The Stewardship Standards for Homeownership Programs was developed collaboratively by a number of national organizations, practitioners, and experts for the purpose of providing an educational resource and measurable framework to help homeownership programs with long-term affordability requirements achieve excellence and maximize impact. View Standards
Most inclusionary housing programs experience very few problems once homes are sold to qualified buyers. However, some degree of ongoing monitoring is always necessary.
Grounded Solutions Network convened dozens of administrators of inclusionary housing and similar programs with long-term affordability restrictions to develop standards for stewardship of these homes. The Stewardship Standards for Homeownership Programs includes a section on ongoing monitoring and recommends the following practices:
Send an annual letter or e-mail to homeowners explaining their responsibilities related to program restrictions and requirements (e.g. occupancy, insurance, capital improvements, repairs, and maintenance). Owners of resale-restricted homes are usually first-time homebuyers and might lack the knowledge and experience to succeed. Annual communication reminds homeowners of their responsibilities. Letters can also serve as a way for programs to elicit changes of address and returned letters for selective follow up.
Verify evidence of owner occupancy annually. In high-cost markets, owners of affordable ownership units sometimes relocate and convert their homes into income-generating rentals. By requiring evidence of owner occupancy annually, program staff can make sure the community investment in the homes is serving its intent. Some programs also collect proof of homeowner’s insurance.
Most programs require homeowners to occupy the unit as their primary residence. This is often defined as living in the unit most of the year. For example, many jurisdictions have a clause such as “The Owner shall be considered as occupying the Home if the Owner is living in the unit for at least ten (10) months out of each calendar year.”
Programs typically allow homeowners to request permission to rent their homes for limited periods of time if they meet certain conditions. For example, the homeowner could receive this permission if she:
- Temporarily relocates to attend school
- Has been called for military service
- Has experienced temporary financial hardship
- Wants to volunteer, travel, or work at another location for an extended period of time
- Needs to seek specialized medical care for an extended period of time
- Is not able to sell the home at the restricted price after a good faith marketing effort of more than a certain number of days (e.g., 180 days)
Many programs let homeowners rent a bedroom in their home without receiving any permission from the jurisdiction. Other programs allow homeowners to rent their homes for any reason, but for a short duration. In this case, it is still important for programs to have a form for owners to fill out so they can track who is living in the house.
Additionally, some jurisdictions have set limits on the rental price to ensure affordability and prevent any windfall for the owner. This is more common in very high-cost communities or resort locations where potential windfalls are quite large. In other communities, allowing homeowners who meet the exception criteria to possibly earn some modest windfall might be preferable to the administrative burden of verifying that sublease rents are affordable.
Finally, some programs have different standards depending on how long a homeowner has lived in a home. For example, a new homeowner might not be allowed to rent out their home at all, but a long-term resident might be given more latitude.
Some jurisdictions struggle to prevent illegal renting of inclusionary homeownership units. While none describe this as a major problem, some indicated that they were not able to completely eliminate it.
To address this problem, some jurisdictions send out annual occupancy verification forms and closely monitor those that are not returned. Montgomery County, Maryland, for example, works with its code enforcement division to inspect homes that raise this type of red flag. San Mateo, California, conducts an annual review of tax records to see where property tax information is being sent. Some programs also make it easy for neighbors to report illegal occupancy of inclusionary units by circulating program contact information.
Both mortgage lenders and cities have an interest in ensuring that a relevant city department receives notice when owners of inclusionary homes default on their mortgages. With adequate notice, the program can often help a homeowner to refinance or find a buyer rather than proceeding through foreclosure. However, it is difficult for mortgage servicers to reliably provide this notice even when it is required of them.
While there is no single widespread best practice to remedy this situation, some common responses include:
- Record a second lien in order to improve the chance of receiving notice of default. In California and several other states, state law ensures that junior lien holders are notified when a homeowner defaults on a first mortgage. A growing number of California jurisdictions have taken to recording “Performance Deeds of Trust” or “Excess Proceeds Deeds of Trust” in addition to deed restrictions/covenants specifically because they are more likely to receive notice of default if there is a recorded deed of trust.
