Beyond competitive rates — 3 innovative ways for credit unions to make housing more affordable
Anyone who has tried to buy or rent housing in the last few years knows all too well that it’s expensive—really expensive.
Research has found that housing price increases have outpaced inflation by 150% since 1970—which means the median home price isn’t the $177,788 that would align with the inflation rate, but a whopping $408,100. And according to August 2022 data from Zillow, monthly rent in the United States was up 12.3% over the previous year, four percentage points more than the national inflation rate.
The lack of affordable housing has become an issue of growing concern, and for good reason. According to the National Low Income Housing Coalition the shortage of affordable housing not only threatens individual stability and well-being, but also costs the American economy about $2 trillion (and, yes, that’s with a “t”) in lower wages and productivity every year.
Yikes.
When it comes to housing, credit unions have typically focused on financial education, competitive mortgage rates, credit counseling, and flexible underwriting that might help people who wouldn’t qualify for a loan elsewhere. These are all worthy endeavors, but in the face of our current crisis, should credit unions be doing more?
Quite a few, in fact, already are. Here are three exciting opportunities for credit unions to tangibly contribute to local affordable housing initiatives:
- Partner with housing/land trusts and affordable housing funds
These resources typically use some combination of funding from financial institutions, philanthropic organizations, and government agencies.
Housing trusts funds are established by city, county or state governments to support the preservation and creation of affordable housing. There are currently 47 states with housing trust funds and more than 765 city and county housing trust funds in operation. One example is Housing Trust Silicon Valley. Launched in 2000, this program supports affordable housing solutions in the Bay Area in three ways: homeownership assistance, a security deposit assistance program for the homeless, and development funding.
Its development funding efforts include an affordable housing loan pool established to provide start-up funding to developers. The fund was set up to be revolving and self-sustaining—once a development project received permanent funding it paid its construction loan back to the fund to finance the next startup. Tech CU in San Jose, Calif. was one of the first financial institutions to support the fund.
Community land trusts (CLTs) separate a building from the land on which it’s located. The trust owns the land, then rents or sells the housing on that land to lower-income households at below-market prices. As a trade-off for being able to purchase a home at a lower cost, the owners agree to price restrictions when it’s time to sell that will allow the homes to remain permanently affordable.
CLTs are nonprofit and membership based—ideally the CLT’s board structure is 33% residents, 33% community organizations and 33% members-at-large. Beyond owning the land, CLTs typically also support owners throughout the buying process and beyond, help with resales, and manage rental units. They’re seen as a powerful tool in both strong and weak markets: They help ensure lower-income residents can afford housing in gentrifying areas; furthermore, as revealed by an analysis of a large Minneapolis CLT, a concentration of affordable housing can also provide stabilizing support in market downturns.
While CLTs typically rely on public dollars, a recent acquisition by San Francisco Community Land Trust was accomplished only with private lenders, one of which was Self-Help Federal Credit Union. As this article notes, that approach to funding required a fair amount of regulatory hoop-jumping, but Self-Help is hopeful that this precedent will help make it easier for CLTs to access funding from regulated lenders in the future.
Affordable housing funds, which typically rely on a combination of government, philanthropic and developer support, facilitate the development of more affordable housing.
One example is the Evergreen Impact Housing Fund (EIHF). The greater Seattle area is one of the country’s most expensive places to live and escalating housing costs make it hard for working-class consumers to live in the area. EIHF creates what it calls “catalytic investment opportunities” that make affordable apartment complexes more attractive to developers.
Over the next five years, EIHF projects are projected to help more than 8,500 people with household incomes that are less than 60% of the local median find affordable housing. Five local credit unions—BECU, Sound Credit Union (a PixelSpoke client), Washington State Employees Credit Union, Salal Credit Union, and Verity Credit Union—invested in Evergreen’s first fund.
- Leverage grants to help finance affordable housing
Your credit union might be able to tap into grant financing to support affordable housing initiatives. Self-Help Credit Union, for instance, leveraged the HUD’s Neighborhood Stabilization Program (NSP) to help stabilize communities with high rates of abandoned and foreclosed homes. In 2010, Self-Help Credit Union combined an $11.76 million dollar award it received from NSP with its own capital to acquire, rehab, construct and offer permanent financing for more than 300 units of NSP-eligible housing in the Northeast, South, Midwest, and California.
Mid Oregon Credit Union leveraged a $100,000 grant from the GoWest Foundation, which has provided nearly $1 million in grant support for innovative credit union housing solutions across the region. Mid Oregon’s Workforce Housing Loan Program offered interest rate subsidies of up to 2.5% for rental properties that maintained affordable rental rates for five years after funding. To qualify for the program, rental rates couldn’t exceed 30% of gross income for tenants who earned between 60%-140% of that county’s median income.
- Offer alternative mortgage products
If you’re like most credit unions, your mortgage products likely tend toward traditional single-family condos, homes or duplexes. Niche products could help put home ownership within reach for more of your members. A number of credit unions have leveraged Community Development Financial Institution (CDFI) funds and alternative mortgage products to do just that.
Housing co-ops. DC Credit Union (a PixelSpoke client) in Washington, D.C., partnered with a local housing co-operative and a HUD-approved housing counseling agency (which administers a city-run down payment assistance program) to make housing affordable for lower-income members. Thanks to the combination of counseling, government funding and affordable loans from DC Credit Union, a number of members have qualified to purchase units in a local co-operative.
Manufactured homes. Many financial institutions (FIs) opt out of writing loans on manufactured homes (aka mobile homes) because their lack of a permanent foundation typically requires FIs to treat them as “non-conforming” chattel loans, which are typically short-term and have high down payments and high interest rates. But in the hot housing market of Missoula, Montana, manufactured homes are a popular option. To make these homes viable for more members, Clearwater Credit Union offers a manufactured home loan product that doesn’t delineate based on foundation type. This loan lets homeowners borrow up to 95% of the home’s value for up to 20 years and charges a reasonable rate of interest.
Zero down payment mortgages not based on credit scores paired with downpayment grants. Many credit unions already offer zero downpayment mortgage options for first-time homebuyers. While we don’t usually look to Bank of America for inspiration, and we haven’t forgotten the significant role it played in the 2008 foreclosure crisis, it’s worth taking a look at the mega-bank’s recently rolled out Community Affordable Loan Solution, which takes the zero downpayment concept two steps further.
The loan is a “competitively priced,” fixed rate, zero downpayment mortgage for first-time homebuyers based on borrower income and the location of their home (the program currently focuses on neighborhoods in lower income Black and Hispanic neighborhoods in five cities). Instead of basing loan approval on traditional credit scores, potential buyers are assessed on their history of making timely payments for rent, utilities, phone service and auto insurance. In addition, those who are approved for a loan also get grants of $10,000 – $15,000 to be used as a downpayment, which means they’ll have equity in their homes from Day 1.
Looking at something other than traditional credit scores for loan approval, as well as offering grants for down payments, are both options that credit unions could be well-poised to explore.
Credit unions can continue to promote “competitive rates,” but let’s face it — even the most competitive mortgage rates in today’s climate are high, and meanwhile, the cost of living continues to rise. It’s time for credit unions to do more, whether that means investing in trusts or housing funds, leveraging government grants, offering alternative mortgage products, or exploring other innovative solutions tailored to your region.
Let’s not forget that “shelter” is on the first rung of Maslow’s Hierarchy of Needs. Being able to afford a safe, comfortable place to live is a critical necessity for your members—one that not only plays a vital role in their financial health but also the health of your community at large.
Co-author: Kerala Taylor
