Shared Equity for Rural Homebuyers
How have shared equity housing models created positive impacts on the supply of affordable housing?
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By Mike Feinberg
Shared equity models are often locally (neighborhood) based. The homes financed may carry resale restrictions on value appreciation and may only be sold to an income-eligible purchaser. These models may not be conducive to rural areas with vast geographies and limited markets.
USDA’s Rural Housing Service provides resources designed to serve rural areas, generally places with populations of 25,000 or less. The agency offers both guaranteed and direct loans. These loans can be made in some of the more traditional shared equity markets, like community land trusts, but these vehicles are not always present in smaller communities.
When thinking of shared equity in housing, rural areas may not be the first to come to mind. But the U.S. Department of Agriculture’s (USDA’s) Section 502 direct loan product is one model of shared equity housing. Under this loan program, low- and very low-income rural residents who cannot obtain credit from other sources have the opportunity to become homeowners. Section 502 direct loans include a feature known as “payment assistance.” The payment assistance is a subsidy that reduces eligible borrower’s share of the principal, interest, taxes and insurance payment (PITI) to about 24 percent of adjusted income. Homebuyers receiving Section 502 direct loans in Fiscal Year 2013 had an average income of $28,268.
Since 1979, the USDA homeownership loans have also included a shared equity component known as “recapture.” Under the recapture requirement, a borrower repays all or a portion of the payment assistance received over the life of the loan. Recapture is repaid when title to the property transfers or when the borrower no longer occupies the home. As long as the borrower owns the property and remains in the home, repayment of recapture can be deferred. This is true even if the loan is paid off.
USDA’s affordable housing loans did not always include a recapture provision. Congress added the recapture provision in the “Housing and Community Development Amendments of 1978 (Public Law 95-557). The provision was added in 1979 as a means of reducing the cost of the program to the government.
USDA’s recapture provision is controversial. Some advocates have raised concerns about the reduced equity for program participants. However, concerns over the federal budget have only expanded since the 1978 amendments were signed into law. Without the recapture provision, funding for this program would be severely reduced, if not eliminated.
Since 1979, over 800 thousand loans have been made to low- and very low-income rural households. Without this assistance, most, if not all, of these families would have been unable to afford to own a decent home.
Mike Feinberg is the Senior Policy Analyst at the Housing Assistance Council.
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