Housing Assistance Programs
Housing Trust Fund
CD-MAC will operate a Housing Trust Fund for the purpose of providing downpayment assistance to qualified member families in the communities in which it works.
CD-MAC anticipates receiving funds for the Housing Trust Fund from a variety of sources, including developers, employers, communities, foundations and other charitable organizations.
A primary source of funds is expected to be developer contributions. CD-MAC anticipates working with communities and developers under its "Bonus Density Initiative" to obtain a donation of funds for downpayment assistance in a community in exchange for that community granting increased density to developer.
Under the Bonus Density Initiative, a developer makes a per unit contribution to CD-MAC and in exchange for the right to build an increased number of units per acre (the "bonus density"). For instance, in a typical scenario, the developer of a 100 unit development would be granted a 20% increase in density in exchange for a $10,000 per unit ($1,200,000 total) contribution to CD-MAC to be devoted to housing assistance. The operation of the Bonus Density Initiative is more fully described below (See Bonus Density Initiative).
In addition, CD-MAC will accept housing fund contributions from local employers, communities, foundations and other charitable organizations. Initially, CD-MAC may seed the Housing Trust Fund with loans and grants from financial and charitable institutions.
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Downpayment Assistance Program
CD-MAC will provide downpayment assistance to qualified member families in its designated communities.
In order to receive housing assistance from CD-MAC, a family must be a member of the organization. The annual membership fee is $15 per family. Once a family is a member of CD-MAC, they are given a spot on the organizations housing assistance waiting list.
As downpayment assistance funds become available, CD-MAC allocates these funds to the member families on the waiting list. 20% of the funds are allocated via a lottery where each of the families on the waiting list will have an equal chance of being selected. The remaining 80% of the funds are allocated to families at the top of waiting list (i.e. that have been waiting the longest).
Once a family receives a downpayment assistance allocation, they will work CD-MAC and local realtors to identify a home to purchase.
In order to buy the home, the family will first have to quality for and obtain a conventional first mortgage loan from a local lender, and use any funds they have available (from savings, investments, etc.). CD-MAC will provide the remainder of the funds needed for the downpayment.
Consider the example of a family earning $75,000 per year and living in a community with high housing prices. The family can qualify to borrow approximately $225,000 from a traditional mortgage lender. With limited funds for a downpayment, they could purchase a $225,000 home. However, if home prices in the community are more than $225,000, and they do not have any savings for a downpayment, they will not be able to purchase a home.
This is where CD-MAC's downpayment assistance program can help. If entry-level homes in the community cost $280,000, this same family will be able to purchase the $280,000 home using a $225,000 first mortgage from a traditional mortgage lender, and $55,000 from CD-MAC's downpayment assistance program. The CD-MAC downpayment assistance program provides the difference between the home the family can afford and the actual price of that home. Table 1 presents an example of this transaction.
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Home Resales
CD-MAC may also be involved when it comes time to sell a home on which downpayment assistance has been received. The homeowner first comes to CD-MAC who identifies qualified families from the waiting list. The qualified family purchases the home, and the existing shared appreciation second mortgage transfers to the new buyer. In the event a qualified purchaser cannot be found from the waiting list, the property may be sold to a non-qualified family, and the shared appreciation second mortgage is repaid to CD-MAC where it is recycled to another family for another property.
Chart 1 provides an overview of CD-MAC's housing assistance process.
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Shared Appreciation Second Mortgages
CD-MAC will secure its downpayment assistance with a shared appreciation second mortgage on the property.
The second mortgage will be in the amount of the downpayment assistance provided. This mortgage will require no monthly payment and will be interest free. The term of this second mortgage will be same as that of the borrower's first mortgage.
Instead of bearing interest, the mortgage will be structured to share in the appreciation of the property. The value of the mortgage will appreciate at the same rate as the value of the home.
Continuing with the example presented in Table 1, if in five years, if the home value appreciates from $280,000 to $375,000 (appreciation of 6% per year), the CD-MAC shared appreciation second mortgage will have grown to $73,661 but will still be the same percentage of the property value, and the owner's equity in the property will have grown from zero to $91,967.
The mortgage may be repaid when the borrower moves from the property or refinances, or may be left with the property to assist another qualified family.
This shared appreciation mortgage structure is advantageous to the homeowner, to CD-MAC, and is generally accepted by banks and other mortgage lending institutions.
This structure offers the opportunity for the homeowners to build equity in the property should home price appreciation occur. Unlike many commercial shared appreciation mortgages, which base their share of appreciation on the percentage of equity provided, the CD-MAC shared appreciation formula is based on the percentage of the total property value, which means that over time, the benefits of increases in value of the property accrue primarily to the homeowner, not to the lending institution. In the example above, the homeowner's equity in the property has increased by more than $90,000 due to home price appreciation and mortgage principal payments over the five years, while the shared appreciation due on the second mortgage increased by less than $20,000.
Shared appreciation second mortgages are simpler than deed restrictions and other forms of equity sharing agreements. Shared appreciation mortgages have been used successfully for more than 25 years in the United States and Europe, and have withstood legal tests over time.
The use of this shared appreciation second mortgage structure simplifies the homeowner's first mortgage process. Both federal mortgage agencies, Fannie Mae and Freddie Mac, and many banks, are very willing to provide first mortgages on properties with shared appreciation second mortgages. These organizations can be less willing to provide first mortgages when deed restrictions and equity sharing agreements are involved.
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