Why You Should Give Up Your Land

By Nik Steinberg

Slate Magazine

04/14/2009

By every indicator, Boston's Dudley neighborhood should be riddled with foreclosures. One in four of its families lives below the poverty line [1]. The unemployment rate there often runs twice as high as the rate in the rest of Boston. And the neighborhood is filled with newly built houses, condos, and apartments.

But banks aren't repossessing homes in the Dudley neighborhood. In fact, this February [2] workers put the finishing touches on a brand-new apartment complex where, despite the real estate collapse, every unit had been presold. What's Dudley's secret?

The answer is that most of the property there is part of a community land trust—a form of shared equity that separates the value of homes from the value of the land they rest on. Dudley's CLT has more than 200 units, and not a single one has been seized by the banks in the collapse.

Not many real estate developers, let alone average Americans, have heard of CLTs. But their resilience in staving off foreclosures is catching the attention of more than a few policymakers and developers. A study performed by the National Community Land Trust Network [3] in 2008 found that, nationwide, CLTs' foreclosure rate was about one-thirtieth the national rate—only 0.06 percent, or six in every 10,000 homes.

Much of the CLTs' success can be traced back to the model itself. First, because trusts own a considerable share of homeowners' properties (the land), houses and apartments in community land trusts tend to be cheaper; one 2005 study in Vermont [4] found that median monthly rent for a CLT was about 40 percent cheaper than other housing. That means smaller mortgages and lower monthly mortgage payments.

Second, CLTs vet potential homeowners and monitor their upkeep. This is simple self-interest. Trusts and their homeowners are partners in a joint investment, and nobody wants partners who can't hold up their end of the deal. Recently, CLTs have proven much more adept than other lenders in distinguishing who can afford mortgages from who cannot (compared with say, WaMu [5], where they'd probably have given a loan to a dead person).

But even with these protections, some homeowners in CLTs have fallen on hard times, and it is here that the trusts perform their last protection. Take the Chicago Community Land Trust [6]. A few months ago, its director—Dena Al-Khatib—got a call from one of the trust's homeowners who had lost her job and knew she wasn't going to be able to make her mortgage payments. The woman had tried talking to her bank, but they were unwilling to cut her any slack. So the Chicago CLT intervened on her behalf, encouraging the bank to temporarily cut her payments. This time the bank responded. The woman was able to keep her home, where she lives to this day.

But if community land trusts work so well at staving off foreclosures, why aren't there more of them? Four decades after their founding, there are only about 200 CLTs, encompassing approximately 6,000 dwellings, nationwide. What's stopping them from becoming the new model for American homeownership?

Partly, it's that CLTs require people to work together. The first CLT was founded in 1968—the year of the Prague Spring, student uprisings in Paris, and riots at the Democratic National Convention. It was a time when radical movements challenged hierarchical structures, and that sensibility is reflected in the collective decision-making structure of CLTs, which empowers communities to work with the government and lenders in plotting their own development.

Yet while community participation is one of the trusts' greatest assets, it has also slowed their expansion. Michael Wadman—vice president of the Phipps Houses Group, a nonprofit housing developer based in New York—explains: "Look at any co-op board in any city. When you have a whole lot of people making decisions together, it may have that feel-good quality, but it can be difficult getting there."

Running a CLT also requires a lot of expertise. Staff and boards have to navigate complex laws and regulations involving zoning, tax codes, and shared finances, all while managing development and tricky public-private partnerships. There just aren't many people around with the know-how—to say nothing of the patience—to take this on.

And some say that the biggest obstacle to scaling up CLTs nationwide is more money.

John Davis is a founding partner of Burlington Associates, a consulting group that advises communities and cities on how to set up and run CLTs. He says that with an infusion of capital, CLTs could march right into some of the neighborhoods hardest hit by foreclosures and say: "Look, we'd like to buy the land under your feet. Here's a check for $30,000. We just want you to agree that when you're ready to sell, you'll sell to us, and that you may not get the full market price."

According to Davis, the government, foundations, or private investors could do this by investing in trusts with proven track records or by seeding new CLTs across the country. And while he concedes that CLTs wouldn't work in every market—trusts cannot, for example, stimulate demand in completely blighted cities like Cleveland [7]—CLTs could go a long way toward helping many homeowners get back onto a sustainable payment plan.

But for all the money being poured into shoring up the housing market, CLTs keep getting passed over. Neither last summer's Neighborhood Stabilization Program nor the recent American Recovery and Reinvestment Act sets aside funds from their billions in housing money for investing in CLTs.

Much of this boils down to ideology. The house with the white picket fence has been part of the American dream for generations. Yet over the past several decades, Americans have come to see their homes not only as places to live and status symbols but also as a key source of wealth generation. By the '90s the dream had less to do with owning a home than it did with making money by flipping it. It was about accruing value—and fast. This held true across class and race lines. For the poor, owning (and eventually selling) a home was seen as a fast track out of poverty. For the rich, it became yet another way to add to the coffers.

And the model delivered. In fact, it worked too well. In Florida, gardeners became mortgage brokers, drug dealers became developers, and a bank teller earning $23,000 a year could buy a house worth 10 times her income [8]. The entire global market bet on it: banks and government agencies, hedge funders and pensioners. And then—POP!—they all lost.

The CLT model breaks with the idea of the home as a form of instant wealth generation. CLTs have a formula for determining the price at which homeowners can sell [9] their property—one that takes into account inflation and improvements made by the owner—though it still promises a modest return on the investment. This formula is designed to keep housing affordable at the market's peak and safe from foreclosure when it hits rock bottom.

But this stability comes at a price. Homeowners in CLTs give up the right to sell their house at market value—and with it, the possibility of doubling or tripling their investment in boom times. That's the rub.

In the words of Diane Levy, an expert on housing policy at the Urban Institute: "[T]here's a cultural component of American life that says you should be able to go out and make it big in the housing market. The CLT model hits right up against that." This is the ultimate irony: No matter how well the CLT model works, Americans probably won't go for it.

Still, there are some signs that this crisis may be bad enough to shift the paradigm. Davis and Al-Khatib say that over the past several months they've gotten a lot more calls from shaken city officials who want to know if forming a CLT could help them stave off more foreclosures. "Even banks are calling us," Davis says. And if change is going to come to housing policy, according to the Urban Institute's Levy, it is most likely to start at the city level and percolate up.

But don't hold your breath. It's a buyer's market, after all.

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Source URL: http://www.thebigmoney.com/articles/judgments/2009/04/14/why-you-should-give-your-land

Links:
[1] http://dsni.org/urban_village_demographics.shtml
[2] http://www.dsni.org/DNI_Web_Pages/serv04.htm
[3]http://www.cltnetwork.org/doc_library/NCLTNForeclosureSurveyReport032008_000.pdf
[4]http://www.burlingtonassociates.com/resources/archives/performance_evaluations_of_clts/000338.ht
[5] http://www.nytimes.com/2008/12/28/business/28wamu.html?em
[6]http://egov.cityofchicago.org/city/webportal/portalContentItemAction.do?contentOID=536947205&contenTypeName=COC_EDITORIAL&topChannelName=Dept&blockName=Housing/I Want To&context=dept&channelId=0&programId=0&entityName=Housing&deptMainCategoryOID=
[7] http://www.nytimes.com/2009/03/08/magazine/08Foreclosure-t.html?_r=1
[8] http://www.onpointradio.org/shows/2009/02/george-packer-the-ponzi-state/
[9] http://www.burlingtonassociates.com/resources/archives/resale_formulas/000123.html