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Subprime Mortgage Meltdown – Challenging the Myths

For many, the foreclosure crisis has been pinned on uniformed minority and low-income borrowers as well as policies that support them in becoming homeowners. This myth has led some to consider low-income buyers as not ready for homeownership, as part of the problem rather than the solution.

A recent groundbreaking study by Maurice Jordain-Earl of ComplianceTech researches the demographics of the subprime fiaso and reveals that upper-income borrowers across all racial groups had the largest number of subprime rate loans, followed by middle-income borrowers from all racial groups. The study concludes that the meltdown “is better described as a mainstream white suburbia problem with aspects that affect minorities and urban communities. Erroneous assumptions about the demographics of subprime rate lending will only lead to poor decisions that result in ineffective solutions.”

Manna’s and others experiences have been that low down payments, 30 year-fixed rate loans and financial education/counseling have proven to be the key ingredients for making low-income home buyers successful, even through the foreclosure crisis. And homeownership has been a legitimate and important way for these responsible buyers and their families to build assets and move up the economic ladder. Low-income buyers are and can be part of the answer to the crisis we are in.

History of Homeownership and Race in the United States

There has always and continues to be a wealth gap between whites and minority groups in the United States. According to a recent Pew Research Center study, the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households. Though the gap has significantly widened in recent years, this gap also has deep roots in the history of the United States, including discriminatory policies and practices that limited the traditional way Americans have increased their wealth: Homeownership.

For a history of homeownership and race in the United States, see the below segment of the documentary “Race – The Power of An Illusion”:

Plug into affordable housing issues today!

Check out the updated information in our Issues section. There is new information on the effects of long-term resale restrictions, Manna’s “Resale and Recapture” provision as an alternative to those restrictions, and the Continuum of Housing campaign. So, read up on the issues, let us know what you think, and consider joining the Continuum of Housing campaign.

HAT will offer you more ways to plug in soon. We can’t do our work without you!

New and Improved

The website is back!  With great joy the Housing Advocacy Team ushers in the new and improved  We also have a Facebook page where you can post your photos of HAT events, have discussions, and more.  Please give us “the thumbs up” by clicking on the “like” button! You can follow our Facebook page (and sign up for an account, if you need one) here.

While you are surfing the web.  Check out the following Housing Complex Blog article here

The Situation of Affordable Condo Owners in NW DC

Through agreements with various developers, the DC government has attempted to integrate low and moderate income families into market rate condominium projects, most of which are in Northwest DC. While the idea was noble, it has been ill-designed.

The City placed 20 year resale restrictions on the Affordable Dwelling Units (ADU), assuming that if low and moderate income people (between 30% and 80% of the Area Median Income) purchased an ADU, these affordable owners would be able to resell to another family earning the same income as the original owner earned at the time of purchase. The City also assumed that the original owners would be able to earn a fixed percentage at the end such a sale. Unfortunately, the City did not factor in escalating condo fees or the costs associated with reselling the ADU. So now, when ADU owners need to resell their units for whatever reason, many of them cannot. With the increased condo fees, many of the units would not qualify as affordable for people in the same income categories, and even if they found someone else, the seller would have to come up with 10% of the sale price for closing costs fees in order to resell it at whatever price they originally purchased it for.

Compounding the issue even further for those owners who cannot sell their units, renting out their homes has not been an option either as the City-imposed rental restrictions forced these owners to rent their units at prices that are lower than the monthly costs associated with owning units. Below is a list of market-rate condo buildings with ADU owners facing rising condo fees compounded by resale and rental restrictions, with many owners paying condo fees almost equal to or more than their mortgage payments.

