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4. New Programs and Innovations
4. NEW PROGRAMS AND
INNOVATIONS
The First-Time Homebuyer and Down Payment Assistance products promote affordable and stable homeownership in New Jersey. But not all communities have benefited from these products.
We propose several new programs or adjustments to current programs to address this concern. Our proposed programs aim to reach the following groups: first-time home buyers who cannot afford a market-rate turnkey home, lower-income families at risk of losing their home due to substandard living conditions, first-generation professionals who are currently unable to access mortgage assistance, and potential landlords of color who would benefit from financial support and counseling. With the right supports in place, NJHMFA could expand homeownership opportunities among these populations and help narrow the state’s racial homeownership gap.
NJHMFA should establish a homeowner rehabilitation assistance (HRA) program to rehabilitate homes for low- and moderateincome families. The program will complement HRA programs already offered by many New Jersey municipalities and counties.
The Agency should direct part of its assistance to first-time home buyers, especially in areas with concentrated vacant, aged, or substandard homes. It should also direct some funds to current homeowners in areas at risk of gentrification and in blighted neighborhoods. For the purposes of this recommendation, “gentrification” refers to the involuntary displacement of households in areas where housing costs are rapidly increasing. “Blight” refers to derelict or visibly substandard homes that depress surrounding property values.
A SURVEY OF HRAs
HRA programs provide financial assistance to low- and moderate-income homeowners for critical home rehabilitation, repair, or renovation needs. They can be categorized into two broad models. In the first model, a government offers loans or grants to current homeowner-occupants loans to improve their homes. The vast majority of state and local HRA programs operate this way.
The second model reaches new home buyers. Under this model, a government will offer loans or grants to first-time home buyers to help cover the cost of rehabilitating a newlypurchased, substandard home. Few HRA programs currently operate on the purchase side.
HRA programs improve both health and housing outcomes for those living in rehabilitated households. The health benefits include improved respiratory health and a reduction in exposure to lead paint, mold, pests, fire hazards, and other safety risks.90 Furthermore, renovation has been shown to appreciate home values in the surrounding area.91
HRA programs are also cost-effective. For example, Detroit’s small home repair grants— with a median grant of just $6,000—enabled homeowners to address one of every two major repair needs. In a survey, all participants said the program was important for their ability to stay in their home, and one-quarter said that, without the program, they would have left their home permanently.92
THE HRA LANDSCAPE IN NEW JERSEY
New Jersey has a patchwork of HRA programs administered by counties and municipalities. These programs are designed to meet the municipalities’ obligations under the Mount Laurel Doctrine, which requires that every municipality provide its fair share of affordable housing for people of low and moderate incomes.93 The programs are funded by local housing trust funds and by federal grants administered via HOME and the Community Development Block Grant Program.
Few data exist on the extent to which rehabilitation under the Mount Laurel Doctrine meets the needs of New Jersey households. At the start of Mount Laurel’s “Third Round” in 2015, there existed at least 36,000 Present Need units requiring rehabilitation spread across over 200 municipalities.94 Meanwhile, the rate at which these homes are being repaired under county and municipal programs is inadequate. An administrator of a housing rehabilitation program informed us that three of the state’s largest HRA administrators each rehabilitate only several hundred homes annually.
TOWARD A STATEWIDE HRA PROGRAM
A statewide HRA program is critical for the expansion New Jersey’s stock of affordable, livable occupant-owned housing units. Today, low- and moderate-income households occupy tens of thousands of deficient units. And around 1.5 percent of units in the state are vacant, many of which may not be habitable without rehabilitation.95
Without a comprehensive statewide HRA program, New Jersey is unlikely to meet its full housing rehabilitation needs. Existing home improvement programs at the municipal and county level are scattered, inconsistent, and not universally available. Meanwhile, many aging homes in the state will likely become deficient absent intervention. A state HRA program will promote streamlined, equitable access to rehabilitation assistance and allow NJHMFA to send rehabilitation funds to those areas with the greatest need.
