Analysis: On Nov. 5, the mortgage giant Freddie Mac is launching a new initiative: Community Land Trust Mortgages. Up until now, a major barrier for potential buyers to participate in a community land trust was getting a loan. Historically, financial institutions have been reluctant to lend money to borrowers interested in community land trusts because of the complexity of initiating and foreclosing a loan for a deed-restricted home. Deed restrictions ensure the permanent affordability of homes. Under its new program, Freddie Mac says it will make it easier for banks to engage in the process of underwriting properties with such deed restrictions. It will also standardize the process for foreclosing on such homes in case the community land trust does not exercise its right of first refusal, the right for the community land trust to be the first to purchase the property once it falls into foreclosure.
While borrowers of mortgages held by community land trusts have the lowest rates of missed payments and foreclosures and thus a very low risk for loan providers, there are a number of other significant benefits. For banks, it is an attractive opportunity to lower defaults by involving community land trusts. For community land trusts, it ensures the likelihood of maintaining a foreclosed home in their housing inventory. For borrowers, the Freddie Mac's purchase of these loans will potentially create greater willingness of banks to originate these types of bank loans in the first place.
Freddie Mac's foray into community land trusts was prompted by the intensifying lack of affordable housing options prevalent in many places across the U.S. today, Chad Wandler, director of public relations at Freddie Mac, says: "In an era of tight housing inventory and rising home prices, shared equity homeownership offers prospective buyers a way to become homeowners and lenders an opportunity to support underserved communities."
This new mortgage program furthers the goals of affordable housing preservation because it provides a central role for community land trusts as an intermediary between banks and borrowers through the incorporation into their loan agreements of a "Freddie Mac Rider." This ensures that both the borrower and the community land trust be notified of default payments. Additionally, by incorporating the rider, Freddie Mac ensures it will purchase the mortgage, allowing for greater liquidity and lower risk.
One indirect benefit of this new scheme, however, is the impact on the trust and willingness of donors to donate homes and money to community land trusts. "CLTs rely on donors for funding and donors want assurance that prospective homebuyers will have access to financing to buy those homes," says Dan Ticona, manager of strategy and policy under Single Family Affordable Lending Business at Freddie Mac. "Freddie Mac's Community Land Trust Mortgage provides an additional alternative for banks to provide financing to CLTs."
While this is in many ways a tremendous victory for both community land trusts and borrowers, these entities will still have to overcome the paramount challenges of new property acquisitions in order to continue to create more affordable housing. This is especially the case in "hedge cities" where the prices are astronomical and the buildings mostly multi-unit where the community land trust mortgage does not apply. However, even if these mortgages did apply, in order to address the problem of affordability in urban centers, a more radical approach for decommodifying housing needs to be taken in order to raise funding for the acquisition of new properties.
Such measures might take the form of state and city housing bonds and new regulations to raise taxes on investment properties to finance a fund for community land trusts, limited equity housing cooperatives, and other forms of shared equity home ownerships. Another method would be to institutionalize the practice of taking by eminent domain those investment properties which remain vacant for the social purpose of meeting the housing needs of its citizens as was done in Boston, Massachusetts, with the Dudley Street Community Land Trust. Finally, leaving the government and philanthropic approach altogether for hybrid approaches like raising money from the community through community bonds and micro-municipal bonds and from Real Estate Investment Cooperatives like East Bay Permanent Real Estate Cooperative and New York City Real Estate Investment Cooperative could also go a long way in creating alternative sources of financing new affordable properties.
