Shared Equity Homeownership: Background, Selling Guide Analysis, & Recommendations Related to Duty to Serve Affordable Preservation BACKGROUND The National Community Land Trust Network The National Community Land Trust Network ( the Network ) is a national nonprofit membership organization of community land trusts ( CLTs ) and other permanently affordable housing organizations. The Network was incorporated in 2006, and, together with our members, we promote strategic community development and permanently affordable housing benefiting low- and moderateincome families. The Network provides support and leadership to over one hundred sixty organizations, including those organizations that offer homeownership programs with lasting affordability in CLTs, Community Development Corporations, Community Development Financial Institutions, Habitat for Humanity affiliates, government-based inclusionary zoning programs, and deed-restricted programs. Shared Equity Homeownership Programs Shared equity homeownership ( SEH ) is an umbrella term for programs that provide homeownership opportunities with lasting affordability, sometimes referred to as permanently affordable homeownership programs or homeownership programs with lasting affordability or long-term affordability. (hereinafter, shared equity homeownership programs as SEH Programs ). SEH Programs generally make a one-time investment to create homeownership opportunities that are affordable for purchase by a low- or moderate-income homebuyer. In return for owning a home at an affordable cost, the homeowners agree to certain restrictions including limitations on returns upon resale or limitations on conveyances of the property. In effect, homeowners share some of the proceeds from resale to pay the opportunity forward to the next low- or moderate-income homebuyer. The majority of shared equity homeownership programs ( SEH Programs ) are resale-restricted programs, meaning that they restrict the maximum price for which the home may be resold and restrict who may purchase the property to income-eligible households. Hence, low- or moderateincome buyers purchase and resell homes at prices below fair market value in order to keep the home affordable 1. Resale restrictions are set forth in a legal contract between the homeowner 1 Community land trusts and deed-restricted programs, such as many inclusionary housing programs, both resalerestrict the price for which the homes may be sold and resold to below market-rate prices. 1
and the SEH Program. Some SEH Programs do not restrict the price for which the home may be sold, but instead, these types of programs allow homeowners to sell homes at fair market value, but use legal documents to stipulate how a sale or transfer may take place to ensure the homes remain affordable for the next low- or moderate-income buyer (such as, stipulating that the seller receives only a portion of appreciation). Examples of these programs include limited equity housing cooperatives, resident-owned communities, community land trusts ( CLT ), certain types of deed-restricted programs, and shared appreciation loan ( SAL ) programs. However, for the purposes of addressing access to single-family mortgages, only the following types of SEH Programs are relevant: CLTs, deed-restricted programs, and SAL programs. Consequently, only these types of programs are discussed below. Aside from resale restrictions, SEH Programs also tend to have primary residency requirements, occasional fees owed to the SEH Program (such as ground lease payments), and/or financing approval requirements. These requirements and restrictions all help create and maintain affordable homeownership opportunities for low- and moderate-income persons. A variety of legal mechanisms are used to create SEH opportunities: 1. Deed covenants: Deed covenants may be designed specifically to create shared equity homeownership opportunities. For example, the vast majority of inclusionary housing programs utilize deed covenants to resale-restrict inclusionary homeownership units. Additionally, some CLTs will utilize deed covenants, especially on condominium projects when a ground lease may not be legally appropriate. Notably, deed covenants used by SEH Programs sometimes only have 30-year terms due to state rules against perpetuities. In these instances, affordability of the homes is preserved by ensuring the SEH Program has the preemptive option to purchase the home and may transfer this option to an eligible buyer. Additionally, deed-restricted programs used by SEH Programs will also have every new homeowner sign a new deed covenant with a new term. That way, the affordable home is preserved and serves subsequent low- or moderate-income homebuyers. 