A statewide HRA program should not, however, replace local programs, which are legally mandated under Mount Laurel. Instead, eligible households should be able to combine state and local HRA loans.
TWO HALVES OF A STATEWIDE PROGRAM
NJHMFA’s HRA program should maintain two separate funds: one for existing low-tomoderate income homeowners and another for first-time low-to-moderate income home buyers. Both models have benefits, and each should be part of a comprehensive approach to expanding affordable, stable homeownership opportunities.
The Agency should reserve at least half of state HRA loans for first-time home buyers. Today, only existing homeowners are eligible for county and municipal HRA programs. By reserving half of HRA loans for first-time buyers, the Agency will expand the stock of livable homes available to low- and moderateincome families, allowing these households to begin building wealth through home equity.
NJHMFA should focus these loans in areas with the most vacant, aged, or substandard
housing units. Figure 8 shows New Jersey’s residential vacancy rate by county. Eight of the 10 counties with the highest residential vacancy rate are in southern New Jersey. Figure 9 shows the median age of housing units by county. Homes are oldest in the counties surrounding New Jersey’s oldest urban areas—Newark, Jersey City, Elizabeth, Paterson, Trenton, and Camden. HRA for first-time home buyers could expand the stock of livable homes in both New Jersey’s rural southern counties and its older urban areas. The remainder of state HRA loans should assist existing homeowners, with the goal of preventing the displacement of households whose homes currently provide substandard or unsafe living conditions. The Agency should target these loans in areas where families are at risk of displacement due to rising housing costs or housing blight. In areas with rising housing costs, homeowners with distressed mortgages can use these funds to avoid foreclosure. Meanwhile, in areas with significant housing blight,
FIGURE 8. HOME VACANCY RATE BY COUNTY, 2019 FIGURE 9. MEDIAN HOME AGE BY COUNTY, 2019
Source: Craig McCarthy. “Here’s How Many Vacant Homes There Are in Each NJ County.” nj.com, January 16, 2019. Source: 2019 American Community Survey 1-Year Estimate
rehabilitation assistance will not only help individual homeowners improve their home, but also buoy the value of other homes in the neighborhood. In either case, NJHMFA’s HRA program would work to promote neighborhood stability, and therefore support anti-gentrification efforts.
Newark, Jersey City, Elizabeth, Paterson, Trenton, and Camden have been among the fastest-growing New Jersey municipalities over the past decade, indicating a potential for gentrification.96 Targeting homeowners in these counties for rehabilitation assistance is likely to go the furthest toward mitigating gentrification and blight. To target HRA loans to the desired communities and x, NJHMFA should follow the outreach and community collaboration guidelines outlined in Section 1.
HRA loans to existing homeowners would also dovetail with NJHMFA’s foreclosure prevention efforts. For example, the Agency should offer HRA loans to first-time buyers and existing owners of properties acquired under the Foreclosure Prevention Program.
NJHMFA should also use its HRA program to promote climate resilience for the state’s housing stock. Today, local housing rehabilitation programs across the state primarily cover health- and safety-related repairs. But repairs related to climate resilience are just as important in protecting future New Jersey families and their homes. By 2050, over 600,000 New Jersey properties are projected to have significant flood risk, due to both sea level rise and severe storms and hurricanes.97 Weatherization- and climate resilience-related repairs—including compliance with flood-resistance standards— should therefore be equally eligible for HRA loans as health- and safety-related repairs. NJHMFA should leverage third-party HRA program administrators. Administering an HRA program is complicated and requires niche expertise. It requires the preparation of bid documents, comprehensive inspections, contractor review and outreach, applicant outreach and approval, unit certification, and legal documentation.
Fortunately, several major private sector rehabilitation program administrators already operate in New Jersey. These include CGP&H, Rehabco, and Community Action Services, among others. Especially in the years leading up to and immediately after the launch of a statewide HRA program, NJHMFA should work with one or multiple such administrators to ease the program’s cost and personnel burden.
