A coalition of regional housing organizations, banks, and charitable trusts has teamed up with Fannie Mae to help low-income families buy their first homes using newly available government funding.
Under the Section 8 Homeownership Initiative, the nonprofit Community Development Corp. of Long Island, in Centereach, N.Y., will provide subsidized second mortgages to poor residents of Long Island's Suffolk and Nassau counties. The second mortgages will make up the difference between the cost of a home and what the residents would be able to afford in a conventional mortgage. Fleet Bank, European American Bank, HSBC Bank USA, and Chase Community Development Group are providing the first mortgages, which are structured so that principal, interest, taxes, and insurance costs do not exceed 33% of the borrowers' income. Fannie Mae is committed to buying the first mortgages and European American is processing them; Community Development will then provide second mortgages originated by its lending arm, CDCLI Funding Corp.
The second mortgage is paid for by subsidies from the Department of Housing and Urban Development's Section 8 program. Borrowers only have to make payments on the second mortgage if their salaries increase.
CDCLI Funding will fund the second mortgages by drawing on a $1 million warehouse credit facility provided by Fannie Mae. It has also received $350,000 in grants from the independent federal agency Neighborhood Reinvestment Corp. and $250,000 from Community Development.
The program is a variation on Section 8 rental vouchers, which help low-income families make up the difference between market rental prices and what they can afford. The dual financing arrangement arose because Section 8 subsidy programs only operate for 10 years. Since the typical mortgage is usually at least a 15- or 30-year instrument, banks will not underwrite a loan based on a 10-year subsidy.
Community Development president Wilbur Klatsky said that, because his company's loan will be the first to absorb losses in case of a default, banks have "a lot of cushion."
He added that he thinks the program can be copied nationally. "We can bring people who are beyond the mortgage bankers' wildest dream of getting into the housing market," he said.