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HomeMy WebLinkAbout12-13-2005 Prop. 1st Time HmBuyer CITY CLERK File # ~GJ~[J-~[Q] AGENDA STATEMENT JOINT CITY COUNCIL AND PLANING COMMISSION STUDY SESSION MEETING DATE: December 13, 2005 SUBJECT: Proposed First Time Homebuyer Loan Program Report Prepared by: Julia Abdala, Housing Specialist ATTACHMENTS: 1) State Housing and Community Development Department Median Income Limits and Calculations at 120%, 140%, 160% and 180% Percent of Median Income. 2) Grid of First Time Homebuyer Programs in Other Cities 3) Most Common Private Home Loans and Implications for Dublin's First Time Homebuyer Loan Program 4) Summary of Issues Under Discussion at Study Session 5) Sample of First Mortgages for BMR Units in Dublin RECOMMENDATION: ck ~>/" .'.....( \ 1) Receive the Staff Report 2) Provide direction regarding issues related to the First Time Homebuyer Loan Program 3) Direct Staff to return with a draft of a First Time Homebuyer Loan Program to the City Council FINANCIAL STATEMENT: There is no financial impact in discussing the various features that could be incorporated into a First Time Homebuyer Loan Program. DESCRIPTION: The City Council has been interested in the development of a first time homebuyer program for several years. The Housing Element adopted on June 3, 2003 contains a policy that the City should provide opportunities for first-time homebuyers to purchase homes in Dublin (Policy ll). As a result of this policy and the desire of the City Council to provide a range of housing opportunities, the City Council's Goals and Objectives for 2005-2006 lists the Implementation of a First Time Homebuyer Loan Program (FTHLP) as a high priority. In addition, the City of Dublin budget for 2005-2006 contains $500,000 for ------------------------------------------------------------------------------------------------------------- COpy TO: FHILP Advisory Group In-House Distribution Page I of 13 ITEM NO. 1.1 K:\HOUSLNG\lst tÎme homebuyers\StaffReports\12-13-05 CC-PC Study Session.doc (II (\, use in a First Time Homebuyer Loan Program. The Godbe Research Housing Needs Study completed in July 2005 further validated the need for this type of assistance. This Study, presented to the City Council on August 2, 2005, indicated that residents in Dublin believe that a program that would provide financial assistance for first time homebuyers would be valuable. In order to develop an effective First Time Homebuyer Program, Staff has been researching existing programs and lending opportunities: . Staff has discussed First Time Homebuyer Programs provided by other cities (Hayward, San Leandro, Walnut Creek, Fremont, Concord, Livermore, Pleasanton and San Jose) with each respective City Staff. . Staff worked with a small group of lending professionals (Bank of America, Diablo Funding Group, Irwin Home Equity, and DHI Mortgage) to review and evaluate the various features that may be beneficial to incorporate into a Dublin First Time Homebuyer Loan Program (FTHLP). Also in this group were Housing Staff from the City of Concord and the City of Dublin Housing Consultant, Dan Lopez. A benefit of working with these lending professionals was to ensure that any financial assistance program that the City of Dublin may develop would work well with mortgages being offered in the private sector. As a result of Staff research on existing FTHLP and features that can be incorporated into a program for Dublin, a Staff Report on FTHLP issues was taken to the City Council for review and direction. At the September 20, 2005 City Council meeting, the Council requested a joint study session with the Planning Commission to better review policy issues involved in developing a First Time Homebuyer Loan Program. At that City Council meeting Staff was asked to provide additional information. This information consisted of 1) information on the First Time Homebuyer Loan Programs of various other cities (Attachment 2); 2) description of the various private loan products available today by the lending industry and how these could affect a prospective First Time Homebuyer Loan Program (Attachment 3); 3) examples of how various income households may be able to qualify or not qualify for a Dublin First Time Homebuyer Loan (will be demonstrated in Study Session); and, 4) a clear definition of a First Time Homebuyer. Staff has also included a sample of some of the mortgages that buyers of BMR units in Dublin currently secure and the monthly payments that result from these mortgages (Attachment 5). The information requested at the September 20, 2005 City Council meeting is included in this Staff Report and in the attachments as indicated above. Additionally, Staff has prepared and will hand out and work through scenarios that will explain how various households may be able to qualify for a First Time Homebuyer Loan in Dublin and how much assistance would be needed in each case. First Time Homebuyer Program General Background: Due to the high cost of housing throughout the Bay Area, jurisdictions can seldom provide residents with full financing to purchase a residential unit. Cities with first time homebuyer programs almost always provide only partial financing for a home. This requires the applicant to seek other financing. Private financing is usually the primary financing secured in purchasing residential real estate. If a prospective buyer goes to a bank, mortgage broker, credit union or uses a California Housing Finance Agency (CalHFA) product, it is the major debt that the homebuyer incurs. Any First Time Homebuyer Program provided by Dublin, of necessity, would provide secondary financing, with the intent to assist in closing the gap between what a buyer could secure in the private Page 2 of 13 market and what amount of financing would be necessary to purchase a home. At the same time, private lenders would not allow a lesser amount of financing from any jurisdiction to place a lien on the title of mortgaged property ahead of the private loan. Due to this industry-wide restriction, the City of Dublin would come in second, or with CalHFA products as low as third or fourth in the chain of title on a mortgaged property. All jurisdictions contacted and all known city programs function by providing a second loan or grant. All the cities contacted have indicated that they have not had many problems with borrowers defaulting on their loans; both private loans and city provided loans. It is important to understand that if Dublin provided a secondary loan and a default on a private loan did occur and should the primary lending institution foreclose on the property, the City of Dublin could lose the amount that was loaned out. The private lending institution would have the ability to foreclose and recuperate their losses, however the same assurance would not exist for the City of Dublin which would be lower in the chain of title for the property. This risk can be reduced somewhat by including an "option to purchase" clause in any loan agreement. The City of Dublin currently has this type of clause in the Resale Agreements in use with the Inclusionary Units. With this option, the City of Dublin would have the option to payoff the first lender, purchase the property and then resell it and recuperate the City's losses. Issues: Staff has developed the folJowing issues for City Council consideration to assist Staff in the development of a First Time Homebuyer Loan Program (FTHLP). 