2. Ground Leases: The vast majority of CLTs utilize renewable, 99-year ground leases to create shared equity homeownership opportunities. The homeowner leases the land from the CLT for a nominal monthly ground lease fee while s/he owns and obtains mortgage financing for the improvements. Notably, sometimes the CLT provides additional subsidy beyond the fair market value of the land in order to make the home affordable for a low- or moderateincome household. Even though ground lease durations are longer than most deed covenants, CLTs usually have preemptive option to purchase the home (or to transfer this option to an eligible buyer), and they also have every new homeowner sign a ground lease with a new term. 3. Shared appreciation loans: Second mortgage loans that share appreciation may be used to create shared equity homeownership opportunities (although few programs currently utilize this legal mechanism). These types of SAL programs should not be confused with other shared appreciation loans that are available in the private market, which are profit-driven first mortgage loan products. SEH Programs that utilize SALs design them as a way to make homeownership significantly more affordable to low- or moderate-income buyers and to 2
recoup the second mortgage and some portion of the appreciation so that a subsequent SAL can be made to a subsequent low- or moderate-income purchaser of a property. Typically, the second mortgage loan has a 30-year term with 0% interest and is due upon sale. The nonprofit or public entity typically records a deed covenant stipulating the program s requirements and resale requirement along with loan documents. Typically, the SAL program retains the preemptive option to purchase the home (or to transfer this option to an eligible buyer) in order to keep the same home affordable to next buyer. Successes of SEH Programs Conducted by Cornerstone Partnership in 2014, the Social Impact Report is the most recent national longitudinal study of 53 SEH Programs representing 3,768 homes. It found that SEH Programs: 1) Increase access to homeownership. The average household income at the time of purchase was 65% of the area median income, and 82% were first-time homebuyers. On average, the homes were sold 25% below their fair market value in order to make home purchase affordable. 2) Improve the likelihood that homeownership will be sustained. Over 93% of households remained homeowners for at least five years. This starkly contrasts a nation-wide longitudinal study conducted by Reid (2005), which found that less than 50% of firsttime lower-income and minority owners maintained homeownership for five years. 3) Reduce the likelihood of foreclosures. Shared equity homeowners all of whom were lower-income were ten times less likely to be in foreclosure than homeowners in the conventional market across all incomes. These results are consistent with findings from other national studies conducted in 2009 2011. 4) Build wealth for homeowners. The annual rate of return on these households investments in homeownership was 7.97%. If they had taken the same amount of money and invested it in the S&P 500, their annual rate of return would have only been 1.06%. Hence, homeowners participating in shared equity homeownership build wealth. Approximately, 62% of households went on to buy a home in the conventional market. 5) Preserve the public s investment by keeping homes affordable resale after resale. Delivering on the model s promises, these programs retained the affordability of the homes to serve the same income level resale after resale. SHARED EQUITY HOMEOWNERSHIP PROGRAMS & FORTHCOMING DUTY TO SERVE RULE The Network anticipates that shared equity homeownership will be incorporated into FHFA s forthcoming proposed rule on the GSE s duty to serve underserved markets. It is expected that the GSEs will be able to receive credit for affordable housing preservation by working to increase access to mortgage financing for buyers of shared equity homes. Shared equity homeownership is the only homeownership model that preserves the affordability of owner-occupied homes in perpetuity. Unfortunately, access to mortgage financing has proven to be the #1 challenge reported by Network members because lenders perceive these models as 3
out of the box. Furthermore, due to regulatory barriers, buyers of shared equity homes are not currently able to obtain FHA-insured mortgages (although FHA is working on this issue). Consequently, promoting access to mortgage financing for lower income borrowers of shared equity homes through Fannie Mae and Freddie Mac would have a significant impact on helping lower income families enter into sustainable homeownership opportunities. SHARED EQUITY HOMEOWNERSHIP PROGRAMS IN FANNIE MAE & FREDDIE MAC This section will first summarize the overarching challenges for lower-income buyers in SEH Programs for accessing Fannie Mae and Freddie Mac. Next, it will present the relevant sections, issues, and recommendations of the Selling Guides by each type of SEH Program (those using ground leases, deed covenants, or shared appreciation loans) for Fannie Mae and then Freddie Mac. It will conclude with additional broader recommendations for all SEH Programs. I. Overarching Challenges