During the worst years of the Great American Mortgage Meltdown, shared equity homes represented an island of stability in a turbulent sea of market failure. Whether community land trusts (CLTs); limited equity cooperatives (LECs); or houses, townhouses, and condominiums encumbered with long-lasting affordability covenants, every model within this sector had admirable outcomes, with fewer defaults and fewer foreclosures than conventional, market-rate housing.
One model of shared equity homeownership, in particular, posted rates that were dramatically lower. Between 2008 and 2010, during the height of the mortgage crisis, CLT homeowners defaulted and descended into foreclosure at rates merely one-eighth to one-tenth the default rate and foreclosure rate experienced by homeowners as a whole.
It would be reasonable to assume such sectoral success would garner wide acclaim and rich reward. You’d think that members of a financial industry so recently burned by lavishing loans on market-rate homes that plunged so easily into disaster when boom turned to bust would be impressed by the resiliency of shared-equity homes. You’d think that bankers so recently scolded for investing in dangerous derivatives would be attracted to a sector where risks are low, where post-purchase stewardship has been proven to work.
You’d be wrong.
As the housing market has begun its slow recovery, major banks have been steadily withdrawing support and withholding capital from shared equity homeownership. It’s as if the entire sector had to be taught a lesson in humility after out-performing the bankers’ favored form of tenure.
This is happening throughout the country, but most severely in the South. Banks that once offered mortgages to lower-income households seeking to purchase resale-restricted homes have stopped doing so. Banks long willing to finance homes on land leased from a CLT have decided they are no longer comfortable with residential ground leasing. Even national lenders that continue to provide financing for resale-restricted homes on leased land in other parts of the country are reluctant to do so in the South, where bankers tend to regard anything other than conventional, market-rate homeownership as something akin to a three-legged dog.
What's the Problem?
Why is this happening? It would be tempting to see in these events a confirmation of what I called in a previous blog the “the threat of a good example.” The sudden disappearance of mortgage lenders, from this perspective, can be viewed as a kind of morality play in which a bankster cabal conspires to stem the tide of virtuous tenures that have shamed a more ideologically acceptable and financially profitable form of homeownership that public policy has promoted for 70 years. The financial industry’s retreat from shared-equity housing might be understood, in other words, as a combination of embarrassed payback and prescient counter-offensive, bringing to heel a frisky upstart that threatens to undermine the national consensus about the “proper” way to structure and operate owner-occupied housing.
That is much too organized for my taste. Other explanations are easier to swallow, with the most likely candidates being the sector’s lack of scale and lack of standardization. Shared equity homeownership is small potatoes compared to the annual harvest of market-rate homes being mortgaged by major lenders. CLTs, LECs, and inclusionary housing with affordability covenants simply don’t yet generate enough new homes to be seen as a lucrative lending opportunity by banks that are becoming ever larger and more remote.
Mergers are part of the problem. In North Carolina, for example, an out-of-state bank acquired a regional bank a couple of years ago. The latter had been mortgaging resale-restricted homes for over a decade. This practice was brought to an immediate halt as soon as the merger was consummated.
A lack of standardization is probably a factor as well. “Boutique” models like CLTs, LECs, and deed-restricted houses and condominiums do not fare well in the brave new world of American banking. Local banks may be willing to experiment with alternative models of tenure, tailoring their products to fit the idiosyncratic needs of trusted nonprofit partners, familiar communities, and underserved populations. The mega-banks are not. A diverse sector like shared equity homeownership does not fit comfortably into uniform standards imposed by managers from afar.
The recent troubles of Fannie Mae and the enduring inertia of the FHA have only made matters worse. Previously, Fannie Mae had taken significant strides toward standardizing affordability covenants and lease riders. Over at FHA, meanwhile, it had began to look as if this agency was finally ready to tackle archaic rules that have long been an obstacle to financing any form of housing that uses a limited-equity resale formula to set the future price of owner-occupied homes, a bureaucratic muddle that has persisted across six presidential administrations. Since the Great Recession, however, neither Fannie Mae nor FHA has had time to spare for shared equity homeownership.
While a lack of scale and standardization are sensible explanations for what is happening, these conditions have characterized the sector for a long time. They cannot fully account for the banks’ recent vanishing act. It’s hard to avoid the suspicion that a modicum of old-fashioned racism may be at work as well—if not in intent, at least in effect.
African-American, Hispanic, and Asian households represent a disproportionate share of the people served by CLTs, LECs, and inclusionary programs producing resale-restricted houses, townhouses, and condominiums. Neighborhoods that are disinvested, dilapidated, and dominated by persons of color represent a disproportionate share of the places served by the nonprofit sponsors of resale-restricted housing. These are the same populations and the same neighborhoods that larger banks historically shunned, until prodded toward fair lending by regulatory measures like the Community Reinvestment Act (CRA).
A New Kind of Redlining
A particular family of tenures being systematically bypassed by banks is something never contemplated by the CRA, however. This is something new, something different than a refusal to lend to protected classes in impoverished neighborhoods circled in red. The latter has not disappeared; geography still matters. Witness the concentration of mortgage foreclosures in inner-city neighborhoods populated by persons of color and the mounting difficulty that residents of these neighborhoods are now having getting mortgages and home improvement loans. But the drought in lending being experienced today by CLTs, LECs, and the sponsors of homes encumbered with affordability covenants is not limited by geography. Persons of modest means who want to buy a resale-restricted home are having trouble getting financing even when houses, condominiums, or cooperative apartments are located in a strong-market sunbelt city, a college town, or an affluent suburb. The sector itself is being starved of capital. Redlining is not just for “the hood” anymore.
Who’s going to battle the banks on the sector’s behalf? It’s not going to be the local sponsors of resale-restricted, owner-occupied homes. They’ve already got their hands full just keeping their doors open. Even as they scramble to find mortgages for their homebuyers, they must also cope with cutbacks in operational funding and project equity that are coming their way, as Washington’s obsession with deficit reduction begins to squeeze their programs, clients, and constituents.
Indeed, in some ways, the sponsors of shared equity homeownership are back where they were in the 1980s, begging cash-strapped cities for funding and looking to credit unions, community loan funds, and other social lenders to provide financing when banks will not. In other ways, however, things are different, and better. Thirty years ago, the sector had few champions among municipalities, private foundations, policy institutions, or national intermediaries; nor did these models of resale-restricted housing have advocacy networks of their own. Now they do.
It’s time for these allies to enter the fray. Organizations at the local level have already done the hard work of showing that CLTs, LECs, and other forms of shared equity homeownership can do what they are supposed to do. They prevent the loss of affordability when markets are hot. They prevent the loss of homes when markets are cold. Their homeowners succeed when many others do not. That’s all that can be asked of them. Community-based nonprofits cannot also be tasked with changing the policies of gargantuan banks that operate on a national scale. They need a little help from their friends, raising the alarm and resisting the rise of sectoral redlining.
Credit unions should be stream into this lending niche — it’s a perfect symbiotic relationship. And when it comes to CUs lending to housing cooperatives, that fulfills one of the Seven Principles of Cooperatives, “co-ops helping co-ops.”