The Island Housing Trust is appealing to the town of West Tisbury to ease affordability requirements on the high-profile eight-house project nearing completion at 250 State Road.

The reason is a new challenge facing Island towns trying to ensure their affordable housing stays affordable in perpetuity: lenders.

Mortgage lenders are reevaluating their policies amid growing defaults and foreclosures, which have exposed problems for banks with affordability covenants. Such covenants restrict who can buy housing in the future and at what price, and they are typical of affordable housing where substantial government subsidies are invested.

The trust will go before the West Tisbury planning board on Monday seeking to amend the special permit for that project, to allow affordable restrictions to be lifted in case of a foreclosure and allow the mortgage lending company to sell the homes at market rates.

In a written request to the planning board, the trust expresses confidence that it has many other levels of protection on affordability for properties it leases. The trust said it was seeking the special permit amendment to conform with the selling guidelines of the government-subsidized Federal National Mortgage Association (Fannie Mae), the nation’s biggest underwriter of home mortgages.

The planning board voted in September of 2008 to approve a special permit for the $3.1 million project, involving construction of eight single-family affordable homes on 3.5 acres along State Road. Town voters already have agreed to invest $570,000 in Community Preservation Act funding in the project.

The special permit requires the Island Housing Trust to provide ground leases for the eight homes which maintain affordability restrictions.

But in letter dated Nov. 6, the trust says the special permit must be amended — to lift restrictions in event of foreclosure — to conform with Fannie Mae’s selling guidelines. “Island banks require Fannie Mae review and approval of affordability restrictions in order to provide home-buyers greater flexibility and better financing products, and eliminate private mortgage insurance,” the letter says.

Bank lending ratios depend on the buyer’s income as well as the potential value of the asset, in this case a home that cannot be sold at market rates.

A phone message left yesterday for Philippe Jordi, executive director of the Island Housing Trust, was not returned by press time.

It is understood this is the first time the Trust or its sister organization, the Island Affordable Housing Fund, have asked any of the Island towns for permission to allow a bank or a mortgage company to lift affordable housing restrictions and sell a home at market rates in the event of foreclosure.

In fact, West Tisbury in 2007 began unprecedented legal action to stop a bank from breaking affordability covenants on a property under foreclosure.

The case involved a single-family log home owned by Shawn R. Cote, built in 2003 on a town affordable housing lot. The mortgage had ballooned to more than twice the maximum resale price allowed in the property’s affordable housing covenant; after foreclosure, Saxon Mortgage Company planned to sell it at market rate.

The town took legal action to ensure the property remained in the town affordable housing pool. The West Tisbury complaint argued that, “The town, its residents, and all those needing affordable housing in West Tisbury and on Martha’s Vineyard, will be damaged if Cote’s former property is not charged with having to comply with the requirements of zoning and the covenant.”

In October 2009, the affordable housing committee unanimously agreed to execute a settlement with Saxon Mortgage, with the understanding that the town has 90 days to sell the house to an eligible recipient who earns 140 per cent of the Dukes County median income.

Town administrator Jen Rand this week said the town is expected to close on the home sale with an eligible buyer by Jan. 15, which would satisfy the provisions of the settlement. She said she could not reveal the identity of the buyer.

Now the town faces a request from affordable housing advocates to take a different course. The Island Housing Trust’s application to the planning board asks that the special permit be amended to include complicated language that strips the affordability restriction in the event of a foreclosure by the lender in a first mortgage.

Selectman Richard Knabel, who is also a member of the board of directors for the trust, said yesterday he has concerns about a provision that allows a bank or mortgage company to sell an affordable home at a market rate after a foreclosure.

“I understand this is a result of the [housing] bubble bursting, which has forced mortgage companies and banks to tighten their regulations for lending. I am not saying this is anyone’s fault. But to me this creates a major conflict that needs to be resolved,” he said, adding:

“This project has an awful lot of community preservation money already invested — almost $600,0000. That’s public tax money. Why should the public invest that type of money in a project that changes from affordable to market rate if someone can’t pay their mortgage?”

The public hearing before the planning board begins Monday at 5:30 p.m. at the Howes House.