Fannie Mae Fannie Mae has incorporated a broad array of affordable housing models into it Selling Guide, including shared equity homeownership programs (SEH Programs). The key challenges are that: Some of the provisions within the Selling Guide are overly restrictive, which has inadvertently excluded the majority of buyers in shared equity programs from access to Fannie products. Origination of loans to borrowers in SEH Programs is very confusing, administratively burdensome, risk-heavy, and poorly incentivized. Freddie Mac Freddie Mac incorporates some affordable homeownership programs into its Selling Guide and it also addresses the various legal instruments used by SEH Programs for market-rate housing (e.g. land trusts, shared appreciation), but the Selling Guide does not have specific guidelines or instructions for lending to borrowers in SEH Programs. The key challenges are that: The Selling Guide does not provide adequate information or instruction on how to originate loans for borrowers in SEH programs under relevant sections. Lenders are rarely if ever using Freddie Mac for mortgage loan origination to borrowers in SEH Programs due to the lack of accommodation of these programs in the Selling Guide and potentially other issues related to administrative burden, lender risk, and financial incentives. 4
II. Relevant Sections, Issues, & Recommendations for Each Type of SEH Program Fannie Mae A. FOR SHARED EQUITY PROGRAMS USING DEED COVENANTS Relevant Sections of Selling Guide: B5-5.3 Loans with Resale Restrictions B5-5.3-01: Loans With Resale Restrictions: Lender Eligibility B5-5.3-02: Loans with Resale Restrictions: Loan and Borrower Eligibility B5-5.3-03: Loans with Resale Restrictions: Underwriting and Collateral Considerations B5-5.3-04: Loans with Resale Restrictions: Legal Considerations B5-5.3-05: Loans with Resale Restrictions: Delivery Considerations B5-5.3-06: Loans with Resale Restrictions: Pricing, Mortgage Insurance and Special Feature Codes B5-5.3-07: Massachusetts Resale Restriction Loan Eligibility Requirements Issues: (1) Loan to Value & Down Payment. Fannie Mae will purchase loans when resale restrictions survive foreclosure or when resale restrictions do not survive foreclosure. When resale restrictions do not survive foreclosure, the LTV may be calculated using the alternative method, whereby the appraised value is used (since the sales price is an affordable purchase price that does not reflect the market-rate value of the property). It is unclear if the down payment requirements are evaluated based upon the appraised value or the affordable purchase price. Since the properties are being sold well below market-value and all restrictions are lifted in instances of foreclosure, there is no additional risk from calculating the down payment off the affordable purchase price. Fannie Mae should clarify down payment requirements. (2) Manual Underwriting. When resale restrictions do not survive foreclosure, manual underwriting is required because an alternative method for calculating LTV is used (see Loan to Value ). However, manual underwriting is administratively burdensome for originators and increases risk for lending institutions. Consequently, our members report that many previous lenders are no longer willing to do manual underwriting for their borrowers. Hence, access to Fannie Mae products has been hindered for borrowers. (3) Reps & Warranties. When resale restrictions survive foreclosure, the originating lender must provide rep & warranties that the resale restrictions will not impair the servicer s ability to foreclose. Furthermore based upon discussions with lenders they stated that they have to provide reps & warranties for manually underwritten loans, meaning that the lender must buy back the property in instances of foreclosure. Consequently, lenders are assuming additional risk to originate Fannie Mae loans to borrowers in these types of SEH programs, which is limiting access to Fannie Mae products. (4) Appraisals. When resale restrictions survive foreclosure, the LTV is calculated using the standard method, meaning that it is based upon the lesser of the sales price or the appraised value of the property with resale restrictions. The Selling Guide goes on to state the appraisal must reflect the impact the restrictions have on value and be supported by 5