STRUCTURE OF HRA LOANS
The structure of HRA loans will be a critical decision point for NJHMFA. The Agency can either allow repayment to be deferred until the home is sold, or it can require regular interest payments similar to a conventional loan. Interest on the loan can be at market rate, below market rate, or zero. Most important, it may choose to forgive HRA loans after a certain number of years of occupancy. Forgivable loans are most beneficial to low- and moderate-income homeowners and home buyers.
HRA loans should ideally be structured like DPA loans: zero-interest, no monthly payment, and forgivable after five years of occupancy. But non-forgivable, interest-free loans that defer repayment until resale offer a less costly alternative. These loans are still valuable in that they provide home buyers the upfront financing to move into and repair a home and begin to build wealth through home equity.
If funds are insufficient to provide fullyforgivable HRA loans to both current
homeowners and first-time buyers, NJHMFA should prioritize forgivability for existing homeowners. Today, most low- and moderate-income first-time home buyers in New Jersey qualify for fully-forgivable DPA loans. But existing homeowners typically cannot access forgivable loans to rehabilitate their homes. By offering forgivable loans to existing homeowners, NJHMFA would even the playing field, thereby combatting displacement and gentrification.
COSTS AND FUNDING
NJHMFA should aim to scale its HRA program to a similar size as its DPA program: at least 1,000 unique loans per year. Based on our conversations with private sector HRA program administrators, we estimate that the average home rehabilitation project carries around $20,000, plus at least $4,000 in administrative costs. Considering the inflationary cost of materials and labor, we recommend that NJHMFA provide loans of up to $30,000.
If NJHMFA were to provide 1,000 forgivable HRA loans of $30,000, the program would carry an annual cost of $30 million, plus administrative costs. We believe this is a cost-effective way to create or preserve 1,000 homeownership opportunities. When seeking funding from the State Legislature, NJHMFA should emphasize that HRA will create homeownership opportunities for low- and moderate-income households and expand the state’s stock of livable housing.
If NJHMFA cannot obtain a full $30 million annual appropriation from the State Legislature, the Agency has a few options to reduce the cost of its HRA program. First, the program could be scaled down in terms of annual number of HRA loans. Second, the program could have a loan maximum of less than $30,000. Finally, the program could offer interest-free, deferred payment loans instead of forgivable loans. As described above, if only some of the HRA program’s loans are to be fully forgivable, they should be prioritized toward existing homeowners.
IMPACT ON NEW JERSEY’S RACIAL HOMEOWNERSHIP GAP
While the state HRA program would not explicitly target households by race, we believe it would particularly benefit Black and Latino families, who are disproportionately low- and moderate-income. As described above, we recommend targeting many of the program’s loans toward areas at risk of gentrification, with widespread housing blight, or with an aged housing stock. These tend to be New Jersey’s older urban areas, which also have the state’s highest concentration of people of color.98 To ensure households of color can take advantage of the state’s HRA program, we recommend employing the outreach, partnership, and community collaboration strategies outlined in Section 1.
4.2. Target firstgeneration professionals
Many factors contribute to the Black–white wealth gap, including policies and practices that have deprived Black Americans of equal access to higher education and homeownership. Today, Black Americans who attain a college degree carry an outsized share of student loan debt and earn a lower rate of return on their degrees compared to white graduates. For Black borrowers, many of whom are first-generation college graduates or professionals, student loan debt is a barrier to homeownership. Current mortgage underwriting practices unfairly penalize borrowers with high student loan debt burdens.
NJHMFA should partner with Rutgers Law School (RLS) to provide home buyer education to law students who are first-generation prospective home buyers and establish a pilot program to offset certain mortgage-related costs for RLS graduates.
