Employer-Assisted
Housing
Introduction
It is thirteen years since the phrase "employer-assisted housing" (EAH) entered the American affordable housing
lexicon. At first viewed as a re-invention of the company town, then the illegitimate offspring of the booming executive
compensation and corporate relocation industries, the idea that employers can play a useful and cost- effective role in
creating affordable housing opportunity for workers while addressing pressing business problems has continued to
slowly gain currency. As a strategy for dealing with recruitment and retention issues, corporate interest in EAH has
waxed and waned with the strength of local and national economies, as paradoxically stronger economies and
increasing employment and wages tends to exacerbate local affordable housing problems. As a tool to attract workers
and customers to distressed neighborhoods by having the workforce serve as a force for neighborhood improvement,
EAH has proven to be a helpful tool, particularly among large institutional employers who cannot relocate to distant
suburbs and who are less subject to larger macroeconomic trends.
EAH has been used as a response to:
- rapidly rising housing prices in urban and suburban communities and rural areas impacted by second-home
buyers or housing shortages;
- fast-growing economies which make recruitment and retention costly;
- employee turnover problems leading to reduced productivity, high training costs and low employee morale;
- continuing decline in urban areas in which the private sector firms have substantial capital investments and/or
community loyalties resulting in an inability to relocate;
- a need to reconfigure corporate wage and benefit packages to control costs and modernize the array of benefits
offered to meet the changing needs of workers.
- worker inefficiencies caused by long, involved or harrowing commutes to work.
In light of changes in the general economy and in the housing finance sector, specifically, during the past thirteen
years, this article seeks to briefly assess the status of EAH particularly in terms of the various ways in which EAH can
be implemented by employers.
EAH was initially a response to the rapid run-up in housing prices that hit both coasts during the mid-1980s and the
first wave of the Reagan HUD budget cuts. The idea that employers could, and would want to play a role in assisting
their workers obtain better housing survived the recession of the early 1990s and the housing deflation that took place
in many markets (particularly in New England, New Jersey and California) during then. Housing prices have since
stabilized and are generally rising slowly throughout the nation. Demographic trends, particularly the aging of the baby-
boomers and the maturing of the "baby-bust" generation mean that demand pressures will be less than during the
1980s for the next decade or more. However, despite the good news of home ownership rates rising during the past
five years, home prices in many markets when compared to stagnant wages remain high. This is particularly true for
those households who have not been able to purchase a home. These high costs, as expressed as either high down
payment or monthly costs, are particularly troublesome if housing is not going to appreciate much as an investment; as
households will be spending income on shelter when income needs to be saved and invested in other, higher yielding
investments for retirement, a child’s education, etc. Similarly, in many markets decent rental housing is in short supply
and the cost of renting is frequently similar to owning a home.
As a response to changed federal policies EAH remains useful in that most of the Reagan-era cuts have been
institutionalized and there is little prospect of the federal government initiating significant new housing and community
redevelopment programs. As such the role of the private sector may need to be greater than in previous years,
particularly in meeting the housing needs of populations not eligible for public assistance targeted to the lowest income
groups. Certainly no employer can assume that the full costs of locating or operating in a distant suburb or distressed
urban neighborhood can be fully externalized onto the employee or public sector. Rather, employers either will have to
intervene via housing benefit programs or bear the greater costs of inefficiency, turnover, corporate relocation and
security.
It is in distressed communities where employers have most clearly understood the value of EAH programming. In the
mid-1980s few universities offered employer-assisted housing programs and those were usually restricted to tenured,
or highly recruited faculty and staff. Often times the housing benefit was offered without regard to the location of the
home. Today many universities and hospitals, both institutions that typically having strong associations with their urban
locations, offer EAH programs. More importantly, these programs are generally open to any permanent employee and
are targeted to neighborhoods proximate to these institutions so that the effect of this new investment can be
concentrated and felt as a force for neighborhood improvement. The discouraging news is that while EAH has grown
among institutional employers, large private employers in these neighborhoods continue to have limited interest in EAH.
