Crunching the Numbers

Most of us would find it astonishing that a person earning $19,500 a year could afford to buy a new home in a neighborhood where the houses sell for $115,000 to $600,000. But when the Los Alamos Housing Partnership developed Piñon Trails, a mixed-income community of 120 homes in Los Alamos, N.M., director Steve Brugger took advantage of every tool he could find to finance homes for buyers earning an average of $37,000 a year. That amount represents 35 percent of the area's median income of $105,600, a number significantly skewed by the salaries of highly paid scientists at the Los Alamos National Laboratory. Down-payment assistance, federally insured mortgages for teachers, soft second mortgages, interest rate buy-downs, you name it, he used it.

“The [buyer] who was making $19,500 got a Rural Development loan at 1 percent for 30 years,” Brugger says. “Financing was a big part of our [affordability] strategy.” Chickie Grayson, president and CEO of Baltimore-based Enterprise Homes, says she's seen that scenario played out “thousands of times.” Part of Enterprise Community Partners, a national nonprofit that provides financing for affordable housing for low-income families, Enterprise Homes is a master developer of mixed-income communities. “There is this sense that people of lower income can't be homeowners,” she says. But, she adds, “You can enable them, and they become part of the American dream.”

With the significant tightening of the sub-prime lending market, builders need to know what resources are available to get their buyers into homes. And it's especially important for builders committed to building affordable housing, where projects often require that the buyers earn 80 percent to 120 percent of the area's median income—or less. Fortunately, there are a growing number of local, state, and national programs aimed at helping low-income families purchase homes and stay in them.

Take, for example, the MyCommunity mortgage from Fannie Mae, designed specifically for borrowers who earn at or below 100 percent of an area's median income, as defined by HUD. (HUD uses either the local number or the national median income, whichever is lower.) A subsidized loan, it gives borrowers with low credit scores access to pricing usually reserved for buyers with much better credit. Plus, the mortgage insurance requirements are lower than normal for a MyCommunity mortgage, says Charles Rumfola, vice president of product management and development at Fannie Mae.

Fannie Mae's expanded approval product is geared to borrowers with blemished or limited credit histories and is “very liberal in terms of debt-to-income ratios, which is exactly what builders want because it qualifies more borrowers to get into those homes,” Rumfola says.

And what about after the loan closes?

“It's not just about getting into the home; it's about staying in the home,” Rumfola says. “That's what we really focus on here at Fannie Mae. There are a lot of resources to keep them in the home afterwards. We can do loan modifications or repayment plans. We really go above and beyond the call of duty to keep them in their homes.”

Enterprise Homes uses a variety of strategies to provide financing to buyers earning anywhere from 40 percent to 120 percent of an area's median income. “We've done [projects for buyers earning] below 40 percent,” Grayson says. “Those people are great homeowners. They rarely foreclose.”

The programs Enterprise Homes typically draw on include:

Whatever financing vehicle is used, Grayson says, the goal should always be to maintain the market-level value of the home. “If you have a house that appraises at $300,000 ... sell the house at $300,000,” she says. Then, fill in with grants and subsidies that bring the price down to what the buyer can afford. “You never want to diminish the value of the home.”

Often, the most generous programs are administered through nonprofit agencies, which also conduct home buyer education classes that help buyers clean up their credit and prepare for homeownership, and walks them through the purchase process. They can also access financing for low-income and credit-challenged buyers. The NeighborWorks Campaign for Home Ownership, for example, includes more than 160 local organizations helping thousands of first-time and low-income buyers purchase homes.

“There are strong home buyer counselors in most markets, and the home builders need those guys,” says Frances Ferguson, director of NeighborWorks' multifamily initiative.

Richard W. Nirk, executive director of the National Association of Residential Construction Lenders, says builders would do well to connect with local lenders who may either have their own special financing for first-time buyers or know which local nonprofit agency doles out the down-payment assistance or interest-rate buy-downs.

“Mortgage brokers may not have access to grant programs and low-income home buyer programs,” Nirk says. “There are a lot of foundations, some sponsored by the federal government, for [low-income buyers] today. It means getting more involved with the local community.”

