The current foreclosure crisis that is sweeping our country illustrates how vulnerable homeowners are — especially low- and moderate-income households. Some reports estimate that over 40 percent of foreclosures are occurring with homeowners who had good, 30-year, low-interest loans in place before they got caught up in the refinancing frenzy promoted by many mortgage providers. Unwisely, many homeowners switched their stable mortgages for other mortgage products that were, simply put, too good to be true.
In addition to the families that refinanced, there are many others now facing the prospect of foreclosure. Some people bought homes they could not afford as their primary residence betting that the rapid escalation in home values would continue. Others bought second and third homes expecting to resell within a short time-frame and realize a quick profit.
The fault for this crisis falls on many. Buyers who were often not well informed, mortgage brokers eager to earn fees, insurance analysts who did not accurately rate the risks, the financial industry that was pulling in investment dollars at record pace, and regulators and politicians who ignored the growing risks. The result is so widespread that it has jeopardized our nation’s economy and affected the world economy as well. This crisis is especially harmful for families of modest means.
As the economy recovers over the next few years, homebuyers, especially first-time and low- and moderate-income homebuyers, need safer ways to move into responsible homeownership. Experience has shown definitively that the traditional real-estate industry cannot necessarily be counted to look out for the best interests of buyers.
While many homeowners were buying homes they couldn’t afford and others were refinancing into mortgage deals that were too good to be true, another group of homebuyers has been doing just fine. Community land trust homeowners all across the country have been insulated from the irresponsible practices in the mortgage industry.
A survey of CLT homeowners found only two — yes, that is not a typo — two out of 3,100 homes in the survey foreclosed in 2007. That’s an annual foreclosure rate of 0.06 percent.
How does this compare that to what is happening nationally? The overall foreclosure rate for the 4th quarter of 2007 was 2.0 percent and getting worse in 2008. That is 33 times higher than for CLT homeowners! Even compared to recent stable years like 2003 and 2004, CLT foreclosure rates were 23 times less than the national average.
How is it that CLT homeowners, of low and moderate incomes, are faring far better in the foreclosure storm than wealthier households?
There are several reasons but first, some background…
Under the community land trust model, the homeowner owns the house and the CLT organization owns the land. The homeowner has a mortgage on his/her house, but the monthly payment is lower than in fee-simple homeownership.
The CLT homeowner has a 99-year secure ground lease at a nominal monthly fee with the community land trust for exclusive use of the land. Because ownership of the house and land are separated, the homeowner and the CLT are permanently involved in the well being of the household, the house, the land, and the financial arrangements that make it all possible.
When a family purchases a CLT home they receive both HUD-certified homebuyer counseling and training in shared-equity homeownership. Mortgages must meet certain criteria to be acceptable to the CLT. The partnership of homebuyer and community land trust begins when interested families enter training and it continues throughout the qualifying and purchase process. And after the family moves in, the CLT continues to offer support.
Typical first-time homebuyer programs offer assistance to families up to the point of sale, but after that they are on their own. Without continuing support, homebuyers are more vulnerable to losing their homes if economic conditions change, or if a mortgage broker offers a refinancing deal that is too good to be true. As I mentioned earlier — over 40 percent of the current U.S. foreclosures are households that gave up perfectly good, reasonable 30-year mortgages and refinanced into a mortgage they couldn’t truly afford and in many cases didn’t understand.
Homeowners can’t refinance without the approval of the CLT organization, the permanent owner of the land. CLTs don’t allow homeowners to get involved in any refinancing scheme that isn’t in the best long-term interest of both the homeowner and the CLT, because CLTs are in the business of permanent affordability and secure homeownership.
Community land trusts are helping with the foreclosure crisis in two ways.
(1) Prevention — homeowners facing foreclosure agree to sell their home to the local CLT, thereby eliminating their unaffordable mortgage. The CLT then sells the home back to the family at a price they can truly afford, using standard 30-year mortgage products. The CLT retains ownership of the land and the homeowner signs a 99-year secure ground lease with the CLT for exclusive use of the land for a nominal monthly fee. Through the ground lease the homeowner agrees to restrict the resale price of the home when they choose to sell. The seller realizes a portion of the homes increased value and the next homeowner still gets an affordable price: Think “Pay it Forward.”
(2) Recovery — buying vacant, foreclosed homes, fixing them up and selling them to CLT buyers at affordable prices.
Congress is working right now to help address a number of aspects of the foreclosure crisis. Both of the major foreclosure bills in the Senate and House contain funding for neighborhood stabilization, i.e., dollars to help buy vacant, foreclosed homes and get families back in them.