Nationally, 37 percent of white adults have bachelor’s degrees, compared to just 22 percent of Black adults. Meanwhile, 13 percent of white adults and 8 percent of Black adults have graduate degrees.99 These disparities are partly explained by racial disparities in college graduation rates: 64 percent of white students graduate, compared to just 40 percent of Black students.100
Black students who do graduate see a lower return on their degrees than white graduates. For every dollar in wealth that the median Black household with a college degree accrues, the median white household accrues $11.49.101 This disparity explains, at least in part, why homeownership is less common among Black college graduates than for white high school dropouts.102
At graduation, Black students—who often lack access to family wealth—owe $7,400 more on average in student loans than do their white peers. Just four years later, that gap triples to $25,000 due to interest accumulation.103 Typically, white borrowers reduce their student loan debt by 94 percent over 20 years. Black borrowers reduce their debt by just 5 percent in the same period, and half default. Although higher education is normally associated with wealth, an average collegeeducated Black family has just two-thirds of the wealth of an average white family headed by someone with less than a high school degree.104
IMPACTS OF STUDENT LOAN DEBT ON BLACK COMMUNITIES IN NEW JERSEY
New Jersey has the fifth highest student debt burden among the states. Two in three recent college graduates in the state have debt, and the average debt burden is $34,000. Since the Great Recession, funding per student at public universities in New Jersey has declined by 23 percent, shifting the cost of education to students. The average annual cost of public college in New Jersey is now $26,000, the third highest in the nation.
For Black and Latino students, these costs can be enormous. In 2017, the cost of public college to Black and Latino students in New Jersey was equivalent to 32 and 29 percent of their median household income, respectively.105 White families, meanwhile, needed only 17 percent of their household income to cover the cost of college. Student loans are therefore
FIGURE 10. STUDENT LOAN DEFAULT RATE BY COUNTY AND RACE
Borrowers of Color Essex County Camden County Mercer County Atlantic County
21% 24%
White Borrowers 4% 8% 22% 28%
4% 10%
Source: New Jersey Institute for Social Justice 2020 report - “Freed From Debt: A Racial Justice Approach to Student Loan Reform in New Jersey”
the only choice for many Black and brown students.106 And in the counties that surround New Jersey’s urban centers, default rates in communities of color are devastating.107 To mitigate the racial wealth gap among college graduates, NJHMFA should target students and graduates of color for its FirstTime Homebuyer Program. First-generation professionals and home buyers are typically trailblazers within their family. They may lack access to generational wealth and can, therefore, benefit greatly from NJHMFA’s guidance on homeownership.
BARRIERS TO HOMEOWNERSHIP AMONG RECENT PROFESSIONAL GRADUATES
To qualify for a conventional mortgage, borrowers must put 20 percent down and pay closing costs.108 Federal Housing Administration (FHA) loans allow borrowers to put as little as 3.5 percent down. To offset the risk of foreclosure, FHA loans require the borrower to carry PMI.109 This PMI is paid to FHA at an upfront rate of 1.75 percent, and at an annual rate of 0.45–1.05 percent, of the purchase price of the home.110 Lenders typically assess an applicant’s monthly debtto-income ratio. The greatest ratio allowed under NJHMFA’s First-Time Homebuyer Program is 45 percent.111
Many recent law school graduates have little savings, making a conventional mortgage unattainable. Because of their student debt, they also struggle to qualify for FHA mortgages despite job stability and modest income-based student loan payment obligations. Black lawyers are especially likely to find themselves unable to qualify for a mortgage—they graduate with nearly double the debt of their white counterparts.112
Federal student loans offer plans that cap monthly payments at 10 percent of an applicant’s discretionary income.113 Despite this, historically FHA had for years required lenders to consider 1 percent of an applicant’s loan balance as their monthly debt. This policy harmed applicants with high student debt burdens by artificially inflating their debtto-income ratio.114 In 2021 FHA relaxed its terms by allowing lenders to use 0.5 percent of the total balance, or the actual student loan payment, when calculating debt-to-income ratio.115
But the requirement remains a hurdle. For some graduates, 0.5 percent of the total balance could still be higher than their actual income-based repayment. And the requirement fails to account for public sector loan forgiveness for which those who work in the public sector may qualify.