1. Definition of a First Time Homebuyer 2. The target units for which the City would provide loans. 3. The maximum amount of financing that the City could provide in a First Time Homebuyer loan; 4. Maximum sale price aIJowed for a home to participate in the Dublin program; 5. The maximum income that would be allowed for applicants for a First Time Homebuyer Loan; 6. Discussion of who would be able to utilize the Dublin First Time Homebuyer Loan; 7. The type of loan that the City could provide; 8. Possibility of equity sharing on repayment of the FTH loan as opposed to simple repayment of the FTH loan; 9. If any interest should be charged and the amount of interest that could be charged for a FTH loan at maturity; 10. City preferences in providing FTH loans to applicants; 11. Charging of an administrative fee for providing the loan and servicing the loan; and 12. Maximum assets that an applicant may own and still qualify for a City of Dublin First Time Homebuyer Loan. Issue No.1. What should be the definition of a First Time Homebuyer? BackgroundfRaûonaw: The first item is to identify who is a first time homebuyer? While the obvious answer is a household that has never owned a home, the practical aspects are more complicated. How does one assure that a household has never owned a home before? The most common criteria used to determine a "first time homebuyer" is that the household has not owned nor had any interest in residential real estate for the past Page 3 of 13 three years (see Attachment 2). It is understood that this is quite different from "never owning a home", however, Staff has not been able to locate any method to clearly verify lack of ownership beyond three years. Discussion/Pros & Cons: Pros: Most private and City agencies, including CaIHFA, use the 3-year rule. Using the "three year rule" as criteria to establish a First Time Homeowner is easily verified by checking the last three year's tax returns, including the tax schedules that aIJow for a household to claim the interest on a mortgage. Most lenders, including any proposed Dublin program would require three years tax returns to establish income and asset ownership. Cons: None. Staff has not identified any negative consequences at this time. Issue No.2. Should the City of Dublin provide loans for Inclusionary Units as well as market rate housing within the City? Background/Rauonaw: Financial assistance may be made available for qualified buyers seeking to purchase Inclusionary Units, both new and Inclusionary Units that become available for resale, as well as market rate homes within the City limits, both used homes and new homes. Discussion/Pros & Cons: Pros: Allowing for financing of both market rate and Inclusionary Units would provide the most comprehensive of first time homebuyer loan products. It would also give the interested buyer the most freedom in what type of unit to purchase. Cons: Restricting the financing to only one type of unit, such as existing market rate units, would limit the ability of households to purchase housing in Dublin with assistance from the First Time Homebuyer Loan Program. The City of Dublin does not have a large inventory of used homes available for sale. Limiting financial assistance to these units could restrict the number of loans provided through the program. Limiting financing to only Inclusionary Units could also limit the number of loans provided through a First Time Homebuyer Loan Program since the number of Inclusionary Units in the City of Dublin is still rather small. Buyers are also more likely to be able to secure private financing for these units since the sale prices are restricted by the City's Affordable Housing Agreements and may, therefore, be less likely to need the City's financial assistance. Issue No.3. What is the maximum amount that the City should loan under the FTHLP? Background/Rauonaw: Reviewing First Time Homebuyer Programs in other cities indicates that when too smalJ an amount is provided as a loan by the municipality, the program generates very little activity. Page 4 of 13 Based on Staff's research, 10% of the sales price appears to provide a sufficient financial participation to make a difference in the ability of lower-income households to purchase a market rate home. If the Council were interested in funding loans for Inclusionary Units, 15% would be recommended. Market rate homes are generally more expensive than inclusionary units. If the FTHLP were to provide the same amount of a loan (15%) as for the inclusionary units, larger loans would be required. For example, 15% of a home selling at $600,000 would be a City loan of $90,000. Because the City of Dublin does not have funding to provide many loans at these high amounts, a lower percentage is suggested for market rate homes than inclusionary units. If the FTI-iLP were to provide loans of 10%, inventory of existing homes in Dublin is rather limited, so Staff anticipates fewer requests for large loans based on high sale prices. Additionally, since this type of financing would only be available to first time homebuyers, it is anticipated that the majority of activity will be in lower priced homes or condominiums including Inclusionary homes. Discussion/Pros & Cons: Pros: A ten percent loan for market rate homes and 15 % for Inclusionary homes should generate interest and applications in the first year of the program. Cons: If the median sales price in Dublin is currently $785,888 (Bay East Association of Realtors in October, 2005), a 10% loan may be up to $78,588. This is a substantial amount of money compared to what is available overall for the program. If many requests come in for loans of this magnitude, the City will not be able to provide many loans with the $500,000 amount budgeted in Fiscal Year 2005-2006. Alternatives: At this time Staff does not have any alternatives that would be recommended for consideration by City Council. Issue No.4. Should the maximum home price a buyer may purchase with