comparables with similar restrictions The appraisal report must note the existence of the resale restrictions and comment on any impact the resale restrictions have on the property s value and marketability. The Selling Guide does not provide guidance for how to evaluate the impact of different resale restrictions on the value of the property. Furthermore, it is rare that comparables with similar restrictions exist nearby or within a reasonable timeframe. The lack of standardized methodology, clear instructions, and ability to appraise market-rate homes without resale restrictions as comps deters lenders and appraisals from originating Fannie Mae products to borrowers. (5) Shared Appreciation. SEH Programs using deed covenants sell homes below their marketrate value and restrict the resale price for which the home may be sold in the future in order to keep the property affordable for subsequent lower income buyers. The Selling Guide states, If the resale restrictions are included in a separate covenant or agreement instead of a second mortgage or deed of trust, the resale restrictions must comply, if applicable, with Fannie Mae s requirements in B5-5.1-02, Community Seconds Loan Eligibility, related to shared appreciation in property value. It is unclear if the requirements on shared appreciation apply to these types of SEH Programs because they are limiting the amount of the home s increased value that the seller may receive upon resale. If these requirements do apply, the vast majority of SEH Programs using deed covenants would not meet Fannie s Mae requirement on the Provider s Share in Appreciation in Value stipulated in B5-5.1-02. This requirement fails to recognize that SEH Programs utilize different types of resale formulas to set the homeowner s proceeds at resale, and some resale formulas are not based upon appreciation. Next, the requirement fails to recognize that SEH Programs exist in different housing markets and resale formulas must balance wealth-building for the seller with preserving affordability for subsequent buyers. Hence, the lack of flexibility and discretion provided to SEH Programs to establish shared appreciation is limiting the number of borrowers that can access Fannie Mae products and deterring lenders from originating Fannie Mae products due to confusion and concerns over compliance. (6) Eligible Properties. Manufactured housing and co-ops are ineligible properties for Loans with Resale Restrictions. However, cooperatives or manufactured homes can be coupled with shared equity homeownership using deed covenants in order to ensure the properties remain affordable for future generations. SEH using deed covenants provide a potential solution for the problem of escalating manufactured housing pad rents. Fannie Mae could help address this problem by making this product available for manufactured housing and coops just like one- and two-unit properties. Recommendations: (1) When resale restrictions do not survive foreclosure, calculate down payment requirements based upon the affordable purchase (not the appraised value) (2) Establish an automated underwriting system for loans with resale restrictions that automatically terminate upon foreclosure. (3) Remove reps & warranty requirements for lenders who originate mortgages to borrowers of resale-restricted properties. (4) Provide guidance on how to evaluate the impact of different resale restrictions on property appraisals and establish a system to allow market-rate comparables to be used during appraisal process. 6
(5) Remove reference to requirements on shared appreciation in property value and allow nonprofits and government SEH programs to design resale formulas that work for their local markets and balance wealth building and affordability preservation. (6) Allow loans with resale restrictions on manufactured housing and coops. B. FOR SHARED EQUITY PROGRAMS USING GROUND LEASES Relevant Sections of Selling Guide: B5-5.1: Community Seconds & Community Land Trusts B5-5.1-04 Community Land Trusts B4-1.4 Special Appraisal Considerations B4-1.4-06 Community Land Trust Appraisal Requirements Form 2100: Community Land Trust Ground Lease Rider Issues: (1) Organizational & Manual Underwriting. Fannie Mae will purchase loans to borrower purchasing homes on community land trusts. However, Fannie Mae requires that lenders underwrite the organization/clt on criteria, such as the organization must have the capacity to administer leasehold mortgages and the lender must review the subject community land trust's ground lease to confirm that it is based upon either the National Community Land Trust Network 2011 CLT Network Model Ground Lease or the Institute for Community Economics (ICE) Model Ground Lease. Some of these criteria are vague, and some the criteria are tremendously burdensome for lenders. Additionally, because an alternative method for calculating LTV is utilized on these ground leased properties, manual underwriting is required, which is administratively burdensome for originators and increases risk for lending institutions. Consequently, our members report that it is tremendously difficult to find lenders willing to originate loans to their buyers and, more recently, previous lending partners are no longer willing to do manual underwriting for their homebuyers. Hence, access to Fannie Mae products is significantly hindered for borrowers. (2) Reps & Warranties. Based upon discussions with lenders, they stated that must provide reps & warranties for manually underwritten loans, meaning that the lender must buy back the property in instances of foreclosure. Consequently, lenders are assuming additional