ESTABLISH A PROFESSIONAL MORTGAGE PILOT PROGRAM FOR FIRST-GENERATION HOME BUYER GRADUATES OF RUTGERS LAW SCHOOL
Recognizing that professionals pose a relatively low risk as borrowers, some lenders—like Cadence Bank, which does not operate in New Jersey—have created special mortgage products for select professionals, including attorneys, doctors, and dentists. These products offer up to $1.5 million, with no PMI requirements.116 The removal of PMI allows borrowers to enjoy lower closing costs and monthly payments.
NJHMFA should fill the need for these products within New Jersey and establish a pilot program awarding grants to cover PMI for RLS graduates who use its First-Time Homebuyer Program. In year one of the pilot, NJHMFA should award such grants to 200 borrowers. After two years, the Agency should expand the pilot to include Rutgers School of Dental Medicine and Rutgers New Jersey Medical School. After three years, NJHMFA should assess risk of current grantees and, if
favorable, make it a permanent program. We are not aware of similar programs offered by HFAs, meaning the Agency has an opportunity to innovate.
The program could have enormous benefits for professionals. In 2020 alone, New Jersey home values increased by 19 percent,117 creating enough equity for the average homeowner to eliminate educational debt several times over. But the significant cost of PMI—nearly 10 percent of the home’s value over the first ten years of ownership—can wipe out much of these equity gains and dissuade recent graduates from becoming homeowners when they are already burdened with debt.
FIGURE 11. ILLUSTRATIVE PMI COSTS OVER TIME
Atlantic County Camden County Essex County
Max Single Family Home Price $311,979
Upfront PMI $5,460
Annual PMI Fee $2,652 $377,540
$6,607
$3,209 $719,953
$12,600
$7,560
Year 1 Cost $8,112
Monthly PMI $221
Property Tax (2%) $6,240 $9,816
$267
$7,551 $20,160
$630
$14,399
Total PMI Cost for 10 Years $31,979 $38,652 $88,200
Percent of Housing Cost – PMI after 10 Years Approximate # of Pilot Grants
Cost of Pilot Grants over 10 Years 10.25%
85
$2,718,215 10.25%
85
$3,285,420
Total cost of pilot over 10 years: $9,972,635 12.25%
45
$3,969,000
Source: “Appendix 1.0 - Mortgage Insurance Premiums,” U.S. Department of Housing and Urban Development, figure generated on December 13, 2021. Note: The PMI costs were calculated by multiplying the applicable rates published in Appendix 1.0 by the hypothetical purchase prices in each respective column. https://www.hud.gov/sites/documents/1501MLATCH.PDF
The table above models one approach for the pilot program. At a cost of $10 million over ten years, NJHMFA could fund PMI grants for 200 loans given current limits on home purchase price as discussed in the down payment analysis earlier in this report. If successful, this program should be made permanent and expand to include other public professional schools throughout the state of New Jersey.
NJHMFA should also partner with RLS to provide home buyer education, with an emphasis on first-generation attorneys and home buyers. This will allow NJHMFA to tap into a promising future market, preparing this group to become homeowners. Early interventions have the potential to make law students ready for homeownership after graduation and keep talented Rutgers-trained attorneys in New Jersey.
4.3. Develop a comprehensive ‘northern county’ strategy to promote landlords of color
NJHMFA should partner with real estate agent networks in key northern counties with higher quantities of 2–4-unit housing to promote its loans for these properties. To do this, the Agency should pair real estate professional partnerships with strategic outreach to home buyers of color, and train and certify on best practices for homeowner-landlords of such small properties (one owner-occupant and two-three renters).