The Changing Product Environment
A continuing, central problem limiting the growth of EAH programs is the lack of "off the shelf" housing benefit products.
Unlike the more familiar health and life insurance or pension products, there is still no entity marketing a standardized,
group benefit product. The offering of a housing benefit still requires relatively high levels of employer involvement and
customization. The only standardized product nationally available is Fannie Mae’s EAH mortgage product. With few
exceptions, however, Fannie Mae does not relate or market to employers and must rely on lenders making the
connection with employers. This typically does not happen because lenders may relate to employers as businesses,
payroll processors, and borrowers, but rarely do lenders relate to the business’ human resources staff and so those
who might be interested in this product remain unaware of it. Another disadvantage is that rather than being a product
to be purchased, what Fannie Mae really offers is the opportunity to put up money for a down payment or closing costs
on a case-by-case basis. There is no economy of scale or leverage for the employer in this program. The employer is
involved in each deal, unlike health care, for example, in which after the employer enrolls all eligible employees the
ongoing management of the benefit is the responsibility of the provider.
Employers who are willing to develop customized EAH products will find the lending and housing markets substantially
changed during the past thirteen years. Pushed by community advocacy and supported by the federal Community
Reinvestment Act, the private mortgage market has witnessed great innovation during the 1990s. Many lenders have
created flexible portfolio lending programs and the national secondary markets, particularly Fannie Mae and Freddie
Mac, have made the national mortgage lending industry more innovative than ever before. Down payments of three
percent and less are routinely available, underwriting ratios have been raised, alternative forms of credit underwriting
have been established and counseling programs which prepare prospective home buyers for the financial
responsibilities of home ownership are widely available.
For this introductory article at the AAHI EAH web site, I thought that it might be useful to review some of the ways in
which employers could provide housing assistance that were first identified by AAHI research and to do so through the
lens of the changed lending environment. EAH benefits are generally understood to be offered in one of two ways. As
a demand intervention, EAH benefit programs increase the affordability of existing housing; while supply oriented
programs focus on specific housing units.
Four principal demand interventions were initially identified by the AAHI research of a decade ago: groups mortgage
origination, mortgage guarantees, down payment assistance and closing cost assistance. As will be discussed below,
as an affordability enhancement the usefulness of each of these methods has changed since first proposed.
Group mortgage origination is the practice of steering a high volume of customers to a single lender in return for
various lending concessions. Though still possible, the new products and flexibilities that have come into the market
during the past decade mean that many of the concessions given in previous years are now standard, readily available
products (for example 3% down payments) or incorporated into various portfolio or CRA products (reduced closing
points, waivers of fees and/or mortgage insurance, high lending ratios, etc.). As a result there is less to negotiate over
than there was a decade ago. In many instances, the best that can be obtained is a broadening of a lender’s CRA
product to serve higher income workers or to serve anyone purchasing a home in specified target areas. On the other
hand, lender marketing of CRA products, even to those who would be normally eligible for them, is often spotty. Having
an employer alert employees to the advantages, availability and safety of these products is a useful piece of
information for prospective buyers operating in a more diverse and complicated mortgage market than ever before. At
a minimum an employer group mortgage program still provides workers useful information and costs the employer very
little.
Another non-cash approach to subsidizing the cost of housing for employees is the mortgage guarantee. Pioneered by
the University of Pennsylvania, which targeted this program to the area around the campus, a mortgage guarantee
enabled home buyers to overcome the down payment barrier to home ownership. By guaranteeing the down payment
portion of the home’s financing (Penn guaranteed 100% of the mortgage) lenders became indifferent as to the
borrower’s personal equity in the home. As a result, borrower’s could purchase a home with little or no down payment.