risk to originate Fannie Mae loans to borrowers in these types of SEH programs, which is limiting access to Fannie Mae products. (3) Appraisals. An alternative method for calculating LTV must be used. Fannie Mae sets forth a clear methodology for the calculation of LTV in the B4-1.4-06 Community Land Trust Appraisal Requirements. However, the Network is repeatedly hearing that issues have arisen with inaccurate appraisals, which has gotten worse since Fannie Mae moved the CLT Appraisal Requirements (B4-1.4-06) out of the primary section on Community Land Trusts (B5-5.1) and since CLTs can no longer recommend educated appraisers to lenders. There is a general lack of education among appraisers on how to appraise homes in CLTs, which results in hesitation to appraise these properties and additional confusion and time spent between lenders, appraisers, and CLTs. (4) Eligible Properties. This product is expressly prohibited from use in manufactured housing and co-ops with ground leases, although these housing types offer the same extra lender security as single-family homes on ground leases. CLTs provide a potential solution for the 7
problem of manufactured housing pad rents that rise prematurely because of market distortion created by the inherent difficulty that unit owners who rent a pad have in moving their unit. Fannie Mae could help address this problem by making this CLT product available for manufactured housing, and for co-ops. Recommendations: (1) Minimize and clarify organizational underwriting criteria for community land trusts and consider moving organizational underwriting in-house or to a third-party (e.g. the Network) in order to minimize burden on lenders. (2) Establish an automated underwriting system for loans to borrowers in community land trusts. (3) Remove reps & warranty requirements for lenders who originate mortgages to borrowers of homes in community land trusts. (4) Educate and potentially create a certification program for appraisers in order to ensure accurate and efficient appraisals of properties in community land trusts. (5) Allow loans with ground leases on manufactured housing and coops. C. FOR SHARED EQUITY PROGRAMS USING SHARED APPRECIATION LOANS-- Relevant Sections of Selling Guide: B5-5.1: Community Seconds & Community Land Trusts B5-5.1-01: Community Seconds Mortgages B5-5.1-02: Community Seconds Loan Eligibility B5-5.1-03: Community Seconds Delivery Considerations Issues: (1) Fannie Mae Purchase. It appears that Fannie Mae will purchase shared appreciation loans provided to buyers in SEH Programs under the Community Seconds guidelines in B5-5.1. However, under section B5-5.3-01: Loans With Resale Restrictions: Lender Eligibility, it states that Resale restrictions may be found in the terms and conditions of the second mortgage or deed of trust (referred to as a Community Seconds mortgage), which Fannie Mae does not purchase. The section goes on to say When the resale restrictions are documented by a second mortgage or deed of trust, the lender must ensure that the second mortgage or deed of trust complies with Fannie Mae s Community Seconds guidelines in B5-5.1-01, Community Seconds Mortgages. It is unclear whether borrowers in these types of SEH Programs may use Fannie Mae products. (2) Loan to Value & Down Payment. Under the Community Seconds guidelines, an alternative method for calculating LTV can be used, whereby the second mortgage loan amount is treated as a subsidy that, in effect, reduces the loan amount and the appraised value of the property may be used as the value. This is justified because the shared appreciation loans are subordinate to the first mortgage and all resale restrictions are automatically terminated upon foreclosure. However, the issue is that the borrower s down payment requirement is calculated off the appraised value of home; rather, than the first mortgage loan amount, which is subsidized by the shared appreciation loan. This requirement is reducing the number of eligible lower income borrowers who could utilize Fannie Mae products. (3) Manual Underwriting. Manual underwriting is required because an alternative method for calculating LTV is used (see Loan to Value ). However, manual underwriting is 8
administratively burdensome for originators and increases risk for lending institutions. Hence, access to Fannie Mae products has been hindered for borrowers. (4) Reps & Warranties. Based upon discussions with lenders, they stated that they must provide reps & warranties for manually underwritten loans, meaning that the lender must buy back the property in instances of foreclosure. Consequently, lenders are assuming additional risk to originate Fannie Mae loans to borrowers in these types of SEH programs, which is limiting access to Fannie Mae products. (5) Shared Appreciation. Fannie Mae has added provisions specifying minimum homebuyer returns on Community Second mortgages in section Provider s Share in Appreciation in Value. In effect, these requirements render