It's a strategy that David Grunwald, president and executive director of Santa Monica, Calif.–based American Sunrise Communities, heartily endorses. Most banks have Community Reinvestment Act requirements that can translate into affordable loans for low-income borrowers, says Grunwald, whose organization runs HomeStart, a program that links builders, lenders, nonprofits, federal, state, and local government, and employers to provide assistance for affordable housing. Much of that comes in the form of funds for down payments or closing costs, forgivable second mortgages, or interest-rate buy-downs.

“Builders don't realize [low-income home buyers] can get discounted loans right now that are prime or below prime,” Grunwald says. “Many cities have bond programs with 30-year fixed loans for 4.5 percent or 5.5 percent, plus down-payment assistance. If someone can get 4.5 percent instead of 6.5 percent, a whole new world opens up.”

For builders, it can be as easy as going online and typing in the name of their state and the phrase “housing finance agency,” Grunwald says. That will give builders a list of their state's bond programs for affordable housing. Also, check with city, county, and state housing agencies. They'll almost certainly have down-payment assistance programs. Builders can also talk to major local employers and ask them to contribute funds to help their employees buy affordable homes.

“We got a county hospital to kick in $20,000 [per employee who bought a house],” Grunwald says. “The builder contributed $20,000. Then we got a bank to give a lower interest rate and kick in some down-payment assistance. It isn't that hard. It just takes putting some time into it.”

Economists propose shared equity as another financing model.

As housing prices escalated dramatically in recent years, many borrowers—particularly first-time buyers and those with damaged credit—found themselves priced out of the market with a traditional, 30-year fixed-rate mortgage. The emergence of adjustable-rate, interest-only, and negative amortization mortgages offered a low-cost way to buy a home. But it meant relying on a trio of uncertain variables—rapid appreciation in the value of the house, increased income, and ability to easily refinance the loan before the interest rate went up.

Economists now have released a report sponsored by the Fannie Mae Foundation detailing shared-equity mortgages (SEM), a possible new financing mechanism for affordable housing. These mortgages, however, are distinctly different from the ones offered through nonprofit organizations, such as community land trusts, to maintain the affordability of housing for the long term.

As an affordability tool, SEMs would allow low-income families to buy a house that is 24 percent more valuable than what they could afford with a standard, 30-year, fixed-rate mortgage, according to the report.

Available first in the United Kingdom and now in Australia, SEMs offer consumers access to a form of financing that's long been available to corporations, blending debt and equity financing. Instead of straight debt financing—putting the house up as collateral—SEMs spread the risk between the borrower and investors who put their capital into the deal and receive shares of the equity, like buying shares in a mutual fund or a REIT.

Investors would provide home buyers with a loan for their down payment at a shared-equity rate, typically 3 percent to 4 percent compounded annually. No payment is made during the term of the loan. The amount due is determined by multiplying the share of the loan due by the value of the house at the end of the term, which generally is 10 to 15 years or at resale, whichever is sooner.

In a survey of renters in 10 major metro markets who thought it was important to buy a home in the next five years, one in six said they would be very likely, and two of three said they would be somewhat likely, to consider a shared-equity mortgage to buy a home. Of those surveyed, 65 percent said they would prefer a shared-equity mortgage over an interest-only mortgage, and 77 percent preferred it over a negative amortization loan.

In the UK, shared equity mortgages are offered as a government-sponsored subsidy. In Australia, it's being introduced now via the private market, says Dr. Andrew Caplin, professor of economics and co-director of the Center for Experimental Social Science at New York University and co-author of the report. “They've lined up the mortgage issuers,” he says. “Once the channels for capital are set up, I think it will boom.”

Caplin says that for the shared-equity mortgage to be viable in the U.S., it will need to be seen as “fitting with a public policy goal, which it is. Then somebody has to take the lead, forcing it through.”

The biggest obstacle, he says, is the need for a tax ruling from the Internal Revenue Service on such issues as how the mortgage interest tax deduction would work with SEMs. “We need to understand where everyone stands with the tax rules,” he says. “No one moves until then.”