financing from the City of Dublin be set at the latest median price as established by Bay East Association of Realtors (BEAR)? BackgroundlRationale: Since the FTHLP is intended for first time homebuyers, it is assumed that the Program is for those buyers starting out in the real estate market and not for buyers interested in purchasing the higher end homes. The homes sold in the City of Dublin have a broad range and can be very expensive. It is therefore suggested that there should be a limit to the prices of homes that could be financed through the City's FTHLP. The Bay East Association of Realtors (BEAR) provides monthly median price listings for single- family homes and condominiums for most of the cities in the region on the Internet. BEAR is focused on those cities in the eastern portion of the East Bay. The member realtors overwhelmingly work in the Tri Valley Area. The statistics collected by BEAR would be used to establish a top sales price for homes that the City would finance. Using BEAR statistics, the maximum home price would be set at the median. The median price for a home in the City of Dublin in October 2005 (the latest month provided) was $785,888 and the median price for a condominium in the City of Dublin in October 2005 was $552,000. Page 5 of 13 Discussion/Pros & Cons: Pros: Setting the maximum sale price at the monthly median amounts as published by BEAR allows the home prices of homes financed to adjust and keep pace with the market rate price of homes in Dublin. This option also provides a standard measurement that is always accessible for Staff to review and obtain for any prospective borrower. Cons: Limiting the price of homes that may be financed through the City of Dublin program may eliminate some interested homebuyers. Alternauves: The City Council may decide to not have a maximum on home prices that may be financed or may suggest some other maximum price. Issue No.5. Should loans be made available to qualifying households with incomes up to 140 % of the County of Alameda median income? Background/Ranonale: Current sale prices of homes in the City of Dublin require a household of 4 with 5% down payment to have over 190 % of the area median income (AMI) to be able to afford purchasing a home at the median price. Due to the price of homes, more and more workforce households are being priced out of the market. Many of these workforce households earn above 120 % of the area median. This is particularly the case if the household is a two wage earner household. Examples of households that tend to be just above 120 % of the area median income are households with a teacher or police officer as one of the wage earners. Discussion/Pros & Cons: Pros: Staff is suggesting that the FTHLP includes loans that are available to qualifying households with incomes up to 140 % of the area median income. By accommodating this higher income category more workforce households may be served. There is a substantial gap between 120 % of AMI as used by many programs including the City of Dublin IncIusionary Ordinance, and the 200 % AMI needed to purchase a median priced home in Dublin. Setting the maximum income of a qualifying household up to 140 % of the (AMI) serves to provide assistance to more individuals who are slightly above the "moderate-income category" or 120%, and yet cannot afford to purchase in Dublin. (See Attachment 1, State Income Guidelines for 2005). There would still remain a gap in affordability for households with incomes above 140 % of AMI; however, the City of Dublin will need to set the limit at some realistic number, since there is not sufficient financing to assist all households needing financial assistance all the way up to 200 % of AMI. Several programs that Staff researched use 140 % of AMI as a maximum household income, including the Silicon Valley Trust Fund and the Home Source Lease-Purchase Program. Cons: No cons identified at this time. Page 6 of 13 Alternauves: The City Council may choose to limit the household income maximum at a percentage other than 140% AMI. Issue No.6. Should the City of Dublin offer First Time Homebuyer Loans to nonresidents as well as Dublin residents? Background/Rauonaw: This issue addresses who should be served by this program; existing Dublin residents or a broader audience including those would desire to live in Dublin, but do not live here currently. Discussion/Pros & Cons: Pros: It is possible that many who would seek housing in Dublin and financing assistance may be employed in Dublin. Assisting these households to move to Dublin may therefore reduce traffic commutes and assist in decreasing congestion on local freeways. Cons: Providing loans to non-residents would broaden the pool of possible borrowers. If many applicants apply, it may be more difficult for Dublin residents to secure a secondary loan from the City of Dublin. Alternauves: The City Council could consider providing FTHLP assistance only to Dublin residents. However, restricting loan funds to Dublin residents could run the risk of not attracting enough qualified candidates for loans. The universe of existing residents seeking and qualifying for this type of City financing may be too small to provide for a successful FTHLP. Issue No.7. Should the City of Dublin provide loans with payment deferred until the home is sold or refinanced? Background/Rauonaw: This issue addresses when a loan should be paid in full. Generally, there are two methods for loaning money: (1) An amortized loan would require that the amount loaned by the City be repaid at some consistent interval, i.e. monthly. The City of Dublin does not have the Staff or financial structures in place to receive monthly loan payments from borrowers similar to a bank. This would necessitate a log-in system, posting of payments, reminders when payments are late and some method to collect from delinquencies among other tasks. (2) A deferred loan postpones the payment of the loan and requires payment with the full amount due at a later date. Requiring a loan to be due, in full, at some future defined date is commonly referred to as a balloon payment. However, another method of deferring a repayment is to defer the payment until the sale of the property or until the property is refinanced. Staff is suggesting that the FTHLP include a deferred loan program with the full payment due at the sale or refinancing of the home. Page 7 of 13 Discussion/Pros & Cons: Pros: Providing deferred loans alJows lower-income buyers to take advantage of a loan source that would not require payment as the buyers are struggling to pay back the primary mortgage, as first time homebuyers. Loans deferred until resale also work well with most private loan products because a primary lender will not count a secondary deferred loan in underwriting to establish the amount of financing for which a prospective borrower may qualify. Cons: Providing deferred financing takes City funds and makes them unavailable for a longer and uncertain period of time since Staff cannot know when a buyer intends to sell or refinance the home. Alternatives: There are several other alternatives that the City Council may consider including: I Amortizing the City of Dublin FTHLP, requiring monthly payments. This requires additional Staff. 