Fannie Mae unusable by SEH Programs using shared appreciation loans (along with SEH programs using deed covenants if this section applies, as reviewed above). First, many SEH Programs do not base sharing proceeds from resale upon appreciation, and instead use other resale formulas, such as fixed percentage increases or index-based formulas to stipulate the homeowner s proceeds upon resale. Second, the provider s share of appreciation stipulated by Fannie Mae would fail to keep properties affordable resale over resale in many local housing markets. Third, the Fannie Mae provisions stipulate what the buyer must be able to recover, such as the costs of improvements and the reasonable costs of selling the property. Just like regular market transactions, the provider cannot guarantee what the seller will recover based upon their investment or costs spent on the property; therefore, the provider should not need to assume these risks. Ultimately, this requirement greatly complicates the delicate balance between preserving affordability and wealth building that depends upon local real estate market dynamics. In addition to constraining provider flexibility, these restrictions are very difficult to understand and are ultimately harmful to potential homebuyers because the product is much less usable. Further, specifying minimum homebuyer returns does nothing to enhance the security of Fannie Mae s loan. Recommendations: (1) Clarify whether Fannie Mae will purchase Community Seconds and consider purchasing loans to borrowers in SEH programs using shared appreciation loans. (2) Calculate down payment requirements based upon the affordable purchase (not the appraised value) (3) Establish an automated underwriting system for loans to borrowers in shared appreciation loan programs. (4) Remove reps & warranty requirements fo lenders who originate mortgages to borrowers with shared appreciation loans. (5) Remove requirements on shared appreciation in property value and allow nonprofits and government SEH programs to design resale formulas that work for their local markets and balance wealth building and affordability preservation. 9
Freddie Mac A. FOR SHARED EQUITY PROGRAMS USING DEED COVENANTS Relevant Sections of Selling Guide: Single-Family Seller/Servicer Guide, Volume 1 Chs. 22-28: General Mortgage Eligibility Chapter 22: General Mortgage Eligibility 22.23: Purchase requirements for Mortgages secured by properties with resale restrictions Issues: (1) Applicability. It is unclear whether this section of the Selling Guide applies to SEH Programs using ground leases (i.e. community land trusts) or shared appreciation loans or whether it only applies to SEH programs using deed covenants. In the Guide it states, These resale restrictions are stated in an easement, covenant or condition in a deed or other instrument executed by or on behalf of the owner of the land, and they may be in effect for a certain number of years or an unlimited time. The restrictions are binding on current and subsequent property owners, and remain in effect until they are formally removed or modified, or terminate in accordance with their terms, such as at a foreclosure sale or upon acceptance of a deed-in-lieu of foreclosure. It is possible to interpret this text as being applicable to all SEH Programs; however, Freddie Mac should clarify which parts of the Selling Guide apply to each type of SEH Program. (2) Right of First Refusal. Freddie Mac allows properties subject to resale restrictions to have a right of first refusal imposed. Right of first refusal is a critical component of every SEH homeownership model in order to ensure the property is transferred to income eligible borrowers upon each resale and to ensure the property remains affordable. However, the Guide states, any right of first refusal must run to the enabling authority or jurisdiction that imposed the resale restrictions. It is unclear whether nonprofits, such as community land trusts or CDFIs with SEH Programs, would be interpreted as having the right to have right of first refusal. This may be particularly unclear during instances where federal funding, such as HOME or CDBG are used to created shared equity homes, as the Participating Jurisdiction would likely be interpreted as the enabling authority; however, the organization with the SEH program must have the right of first refusal in order to borrowers to utilize Freddie Mac products. (3) Authority for Resale controls & Terms. The Guide states, Properties subject to resale restrictions, except for age restrictions, must have resale controls for a fixed period of time. The controls must be administered by a duly authorized authority of State, local or municipal government or an agent of the authority that has established mechanisms to provide applicant screening and processing on an ongoing basis. The controls may not be administered by the developer. This poses two problems for SEH Programs. First, some programs have resale restrictions that are permanent or in perpetuity or for the life of the building. The period of time for resale restrictions is typically dependent upon state rules against perpetuities; however, Freddie Mac should not exclude SEH programs that have unfixed terms, especially since the objective of these programs is to preserve affordability permanently to help family after family. Second, resale restrictions or controls should be able to be administered by nonprofit organizations separate from any role where they are an 10
