Shared equity and trusts provide a path to affordable homeownership
A lot of people who bought their first home about the same time as Colin and Sarah Robinson in 2008 — or maybe a little before — have already lost it. Others won’t own theirs much longer.
Those are the sad facts of the national foreclosure nightmare, but the Robinsons are confident they won’t become another casualty. Although they’re not immune to job loss or some other piece of bad luck, the young couple found a way to buy a home without the kind of fast and loose financing that fed the housing crash.
The Robinsons bought their home through the Champlain Housing Trust (CHT), a nonprofit organization in Burlington, Vt., that supports sustainable models of affordable housing. CHT’s marquee program gives grants to people with low and moderate incomes who purchase homes on land owned by CHT and who agree to cap their return when they resell.
Everybody wins. The grants create a sizable chunk of instant equity that makes mortgages affordable for people like the Robinsons. And the cap on return helps keep homes bought with CHT assistance affordable for future buyers — who also save because they pay only for the house instead of the house and the land.
It’s not a new approach — CHT has been around for 27 years — but it’s one example of how to make homeownership more affordable without resorting to the rash practices of the recent past that put people into homes they were destined to lose.
Community housing trusts such as CHT are forms of shared equity ownership. Along with deed restrictions and down payment assistance loans, shared equity offers a sustainable — if still limited — path to an affordable home for people of modest means all across the country. Such strategies also support a key principle of smart growth — providing a range of housing choices for people of all income levels.
“I think these sorts of models are going to be very important going forward,” says Brenda Torpy, CEO of CHT. “They’re a much better way to get lower-income people into homeownership.”
CHT is the largest — and one of the oldest — community housing trusts in the country with 500 owner-occupied homes and condos permanently preserved as affordable housing in a three-county region. Overall, though, the country’s more than 250 community housing trusts account for only about 10,000 owner-occupied homes, according to the National Community Land Trust Network (NCLTN).
Although still microscopic in numbers, community trust homes are greatly appreciated by the people who live in them. “It’s a real blessing,” says Sarah Robinson.
The Robinsons, both 27, earn steady but modest incomes working in social services. Tired of paying $1,200 a month in rent for a “nothing special” apartment, the couple longed to buy a home but couldn’t put enough down to make the mortgage affordable. “The numbers just weren’t adding up,” Sarah says.
They learned about CHT through word of mouth. “It presented an opportunity for us to get in our first house in a way that was sustainable,” Colin says.
No two community housing trusts are exactly alike, but many are based on CHT’s proven blueprint. “Ours is the classic community trust model,” Torpy says.
CHT assists buyers who make 100 percent or less of the area median income. For a couple like the Robinsons, that’s $60,600. Buyers can take two different paths. They can purchase a home that’s already part of the trust — provided there’s one for sale they like — or they can buy a home on the open market that will then become part of the trust. The Robinsons took the second path.
They received $40,000 from CHT to put down on a $212,000 home. Together with some of their own money, the grant left the Robinsons with a mortgage of $170,000 and a total house payment — including taxes and insurance — that’s $200 less than their rent was. They also gained peace of mind from having instant equity in their home and — because they didn’t need to resort to a gimmicky loan — a stable monthly payment. “It sets us up on a solid track,” Sarah Robinson says.
If the process ended there, the Robinsons would be the only ones to benefit from the grant. However, community housing trusts are all about making sure the homes they help purchase stay affordable forever. They do that in several ways.
Owners can pocket only part of their home’s appreciation when they sell. CHT’s formula awards owners everything they paid toward the principal and anything spent on home improvements, but only 25 percent of the home’s appreciation. By leaving 75 percent of the appreciation on the table, the formula helps keep trust homes affordable for each new buyer.
The other way CHT keeps the homes permanently affordable is to own the land under every home that enters the trust — all part of the grant agreement with the original buyer — and to retain ownership with every future sale. Homeowners pay $25 a month for a 99-year ground lease, but pay nothing else for the land. One last pro-affordability provision: trust homes can only be resold to buyers with low and moderate incomes.
By adjusting its formula as needed, CHT ensures its homes are priced appropriately for buyers and sellers regardless of market conditions. “It’s been easy to tweak,” Torpy says. “We don’t want owners to get stuck, but we need to keep the home affordable for the next buyer. A study of our first 200 resales showed the homes were actually more affordable the second time around.”
Sustained affordability is not CHT’s only goal, though. It also fosters sustained ownership. Every prospective owner must complete CHT’s homeownership class. And every owner can turn to CHT for counseling if they experience financial trouble somewhere down the line.
Even if owners don’t inform CHT they’re in trouble, lenders automatically alert the trust if owners fall behind on payments. By intervening early, CHT can help owners find a way to remain in the home or — if all else fails — to sell and escape the repercussions of foreclosure. “It’s nice to know Champlain Housing Trust is there to work with you if you get in a tight spot,” Sarah Robinson says. “They don’t want to see you fail.”
