Lending Processes and Loan Products to Optimize Homeownership

Mortgage lending lies at the heart of homeownership. Typically, off reservation, the lender provides a mortgage loan to the homebuyer to enable them to purchase a home. The collateral for this loan is the house and the land, so if the borrower fails to make payments, the lender has the right to the house and the land. The mortgage process is different on trust land, since the land cannot be used as collateral. On trust land, the lender takes a leasehold mortgage, where the collateral for the loan is the house and the interest in the land, rather than the land itself beneath the house.

In this module, we’ll take a look at the overall lending process, and then hone in on two important pieces of lending on trust land – the secondary market and the role of community development financial institutions. Then, we’ll turn to specific mortgage products.

Overview of the Lending Process

Building on our examination of the leasehold mortgage process in Module 3, let’s take a look at the overall lending process. More detailed information on this process can be found on pages 69-70 of the Tribal Leaders Handbook on Homeownership.

Secondary Market

Secondary market investors purchase loans from lenders. This makes lending more attractive to the lenders, since they can recapture loan capital and relend it to other borrowers.

Community Development Financial Institutions (CDFIs)

CDFIs are community-based lenders created to meet the financial needs of community members. Often, CDFIs operate in areas not served by other lenders. There are currently over 70 Native CDFIs certified by the U.S. Treasury Department. These CDFIs can function as loan funds, banks, bank holding companies, credit unions, and/or venture capital funds. While many of these Native CDFIs focus on entrepreneurship and business lending, a number of Native CDFIs have developed mortgage loan products and are showing private lenders that mortgage lending on trust land is possible. (See case study on pages 72-76 of the Tribal Leaders Handbook on Homeownership.)

Overview of Loan Products Available for Native American Homebuyers

Now, let’s take a look at the different mortgage products accessible to Native American borrowers on trust land. There are basically three types of loan products:

• ◉Direct loans are originated by a government agency directly to a borrower, such as the USDA Rural Development 502 Direct Loan or Veterans Affairs (VA) Native American Direct Loan. In this case, the government is the lender.

• ◉Guaranteed loans are originated by a private lender but guaranteed by a government agency, such as the U.S. Department of Housing and Urban development (HUD) Section 184 or USDA- guaranteed loan. In this case, the government is the not the lender but often sets strict guidelines that the private lender must follow to participate in the program.

• ◉Conventional loans are originated by a private lender and are often sold to secondary market investors, such as Fannie Mae, Freddie Mac, or Ginnie Mae. These private loan products have certain requirements set by the investor. If the lender does not follow the requirements, the loans cannot be sold and must be held in the lender’s portfolio. Or if the circumstances change and the loan no longer conforms to the requirements, then the lender may have to repurchase the loan from the investor.

It is important to note that we typically see less conventional loans on trust land than direct or guaranteed loans, since private lenders are often hesitant to originate mortgages on trust land because of concerns about collateral and risk.

In looking at these different mortgage products and programs, it is important to analyze and compare available loan products to determine which option is best for a particular borrower. A more detailed matrix of loan products is provided on pages 132-37 of the Tribal Leaders Handbook on Homeownership.

The Role of Tribal Leadership in Mortgage Lending

Regardless of the type of loan product selected, tribal leaders have an important role to play in the smooth implementation of the lending process.

• ◉Practitioners should work closely with their tribal leadership to encourage them to exercise tribal sovereignty and ensure that the lending process in their jurisdiction benefits their Native community.

• ◉The process should meet the requirements of the lenders and loan programs and give homebuyers the best chance for success possible. For example, tribal decision-makers should take the steps necessary to ensure that tribes and TDHEs receive notice as early as possible in the event of default (nonpayment) in order to avoid foreclosure.

• ◉Also, the tribe or TDHE should have the authority to exercise a right of first refusal to purchase a unit from a family that can no longer pay their mortgage. The tribe or TDHE could resell it to another homebuyer or add the home to their rental housing inventory.

• ◉Active engagement of tribal leadership throughout the loan process can help to avoid foreclosures and vacant homes within Native communities.

We will discuss the role of tribal leadership further in Module 11.