No county has a uniform housing stock. Our research and conversations with housing stakeholders revealed challenges to successful NJHMFA loans in northern counties: the high fraction of renters in these areas,118 housing stock that is more expensive, and more multi-units. These challenges present an opportunity for NJHMFA to help minority home buyers build wealth. If NJHMFA loans are used by home buyers to purchase 2–4-household units (while abiding by the regulation that the homeowner permanently reside in one of the units), these home buyers can become landlords to pay for their mortgages and build wealth.
DIFFERENCES IN HOUSING STOCK
Figure 12 `indicates the prevalence of 2–4unit housing by county. These units are more common in counties that receive few of the Agency’s loans: Essex, Hudson, Bergen, Passaic, and Union. These five counties accounted for 5.8 percent of NJHMFA’s DPA loan portfolio from 2016–2020.
DEPLOYING NJHMFA’S CURRENT PRODUCT LINE
Because the NJHMFA First-Time Homebuyer loan already includes maximum purchase price limits for 2–4-family homes, this recommendation requires little fundamental change. Instead, work remains in strategic outreach and communication. NJHMFA should adopt an online training module with best practices in buying a multi-family home and overall financial modeling. The Agency may choose to emulate, or simply take advantage of, the similar resources offered by partners to Freddie Mac.119
NJHMFA has had difficulty breaking into real estate professional networks in northern New Jersey. One lender we spoke to emphatically endorsed the idea of ensuring that low and moderate-income home buyers understood the potential of NJHMFA loans for multifamily units: “Making this more compelling,” she said, “is a big marketing hook. It really gives real estate professionals something to talk about.”120 Due to the challenge of making a 20 percent down payment on a larger
FIGURE 12: TYPES OF HOUSING UNITS BY COUNTY
Total # Units 2 or more/1,000
Total # Units 2 or More
3 or 4 Unit 233
93,645
48,969
2 Unit
1 Unit Attached
1 Unit Detached
1 Unit Housing
Total Housing Units 44,676
22,950
103,900
126,850
319,689 228
97,650
36,773
60,877
15,186
25,027
40,213
286,907
County Essex County Hudson County 170 164 136 97 43 38 36 32 27 25 25 24 15 13 11 10 6
65,739 57,560 49,855 35,567 16,923 15,310 15,088 15,175 10,558 10,156 9,598 11,689 5,772 4,958 4,285 10,566 2,381
18,716 18,822 15,919 13,920 8,971 5,438 9,194 8,175 5,334 6,285 5,362 5,002 3,381 2,843 1,918 3,997 1,343
47,023 38,738 33,936 21,647 7,952 9,872 5,894 7,000 5,224 3,871 4,236 6,687 2,391 2,115 2,367 6,569 1,038
22,931 9,534 8,070 33,587 14,788 36,411 23,783 26,363 31,370 29,437 16,872 10,997 8,393 4,604 4,533 24,264 5,448
188,592 74,368 102,497 160,712 126,609 114,297 172,600 216,383 69,058 116,177 77,981 75,743 84,660 36,317 35,926 51,951 30,595
211,523 83,902 110,567 194,299 141,397 150,708 196,383 242,746 100,428 145,614 94,853 86,740 93,053 40,921 40,459 76,215 36,043
360,822 177,254 203,047 303,457 196,196 206,368 262,917 286,173
Bergen County Passaic County Union County Middlesex County Morris County Camden County Monmouth County Ocean County 145,133 180,448 127,526 128,951 114,452
Mercer County Burlington County Somerset County Atlantic County Gloucester County 56,471
Cumberland County 50,554
Hunterdon County 99,630 45,624
Cape May County Warren County 5 4
2,345 1,619
1,373 1,167
972 452
3,466 1,399
50,182 20,323
53,648 21,722
62,632 27,603
Sussex County Salem County
Source: American Communities Survey Data, 2019, 1-Year Estimate 137
property, real estate professionals are more likely to recommend that buyers of multifamily units use an NJHMFA loan. The same lender continued, “Plus the icing on the cake is that in addition, they can get the $10,000 DPA. On top of that if the $10,000 was even higher that would be a game changer.”121
FINANCIAL BENEFITS OF MORE LANDLORDS OF COLOR
NJHMFA can help Black homeowners purchase properties, build wealth through rental income, quickly pay down mortgages, and generate home equity. For example, a buyer of a $599,900 four-unit home in Passaic County can rent each of the three spare units for $1,800,122 bringing in $5,400 in monthly rental income. That income more than covers the mortgage and PMI costs for the home, leaving about $1,500 that can be used to aggressively pay down principal.