- Require mortgage holders to enter into separate agreements which require notice or have refused to fully subordinate their covenants to the first mortgage. In states where junior lien holders are not reliably notified of defaults, some programs have pursued this option. For example, a program agrees to release a unit from resale restrictions only if it has received prior notification of a default and been given an opportunity to cure. Fannie Mae guidelines explicitly allow this kind of requirement as long as the lender certifies that they have the capacity to provide notice when required. Currently FHA prohibits this approach and requires that FHA-insured homes be released from restrictions in foreclosure without any conditions. This approach has become far less practical in recent years as it has become much harder to find lenders willing to underwrite price-restricted homeowners.
- Monitor title reports or newspaper notices of foreclosure proceedings for evidence of foreclosures. Some communities, recognizing the limitations on their ability to require notice, choose this option instead. This approach requires more staff time than the other alternatives and may involve other costs. It also generally identifies problems at the last moment before a foreclosure.
It may also be a good idea to contract with an outside agency (e.g., housing counseling agency, realtor, or local) to provide a set of administrative and outreach services related to preventing foreclosures. These may include:
- Contacting owners of all MPDU homes (IHO and Large Scale Developments), notifying them of approved waivers, and encouraging them to reach out for assistance if they experience difficulty selling their affordable unit.
- Monitoring (through the MLS or otherwise) the sales of any MPDU homes and offering assistance to listing realtors.
- When necessary and appropriate, making recommendations to the department when waivers are approved to enable subletting or unrestricted sales of a MPDU.
- Evaluating the feasibility of financing purchase of unsold MPDU homes by a nonprofit organization for temporary or permanent use as affordable rental housing.
- Tracking any foreclosures that do occur and providing brief reports every six months that identify the cause or causes of each foreclosure that has occurred, along with recommendations for changes to policies or procedures which could help prevent further foreclosures in the MPDU stock.
Some programs have acknowledged that they do not know exactly how many units they have produced in the past. Often the lack of data on housing production is the result of lax stewardship practices and inadequate systems for monitoring during the early years of the program. In addition, some programs manage portfolios of units with variable terms and affordability periods as a result of program requirements changing over time, which can complicate administrative and monitoring activities
Some jurisdictions have found it helpful to utilize specialized computer software to track not just their large and growing inclusionary portfolio, but also the varying affordability periods, resale restrictions, and regular notifications involved with the constituent properties. Staff at the cities of Cambridge, Massachusetts and San Mateo, California, for example, use HomeKeeper software to manage their for-sale portfolios. To monitor the city’s rental portfolio, Cambridge uses Emphasys software commonly used by housing authorities.
Condominium fees can increase substantially over time, making the overall costs of homeownership unsustainable for low- and moderate-income households. Rising condominium fees are a growing problem for many municipalities that are seeing their new for-sale inclusionary homes primarily built as condominiums, including Washington, DC, Fairfax County, and Cambridge.
Program administrators can set the initial affordable home price low enough to offset high initial condominium fees but, increases in these fees over time for new amenities or building repairs, can in some cases rival mortgage payments on below-market-rate units, leading to high overall housing costs, potential default, or homeowners being forced to sell their units.
Two promising solutions emerged through the research:
- Keep condo fees manageable through proper initial pricing that also anticipates a rise in condo fees over time. Shortly after Washington DC adopted its inclusionary housing program in 2007, there were several cases where high homeowners’ association (HOA) and condo fees were compromising the overall affordability of affordable homeownership units created through a separate city program. This prompted the city to survey condo fees citywide to compare its cost assumptions about fees in its affordable homeownership program to prevailing practice. Having discovered that its fee assumptions were too low, the city lowered its standard affordable inclusionary home price in 2012 by 11 percent to better reflect prevailing condo fees in the monthly cost of the home and provide room for fees to rise over time.
- Require that condo fees be proportional to the lower home values of inclusionary ownership units. Not all states authorize localities to require lower HOA or condominium fees for lower-value properties, but some do. The city of Cambridge takes advantage of this legal permission. It requires that developers and HOAs assess fees based on the reduced value of the inclusionary home to ensure that owners of affordable units are not paying fees as high as market-rate owners. Fee increases must also be proportional. Staff works to proactively address concerns about ad valorum assessments from condominium associations by educating them about what the owners of the affordable condominiums are giving up by agreeing to restricted resale prices.