Homeowners With Risky Alternatives to Traditional Mortgages Eligible for COVID-19 Relief Money

The U.S. Treasury Department released guidance in August that made financial assistance available to homeowners experiencing financial hardship linked to the COVID-19 pandemic. The aid could be offered to those with traditional mortgages and those using alternative financing to purchase a home, including many who previously had been excluded from earlier federal and state programs.

Alternative financing is portrayed as another pathway to homeownership, but experts warn that these arrangements lack the important protections that accompany mortgages, potentially placing borrowers at risk. 

Almost $10 billion from the American Rescue Plan Act will be allocated to help homeowners. Congress included the Homeowner Assistance Fund (HAF) in the sweeping legislation enacted in March, and the new guidance spells out how Treasury will disburse the emergency money to eligible states, territories, and Indigenous lands. For example, those eligible could include owners with land contracts—financial agreements directly between sellers and buyers without the involvement of traditional lenders—and those with loans secured by manufactured homes. In April, Treasury distributed initial payments to eligible jurisdictions that requested assistance in amounts equal to 10% of each entity’s total allocated funds.

According to pending Pew research, millions of Americans use nonmortgage alternatives—which are less protected than traditional mortgages and are often risky—to acquire their homes. Including alternative financing in the Treasury program is a step toward addressing the needs of these current and prospective homeowners. Still, eligibility for federal homeowner assistance largely depends on state-level policies. In the case of the HAF program, Treasury encourages authorities from states, Indigenous lands, and other jurisdictions to include borrowers with alternative financing in their requests for federal funds and to present evidence that those using such alternative arrangements are considered homeowners per state guidance.

Eligibility for federal program determined by state proposals

Treasury plans to help homeowners experiencing financial challenges such as delinquencies, defaults, foreclosures, displacement, or loss of utilities or home energy services. The guidance says those eligible must have experienced financial hardship after Jan. 21, 2020, and have incomes meeting certain thresholds.

The program gives local authorities some discretion to disburse leftover funds among socially disadvantaged people who have been historically excluded from access to home equity. Examples include groups that have been subjected to racial or ethnic prejudice. Also covered are residents of U.S. territories, Indigenous lands, and Hawaiian home land and those in counties where at least 20% of the population lived in poverty over the past 30 years as measured by the three most recent censuses.

The HAF program seeks to provide aid to these communities by giving funds to local authorities to distribute to distressed mortgage borrowers. Importantly, Treasury’s guidance states that “a loan secured by a manufactured home, or a contract for deed (also known as a land contract) may fall within this definition … in accordance with applicable state law.”

Identifying those with alternative financing can be difficult

Most jurisdictions do not require an official record of land contracts or other alternative arrangements, as they do for mortgages. This makes it difficult to identify homeowners who may be eligible for HAF or similar programs. There are some exceptions; for example, some states require sellers to record land contracts with the appropriate register of deeds. And a recent change in national Home Mortgage Disclosure Act data makes it possible to distinguish personal property loans from mortgages on manufactured homes. That provides a meaningful, if limited, new way for decision-makers at the state or local level to examine manufactured home financing and identify residents eligible for assistance.

New York and Wisconsin have submitted proposals to Treasury outlining plans for their states to receive about $539.5 million and $92.7 million, respectively. According to the U.S. Census Bureau’s American Community Survey, more than 110,000 households in New York live in manufactured housing communities, while Wisconsin has more than 95,000 such households. Each state estimates that under its current policies, about 5,000 of its residents could qualify for assistance in accordance with HAF.

Treasury’s HAF guidance will improve access to assistance programs for some homeowners who live in manufactured housing communities and those who acquire homes using land contracts. But the benefits will apply only if relevant authorities include alternative financing arrangements in their plans and eligibility criteria.

To include all those eligible as set forth in the guidance and future policies, state and federal lawmakers will need evidence to support their decision-making.

Pew’s home financing project is studying the alternative financial arrangements that people use to buy lower-cost homes, including site-built and manufactured homes. The overall goal is to publish information designed to inform policymakers and other stakeholders about market practices, consumer protections, and borrower experiences.

Nick Bourke is a director, Tara Roche is a research manager, and Chase Hatchett is a senior associate with The Pew Charitable Trusts’ home financing project.