2. Forgive the loan after a given amount of time; or 3. Defer the loan initially for some period of time (such as five years) and then require monthly loan payments to begin. The loan payments would again, require additional Staff. Requiring payments on a First Time Homebuyer Loan replenishes the pool of money allocated for the program more quickly. The money would then be available for other uses to be developed by the City Council, or for other first time homebuyers, however would require additional Staff. As an alternative, the City could contract out for loan servicing, if amortized loans were the preferred method of having loans repaid. Contracting out may be cumbersome since some monitoring and supervision is still required of the procured entity. Additionally, there are very few agencies that provide this type of activity, limiting both the choice and possibly the quality of work provided by the contractor. Finally, because the City of Dublin does not have a large portfolio of loans nor is it anticipated that the numbers of loans would reach any considerable size, it may be difficult to attract loan-servicing contractors to provide this service for the City of Dublin. Forgiving the loan entirely may eliminate any type of collecting activity on qualifying loans and is usually considered when a municipality is seeking to encourage a specific type of response from borrowers. For example, to encourage long-term residency, the City Council might decide to put forward a program that forgave a loan after 15 years. This alternative would reduce the amount of long-term funds that the City would have for housing activities. Issue No.8. Should the City of Dublin First Time Homebuyer loan be repaid with principal and a share in the equity earned on the City financed home? This option relates only to market rate units. Background/Ranonaw: The terms of the loan could provide for the City of Dublin to share in the equity with the participant in the FTHLP. Equity sharing is one method to increase and replenish affordable housing funds for the future. In this Option payback of the loan would include the full principal loaned as well as some amount of the equity the borrower has acquired on the financed property. Page 8 of 13 Since the borrower would not have been able to purchase the home without the City of Dublin FTHLP, the City of Dublin could decide that the City should share in the appreciation of the property. The percentage of equity that would come to the City when the loan is repaid could be the same ratio as the City loan to the total sales price. For example, on a 10 percent loan, if the original sale price was $500,000 and the City provided a loan of $50,000, then when the loan was paid back, the City would receive $50,000 p]us 10 percent of any appreciation on the property financed. To provide greater security to the City's loaned funds, the provision could be that the loan will be repaid with the higher of; the percentage of equity discussed above or the average rate of return the City of Dublin would have earned on the money, if the money were invested. Staff is not recommending as an option to share equity on Inclusionary Units where the buyers received a First Time Homebuyer loan because of the resale agreements these properties have on title. These units appreciate much more slowly and offer less equity to the owners. Discussion/Pros & Cons: Pros: One advantage of equity sharing is that it does not limit the future sale price of the home through a resale agreement. Equity sharing uses the real estate market to give control and opportunity to the owner. It provides the owner a vehicle to receive the benefit of the appreciation on the property and at the same time allows the City the ability to receive additional affordable housing funds. The City of Dublin has In Lieu fee funds, collected from developers to use for affordable housing. However, the In Lieu fees that will be received over time may begin to diminish, as the City gets closer to build out and less land is available for development. Finding new sources to generate affordable housing funds could be useful in the future. Cons: Equity sharing does reduce the amount of equity that a buyer receives for the property that was purchased. If housing values cease to escalate, or homes began depreciating in value, equity sharing does not work well since there is less or no equity to share. Alternanves: The City Council may also consider simply requiring the loan paid back with some amount of interest. Borrowers would probably view paying the loan paid back with some amount of interest more favorably since the borrower would be able to keep the equity earned on the property. Additionally, if the loan were paid back with some amount of interest, rather than sharing equity, the outcome mayor may not provide as much money for the City to use for affordable housing purposes depending on the escalation of housing values Issue No.9 Should the City of Dublin FTHLP require loans received to be paid back in full, including interest in the amount of the average rate of return earned by the City? Background/Ranonaw: Inclusionary Units are tied to resale restrictions and the equity received by the homeowner selling their unit may be minimal. Requiring repayment of the First Time Homebuyer loan with interest, instead of equity sharing is a practical manner to address the special circumstance of the resale restriction on the pnce. Page 9 of 13 Requiring loans on IncIusionary Units to be paid back with interest would return money to the City of Dublin that was loaned along with the interest that the City would have eamed if this money had been invested instead of used to provide a FTHLP loan. Discussion/Pros & Cons: Pros: If the City of Dublin were to charge interest on the loan, then the City could be paid back in an amount similar to what the City would have earned if the money had been invested. Cons: Owners of Inclusionary Units will accumulate limited equity on the property they have purchased. This is because the Resale Agreement that would be entered into under the City's IncIusionary Ordinance restricts the price the unit may be sold at for 