When home financing required down payment of ten or twenty percent a mortgage guarantee was a very useful
benefit. Now, with three or five percent down payment mortgages readily available it is much easier to accumulate the
necessary savings, thus the value of a guarantee is less than it once was. Moreover, although the University of
Pennsylvania has had barely a handful of defaults in more than 30 years, having little or no equity in a home does
correspond with higher mortgage delinquency and default rates. As a result, there is a growing consensus among both
lenders and neighborhood advocates, who are concerned with the impact of mortgage defaults on communities, that
while a ten or twenty percent down payment is too much, little or nothing down is too little. In the current lending
context, a mortgage guarantee benefit enabling those to purchase a home who are unable to save the three to five
percent required is viewed less favorably than previously. Mortgage guarantee programs also can be difficult to initiate
because the employer guaranteeing the loan must be able to demonstrate the financial strength to guarantee a loan
and many employers cannot. For the lender, a loan secured with a guarantee is also problematic. First the lender must
be able to determine that the employer has the capacity to offer a guarantee and then the lender must generally be
willing to portfolio the loan as a loan carrying this type of credit enhancement cannot be easily sold on the secondary
market.
There are however other instances when a mortgage guarantee can be useful. In some older urban neighborhoods
housing values are even lower than might be expected because those doing the appraising are unfamiliar with urban
settings, biased, and/or fail to properly assess the difference between rehabilitated property and deteriorated housing.
In addition many urban neighborhoods have chronically slow real estate markets resulting in few timely or relevant
comparables. The appraisal industry, which by definition looks to what was in order to assess what will be, is often slow
to pick up on neighborhood improvement. The result can be an "appraisal gap" where by the market price that a buyer
is willing to pay exceeds the price assigned to a property by the appraiser. In these situations, the lender is only willing
to make a loan based on the appraised value. Financing needed in excess of the appraised value must be provided by
the buyer or a public entity. For employers with an interest in improving a neighborhood where an appraisal gap
problem is prevalent an employer’s guarantee could be helpful in securing financing that would otherwise be
unavailable. For example, to purchase and rehabilitate a home might cost $75,000, but the appraised value of the
rehabilitated property might only be $60,000. The lender without the employer guarantee will only be willing to lend
$57,000 (95% of $60,000). This would require the buyer to put an additional $15,000 into the purchase in addition to
the $3,000 down payment. With an employer guarantee the lender might be indifferent to making a larger loan to cover
the true cost of the rehabilitation.
Another type of guarantee that employers could offer is a guarantee of an employee’s home equity. The idea behind
an equity guarantee is that some buyers would be willing to take a chance on a neighborhoods currently perceived as
less desirable if they knew that they would not have to bear the risk of financial loss if housing values declined. In
response to this concern employers could guarantee the resale price on the home (something often done in the
corporate home relocation business). This guarantee would not affect the relationship between the lender and buyer.
The employer’s guarantee would not enhance the creditworthiness of the buyer or guarantee the loan should it default.
Typically, one of the requirements of this type of program is that the home owner maintain the property in at least as
good of a condition as when the home was purchased in order to be eligible to file a claim. Since improvement of the
neighborhood is often one of the employer goals in offering a housing benefit program, this approach can be
particularly helpful to an employer operating in a less desirable area.
If prices do not decline, or if the employee/home owner does not sell the home this benefit is costless to the employer
(there is some evidence to suggest that the existence of this type of insurance builds a floor under home prices and as
a result in neighborhoods demonstrating this approach to urban renewal there have been very few claims). If the
employer must pay a claim the cost is the difference between the original and resale price of the home. A resale
guarantee could be offered for new construction or the purchase of existing housing and this benefit could be readily
combined with other employer, lender or public sector housing programs.
Two ways of providing housing assistance that continue to be used are down payment and closing cost programs. As
noted earlier, the closest EAH has come to having a standardized product is the Fannie Mae program which accepts
employer contributions towards a down payment. The employer contribution typically is 2% of the down payment with
home buyer providing at least 3%, though some employers have made significantly larger financial commitments.
