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Balancing Ongoing Affordability with Asset-Building: the Continuum of Homeownership Subsidy Programs

As illustrated by the figure below, governments and nonprofits have employed a continuum of strategies to help moderate-income families purchase a home. In general, the programs below balance two competing objectives: individual asset accumulation and ongoing affordability.

Source: Preservation of Affordable Homeownership: A Continuum of Strategies. 2007. By Rick Jacobus and Jeffrey Lubell. Washington, DC: Center for Housing Policy.

On the left-hand side of the figure, "subsidy forgiveness" programs like downpayment assistance grants, maximize the asset-building potential of homeownership, but do not recycle public funds to help future buyers afford the costs of homeownership.

"Subsidy recapture" programs such as silent second mortgages that families repay upon sale of the home recycle assistance, using the recaptured funds to help subsequent purchasers; these programs represent a step in the direction of ongoing affordability. In rapidly rising housing markets, however, subsidy recapture programs do not keep pace with the market and so do not ensure ongoing affordability as well as "shared equity" programs, in which homebuyers "share" a portion of home price appreciation in order to preserve affordability for the next buyer. Shared equity homeownership programs include community land trusts, limited equity cooperatives, deed-restricted homeownership, and shared appreciation mortgages.

Depending on how they are designed, shared equity homeownership programs have the potential to balance and help achieve both individual asset building and ongoing affordability. Such programs represent a promising middle ground that can help create a stock of permanently affordable homes that also provide families with a strong return on their initial investment. Many families living in shared equity homes move on to standard homeownership.

Click on the category of homeownership assistance below for more information:

Subsidy Forgiveness: At one end of the continuum, subsidy forgiveness programs maximize asset-building opportunities. These programs provide one-time assistance to homebuyers with no expectation that these funds will be repaid to help serve future buyers. Such grants are usually designed to help buyers who have enough income to afford the monthly mortgage costs but have not saved enough for a minimally adequate downpayment. But in some communities, where home prices are so high that working families cannot afford monthly mortgage costs even after putting down a minimal downpayment, subsidies are larger.

Similarly, communities with inclusionary zoning programs sometimes require developers to sell a portion of newly developed homes for less than their market value but allow qualified buyers to resell these homes at market price after a short period of time. Such programs forgive the subsidy implicit in the inclusionary units that might otherwise be retained to help future buyers.

Subsidy forgiveness also includes loans that are forgiven if families live in the homes for a specified period of time. For example, a program might reduce the amount owed by a certain percentage for each year the family remains in the home. This "forgivable loan" structure prevents homebuyers from immediately selling their properties and pocketing the downpayment assistance as profit.

Grants and forgivable loans offer an even greater opportunity to build equity than traditional homeownership because the homeowners are allowed to keep the public funds along with any equity they earn through home price appreciation. The programs are also simple to administer and easier to market to families than more restrictive models. However, new subsidy funds are necessary to assist new homebuyers. As home prices rise, each assisted family requires a higher level of funding. The need for large grants limits the number of families who can receive assistance, and public support for the program may decline.

Subsidy forgiveness is a sensible choice when the level of assistance provided per buyer is relatively low, when ongoing affordability is not a major goal of the program, or when homebuyers need inducement to buy a difficult property or a property in a challenging location.

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Subsidy Recapture: Next on the continuum, subsidy recapture programs allow buyers to temporarily use public funds but expect these resources to be returned so they are available to assist future buyers. The most common form of subsidy recapture is a "silent second" mortgage that is subordinate to a family's primary mortgage, but requires no payment of principal or interest until the family sells its home (or, in some cases, refinances the first mortgage). Sometimes these loans are interest free; other times sellers are required to repay the funds along with deferred interest. In some cases the loans are only deferred for a limited period of time (e.g. five years) after which homebuyers are expected to begin making regular payments.

A silent second mortgage is just as effective as a grant or forgivable loan in making homeownership affordable, but has the advantage of being able to be recycled to help other families. Thus silent second mortgage programs allow communities to serve many more families than equivalently sized grants.

As home prices increase over time, however, the size of the second mortgage needed to close the affordability gap for a similarly situated family may increase as well. As a result, communities relying on a subsidy recapture approach will end up serving fewer families than they could have served if they had implemented policies to preserve the effective buying power of the public subsidy.

Subsidy recapture approaches are most appropriate when subsidy amounts are modest, the jurisdiction can afford to supplement recaptured funds with new subsidy with each resale, home prices are not expected to increase substantially, and the market offers an ample and expanding supply of reasonably-priced homes where the recaptured subsidy can be re-invested.

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Shared Equity: In a rapidly rising housing market, homes that were once made affordable through subsidies or inclusionary zoning may become out of reach of working families upon resale. Shared equity strategies are designed to address this problem, balancing ongoing affordability and individual asset-accumulation. Under a shared equity approach, families who benefit from large public subsidies to purchase a home agree to share any home price appreciation that occurs with the entity that provided the subsidy. Assisted families generate a healthy return on their investment, and at the same time, the public's investment keeps pace with the market so there is no reduction in the number of families that can be assisted over time. Shared equity strategies include shared appreciation loans and subsidy retention programs such as deed-restricted homeownership, limited equity cooperatives, and community land trusts. Click here for more information on shared equity homeownership.

Even in weak or declining housing markets, some researchers suggest that shared appreciation mortgages can still work as a model for homeownership assistance, If housing values decline, shared appreciation mortgages could forgive some of the principal owed without compromising future affordability. This would provide a measure of downside protection similar to what is provided in subsidy retention models.  Click here to learn more about shared equity in weak markets.  

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The above text is abstracted from Preservation of Affordable Homeownership: A Continuum of Strategies [PDF] by Rick Jacobus and Jeffrey Lubell. The full paper provides a much more expanded overview of the continuum of affordable homeownership programs.