55 years. If the owners remain in the same unit for longer periods of time more equity may accrue. If the owner moves out within the first few years, however, the equity received may be nonexistent or minimal depending on the sale price that is based on the increase in the Income Limits. If this is the full extent of the equity earned and the owner must pay back a loan along with interest, it is conceivable that the household may be required to pay back more than what will be received on sale of the house and, therefore, leave with less money than they originally invested. Alternatives: The City Council could consider forgiving the loans entirely for Inclusionary Unit buyers, or allow for loans to be made with 0 percent interest. Both forgiving the loan and making loans with 0 percent interest would alleviate the possibility that an Inclusionary Unit buyer may need to pay more than the loan itself, at resale. However, both forgiving the loan and charging no interest on a loan would result in the City of Dublin receiving money back with less value than when initially loaned or may result in the City receiving no money back, in the case of forgiving the loan. Issue No. 10. Should the City preferences used in the IncIusionary Zoning Ordinance be applied to the First Time Homebuyer Program as well? Background/Rauonaw: The City of Dublin Inclusionary Zoning Ordinance sets forth certain preferences for purchasing Inclusionary Units. This option would utilize the same preferences as those established for the Inclusionary Housing Program. These preferences include those who lived and/or work in Dublin, public service employees, including teachers, senior and disabled applicants as we]] as applicants who do not live in Dublin but have an immediate family member living in Dublin and applicants that must relocate due to demolition of existing housing or of condo conversion of existing housing. The application of this option would result in a ranking system for applications. If an application that was consistent with the preferences were to submit a complete application for the FTHLP and there were others ahead of this household~ Staff could move the applicant with City preferences ahead of others waiting for review and approval. Page 10 of 13 Discussion/Pros & Cons: Pros: As noted under Issue No.5, if this program assisted non-residents, then it may be more difficult for residents to obtain financing. Allowing for a preference system would address this concern. If Dublin residents applied, the application would be taken next, not in the order received. Cons: Requiring City preferences for the FTHLP would make the administration of the program slightly more complicated, since verification of any claimed preference must be ascertained prior to proceeding with the applicant. Alternauves: Staff did not identify any alternatives other than not choosing this option. Should the City of Dublin charge an administrative fee, to be determined, for the administration and servicing of these First Time Homebuyer Loans? Issue No. 11. Background/Rauonale: The Affordable Housing In lieu fee funds the Housing Division at this time. The purpose of the fee is to assist with the development of affordable housing. While these FTH loans do assist in making housing more affordable, they do not guaranty long-term affordability to a home. At the same time, as mentioned earlier, it is estimated that as the City builds out the amount of in lieu fees collected will diminish. Collecting an administrative fee helps to pay for the services of the Housing Staff to administer this program. Since the FTHLP will allow the buyer of a market rate home to resell at market rates, the buyer may earn appreciation from this purchase. At the same time, this type of program is labor intensive. It requires Staff time to work with applicants. Additionally, the program requires underwriting and communication with lenders, realtors and escrow companies. A reasonable fee added to the close of sale is a possible way to extend housing dollars. The amount charged would directly relate to the time and effort that is typically required by Housing Staff to process the loan. Discussion/Pros & Cons: Pros: Charging a reasonable administrative fee to service the loan would assist the City of Dublin in recuperating the funds that are spent by the City to administer the program and each loan. The fee could be a reasonable amount and collected by the escrow company at close of the loan, along with all the fees of financing and purchasing real estate. Cons: A fee would add a minimal amount to the cost of the home. The buyer will need to pay this fee along with mortgage, interest, points and everything else from appraisals to inspection fees. Alternanves: The City Council could consider not adding an administrative fee to each loan given. If the City Council determined not to charge this fee, the cost of the house would be slightly less; however, the amount would be negligible. This decision would reduce one fee from the purchase of a Page 11 of I3 home. If the administrative fee were not charged Staff would continue to utilize the in lieu fee for Staff time to administer the FTHLP. If in lieu fees become insufficient in the future, the General Fund would need to be used to maintain and service existing loans, whether or not the program were to continue through future fiscal years. Issue No. 12. What would be the maximum amount in assets that a household may have and still qualify for a First Time Homebuyer Loan? Background/Rauonaœ: Primary lenders usually require a reserve in savings when these agencies underwrite loans for applicants. These lenders want to make sure that a borrower has money in the bank to pay for homeowners insurance, property taxes and other housing associated expenses. The amounts required in reserves vary from around $5,000 to 12 times the mortgage payment depending on the type of loan that is being provided. In discussing an asset cap with lending professionals, City Staff was encouraged to allow borrowers to maintain an amount somewhat larger than required reserves in savings. The lenders seemed to be concerned that first time homebuyers may run across unanticipated expenses and would not be able to cover them without some amount in savings. Furthermore, discussion suggested that those assets that cannot be turned into cash without substantial penalty (401K, IRA) not be included in the asset cap. In addition to the reserve that most lenders require of loan applicants, it may be beneficial to allow borrowers to have some amount of money in savings to cover an unforeseen emergency. In underwriting the City of Dublin's FTH loans, Staff would review a number of factors, including