or a share in the appreciation.
Two approaches to these programs include deed-restricted homeownership and community land trusts.
The first approach applies a subsidy to reduce a home’s purchase price for homeowners at a target income level. Restrictions are then put in place requiring units be sold to buyers meeting certain qualifications at an affordable price as defined according to a formula set in the deed restriction or covenant.
Based on a HUD study cited in the Fannie Mae affordable housing plan, there about 500 programs geared to deed-restricted homeownership covering between 250,000 and 450,000 units.
In a community land trust (CLT) arrangement, the CLT owns the land that a home sits on. The trust leases that land to the homeowner. By only buying the home and not the land, the purchase price is less.
The Fannie study estimated that about 225 active CLTs operate, which represent about 20,000 rental units and 15,000 homeownership units.
Freddie Mac’s Duty to Serve plan stated that, “Although shared equity programs have achieved limited scale thus far, our research confirms that they can be an effective means for providing income-eligible families with sustainable homeownership opportunities…”
But there are a number of challenges to increasing the shared equity market.
Shared equity programs are complex and fragmented, with the little in the way of standardization. Organizations have created programs based on their the needs of their geographic area, their budgets and other factors.
According to Freddie, “this siloed development process creates loan products that, individually and in the aggregate, generate a small number of loans. The variety of program structures creates challenges when it comes to determining appropriate underwriting requirements and designing property valuation guidance. The need to scale production and increase funding available to program sponsors are additional growth barriers inhibiting this market.”
There is also a general lack of knowledge by lenders and other market participants. They are not well promoted or supported by the industry.
Another challenge is the additional underwriting required and other complexities that lead fears of non-compliance with investor requirements.
There is also a lack of guidance on what should be identified as a shared equity mortgage loan in the Uniform Loan Delivery Data (ULDD) set.
These factors, combined with little interest in the market by investors, has contributed to a lack of a secondary market for shared equity mortgages.
Freddie Mac indicated in its plan that it would be developing a shared equity product “from the ground up.” Freddie’s plan includes the following objectives:
• Develop product flexibilities and guidelines that facilitate new mortgage originations under shared equity programs
• Purchase loans originated under shared equity programs to inform product design
• Support standardization of data collection at the transaction level
• Promote market awareness of shared equity programs
In its Duty to Serve plan, Fannie Mae stated that it will address the lack of liquidity in this market by expanding its purchase of shared equity loans over the next three years. Fannie plans to increase its purchases by an additional 1,100 to 1,300 loans, which equals an estimated $158 million to $194 million of liquidity.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.