  1. Barcelona – 1435 Chapin St NW
  2. Chase Point – 4301 Military Rd NW
  3. City Vista K – 475 K St NW
  4. City Vista L – 440 L St NW
  5. Fedora – 1451 Belmont St NW
  6. Kenyon Square – 1390 Kenyon St NW
  7. The Heights of Columbia – 2750 14th St NW
  8. Union Row – 2125 14th St NW
  9. Verona Parc – 1348 Euclid St NW

In any scenario, the end result is the complete opposite of what the City originally set out to do, and many of these families, without intervention, will be returned back into the ranks of folks needing affordable housing, but with damaged credit and no prospect of purchasing again. This situation simply does not make sense as these families have to take the same level of risks and responsibilities of being homeowners, while reaping none of the benefits, even after the City is repaid its subsidies (which actually went to the developer in the first place).

In October 2011, Manna organized affordable owners across these buildings, collected physical and online petitions, and met with City Council officials. Throughout 2012, these owners organized within their buildings, sought support from their condo associations, met with City officials, testified publicly and worked through Manna and with the City Council to address their issues. Direct meetings between affordable owners and the Department of Housing and Community Development began in February 2013.

In the summer of 2013, the Department of Housing and Community Development (DHCD) put forward a process to evaluate the affordability of each ADU and possibly allow owners to rent or sell to people in higher income categories. Information on this process and the form are on DHCD’s website at More changes need to be made for current and future owners, but this is a significant step in the process.

Addressing Affordable Homeownership in a Different Way: The Present and The Alternative

The Present: Long-Term Resale Restrictions

The current long-term resale restrictions that the DC government places on homebuyers of affordable units – typically 15-20 year restrictions, but even reaching up to 30 years or permanent – force home owners to sell their properties at below market rate. The intended purpose of these restrictions is to preserve affordable housing units in Washington, DC and ensure against people immediately reselling their properties and making a ‘windfall’ profit. However, the flipping of affordable units is almost nonexistent and these restrictions have the unintended result of preventing home owners from building up equity. The chance to build reasonable equity is one of the main reasons people become homeowners, and home equity has historically and continues to be the primary asset builder for lower income people.

The effects of long-term resale restrictions include:

  1. Short-term effects: home owners are unable to access their home equity when unforeseen or emergency expenses arise (e.g. health emergencies, emergency home repair, etc.).
  2. Long-term effect: home owners are unable to build wealth and maintain generational home ownership.  With long resale restrictions, home ownership is not a viable investment. Instead, it creates one-time home owners.

Real-life situations to consider in regards to long-term resale restrictions:

  1. If a lower income person gets married, or a couple has a child, and needs to trade up to a larger home in the same neighborhood, where will the equity come from to enable them to buy a larger home in DC? As second-time homeowners, they will not be eligible for the same benefits they could get as lower income, first-time homebuyers.
  2. If a lower income owner has a better job opportunity in another location, how will he/she be able to remain a homeowner unless reasonable equity can be realized so that a home can be purchased in another area? Even in an area with lower prices, substantial down payments are often needed for low-income persons.
  3. What happens if the housing market declines and there is a financial loss? It would appear that the lower income owner bears the full burden of all losses whereas that same owner is severely restricted in what he/she can realize.

In summary, without the ability to accumulate reasonable equity over time, the lower income buyer can easily become trapped in a homeownership situation and forced to sell rather than be able to cope with adverse life circumstances. Therefore, the people who can least afford it and are in need of the economic opportunity only homeownership can give them are being forced to shoulder a disproportionate share of the burden in creating affordable homeownership in DC. We and the population we serve feel this is unfair and discriminatory.

The Alternative: Recapture and Recycle

Manna advocates an alternative to long-term resale restrictions, particularly in wealthier areas of the city where home appreciation is high. A better, more equitable way to insure against the concerns voiced by long-term resale restrictions, specifically against “windfall profit” and “property flipping”, is through what Manna calls a “Recapture and Recycle” provision. This provision, which has been promoted in different forms by the US Department of Housing and Urban Development, recaptures all funds that are considered “subsidy” to the buyer, which is the difference in the original sales price to the lower income buyer and the higher appraised/market price at that time. This difference would be repaid if and when the lower income buyer resells his/her unit. This allows the “recaptured” funds and any funds considered subsidies to be treated as a loan that gets repaid and  “recycled” back into additional affordable units for more qualified lower income families. Rather than long-term resale restrictions, Manna advocates and employs a 5-10 year resale restriction.