wages or actual income of a qualifying household. For example, if an applicant household is a young family with two wage earners and this household has assets of $250,000; then Staff would be able to make the determination that some of this money should be used to purchase the home, rather than a City of Dublin loan. On the other hand, if the applicant is a retired person with a pension (income) of $16,000 and has savings of $150,000, then it may be reasonable to assume that this individual lives off of the pension and augments all needs from the savings. This household may be able to qualify. These are decisions that are usually made when underwriting the loan. Dublin Housing Staff has spoken with Staff from several cities; San- Leandro, Hayward, Concord and Walnut Creek and all cities have flexibility in determining the amount of assets that an applicant may posses and still qualify for a loan. With the exception of Concord, none of these cities had a hard and fast asset limit. As an overall cap, Staff would suggest that no household with assets over $250,000 qualify for a City of Dublin First Time Homebuyer loan. As stated, the actual situation may vary on a case-by-case basis and is reviewed and evaluated along with the entire financial status of the household in the underwriting process. Discussion/Pros & Cons: Pros: Allowing for some assets would allow the qualifying household to respond to unanticipated circumstances with the money in savings. If there were an emergency and the borrower had insufficient savings, one option the household may have to explore to secure cash could be to refinance the home loan and take out money. However, the City of Dublin requires the City loan to be paid back when this occurs. Refinancing and repaying a loan that could be in the magnitude of $20,000 - $60,000 could cause a Page 12 of 13 substantial burden. Additionally, it may be that the refinancing institution is not able to provide the borrower with sufficient funds to resolve the household fiscal emergency and pay back the City. This type of scenario would require the City of Dublin to review the applicant's personal situation closely and make a special determination whether the City loan may remain intact with the individual refinancing the first home mortgage and taking out money. It may be preferable to allow a cushion for the household for any potential emergency when first evaluating the applicant for a FTH loan rather than later make discretionary determinations regarding repayment at a later date. Cons: Providing loans to applicants with assets up to $250,000 may reduce available loan funding to households with less income. Alternauves: The City Council could consider not allowing borrowers to have any assets above primary lender required reserves when applying for a Dublin FTH loan or could consider allowing qualifying applicants to possess smaller amount of assets. Requiring first time homebuyers to use personal assets if there are any, rather than City funds would stretch the City of Dublin first time homebuyer money further. Not allowing applicants to have some assets when applying for a City of Dublin loan could cause the problem in refinancing outlined above. Allowing for a smaller amount as an asset cap would require setting the cap at some other arbitrary number since the jurisdictions polled do not have asset caps. RECOMMENDATION: Staff recommends that the City Council and the Planning Commission receive the Staff Report; provide direction regarding the issues related to the First Time Homebuyer Loan Program; and direct Staff to return with a draft of a First Time Homebuyer Loan Program. Page 13 of 13 STATE INCOME GUIDELINES FOR 2005 Alameda County 1 2 3 4 5 6 7 8 Area Median $ 82,200.00 $ 57,550 $ 65,750 $ 74,000 $ 82,200 $ 88,800 $ 93,350 $ 101,950 $ 108,500 Moderate 120% $ 69,050 $ 78,900 $ 88,800 $ 98,650 $ 106,550 $ 114,450 $ 112,350 $ 130,200 140% $ 80,570 $ 92,050 $ 103,600 $ 115,080 $ 124,320 $ 130,690 $ 142,730 $151,900 160% $ 92,080 $ 105,200 $ 118,400 $ 131,520 $ 142,080 $ 149,360 $ 163,120 $ 173,600 180% $ 103,590 $ 118,350 $ 133,200 $ 147,960 $ 159,840 $ 168,030 $ 183,510 $ 195,300 _. ¿}. 1 ATTACHMENT Number of Persons in Houshold 40% ncome Guidelines at ¡-ò , ;~ , ,::7, ., -.j GRID OF FIRST TIME HOMEBUYER PROGRAMS IN OTHER CITIES - - Concord Fremont Livermore Pleasanton Creek Walnut 3 years San Leandro Hayward Not owned Time Homebuyer. Both 3 years Both 3 years Both 3 years Both 3 years 3 years 3 years Inclusionary Units Definition of a 1 st home within last. Should the City provide loans for as well as market rate homes? 1 2 $65,000 $20,000 to $30,000 $20,000 15% of sale price Both $20,000 Only 20% of sale price or $25,000 1$40,000 Market Both loan amount the City should What is the maximum consider providing? there be a maximum sales price for the loans? 3 None 120% (maximum 110% (maximum allowed per ¡allowed per Redevelopment Law) Redevelopment Law) None None 120% None 120% (maximum allowed per Redevelopment Law) $400,000 120% (maximum allowed per Redevelopment Law) None 120% (maximum allowed per Redevelopment Law) None 120% (maximum allowed per Redevelopment Law) City SIShould loans be provided to households with 'ncomes up to 140% of Area Median Income? Should homes using 4 Currently lives or works in Walnut Creek Both Both Both Both Currently lives or works in Fremont to non-residents as well as I Should loans be offered 6 Dublin residents? Deferred years Equity sharing based on % of loan to original purchase price 45 for Deferred 5 yrs. then amortized Deferred 5 yrs. then amortized Amortized over 20 years Amortized for 45 Pay back principal and 3% simple 'nterest Principal and nterest Principal and nterest Principal and nterest Deferred years Equity sharing based on % of loan to original purchase price Both Deferred for 45 years or due at sale the City provide? Equity sharing, 50% of loan to purchase price the What types of loans should 8 I Should repayment of loans include a share in equity earned for the home? 7 No interest, but portion of equity No preferences No fee, uses redevelopment funds Preference for those who live or work in City No fee, uses redevelopment funds 3% varies per loan type nterest charged, varies depending on loan type nterest charged over 30 yr. amortized loan No interest, but portion of equity No interest, but portion of equity which 9 I Should interest be charged on the loans "oans and how much? No preferences No fees charged N cJ.. loan Max. assets determined in underwriting of Max. assets determined in underwriting of oan ATTACHMENT 2 No preferences 1$125 set up fee $200 application & redevel funds fee Formula is used "n assets in excess of $25,000 No preferences No preferences for admin Max. assets determined in underwriting of oan Max. assets determined in underwriting of oan No fee, uses redevelopment funds Max. assets determined in underwriting of oan No preferences No fee, uses redevelopment funds $30,000 liquid assets City programsQuestJon 10lShould City preference be used in the FTHLP? Should the City charge an administrative fee for servicing the loans? Should there be a maximum in applicant assets 2 I allowed to participate in the program? If so, how much? K:IHOUSINGI15t time homebuyerslGrid of other 11 1 ~ > n ::c == m :z:: -t ~ 3~ Most Common Private Home Loans Implications for Dublin's FTHLP The following list represents loans that are currently available to households who want to purchase either market rate or below market rate units in Dublin. This list also includes analysis of how these loans may affect the success of a Dublin First Time Homebuyer Program. 