SOCIAL BENEFITS OF MORE LANDLORDS OF COLOR
Black and Latino landlords have struggled to make payments during the COVID-19 pandemic.123 These landlords have been more likely than white landlords to opt into mortgage forbearance, in line with the wealth gaps outlined in this report. Despite their more precarious financial situation, Black and Latino landlords were more likely to provide rental payment plans for their tenants.124
COSTS AND FUNDING
This intervention is relatively low-cost, requiring focused marketing and work to partner with existing resources on landlord training. NJHMFA should strengthen its relationships with the New Jersey chapters of the National Association of Hispanic Real Estate Professionals and the National Association of Real Estate Brokers. These partnerships require focused staff time and would be allocated to new marketing and partnership hires recommended in this report.
IMPACT ON NEW JERSEY’S RACIAL HOMEOWNERSHIP GAP
Given the higher costs of multi-unit properties and the work that accompanies becoming a landlord, we believe this program will reach a small number of home buyers of color. Despite its limited impact on the racial homeownership gap, this program allows borrowers the opportunity to accumulate wealth and equity quickly, making it a powerful component of the Agency’s goal to reduce the racial wealth gap through homeownership.
4.4. Improve access to community land trust (CLT) homeownership opportunities among lowincome households
Community land trusts (CLTs) provide homeownership opportunities for families who would otherwise be unable to purchase a home, even with down payment assistance. While CLT homeowners see more modest equity accumulation than market-rate homeowners enjoy, CLTs can be an effective stepping-stone to nonsubsidized homeownership and can mitigate gentrification. Without radically altering its operations, NJHMFA can help make CLTs more accessible.
In the short term, the Agency should offer CLTs right-of-first-refusal on some of its foreclosed properties and create underwriting guidelines that encourage private lenders to issue mortgages for homes in CLTs. Over the long term, the Agency should provide CLTs
with modest financial assistance and ensure that CLT home buyers can access DPA.
Community land trusts are nonprofits that provide shared equity homeownership opportunities for low- and moderate-income households. CLTs operate as owners of the land. CLT homeowners purchase the house, but not the land itself, which they lease for a long period—typically 99 years.125 When the homeowners sell their homes, they do so at a restricted price, which ensures the homes’ long-term affordability.
In addition to preserving neighborhoods’ stock of affordable housing, CLTs offer opportunities for homeownership to families which would otherwise be unable to afford a home, even if they received down payment assistance. A 2019 study found that 95 percent of shared equity homes, including community land trust homes, are affordable to moderate-income households, and nearly half are affordable to low-income households.126
Even with access to down payment assistance, low-income households in New Jersey can rarely afford a market-rate home. CLTs should therefore not be seen as competing with conventional or FHA-assisted homeownership opportunities. Rather, they may be a valuable means to help low-income families begin to build wealth through home equity, rather than lose money to rent.
