Freddie ADU’s endorsement excites lenders and advocates – RISMedia

They were first a niche, then a novelty. But as the housing affordability crisis deepens and land-scarce coastal areas grapple with the limits of single-family zoning, accessory dwelling units (ADUs) are now very much in the conversation.

Perhaps the clearest sign of what would-be decision makers are seeing in these structures (sometimes still called “grandmother’s apartments” or “in-law suites”) came last month, when Freddie Mac has rolled out new funding guidelines that, in theory, will start to open up opportunities. for ADUs – like rentals, affordable housing, and non-traditional lifestyles – to a huge new segment of the population.

“We have a unique opportunity where the cost to build is lower than the cost to buy,” said Meredith Stowers, business development manager for Cross Country Mortgage.

Stowers joined a diverse group of advocates, real estate practitioners and policy makers at a panel sponsored by the University of Southern California last week to discuss the impact of these changes on access to ownership of low-income families, as well as how they can expand the housing stock. in areas traditionally resistant to growth.

The most immediate change from Freddie is the support for ADUs in all of their mortgage products, with many requirements and restrictions. This includes loans for existing homeowners looking to add an ADU as well as buyers who want to include the addition of an ADU with their purchase.

It’s also important to note that buyers will be able to use (some) rental income from ADU in their mortgage application, giving low- to middle-income buyers access to more properties.

While local governments have eased restrictions and encouraged ADU production in their areas, some have not seen a significant increase in the number of people taking advantage of the new opportunities. According to Amy Anderson, senior vice president of the Wells Fargo Foundation, inaccessible, obscure or missing funding options for structures are often to blame.

“Funding has become one of the main barriers to production,” she said. “A critical aspect of ADU funding…is how to change the programs of federal agencies that can really play a pivotal role in unlocking more private lending.”

Only a month after they came into force, it is certainly too early to pass judgment on how the new guidelines will shape the markets. Some panelists were a bit more cautious in their assessment of how fast or how big the ADUs are appearing in real estate markets based on the changes, describing them more as a first step than a huge leap forward.

“Why don’t you allow multiple ADUs, especially on a homestead? Stowers wondered. “Why can’t we build isolated ADUs?” We also need to eliminate random obstacles.

Samar Jha, AARP’s director of government affairs, said a request from Freddie that applications using ADU rental revenue require at least one ADU comp for evaluation could prove to be a significant hurdle.

“Some kind of flexibility on this requirement would be nice,” he said.

As the technical aspects of the Freddie program are worked out and more lenders see ADUs as a potentially important part of their portfolios, the question is no longer whether they will eliminate the problems of inventory, affordability and accessibility in the housing market, but rather, to what extent and where they can mitigate these problems.

“ADU is part of the solution, not the solution,” Jha added. “People say ADUs aren’t going to solve the affordable housing problem, but it has to be part of the solution.”

who and where

None of these changes matter if ADUs aren’t in demand by consumers or aren’t viable projects for builders. Stowers, who described herself as an in-the-field mortgage lender “managing” in a competitive California market, said ADUs were growing to serve a mostly unrecognized lifestyle niche.

“Our housing policies have tended towards a one-family view where we kick the kids out of the house and tell them to go buy a house,” she said. “In fact, most families, especially brown families, are used to ‘family compounds’. This is the norm for most people around the world.

Working in areas just north of the US-Mexico border in San Diego, Calif., Stowers said ADUs are often perfect for upwardly mobile immigrant families who use the space for multi-generational living situations at long-term – something becoming much more common at least in some regions.

Even if there is a demand, because funding and land use policies are historically hostile to ADUs, many who want an ADU are simply unable to pursue this lifestyle. Stowers said in his experience people would “ghost” contractors and blame builders if there were financing problems, making it a riskier proposition for everyone.

But as funding becomes more stable and more data enables better underwriting, builders will have much more confidence to take on ADU projects, she adds. Conversely, if financing remains difficult, builders and private lenders will likely pull back.

“If we don’t get to this funding sooner, it will kill this trend,” Stowers lamented. “Freddie, in my opinion, God bless them, it’s great, but it’s a very small step. Because we must first build ourselves.

Susan Geddes Brown was a longtime mortgage lender who now runs her own business advising financial institutions on construction loan programs (with a particular focus on ADUs). She called Feddie’s changes “not exactly bold” and described how appraisers are working to quantify the value of ADUs, even though they are still rare in some areas.

“I think the other piece is to help appraisers understand that there are many ways to get an opinion on value, where you extrapolate data, where you overlay data to help demonstrate what those values ​​are” , she said. “Appraisers just don’t have the tools, and it’s not yet a real estate technology they’re used to.”

Stowers said an appraiser once assigned a value of $0 to a three-bedroom, 1,200-square-foot ADU. That comes from federal guidelines, she claims, that only allow appraisers to look at the “merchantability” of such structures, but not rental income. ADUs still cannot be considered part of “gross living area”.

“A clear change in these guidelines would solve all the problems,” Stowers said.

Jha and panel moderator Ben Metcalf of the University of California at Berkeley’s Terner Center for Housing pointed out that many single-family neighborhoods actually have properties with ADUs — they just don’t go by that name.

“We talk to people, they’ll say, ‘We’ve been doing ADUs all along, we just call them duplexes. Or, “We do ADUs, but we just call them triple-deckers or triple-deckers,” Metcalf explained.

Jha used an example from popular culture to help demonstrate that ADUs are not a new invention.

“The most famous, famous person to ever live in an ADU is The Fonz,” he said, referring to the iconic “Happy Days” character played by Henry Winkler. “ADUs have been ever since.”

Assessors and regulators can start using these already existing structures, which vary by region and come in all different shapes and sizes, as models of ADU values, panelists argued.

Speaking to RISMedia late last year, Jeff Cohen, an economist at the University of Connecticut, said large traditional single-family neighborhoods, especially in the northeast and west, will disappear.

“Take these small starter homes, tear them down and build multi-family units – that could be a way to solve the supply issues in some way,” he says.

He adds that savvy investors are beginning to realize that a single-family lot can quickly be turned into a multi-family property, sold or rented out for a significantly higher return on investment. This has potentially negative effects with overcrowding or an overall loss of entry-level single-family homes, as well as positive effects, with more housing being created in high-demand, limited-lot neighborhoods.

“Where I live, in a very popular suburb because of schools, parks and relatively safe neighborhoods, you don’t see as much new construction because there really isn’t any vacant land. But if you move further away… you can have that kind of development, but maybe that’s not where the majority of people want to live.

As for funding, other government entities are already expanding how (and how much) they will fund ADUs. The California Housing Financing Authority (CHFA) ​​recently increased a grant program to $40,000 per family, and a representative who attended the panel said it had already disbursed $1 million.

Amanda Chiancola, a planner working for the city of Salem, Massachusetts, told RISMedia that her relatively small suburban town (population 44,000) independently plans to announce a new funding program for affordable ADUs after lobbying to facilitate and easing restrictions around them over the past two years.

She adds that while she’s unfamiliar with Freddie’s new guidelines, it usually takes a while for these things to trickle down to the point where builders and local governments will see new permits and applications. But whatever the specifics, from a purely political point of view, ADUs are very often worth the investment.

“It’s the cheapest way to create affordable housing,” says Chiancola.

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