Nearly four million affordable housing units are needed to close the housing gap; this severe shortage has contributed to home prices increasing each year for the last 10 years. Beyond traditional mortgage financing methods, how can housing professionals collaborate across the ecosystem to help close the gap and establish solid, sustainable pathways to affordable homeownership?

One alternative is through shared equity programs, including those that leverage the community land trust (CLT) model. For example, because the pace of building is not enough to meet demand, existing properties that are vacant, abandoned, and/or deteriorated could be transformed into safe, permanently affordable housing units through shared equity programs. This can help keep homes affordable over long periods of time, often in perpetuity. Generally, affordable housing providers focus on making homes affordable for the initial buyer through subsidies or down payment assistance. While these programs work well, they do not keep homes affordable for subsequent homebuyers. Therefore, housing professionals should consider the benefits of creating partnerships across the industry with program providers that focus on long-term affordable homeownership opportunities for low- and moderate-income households in high-cost areas.

What Are Shared Equity Programs and How Do They Work?

Shared equity programs are typically managed by government instrumentalities or nonprofit organizations and use a self-sustaining model for lasting affordability. The shared equity program provider acquires homes by leveraging state, federal and philanthropic dollars set aside for affordable housing. They then sell the homes to income-eligible homebuyers at below-market rates. In return for purchasing a home at an affordable cost, the homebuyers agree to certain restrictions on the resale of the homes in the future, such as limitations on conveyances of the property or returns on sale. In effect, homeowners will share some of the proceeds from the resale with the program provider and pay the opportunity forward to the next income-eligible homebuyer. Shared equity homeownership has been particularly effective in expanding homeownership opportunities in high-cost areas to first-time and minority homebuyers.

As a form of shared equity program, CLTs are typically managed by nonprofit organizations that help create permanent housing affordability. Basically, here’s how:

  1. The CLT acquires properties with the intent of listing the homes for sale below market value to prospective low- to moderate-income homebuyers.
  2. The income-eligible homebuyer purchases the home from the CLT and rents the underlying land through a long-term ground lease with the CLT (often a 99-year renewable term). Being able to rent the land at an affordable rate that will not increase over time rather than having to buy it brings homeownership within reach for many households; this arrangement significantly lowers a major cost associated with a typical home purchase. The rent payments also help the CLT cover some of the costs of stewardship, given that it sells the home at below-market rate.
  3. Upon resale, the homeowner agrees to sell the home at a restricted price to keep the property affordable for the next homebuyer. The homebuyer also agrees to share home price appreciation with the CLT.

CLTs create opportunities for low- to moderate-income families to achieve sustainable homeownership, allowing them to begin building equity while strengthening their financial security.

Collaborating to Make a Difference Through Shared Equity

Freddie Mac is supporting innovative collaborations that could help bring vacant, abandoned and deteriorated properties in selected opportunity zones – including those held by land banks, municipalities and similar entities – back into productive use as affordable housing units through shared equity programs.

Opportunity zones, as defined under the Tax Cuts and Jobs Act of 2017, comprise economically distressed communities in urban, rural, suburban, and tribal areas. Designated opportunity zones nationwide receive tax incentives intended to spur economic development in these low-income communities. However, economic development efforts do not necessarily include preserving or creating affordable housing and sometimes result in low- and moderate-income households being priced out of their neighborhoods.

Freddie Mac has served as the catalyst in targeted communities to encourage activities that will lead to a greater number of affordable housing units.

After thoughtful evaluation, three cities in opportunity zones were selected—Milwaukee, Minneapolis and Omaha—where both the city and local nonprofit organizations showed interest in pursuing long-term affordable preservation strategies leveraging the shared equity model of homeownership. We began our selection process by comparing the full list of U.S. metropolitan statistical areas against a specific set of criteria. Our considerations included identifying a land bank or similar functioning entity with available housing inventory, the presence of opportunity zone census tracts, the presence of non-profit organizations that focus on community development and have opportunity zone census tracts in their footprints, and municipalities focused on affordable housing development. Other factors included a disparity in homeownership rates and minority homeownership rates below the national average.

In these three markets, efforts centered on coalition building, facilitating partnerships between land banks and shared equity program stewards, identifying areas of opportunity for technical assistance, introducing industry subject matter experts to provide technical assistance, and seeding innovation through thought leadership.

A lot of individual efforts already were under way in the selected cities. Freddie Mac has helped create synergies and provided advice and support to help move them forward.

Such collaboration across the ecosystem is vital to creating more sustainable, affordable homeownership opportunities.

In turn, this will support business and economic growth in the opportunity zones. Highlighted below are the challenges each city experiences and how Freddie Mac is looking to be a provider of collaboration.

Milwaukee:

Although there have been significant strides in creating affordable housing in Milwaukee, the city faces challenges, according to the state’s Collective Affordable Housing Strategic Plan. These include severe racial inequities in homeownership and increasing difficulties for families to pay rent.

Through Freddie Mac’s partnership, Milwaukee identified CLTs as a valuable contribution to housing to address these challenges. Freddie Mac provided educational support on shared equity programs to interested stakeholders and is collaborating with the newly-formed Milwaukee Community Land Trust to expand their capacity by creating the organizational foundations to launch their shared equity program in alignment with best practices.

Minneapolis:

The Minneapolis market had more than 4,000 loans in forbearance at the time we completed our due diligence, for which one shared equity provider was seeking to pair long-term affordable housing preservation with long-term homeownership retention solutions.

To help address some of the affordable housing challenges, Freddie Mac worked to leverage the CLT model to design a distressed-homeownership stabilization program and loss-mitigation tool. This allows households with partially resolved economic hardships to convert their existing mortgages on fee-simple homes to shared equity mortgages, which aim to preserves the homes’ affordability over time. Under this approach, an eligible homeowner who is at risk of default may opt into shared equity homeownership with ongoing resale and affordability restrictions and, in exchange, retain homeownership for a more affordable monthly payment.

Omaha:

The homeownership rate in Omaha is nearly 60%, but that number is declining, particularly among Black households, according to a recent report from Grounded Solutions Network. Because of the racial homeownership gap, Omaha experiences a significant racial wealth gap.

Based on these challenges, Freddie Mac provided training and educational opportunities on shared equity programs to interested stakeholders. Freddie Mac also collaborated with and provided technical assistance to the Omaha Municipal Land Bank (OMLB) to support its ability to prioritize wealth building for people already living in the area. The technical assistance provided helped the OMLB to rewrite its land bank policy to accommodate the update as well as stand up its ambassador program, which aims to create a network of trusted and knowledgeable liaisons throughout the community. It also seeks to train, mentor, and engage representatives from every district to create a pipeline into board service and increase board diversity at the bank.

Building Blocks for Success

In selecting communities and working in partnership with them toward making homeownership possible for more of their people, we learned that city stakeholders first must want to have a focus on preserving housing affordability and awareness of the types of programs and tools available that might fit the city's and residents' specific needs. They also must be willing, ready, and have capacity to pursue creative solutions. The local governments and organizations in Milwaukee, Minneapolis, and Omaha demonstrate desire to do more to preserve and increase housing affordability, openness to new ideas and broader collaboration, ability to build skills and resources, and the energy needed to drive change.

It's important to note that not every shared equity program will look the same. Some aim to bridge the gap for the homebuyer through greater affordability, while others help increase housing supply by addressing issues such as aged or vacant homes.

Learn more about how to create business opportunities by working across the housing ecosystem to promote long-term, sustainable housing through innovative approaches.