Market-rate home mortgages are six to eight times more likely to be in foreclosure than Community Land Trust mortgages



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Even Community Land Trusts affected
by American cities’ financial problems

By City Mayors’ Special North American Correspondent

26 February 2011: Mayors in at least 100 municipalities in the United States, from Bridgeport, Connecticut to Los Angeles, California, are openly contemplating bankruptcy. The cities’ financial problems result fundamentally from widespread home mortgage foreclosures that have reduced property values and consequently the amount of property taxes local governments can collect.

The sharply reduced revenues make it difficult for cities to meet obligations such as pension and health care costs for employees and bond debt payments. The New York Times recently reported that the housing crash has spread for the first time to metropolitan areas with the strongest economies, such as Seattle, Minneapolis, and Atlanta.

Some of the most stable owner-occupied housing in the US is located in the poorest urban neighborhoods and operated by Community Land Trusts (CLTs). According to a new study, mortgages held by Community Land Trust homeowners have a significantly lower risk of delinquency and foreclosure than comparable market-rate mortgages.

However, many Community Land Trusts are struggling because of the recession, and their ability to continue to outperform the market, and in some cases survive, is in question.

Community Land Trusts
The first Community Land Trusts were created in the 1970s by grassroots activists to provide affordable housing for low-income individuals and families and to re-use abandoned city buildings. Although different CLTs use slightly different approaches, the general model is for the non-profit trust to own the land and lease it for a nominal fee to individuals and families who own the home on the land. The home is built with public subsidies and sold at a below-market rate to income-eligible buyers. The lease contains a provision limiting the profit a homeowner can make on the re-sale of the house, thus ensuring that it remains affordable to the next buyer without the need for additional subsidies.

Homeowners become members of the Community Land Trust and have input into how it operates. Some CLTs partner with other organizations to offer programs, such as preserving open space and creating economic opportunities for low-income residents in city neighborhoods. Membership in a CLT also requires homeowners to participate in mandatory training on stewardship activities like home maintenance and how to be a good neighbor, as well as personal financial counseling. Interventions by a CLT to prevent foreclosures may go beyond education and counseling. Many trusts provide rescue funds, pay a mortgage until resale, or even purchase a home to avoid default or foreclosure.

Over the past ten years, the number of Community Land Trusts in the US doubled to over 200, as local governments increased their support. Mayors such as Richard Daley of Chicago and Beth Krom of Irving, California became notable supporters of Community Land Trusts. The CLTs offer long-term housing affordability and long-term neighborhood stewardship, both of great value to local governments. Despite their effectiveness and, in some cities, prominent support, Community Land Trusts are generally not well known. Most CLTs are small, accounting for a total of about 6,000 dwelling units nationally.

Defying the trends
According to a study published by the Lincoln Land Institute, market-rate home mortgages were six times more likely to be in foreclosure than Community Land Trust mortgages at the end of 2008. By the end of 2009, the gap widened and conventional mortgages were eight times more likely to be in foreclosure. CLT mortgages were also less likely to be delinquent than conventional mortgages. While the number of market-rate mortgage loans that were delinquent more than 90 days increased 1.3 per cent to 7.5 per cent between 2008 and 2009, the number of seriously delinquent Community Land Trust mortgages declined 0.4 per cent to 1.6 per cent.

The ability of Community Land Trust homeowners to defy national economic trends is impressive considering that they have low-incomes (less than 80 per cent of the area median income), often lack health insurance, and are generally more susceptible than middle- and upper-class individuals to unemployment and health problems.

The study concluded that the “extensive stewardship of Community Land Trust homeowners appears to contribute to the low rates of delinquency and foreclosure.” But the study also found that the current recession has placed many CLTs under considerable stress. Most Community Land Trusts, according to the study, have had to “expend more resources on delinquency and foreclosure prevention stewardship.” Moreover, stricter national mortgage rules make it more difficult to qualify potential buyers for financing than in previous years, and, in some markets, declining home prices place Community Land Trusts in competition for buyers with lower-cost, market-rate-homes.

Challenges
Funding for pre- and post-purchase homeowner education and training, as well as the more intensive interventions of Community Land Trusts, typically come from private donations, foundation funds and, mostly, city and state grants.

Funders view Community Land Trusts as cost-effective means of promoting family and neighborhood stability. Stable neighborhoods provide reliable property tax revenues and require less spending for police and fire services, demolition of vacant properties, and fees to process foreclosures. Community Land Trusts operate primarily in low-income and minority neighborhoods, helping to lessen racial disparities.

While most mayors continue to call bankruptcy protection for their cities a last resort, they are desperate for relief from financial difficulties. Mayors are cutting spending for a wide range of services that impact the quality of life of their communities, including infrastructure and public works, public safety, and parks and recreation. They are trying to freeze wages and cut pension and health care benefits for employees and retirees.

These financial challenges explain why mayors and others find it difficult to increase or even maintain support for Community Land Trusts. The study found that most land trusts are “not sufficiently resourced” to meet the stewardship needs they face.

Community Land Trusts have been a bright spot in low-income neighborhoods over the past ten or twenty years. Because most CLTs are small, they flew under the radar screen in good economic times - quietly and efficiently providing stable, affordable housing, and growing slowly. Now, the message of their success is being drowned out by other voices petitioning city governments for financial support in a challenging economy. Many Community Land Trusts are struggling to survive, adding to the challenges of urban America.

Reference: Emily Thaden. Outperforming the Market: Making Sense of the Low Rates of Delinquencies and Foreclosures in Community Land Trusts. Lincoln Institute of Land Policy, 2010.


Membership in a CLT requires homeowners to participate in mandatory training on stewardship activities like home maintenance and how to be a good neighbor


On other pages
US subprime mortgage crisis hurts individuals and whole communities
Homeownership has long been the basis of community revitalization efforts in American cities. Homeowners bring well-documented stability and investment to neighborhoods. The recent rise in mortgage foreclosures, fueled by subprime lending, seriously threatens neighborhood stability and revitalization.

Home purchases in the United States are typically financed by mortgage loans. Home mortgages are indexed to the prime rate, that is, the interest rate commercial banks charge their most creditworthy customers.

Mortgages with the lowest interest rates are available to customers whose creditworthiness, or ability to repay the loan, is so high that there is little risk to the lender. “Subprime” mortgages are offered to borrowers who don’t meet the credit standards for borrowing in the prime market. These loans are more expensive for borrowers with rates higher than prevailing prime rates, presumably to compensate lenders for the additional risks associated with lending to less creditworthy borrowers. Subprime loans are characterized by low ‘introductory’ interest rates, usually for the first two or three years. These rates frequently rise rapidly in subsequent years, resulting in payments that can increase hundreds of dollars each month. More