agent of the authority. There are times when nonprofits may privately fund the creation of SEH homes. Also, the nonprofit must have the authority to impose resale restrictions and controls that are independent of the government entity in order to effectively run their programs. (4) Automatic Termination of Restrictions upon Foreclosure. The Guide states, Any resale restrictions, except for age-restrictions, must not survive foreclosure or deed-in-lieu of foreclosure. Some programs opt to have restrictions that survive foreclosure in order to preserve the public s investment in affordable housing. Borrowers in these programs are being excluded from access to Freddie Mac products. (5) Appraisals & Loan to Value. The Guide states, The appraisal must include at least three comparable sales with similar resale restrictions. The Guide does not provide any information on how to assess LTV for properties with resale restrictions using various shared equity legal instruments or terms. This poses numerous issues. First, the Guide provides inadequate instruction on how to appraise leasehold interests for community land trusts. Second, it is unclear why comparable sales with similar resale restrictions are needed if all restrictions are removed upon foreclosure. Third, it is rare that comparable properties with similar resale restrictions will exist nearby or have occurred recently. Recommendations: (1) Clarify whether section 22.23 applies to all SEH Programs or only those using deed covenants and clarify what other sections of the Selling Guide do or do not apply to each type of SEH program (i.e. those using ground leases, deed covenants, or shared appreciation loans). (2) Ensure that nonprofits or governments with SEH programs are able to have the right of first refusal and assign that right to an income eligible buyer. (3) Remove the requirement for resale controls to have a fixed period of time and let SEH programs defer to state law, which may allow in perpetuity. (4) Include nonprofits in the duly authorized authority... to administer resale controls and restrictions. (5) Allow SEH programs that have resale restrictions survive foreclosure to be eligible under Freddie Mac, as Fannie Mae has done. (6) Adopt a standardized appraisal methodology and instructions for appraising the leasehold interest of homes in community land trusts, as Fannie Mae has done. (7) Provide clear instruction on whether and what types of resale restrictions affect value of property for appraisers. (8) Adopt an appraisal methodology that allows market-rate properties to be used as comparables, as Fannie Mae has done with CLTs and loans with resale restrictions (if applicable). (9) Provide clear guidance on how LTVs should be calculated for each type of SEH program (those using ground leases, deed covenants, and shared appreciation loans). B. FOR SHARED EQUITY PROGRAMS USING GROUND LEASES Relevant Sections of Selling Guide: Single-Family Seller/Servicer Guide, Volume 1 Chs. 22-28: General Mortgage Eligibility 11
Chapter 22: General Mortgage Eligibility 22.10: Living Trusts and land trusts (02/14/14). Chs. 39-45: Property Eligibility Chapter 41: Special Warranties for Leasehold Estates Issues: (1) Applicability. Freddie Mac s Selling Guide has two sections on land trusts (see aforementioned Relevant Sections ); however it appears that these sections are designed for intentional communities, employer-related housing, or university-based land trusts. They do not address homes on nonprofit community land trusts that provide and preserve affordable homeownership opportunities. (2) Ground Lease stipulations. Because it appears these sections of Selling Guide did not accommodate community land trusts, the Special Warranties for Leasehold Estates (Ch 41) has many provisions and requirements that would not work for community land trusts, such as not allowing the developer to be the owner of the land or not allowing the Lessor to enforce primary residency requirements. In order to increase access to mortgages on leasehold estates for lower income borrowers in community land trusts, these sections will need to accommodate the terms, structures, and requirements of community land trusts. (3) Appraisals. Additionally, the appraisal requirements do not provide adequate instruction for ensuring standardized appraisals of leasehold estates and request that comps of properties with similar leasehold estates, which is not often feasible. (4) Eligible properties. This product is