Community housing trusts excel in that role. According to a recent NCLTN study, people who bought homes through trusts were 10 times less likely to be in foreclosure proceedings at the end of 2010 than conventional buyers. In addition, just 1.3 percent of trust homeowners were seriously delinquent compared to 8.57 percent of homeowners in the conventional market at the end of 2010.
While community land trusts aren’t for everyone, they are another rung on the ladder between renting and conventional homeownership. Two-thirds of CHT’s buyers have eventually sold their trust home and used the equity they built to purchase another home on the open market, Torpy says.
The key to the growth of community housing trusts is funding. Tens of thousands of dollars in buyer assistance is typically required each time a home is added to a trust. The rub is that trusts lean heavily on public dollars — a dwindling resource. Another challenge is that banks aren’t always willing to make loans for trust homes. “There are regional differences in how banks treat these,” Torpy says. “We’ve made a lot of progress, but every few years we have more people to educate.”
The number of community housing trusts grew rapidly during the housing boom when more and more parts of the workforce were being priced out of the market and communities scrambled for solutions. Now that the housing crash has sent prices plunging, some of the air has — at least for now — gone out of the balloon. “It definitely has tempered [the momentum], but we all know things are going to come back and we’ll still have the same issue,” says Sharon Kerrigan, executive vice president of the South Tahoe Association of REALTORS® (STAR).
Like a lot of tourist destinations, Lake Tahoe struggles to provide affordable housing for the hospitality industry employees who work there. In 2002, the St. Joseph Community Land Trust was formed to increase the supply of affordable housing.
Many trusts — including St. Joseph — acquire and manage apartment complexes as part of their mission. In 2004, St. Joseph was given a vacant lot by the South Tahoe Redevelopment Agency (STRA) on which to build and sell the trust’s first owner-occupied home. STAR won a $25,000 grant from the California REALTORS® to support the project.
“The hope was it would become the first of many,” Kerrigan says. So far, though, it’s the only one. “There’s not as much urgency right now … but no one is giving up on this,” she says.
The Washington, D.C., Association of REALTORS® (WDCAR) is also committed to supporting sustainable affordability, but via a different model. It recently joined with the National Association of REALTORS® (NAR) to provide up to $5,000 in closing cost assistance to people buying homes through City First Homes.
City First Homes makes $75,000 down payment assistance loans to buyers earning up to 120 percent of the area median income. The rate on the loans is fixed at 3.79 percent and buyers make interest-only payments for the first seven years. The loan, which is combined with a conventional first mortgage loan obtained from a bank, reduces the amount of cash required at time of purchase — one of the biggest barriers to homeownership.
This approach, known as shared appreciation, differs from the shared equity model housing trusts use, because buyers own both the house and the land. However, both models limit the appreciation owners can pocket when they sell. In the case of City First Homes, this not only keeps the price down, it shrinks the size of the down payment assistance loan required by the next buyer. In the long run, the amount of appreciation left on the table with each sale — 75 percent — is expected to make the home affordable without a second mortgage.
Another expectation is that the loans will let buyers choose from a wider range of neighborhoods and thereby increase the number of permanently affordable homes in every corner of the city. That need is what drove the WDCAR to support City First Homes, says Ed Krauze, the association’s CEO. “We’re very concerned about the workforce housing [supply],” he says.
Most REALTORS® aren’t familiar with shared appreciation sales, so the WDCAR plans to educate its members. “Shared appreciation is a good way to get the ball rolling and get into homeownership, but REALTORS® have to understand it well enough to present to their clients,” Krauze says.
The Chicago Community Land Trust (CCLT) is yet another example of the different paths cities are taking to support sustainable affordability. The CCLT operates in tandem with the city’s inclusionary zoning ordinance. Any developments of 10 or more units that require a rezone, acquire land from the city or receive financial assistance from the city, must write down the price of at least 10 percent of those units. Most are then sold through the CCLT at a price affordable to buyers making 100 percent of the area median income.
The average write down is about $75,000, says Kara Breem, the trust’s executive director. To ensure the units remain affordable when resold, the city imposes a deed restriction on every unit that puts a cap (usually 20 percent) on the amount of appreciation the owner gets to keep.
The HomeWorks program in Boulder, Colo., also employs a combination of inclusionary zoning and deed restrictions, but the requirements are more aggressive. One out of five units in every new development — regardless of any city involvement — must be affordable. The program targets people earning between 80 and 120 percent of area median income.
In addition, HomeWorks offers two down payment assistance programs for first-time buyers. Buyers can get a 3-percent grant that is then subtracted from the price of the home when they sell — which in effect passes the grant on to the next buyer. They can also get a deferred payment loan for up to $50,000 that is due in full — along with 15 percent of any appreciation — in 15 years or whenever they sell or refinance. In this case, owners are allowed to sell at full market value.