Deed restrictions may end with foreclosures

December 13, 2018 GMT

Elected officials decided their fears of losing affordable housing to bankruptcy were unfounded and settled for the risk of allowing deed restrictions to expire with foreclosures.

After learning about the potential pitfalls of safeguarding deed restrictions — which guarantee home prices stay affordable for low-income residents and local workers — the Jackson Town Council and Teton County Board of County Commissioners voted Dec. 3 to leave the restrictions vulnerable to keep homes affordable.

“If we go the route to protect against all risk, it’s going to cost homeowners roughly $150 to $200 more per month,” Councilor Jim Stanford said. “Then the gap of affordability gets farther from what they can pay.”

That’s the thinking that swayed Stanford and most of his colleagues, steering them away from their original inclination to shield deed restrictions at all costs.

As part of the Housing Action Plan approved in 2015 the elected officials endeavored to update a wide range of housing policies, including restrictions. During that process they learned that the restrictions were at risk of being terminated in the case of bankruptcy. Though the Jackson/Teton County Affordable Housing Department has never lost a unit to bankruptcy, department officials sent their staff on a hunt for ways to protect deed restrictions just in case.

Seeking insight into a complex legal world, they consulted with bankruptcy lawyer Brent Cohen, who practices in Wyoming and Colorado.

“He was clear,” Assistant Town Attorney Lea Colasuonno said, “that in his professional opinion … the risk of abuse and the risk of loss for the public’s assets are quite high.”

Cohen could not be reached for comment.

Deed restrictions reduce the market value of homes, so when a creditor takes ownership in a foreclosure the incentive is to nix the restrictions. Stripping deed restrictions essentially pushes an affordable or attainable home onto the free market.

Cohen recommended striking the clause that allows deed restrictions to be stripped. But after hearing from lenders — primarily First Interstate Bank — the council and commission second-guessed that advice.

Patti Patterson, a loan officer at First Interstate, said that if deed restrictions were to be required after a foreclosure, anyone seeking a home loan would need either private mortgage insurance or a 20 percent down payment, which puts would-be borrowers between a rock and a hard place.

The down payment can amount to tens of thousands of dollars, and, as Stanford said, mortgage insurance costs anywhere from about $100 to upward of $200 per month. For many, the elected officials worried, that could put homes out of reach, requiring greater subsidies from the town and county.

“Given the pros and cons that the electeds had to weigh,” Housing Director April Norton said, “I appreciated that they erred on the side of units remaining affordable.”

On top of price concerns, it appears most private mortgage insurance companies are reluctant to provide insurance under the regulations that accompany deed restrictions, Patterson said.

Even if a unit were in danger of foreclosure, the Housing Department has the right to purchase it within 90 days, and it likely would, if possible. In the case of an economic downturn, however, if several foreclosures happened at once, the department might not have the cash to save them.

“If you had like eight all of sudden show up all in one day for some odd reason,” Deputy County Attorney Keith Gingery said, “the town and county would be scrambling to find the money.”

That was not a problem in the 2008 recession because property values in Jackson have historically been so high. But the new housing rules and regulations have changed things.

Restricted homes used to increase in value at a fixed rate over time, and never decreased. But now their values are tied to the Consumer Price Index, which allows them to depreciate and could increase the number of Chapter 7 bankruptcies if the economy goes south.

The cost to taxpayers of replacing a lost unit is about $250,000, depending on which income range it falls under, according to a report from housing staff.

The Housing Department has dealt with two foreclosures. In one case the department rescued a foreclosed home for $400,000. In the other the department decided it was not worth paying $600,000 to buy another home to keep it as part of the community’s affordable housing stock. The department has never lost a unit to bankruptcy.

Commissioners Natalia Macker and Paul Vogelheim were the only votes in opposition. They recognized possible problems with protecting deed restrictions but argued that it was worth a shot for the sake of preserving a community asset that taxpayers helped create.

“If we run into some problems as we test drive this,” Vogelheim said, “we can amend.”

But the other eight officials judged the risk low enough to justify the gamble.

“When we are working so hard to provide housing opportunities, we cannot shield potential homeowners from all risk,” Councilor Don Frank said. “But I do think we have a sufficient firewall.”