expressly prohibited from use in manufactured housing with ground leases. Community land trusts provide a potential solution for the problem of manufactured housing pad rents escalating quickly and making homeownership unaffordable to lower-income owners. Recommendations: (1) Expand the land trust sections of the Selling Guide to provide adequate guidelines or instructions for loans to community land trust homebuyers or explicitly refer lenders to the appropriate section of the Selling Guide. (2) If the land trusts sections apply to buyers in community land trusts, address requirements that prohibit loans to borrowers in community land trusts, such as allowing for primary occupancy requirements and a nonprofit developer to hold the title to the land. (3) Adopt a Community Land Trust Ground Lease Rider that may be appended to the Network s Model Ground Lease to comply with Freddie Mac requirements, as Fannie Mae has done. (4) Adopt a standardized appraisal methodology and instructions for appraising the leasehold interest of homes in community land trusts, as Fannie Mae has done. (5) Adopt an appraisal methodology that allows market-rate properties to be used as comparables, as Fannie Mae has done with CLTs. C. FOR SHARED EQUITY PROGRAMS USING SHARED APPRECIATION LOANS-- Relevant Sections of Selling Guide: Single-Family Seller/Servicer Guide, Volume 1 Chs. 22-28: General Mortgage Eligibility Chapter 25: Secondary Financing and Other Financing Agreements 12
Issues: (1) Applicability. It appears that SEH Programs that utilize a shared appreciation loan would be considered included in this section of the Selling Guide. However, this section appears to have been designed around more traditional financing and buy down agreements, such as down payment assistance, closing cost assistance, and for-profit subordinate financing products. Freddie Mac s Selling Guide contains sections on Shared Equity Plans (25.5) and Interested Party Contributions (25.3), and it is unclear if these sections would apply to mortgages of borrowers in SEH Programs located in nonprofit or governments. If either of these sections do apply, there are requirements that would need to be amended in order for borrowers in SEH programs to be eligible, such as allowing a nonprofit developer to share equity and provide financial contributions. (2) Maturity Date. The Selling Guide states that, For financing other than HELOCs, the maturity date or amortization basis of the junior lien must not be less than five years after the Note Date of the First Lien Mortgage delivered to Freddie Mac, unless the junior lien is fully amortizing. It is unclear if this would render shared appreciation loans used by SEH Programs ineligible under Freddie Mac, as the majority of structured to be due-on-sale. (3) Shared Appreciation. Freddie Mac s Selling Guide has a provision on Participation in appreciation, which sets forth a specific formula for sharing in appreciation, which would not work for many if not all of these types of SEH Programs to keep properties permanently affordable and balance wealth building for owners. For SEH programs that utilize resale formulas that are not tied to appreciation, it is unclear whether they would be able to use Freddie Mac for mortgage loans. The participation in appreciation requirement fails to recognize that SEH Programs exist in different housing markets and resale formulas must balance wealth-building for the seller with preserving affordability for subsequent buyers. Hence, the lack of flexibility and discretion provided to SEH Programs to establish shared appreciation is limiting the number of borrowers that can access Freddie Mac products and deterring lenders from originating Freddie Mac loans due to confusion and concerns over compliance. Recommendations: (1) Specify which sections of Chapter 25 apply to SEH Programs using shared appreciation loans and remove or amend requirements that create barriers for borrowers of these programs to access Freddie Mac. (2) Clarify that the maturity date for shared appreciation loans may be due on sale. (3) Remove requirements on shared appreciation in property value and allow nonprofits and government SEH programs to design resale formulas that work for their local markets and balance wealth building and affordability preservation. 13
III. Additional Recommendations for Fannie Mae & Freddie Mac 1. Develop more explicit, detailed, clear, and standardized products and Selling Guides that would facilitate a streamlined lending process for buyers in SEH Programs. 2. Provide training to lenders and appraisers on SEH-related products and requirements. 3. Offer automated underwriting SEH-related products. 4. Do not require reps and warranties for loans made to borrowers in SEH Programs. 5. Factor the lower default rates into pricing for shared equity loans and find additional ways to incentivize lenders. 6. Create a shared equity loan fund as an investment to create new shared equity homes for lower income buyers. 14