An example of the “Recapture and Recycle” provision:
If a lower income person purchases a unit that is worth $435,000 from a developer for $235,500 (the cost of developing the unit), then the $199,500 “discount” would be considered a subsidy that would be repaid to the city to produce more affordable homeownership opportunities when the homeowner sells or refinances. The homeowner would benefit from being able to fully utilize, like a typical homeowner, any appreciation accumulated above the original $435,000 value after the 5-10 year period.

The newly released proposed FY2010 budget includes cuts to valuable housing programs, including Local Rent Supplement and housing first. We are currently in the process of parsing through the proposed budget numbers to find where the money is being reallocated.

The city’s tactic of cutting funding to these programs is a temporary fix and will have negative long term repercussions. We are hoping that the city can responsibly raise revenue in order to protect these and other critical housing programs.

Visit Save Our Safety Net for more information and to sign an online petition.

The District Can Learn from Others about the Effects of Long-Term Resale Restrictions

Long-term resale restrictions are relatively new to DC.  It takes a few years to understand their effects.  Fortunately, we have some examples from the last several years that demonstrate what Manna has been saying, simply that long-term resale restrictions are not fair and have not been working.

  • In Boston, MA, resale-restricted properties are not selling due to the softening housing market, undercutting housing programs’ intent.  Buyers can buy non-restricted properties now becoming affordable.  Therefore, the city and nonprofits have spent significant funds marketing units.  A proposed bill will reduce the restrictions to 10 years. For more information, see “Droop in Home Sales Infect Even the Subsidized Market” by Binyamin Appelbaum, Boston Globe, 28 January 2008,
  • In Chapel Hill, NC, the government has had to appropriate an unexpected and additional $3.1 M because owners cannot maintain their homes and administration costs are high to oversee each and every resale.  There is little financial incentive to pay for, say, a new roof if a buyer cannot realize the market benefit of the maintenance.  Therefore, new public funds are necessary to spur home repairs, improvements. For more information, see “Housing Program Strapped: Agency Needs $3M to Keep Homes Affordable” by Lisa Hoppenjans, The Chapel Hill News, 1 April 2007.
  • In Madison, WI, housing advocates, stakeholders, city officials and developers amended their city’s permanent affordability restriction on Inclusionary Zoning (IZ) homes to simply be a recapture model because the complex resale formula was not attractive to buyers.  Now, for example, if the City’s “subsidy” is 1/3 of the market price at the time of purchase, then the City gets back 1/3 of proceeds when the home is resold.  Buyers understand this and their IZ program has become successful. For more information, see “Madison, Wisconsin Inclusionary Zoning Ordinance” by Manna, Inc., Fall 2006,
  • In Austin, TX, city officials increased the restriction period from 15 to 30 years, but affected buyers and owners have accused them of predatory practices; including not fully disclosing the effect of the restrictions, deceiving buyers into signing onto complex formulas at the closing table, and forcing those with no other option to participate. For more information, see “City, homeowners at odds over changes to loan program loan” by Suzannah Gonzales, The Austin American-Statesman, 12 October 2007.
  • In South Carolina, long-term resale restrictions are disastrous for buyers and set up de facto redlining.  A town manager says that the town’s 30 year resale restrictions have “potentially trapped residents in financial disaster” while a local developer said, “The deed restrictions make the properties unattractive to mortgage lenders.” For more information, see “Island May Abandon Efforts to Create Affordable Housing” by Tim Donnelly, the Island Packet, SC, 29 June 2007,
  • In Palo Alto, CA, city officials have retreated from permanent affordability restrictions because the restricted owners could not keep up homes or sell and move into the open market.  The nonprofit running the program says, “Sometimes residents are eligible but can only barely afford the house and may not have enough savings for maintenance or fixing the heater, so over time the unit is not in the best shape.” For more information, see “Affordable Housing on City’s Slate” by Kristina Peterson, Palo Alto Daily News, 10 October 2007,

Madison, Wisconsin Inclusionary Zoning Ordinance

Manna, Inc.

