How hard do you think it might be to obtain a mortgage on a patch of real estate in Yellowstone Park? If you answered "pretty difficult," you'd be right.
But there are more than 40 million acres of land in the United States where it has been nearly as daunting to get a piece of the American Dream as it would be to put up a house next to Old Faithful.
The land in question is called trust land, and it is owned by the federal government, much as our national parks are. It is held "in trust" for American Indian tribes on their reservations.
Just how hard is it to get a mortgage on trust land? The Government Accountability Office did a survey some years ago and found just 91 mortgages were made on all of the country's reservations during the five years between 1992 and 1996. And Indian Country, in aggregate -- not all reservation land is in trust; there is private property there as well -- is about as big as Utah. In short, Indian Country has been a mortgage nonstarter.
That's been changing in the years since that GAO survey. Lenders and tribes have come up with workarounds, like the leasehold mortgage. There, the tribe assigns a lease to one of its members for reservation land. The lender gets a security interest only in the improvements, not the land.
But for the most part, lenders aren't happy with half of their usual collateral.
Enter the federal government. In 1995, the Department of Housing and Urban Development started the HUD 184 mortgage. This was an effort to duplicate the kind of private mortgages most Americans can get in their neck of the woods. It's a pretty sweet deal for the lender, too. Uncle Sam guarantees 100 percent of a lender's outlay. That's right: It's practically impossible for a lender to lose money on a HUD 184 loan.
From a slow start, the HUD 184 has developed into a considerable success story. As of the end of the last federal fiscal year, HUD had guaranteed $2.7 billion in mortgages to individual American Indians and Indian tribes.
Granted, not all of that was on reservation trust land. In fact, the majority of the loans have been on private property, called "fee simple" by the lawyers. But according to Tom Wright, who heads the program at HUD, most of the loans have been either on reservation or within a few miles of tribal homelands. And the credit quality of the loans has been sensational. As of the end of fiscal 2010, less than 1 percent were in foreclosure.
Some 2,000 mortgages have been made on trust land since the program's inception. Compared to the 91 in the GAO survey, that's a twentyfold increase. And in addition to the HUD program, a Department of Agriculture mortgage has also made some inroads into Indian Country. The Rural Housing Service Section 502 and Section 504 mortgages include both guaranteed loans and direct mortgages from lenders.
Who takes an interest in these remote rural areas with their scattered populations? Well, at least 100 lenders have qualified to do HUD 184s, including Wells Fargo and other large lenders. Why? For a nationwide lender, reservations are part of their footprint, no matter how remote. And these are primo loans when it comes time for complying with the Community Reinvestment Act.
The Census Bureau estimates that as of 2011, there were 5.1 million American Indians or Alaska Natives in the United States, including those who classified themselves as members of more than one race. More than a million of them live in Indian areas. Moreover, the Native population is growing by leaps and bounds -- 27 percent between 2000 and 2010. And there is pent-up demand on reservations among the tens of thousands of people who hold government or casino jobs.
A complication with reservation land is that not all of it is trust land. Over the years, tribes and individuals have sold off land to raise cash, leaving a "checkerboard" effect. The sold-off land then reverts to private property, or fee simple, status. Often enough, lenders take the path of least resistance and make mortgages on the private property parts of reservations where the land issues aren't as complicated.
One case where mortgages have taken a true foothold into trust land comes from the Bay Mills Indian Community in the Upper Peninsula of Michigan. The 3,400-acre reservation, nestled on the shores of Lake Superior, isn't checkerboarded. And its leaders have adopted homeownership as a public policy.
Cheryl Causley, housing director for the Ojibwe tribe, said that as of last year, 74 of 324 homes on the reservation have mortgages on them. And she knows of six more mortgages closed for tribal members this year. That means 20 percent of the houses on tribal trust land have mortgages -- quite a high percentage.
What's the key to this success? Unemployment is fairly low, 12 percent or so, with the tribe's two casinos providing jobs to lots of tribal members. A job, you might remember, is a very hopeful sign that a borrower will repay a mortgage. And the tribe has built relationships with several lenders through the HUD and USDA mortgage programs.
There are still real estate issues at Bay Mills. For one thing, the reservation is landlocked, despite being on the shores of one of the Great Lakes. There aren't a lot of lots on which to build. Why? When Uncle Sam drew up the reservation boundaries, he included lots of what's officially known as wetlands. You would call them swamps, and they're not great for homebuilding.
But where there's a will, there's a way. The tribe negotiated a land swap with the U.S. Forest Service for a nice dry hilltop site where it will build 78 single-family homes and a commercial area, once it can raise the estimated $6 million pricetag.
There's another successful mortgage strategy that can be brought to bear on Indian Country. Remember those 91 mortgages made during five years of the 1990s? They were made to just two of our more than 500 tribes. One of the tribes was in Wisconsin, the other in the Pacific Northwest, but they had something in common. They were part-owners of the lenders who extended their members the mortgage finance.