1. 30-year Fixed Loan · Would require "A" credit rating (700 + FICA Score) · Higher income neCeSsary since the amount of financing the household may qualify for is less than in other products. (More likely to be moderate-income or up to 140% income households) IMPLlCA nON FOR CITY LOAN PROGRAM: · May need more financial assistance to close the gap in purchasing a home. · Most secure type of loan to pair with City money. · Fewer households may be able to secure a 30-year fixed loan than would be able to secure with some of the adjustable rate products. 2. IS-year Fixed Loan · Would require "A" credit rating (700+ FICA Score) · Would be available to higher income households (More likely to be moderate- income households or up to 140% income) IMPLICATIONS FOR CITY LOAN PROGRAM · Would need even more financial assistance than 30-year loan since the loan must be paid back in 15 years instead of30. This means the household would qualify for less bank funding than with a 30-year loan. · Fixed interest loans, which are the most secure types of loans, to pair with City money. · Few household may be likely to secure this type ofloan so less assistance may be given through the FTHLP. 3. Adjustable Rate Mortgages (1/1, 3/1, 5/1 ARMS) · Varies from ai, 3 or 5 year fixed interest rate mortgage to an adjustable interest rate for the remainder of the loan. This is the most common mortgage that Housing Staff has seen in buyers of the Inclusionary Units at the Terraces. · Available to households with lower income, since the lender is providing a lower interest rate and consequently a lower monthly payment results for the first one, three, or five years. After that fixed period, the interest on the loan will usually adjust annually. · Usually has a maximum adjustable amount, both annually and for the life of the loan. · When the loan adjusts, this loan may be a burden to the homebuyer if the monthly payment jumps beyond what the household can afford. If this is the case, the household may try to refinance and secure alternate financing. I ATTACHMENT 3 L.{ffJ) IMPLICATIONS FOR CITY LOAN PROGRAM · May need less financial assistance to purchase a home since these loans are able to provide higher amounts of financing. · May be available to slightly lower income households. · Credit scores may be slightly lower than that of the fixed rate mortgages. · Loan will likely be refinanced by homebuyer at shift to adjustable interest rate, requiring subordination documents and further review by City Staff of future loan product. · Slightly more risky than fixed rate mortgages since there is the possibility that a household will have difficulty making payments when the interest rate adjusts and the mortgage payments increase, especially if the household is unable to refinance for some reason. 4. Interest Only Loans · Applicant pays interest only for a given period of time, usually 5 to 10 years. After that time, the entire mortgage is amortized, including interest for the remaining period, say 25 or 20 more years. . · This is usually one of the easiest loans to qualifY for, especially for households with less than "A" credit, or for those households with less income. · One of the most popular new loans provided by the private lending industry. Applicants typically assume that they will refinance the loans before the principal becomes due. This may not always be possible since the full loan is still due, after the interest-ouly period. If very little equity is earned on the property or the interest rate jumps too high, the household may not be able to refinance, burdening the homebuyer with monthly payments that may be too high for them to afford. IMPLICATIONS FOR CITY LOAN PROGRAM · May need to provide far less financing to fill the gap between a home price and the amount that can be fmanced since larger loans may be provided. · May be able to assist households with lower incomes. · Usually available to households with lower credit scoreS. (less than "A" credit) · Will most likely be refinanced as soon as the interest only period expires, requiring subordination documents and further review by City Staff of future loans. · Much riskier loan for City financing to pair with since the possibility exists that the note holder will not be able to refinance in any favorable manner. In this scenario, a default could occur. Should the City loan holder default and the lending institution foreclose, the City of Dublin could lose the money that was loaned as a second loan. 5. Negative Amortization Loans · Many types of variations ofloans where the principal increases, rather than decreases oVer time. Negative amortization loans that are given for the purchase of a home usually hold a lower interest rate than what is available 2 6rtJ elsewhere. The monthly payment is calculated based on the lower interest rate. At the same time the lender uses an index to increase the "actual" interest rate on the loan based on the interest rate in the market. The monetary difference created between the lower interest rate the buyer is making mortgage payments on and the "actual" interest rate is added to the debt owed by the buyer. The amount of the loan therefore increases. IMPLICATIONS FOR CITY LOAN PROGRAM · May require less financing by the City if the applicant can secure a larger primary loan through this type of financing. · May be more available to households with less than "A" credit. · May be more available to lower income households. · Will require in depth review of product to determine the long-term consequences of the particular product. · Any loan where the principal increases means that the primary lender will have a higher fiduciary interest in the property, and the City less fiduciary interest, risking the City's position on title. 