A hurdle for housing
By Doug Cabral
Published: June 23, 2011
The Times reported recently that West Tisbury filed suit in Dukes County Superior Court to retain control of a house in town, built under affordable housing terms, from passing in foreclosure to the lender that holds the mortgage on the property and thence to sale on the open market, with no affordable housing limits retained. The town wants the property to remain subject to rules that limit the use and sales price of the property for affordable housing in perpetuity.
Most mortgages, even those given by borrowers buying subsidized affordable housing units, permit the lender to scrap the affordable housing limits on sales prices when a property owner falls into default and foreclosure ensues. West Tisbury seeks to keep an affordable housing hold on the property by charging that the original lender has a "history of engaging in predatory lending" practices, including making loans to buyers whose credit worthiness was not assured, or even tested. The lender shouldn't have made the loan, so it cannot defeat the rules under which the property was sold as affordable housing. When the mortgage was foreclosed, the balance was $640,000. The original mortgage was $252,000. The balance was double or more the allowable sales price, under West Tisbury's affordable housing limits, as set out in the deed's affordable housing covenant.
Among the difficult issues facing organizations that build, facilitate, subsidize, and manage affordable housing efforts: How to find necessary, commercial financing for affordable properties, while guarding against the economic stumbles to which low and moderate income beneficiaries may be liable, particularly in economic circumstances such as those afflicting the country today. Organizations, such as the Island Housing Trust, A Community Land Trust for Martha's Vineyard, using techniques that have been successful elsewhere, may help.
Recently, Phillippe Jordi, executive director of the Island Housing Trust, sent along an essay written by David Abromowitz, a partner at Goulston & Storrs in Boston, and Roz Greenstein, senior fellow and chairman of the department of economic and community development at the Lincoln Institute of Land Policy. Richard Leonard, chairman of the housing trust, sent it to Mr. Jordi. The essay was published in the Boston Globe. The writers describe the "land trust model", its authentic successes, and its virtues in preserving affordability, even when default and foreclosure imperils beneficiaries of an affordable property. The key is that the property owner buys the house, agrees to limitations on resale, and the trust retains title to the land and leases it long-term to the homeowner.
How does this protect against foreclosure? The land trust, by its control of the underlying property, backstops the homeowner, leveraging the lender and protecting affordability into the future. But, of course, in exchange for the hedge against the loss of an affordable property in foreclosure, there are costs.
First, of course, is the fundamental loss of upside potential to a homeowner in the class of homeowners who benefit from subsidized affordable housing opportunities. But, that's common to all such public housing efforts, and that's acceptable. There is a community price to pay, but it's one of several ways to increase the affordable housing stock. At the same time, if subsidized and limited efforts like these are the only ones a community makes to increase and vary the housing supply, low and moderate income residents will never completely enjoy the wealth creating appreciation of property value that most of the rest of us have benefit from over time. As Abromowitz and Greenstein describe the deal, "Homes can be sold at a profit, but not for a windfall, to the next generation of buyers who need an affordable house in the neighborhood." It's a tradeoff, and a cost.
Another hard to measure cost associated with the land trust model is that prudent stewardship will require the creation of reserves, taken from the limited funds available to affordable housing creators, to guard against costs associated with defaults, foreclosures, and ultimate resale. And finally, the cost of financing must reflect the value of the limits that lenders agree to accept in order to step up to make mortgage loans whose value, should there be a default, may be difficult or impossible to recover.
The West Tisbury experience with the affordable housing lot that is at the heart of the town's lawsuit and the experience of successful community land trusts elsewhere in the nation, as well as here in the six Vineyard towns, will help to perfect the mechanisms used to create, finance, and convey subsidized affordable housing to Island neighbors who need it. Absent a political willingness to entertain changes in development rules that will lead to increases in the housing stock by inviting greater development density, such mechanisms are important tools in the struggle to create affordable housing opportunities.