Shared equity homeowners see real gains in wealth—about $14,000, on average, by the time they sell their homes.127 More important, CLTs act as a stepping-stone for families to become market-rate homeowners. For example, more than two-thirds of homeowners in the Champlain Housing Trust, a CLT in Vermont, purchased a market-rate home without subsidy after moving out of the land trust.128 CLT homeowners have also been at significantly lower risk of foreclosure compared to conventional homeowners, even during the Great Recession.129
Finally, CLTs have helped combat gentrification. A statistical analysis of CLTs nationwide found that they prevent the displacement of low-income homeowners, preserve affordability, and build community assets in neighborhoods at risk of gentrification.130
IMPROVING ACCESS TO CLT HOMEOWNERSHIP IN NEW JERSEY
Only one CLT, the Essex Community Land Trust, currently operates in New Jersey131 . Established in 2011, the Essex CLT owns the land under 14 homes and seeks to expand. At least three CLTs previously operated in Trenton and Camden but were discontinued in the 1980s and 1990s. Our conversations with Alan Mallach and Harold Simon indicate that these CLTs stopped operating primarily due to inadequate management and resources.132
Despite the relative lack of CLTs in New Jersey, there are several short- and long-term opportunities for NJHMFA to facilitate CLT homeownership among low-income New Jersey families.
As part of NJHMFA’s Foreclosure Prevention Program, the Agency should aim to offer CLTs a right-of-first-refusal when selling off foreclosed properties in their vicinity. Unfortunately, some of the mortgages NJHMFA acquires as part of its bulk purchase program will end up in foreclosure. The Agency should resell these homes to missiondriven organizations that promote affordable housing opportunities, rather than for-profit institutional investors.
Given the opportunities CLTs create for stable, affordable homeownership among low-income families, New Jersey CLTs should be offered the opportunity to purchase NJHMFA-owned properties in their vicinity— for example, if the CLT owns any land within one mile of the foreclosed property. While this policy would apply only to the Essex Community Land Trust today, it should also apply to any CLTs that form in New Jersey in future years.
NJHMFA should create underwriting guidelines that encourage private lenders to issue mortgages for CLT properties. Currently, both Freddie Mac and Fannie Mae maintain checklists for underwriting CLT mortgages.133 These checklists are simple—they require confirmation that the ground lease conforms to National Community Land Trust Network guidelines, has a term of at least 30 years, and includes an explicit resale formula. NJHMFA should offer banks a similar checklist to reduce the perceived risk of issuing a mortgage to a CLT.
Over the long term, NJHMFA should ensure CLT home buyers can access the Agency’s DPA program. Currently, it is difficult—but not impossible—to use an FHA-insured mortgage to purchase a home on land owned by a CLT. The difficulty arises from FHA’s stringent requirements around resale formulas and a CLT’s right to enforce resale restrictions.134As DPA loans are almost always paired with FHA first-lien mortgages, this makes DPA inaccessible to CLT home buyers. NJHMFA should work with FHA to develop a set of “mortgage amendment” guidelines, which the Agency can offer to CLTs such that they can structure a mortgage product that will be FHA-insured and thus DPA-accessible. And to the extent that the Agency seeks to offer DPA on conventional loans in the coming years, it should ensure that these loans are also available to CLT home buyers.
The Agency should also explore providing modest financial assistance to CLTs. Currently, eight state HFAs provide some financial support to land trusts, including loans or grants from the state’s housing trust fund.135 Colorado’s HFA uses money from the state’s housing trust fund to provide CLTs with cash collateral when seeking loans to purchase houses.136 While providing direct financial assistance to CLTs may not be immediately feasible for NJHMFA, it should consider such assistance as a long-term opportunity to promote affordable, stable homeownership.
IMPACT ON NEW JERSEY’S RACIAL HOMEOWNERSHIP GAP
CLTs create homeownership opportunities for households with low and moderate incomes. In New Jersey, as in other states, these households are disproportionately Black and Latino. Essex County, which contains New Jersey’s only currently operating CLT, is 38 percent Black and 24 percent Latino. To the extent NJHMFA’s policies support the growth of the Essex CLT, the Agency will be supporting new homeownership opportunities for Black and Latino households. As any new CLTs begin to operate in New Jersey in the coming years, the Agency’s modest support of these institutions is likely to benefit Black and Latino families with low and moderate incomes.