6. Lines of Credit · Usually used in conjunction with a primary loan. This allows for the applicant to qualify for a lesser amount of money and boost the total provided by securing a line of credit for the remainder. For example, a household may only qualify for $400,000 in a primary loan, but be able to secure a line of credit for $80,000, boosting the financing provided to $480,000. The Lines of Credit discussed here are secured by a lien on the title to the property being financed. · Lines of Credit come in many forms, they may be interest only for a given period of time, or require some payment of principal and interest, or have options where the applicant may select whether to pay principal and interest or some variation each month. · Most Lines of Credit allow for a period of time when the applicant may continue to draw on the funds similar to a credit card. · Interest can change with only a one-month notice. IMPLICATIONS FOR CITY LOAN PROGRAM · Easier to secure this type of financing as a secondary mortgage, rather than pay Private Mortgage Insurance (PMI). · Is relatively available to buyers with less than good credit. · May be a manner for households that cannot secure enough in a first mortgage, even with City assistance, to be able to purchase a home. · Extremely risky to pair with a City loan product since neither the City nor the applicant is able to determine how much the interest rate may increase and because the applicant may continue to draw funds &om the Line of Credit further encumbering the property. · Would require the City to drop in position on the title of the property to third, since the primary loan would be first and the Line of Credit would be second. 3 LPlJb · Refinancing would be very common with these products and require Staff time in reviewing new loan products and in producing subordinating documents. 7. Specialty Loans such as CalHFA HiCapp and CHADAP Loans · These loans are created especially to accommodate the need for financing to lower income households and to provide entry to the homebuyer market by the State of California. They are successfully used by many cities throughout the region including Livermore, Hayward and Fremont. · CalHF A has a variety of loans, some of which cannot be used in Dublin because the maximum sale price allowed ($569,633) tends to be lower than the home price of entry level homes in Dublin. However, buyers seeking this financing as well as ap.plying for City financing may purchase condominiums, Inclusionary units or some older homes. · Additionally, CalHFA insures their own loans so the applicants are not required to seek PMI insurance. IMPLICATIONS FOR CITY LOAN PROGRAM · Typically a good loan for municipal lending programs to pair with because it works with the needs of the community. · This is a loan type that is usually readily available to lower income households. · Will lend at an interest rate that is often substantially below the market interest rate. · Will review all loan documents the City of Dublin utilizes for a secondary loan program and must approve before can pair with a City loan program. K:HOUSING/ISl Time Homebuyers/ Supp for workshop.Types ofloans on market 4 i FJ;' D FIRST TIME HOMEBUYER LOAN PROGRAM (FTHLP) ISSUES I Issues: II ~commenáation: II lPros: II Cons: I 1. Define a First Time Household that have not had Easily verifiable with tax I- I Homebuyer. ownership or interest in returns. Industry-wide residential property within the standard I past 3 vears 2. Should the City provide loans Loans be made available for Larger pool of Limiting homes that may be for Inclusionary Units as well as purchase of both Market Rate applicants purchased will limit scope of market rate homes? homes and Inclusionary program homes 3. What is the maximum loan 10% of sale price for Market Will generate interest in May not be able to provide amount the City should consider Rate homes and 15% of sales program by lenders and many loans providing? I price for Inclusionarv homes apolicants 4. Should there be a maximum Median sale price as Will keep pace with May eliminate some sales price for the homes using established by Bay East market interested homebuyers City loans? Assoc. of Realtors 5. Should loans be provided to Households up to 140% of Higher income limits will None at this time households with incomes up to AMI help with gap between 140% of Area Median Income? income and market price of homes 6. Should loans be offered to Loans available to residents Reduce traffic and May be more difficult for non-residents as well as Dublin and nontesidents commute residents to compete for residents? . loans with nonresidents 7. What types of loans should Loans should be deferred Will help applicants in Will make housing money the City provide? qualifying with private unavailable untillaler date lenders 8. Should repayment of loans Market rate homes: the higher City will have new Owners will not receive full include a share in the equity of equity share in repayment revenue source to equity earned for the home? or the average rate of return continue housing the City would have earned on programs the monev 9. Should interest be charged on Interest charged only on The City would receive May be a burden on the loans, which loans and how Inclusionary Units interest in the amount Inclusionary Unit owners, if much? the money would have homes do not appreciate been invested much. 10. Should City preference be No recommendation at this Would allow Dublin Would require more used in the FTHLP? time. residents ahead of administrative time. nonresidents 11. Should the City charge an A reasonable administrative Would provide for the Would add a minimal administrative fee for servicing fee be charged Staff time involved to amount to cost of home the loans? administer program buvine 12. Should there be a maximum Maximum amount of assets to May help homebuyers May reduce available loan in applicant assets allowed to be determined in underwriting weather emergencies funding to lower income participate in the program? If so, without having te households how much? refinance G:HOUSING/I ST Time Homebuyer ProgrmnlTabJe for Council 92005 ATTACHMENT 4 1 ST MORTGAGES FOR BMR UNITS IN DUBLIN #in Total Household Primary Mortgage Total Primary Loan Client Household Income Payment Amount 1st 5 years $1,110.76 1 2 $ 68,838 Next 25 years $1,156.34 208,000 2 1 $ 58,937 30 year fixed $1,192 213,000 1 st 5 years $1,110.76 3 2 $ 56,959 Next 25 years $1,138.43 204,000 4 1 $ 42,924 30 year fixed $1,302 239,050 1 st 5 years $1,247.07 5 1 $ 37,011 Next 25 years $1,241.91 208,000 SAMPLE OF w c¥ Note The above table does not include all financing used for the purchase of the BMR units ATTACHMENT 5 K:IHOUSING\1st time homebuyerslSample 1st Mortgages