Employer down payment assistance is offered as an unsecured loan, or a forgivable loan or a grant. Forgivable loans
often have their rate of forgiveness tied to slowing employee turnover. Beyond the ability to access the Fannie Mae
program, down payment assistance is a relatively popular form of benefit because the aid is useful and the usefulness
of the aid is well understood by buyer and employer. The down side of down payment assistance continues to be the
taxability of housing benefits. Technically all housing benefits are taxable, however some benefits, because of the way
in which cash changes hands, are more readily taxable than others. For example, a mortgage guarantee has no cash
transference and hence there is no taxable event. Providing an employee money whether as salary or to purchase a
home is more clearly cash income and most employers view down payment grants and forgivable loans as taxable
benefits. Loans are not income, except that any discount on the interest rate, can be taxed as imputed income. In at
least one case an employer providing down payment assistance to employees purchasing a home in an area proximate
to the employer has interpreted the tax code in a way that views the assistance provided as one of being of benefit to
the employer and for the purpose of improving the community and thus does not consider the assistance provided as
taxable.
receive lower interest rate mortgages if they agree to pay closing points, which is really a form of pre-paid interest on
the mortgage. Points, as mortgage interest are tax deductible, as are other mortgage interest payments. Although an
employer’s paying of points is a taxable benefit, the deductibility of this interest offsets the income received and thus
the benefit becomes, in effect, tax free. For employees therefore, it may be better from a tax perspective, to receive
assistance in the form of a grant for two closing points rather than a grant for two percent of down payment. For the
employer the costs are the same.
When a number of EAH models were first proposed it was hoped that the private mortgage insurance industry might
become interested in EAH since an employer-paid mortgage insurance program would alleviate the need for an
employer guarantee. An employer who could purchase mortgage insurance on behalf of an employee or group of
employees would be able to provide relatively inexpensive credit enhancement without having to take all of the risk of a
guarantee. Unfortunately, the mortgage insurance industry has failed to innovate in these ways. It continues to be our
hope that mortgage insurers might create EAH products, including:
- A lump sum payment product in which an employer could make a one-time payment to the mortgage insurer on
behalf of the employee.
- A shared risk product in which both the employer (on a lump sum basis) and the employee/home buyer on a
lump sum or monthly basis would pay a mortgage insurance premium that in total would yield a greater premium
than either party alone would pay. In return for this increased premium insurers would agree to assume more
risk.
- A product to deal with "appraisal gaps" enabling a lender rather than an employer to "front" the money needed
to overcome the gap.
In surveys of those interested in buying a home, many report that a significant obstacle to buying is confusion
regarding how to get started. In response to this problem numerous home buyer education and housing counseling
programs ,of ever improving quality, have come into existence during this past decade. Housing counseling enables
prospective home buyers to qualify for mortgages and provides other information that helps buyers become successful
home owners. By developing a relationship with a counseling agency employers can provide a valuable source of
information about the home buying process and home ownership. Employers can assist the operations of housing
counseling agencies by making performance-based, or charitable contributions to these providers.
In some instances employers have felt the need to affiliate themselves with efforts to increase the supply of available
housing in an area, often times as part of an effort to redevelop a specific neighborhood. There are at least a half a
dozen ways in which employers can assist in the production of new housing, particularly rental housing.
First and foremost, any employer of moderate income workers can be an advocate for local and state housing policies
and programs that encourage more public funding and friendlier land use policies. The development of rental and
other affordable housing is often contingent upon public financing and local land use policies that make higher density
development feasible. Corporate leaders testifying to the importance of affordable housing to business at state and
local budget hearings and local zoning hearings is a valuable contribution.