Fall 2006

In July, 2006, the Common Council in Madison amended its Inclusionary Zoning (IZ) ordinance (officially adopted in 2009; see the new ordinance at, the second of its kind in the Midwest, in response to perceived resistance of buyers of IZ homes to the permanent resale restrictions in the original ordinance. The original ordinance included a formula intended to preserve long-term affordability of IZ units.  The formula determined what percentage of appreciation (between 0 and 50%) the homeowner could realize in order to keep the IZ unit affordable to the next eligible purchaser.  The restrictions were permanently tied to the particular IZ unit. For the new

After 18 months, the City conducted a study of the IZ program and found that one major concern was that “it is difficult to attract potential buyers to discuss the purchase of inclusionary units.  Some cite the complexity and effect of the equity sharing model in the ordinance.” (p. 21, Inclusionary Zoning Ordinance Evaluation Study, Madison, WI,

The new ordinance, adopted in July, releases IZ units from permanent resale restrictions and initiates a model whereby the City and the owner/seller share the proceeds of sale.  The new model substitutes a City share of the sale proceeds for long-term affordability of the original IZ unit.  The City share that is recaptured upon resale is placed in a fund to subsidize future affordable homes.  This new model provides incentives for the IZ homeowner to maintain and improve the home, allows the homeowner to build equity and take risks commensurate with the market, provides the City with a permanent source of funding for affordable housing development that increases as the market increases, and gives the flexibility and opportunities of homeownership to lower-income households.

For example, in simple terms, an IZ unit is assessed to be worth $300,000, but an eligible buyer can only afford to pay $200,000.  The City’s interest is 1/3, or 33%, of the IZ unit.  Fifteen years later, the homeowner sells the IZ unit at its assessed market rate, now $400,000, and pays the City 95% of its interest in the property, which is $126,654 that the City will then recycle into further affordable housing development.  The owner/seller can now take his proceeds, $273,346, and put them toward a larger home, a college education for his kids, etc.

Subsection 26.9 of Madison IZ Ordinance

(h) Distribution of proceeds from sale of an owner-occupied Inclusionary Dwelling Unit.

1. At the time of the qualifying sale of an owner-occupied inclusionary dwelling unit, the income eligible family shall provide the City with a promissory note, secured by a second mortgage, for an amount that is the percentage difference between the appraised value of the unit, determined within thirty (30) days prior to the sale, and the sales price of the unit. The resulting City percentage share of the value of the inclusionary dwelling unit shall be the percentage of the total value represented by the difference between the appraised value and the sales price divided by the appraised value of the inclusionary dwelling unit.

2. At the time of the sale of an inclusionary dwelling unit, the amount of the sale proceeds paid to the City shall be the City’s percentage share of ninety-five percent (95%) of the sales price of the inclusionary dwelling unit. This provision applies to all inclusionary dwelling units sold by income eligible families before or after the effective date of this amendment.

3. Any proceeds of a sale that are remaining after the seller’s share shall be deposited in the Inclusionary Zoning Special Revenue Fund.

4. The seller cannot offer the inclusionary dwelling unit for sale at a price below the assessed value unless approved by the Director of the Department of Planning and Development.


Stakeholders, housing advocates, City officials, developers and non-profit housing providers in Madison, Wisconsin observed that their IZ program created significant barriers for lower-income residents and changed the affordability requirements from a permanent resale restriction tied to IZ units to a Recapture/Recycle model that gives lower-income homebuyers the opportunity to build equity and the City the ability to recapture public investment and recycle the proceeds into further affordable housing.