Employers may want or need to become involved in the production of affordable housing, but few will want to be the
developer, owner and/or manager of the housing produced. An arms length transaction is always preferable in offering
a housing benefit, but producing housing is sufficiently complicated and risky that most employers should seek a role
that is discrete and discreet. Given potential fears of company towns and company ghettos, it has been suggested that
no employer or group of employers subsidize an entire project, but rather that a significant portion of the development
remain available to the market. This provides surety that the development meets a market test as to its desirability and
to ensure that the project provides for a diverse population within the development. Ways in which employers can
partner with developers include:
- Providing cash. This can be done in many ways including donations, equity investments, loans and guarantees
of construction financing and permanent financing. The type of intervention which an employer might select
depends upon the cash, risk and debt preferences of the employer and the requirements of the particular
development. In return for this assistance the project sponsor would presumably offer for sale or rental units to
employees on a discounted basis. - Land. There are firms with unneeded or obsolete buildings or land suitable for housing purposes. Land could be
sold at a discount or leased on a long-term basis to project sponsors enabling the sponsor to sell or rent units to
employees at lower costs than would otherwise be available. - Donation of services. Many larger firms have "in-house" legal, architectural, engineering and, property
management capacities which can provide valuable technical assistance particularly to nonprofit project
sponsors. - Master Leases. A master lease is an agreement to rent one or more housing units for some extended of time. A
master lease guarantees income for the developer, and ultimately the lender, enabling project financing to be
more easily obtained. The cost of a master lease to the employer can be very minimal, for there is no cost as
long as the unit is actually rented by an employee or other renter. The rental guarantee only is callable for those
periods when the unit is vacant. - Purchaser of last resort. Similar to a master lease, a purchaser of last resort can guarantee to a developer that
for sale units built will be sold by a date certain. This enables the builder to obtain and get better terms on
construction financing. In return for this commitment from the employer, the developer agrees to sell the unit at a
lower price. If the units on which the employer has made a commitment to buy sell before the employer’s "take
out" date then the guarantee costs the employer nothing. If the units do not sell, then the employer is liable for
the cost of carrying those units until they do.
Leveraging Employer Contributions
Whether an employer chooses to offer a housing benefit program enhancing the affordability of existing housing or
creating a new housing opportunity, employers can leverage their contributions with local, state and federal funding.
More than ever before government is looking for partners with whom to work as are a growing network of high capacity
local nonprofits and national intermediaries. Too often employers view public funding and nonprofit partnerships as
only helping the very poor and therefore shy away from involving these other sectors. However, as local governments
seek to improve distressed communities, states seek to create business friendly housing policies and respond to
sprawl and nonprofits seek to create "all income" communities that can create vibrant local economies, there is greater
interest in working with higher income consumers. Programs such as Baltimore’s Live Near Your Work program in
which each employer dollar is matched with a state and a local dollar to provide down payment and closing cost
assistance is just one example of how employer and public sector involvement can be combined. The ability to
leverage the experience and funding of the public and nonprofit sectors is one important way in which housing benefits
differ from other types of employee benefits in which the full value of the benefit is paid for by the employer, or
employer and employee.
Conclusion
As recently as the mid-1980s the relatively few employers interested in offering a housing benefit to their employees
were pretty much on their own in trying to figure out a way to do so. In the ensuing years methods of how to offer a
program have been articulated as have the reasons for choosing particular methods; state and local governments
have experimented with programs for their own employees and as offerers of product for other employers. The federal
government has made EAH an eligible activity within the HOME program. Fannie Mae has developed a program to
facilitate EAH mortgage loans. Neighborhood-based nonprofits and CDCs have sought to engage local employers in
new housing dialogues and have offered housing-related services to these employers. Groups of employers have
sought to engage each other in housing issues.
In the coming decade, if employer-assisted housing is to continue to grow there is a need to create more "off the shelf"
products for employers to access (particularly mortgage insurance products) so as to overcome the sometimes
complicated, customized aspects of EAH. Local and state governments need to engage employers in a more
expansive housing conversation with the assistance of community-based organizations. These governments also need
to re-tool their housing programs to make them more responsive to the actions that employers might be willing to take,
enabling both the employer and the government to leverage their actions and investments, creating additional
affordability. Lenders must make greater efforts to reach out to and teach their corporate clients how housing benefits
can be affordably structured and the mortgage insurance industry needs to participate in these activities. With this
agenda the public and private sectors, together with community-based organizations, can initiate a new level of activity
and achieve greater levels of housing affordability and neighborhood revitalization throughout the nation.
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