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HomeMy WebLinkAbout8.5 Homeownership Assistance Program AGENDA STATEMENT CITY COUNCIL MEETING DATE: January 23, 1989 SUBJECT: Alameda County Homeownership Assistance Program Report Prepared by Laurence L. Tong, Planning Director EXHIBITS ATTACHED: Exhibit A: Letter from John Shepherd, Asst. Planning Director, Alameda County Housing & Community Development Program RECOMMENDATION: (,+`'Y 1) Indicate interest in participating in the Mortgage Credit Certificate Program 2) Indicate no interest at this time in the Supplemental Mortgage Assistance Program FINANCIAL STATEMENT: None at this time. Up to $4,000 one- time start up cost for Mortgage Credit Certificate Program DESCRIPTION: Alameda County is designing a joint County-cities program to assist first time homebuyers. The federal Technical Corrections and Miscellaneous Revenue Act of 1988 authorizes the issuance of Mortgage Credit Certificates (MCC' s) during 1989. The MCC program would allow the homebuyer a tax credit against federal personal income tax. The tax credit under the proposed program would be 20% of the annual mortgage interest. The tax credit would be in addition to the usual deduction of mortgage interest from gross income before calculating federal income tax. The homebuyer can use the remaining 80% of the mortgage interest amount as a deduction in the usual manner. Eligible homes would be existing homes under $149, 400 and new homes under $159, 300. Eligible purchasers would be first time buyers with incomes under $43,100 for one and two person households. - The program would reduce the homebuyer's total net payment liability and make it possible to purchase a home that he/she might not otherwise be able to afford. Each participating city would be able to identify target neighborhoods and/or populations for the first 9-12 months of the 18 month program. After the initial period, the 14CC program would be available anywhere in the county where overall program guidelines would be allowed. Benefits from the joint County-cities program would be the joint, coordinated application process, central administration of the program by the County, sharing of start up costs, and a coordinated lender outreach and education program. After a relatively modest start up expense, expected not to exceed $4, 000 per participating agency, the MCC program would be costless to the City. Additional information regarding the MCC Program is attached (See Exhibit "A") . In addition to the MCC Program, Alameda County is exploring possible interest in a Supplemental Mortgage Assistance Program. Two examples of supplemental mortage assistance techniques are: ----------------------------------------------------------------- ITEM NO. f COPIES TO: Planning 1) Deferred Payment Second Mortgages where the City would provide funds for a second mortgage with payments deferred. The City would ultimately recover the funds plus deferred interest. 2) First Mortgage Interest Rate Buydown where the City provides funds for a mortgage rate buydown. The City would not recoup any of the funds. Additional information regarding the Supplemental Mortgage Assistance Program is attached (See Exhibit "A") . Staff recommends that the City Council indicate its interest in participating in the MCC Program with up to a $4, 000 one-time start up cost. Staff further recommends that the City Council indicate that it is not interested at this time in the Supplemental Mortgage Assistance Program due to lack of funds. HCD ALAMEDA COUNTY PLANNING DEPARTMENT Housing & Community Development Program December 5, 1988 Dear Mr. Tong: � - _'J Subject: Proposed Alameda County Homeownership Assistance Program r__._..... _. . .-.... . Thank you for attending our recent meeting to discuss a homeownership assistance program. The program would be designed oto assist first time homebuyers in purchasing a home in Alameda County or its cities. As presented, such a program could have two parts designed to function together: (1) a first mortgage (MCC) Mortgage Credit Certificate Program which would reduce the net effective mortgage rate; and (2) a Supplemental Mortgage Assistance Program which could involve either deferred payment second mortgages or a further subsidy of the first mortgage interest rate. Each of these mechanisms would reduce a borrower's total net payment liability, making it possible for a borrower to purchase a home she/he might not otherwise be able to afford. The attachment describes both the MCC Program and options for a Supplemental Mortgage Assistance Program. Except for modest start-up expenses which would be divided among the participants, the 14CC Program would be costless. Funds for the Supplemental Program would come directly from each of the participants. Please read the attachment and fill out and return the questionnaire to indicate your City's interest. Please return your response to me by December 19, 1988. The MCC Program will require an application or applications to the State for private activity bond authority. We currently expect that the California Mortgage Bond and Tax Credit Allocation Committee will not accept application for such authority until February (for 'l4arch allocation) . Our schedule anticipates receiving authority in March or April. If the MCC and Supplemental Programs were designed in the meantime, a joint program could be in place by early summer. We would anticipate an approximately , 18 month origination period for the overall program. ;pie look forward to the possibility of working with you on this project. Thank you. Sincerely, f AA- A ohn N. Shepherd Assistant Planning Director Housing & Community Development JNS:dvs/2354A Attachments rv, PI lann"IBIT 224 W.WINTON AVENUE• ROOM 169•HAYWARD,CA 94544.415/0/U-04U4 MORTGAGE CREDIT CERTIFICATES The Mortgage Credit Certificate (MCC) is a relatively new means of providing financial assistance to first-time homebuyers. The IRS allows an eligible purchaser to take a specified percentage (in our program, 20 percent) of his or her annual mortgage interest payments as an annual dollar-for-dollar tax credit against federal personal income tax. This tax credit is in addition to the usual deduction of mortgage interest from gross income before calculating federal income tax, which the homeowner can utilize for the remaining 80% of the mortgage interest amount. The prospective homebuyer goes through the normal . process of choosing a realtor, finding a house, and arranging financing with participating lenders. Lenders and realtors will be alerted to the program and will identify eligible houses (new houses under $159,300, and existing homes under $149,400) and eligible purchasers (first-time buyers with incomes under $49,565) . The lender then fills out an MCC application fotm and sends it to the County. The County verifies the eligibility and issues the MCC. After the eligibility of the homebuyer and the house to be purchased are established, the MCC is issued, and escrow closes, the homebuyer can take the annual tax credit as long as he/she maintains the original mortgage and lives in the house as his or her principal residence. The table below illustrates how an MCC may be used to assist the qualifying homebuyer to obtain an effective reduction in the monthly mortgage payment. In the example, a purchaser who obtains a 30-year $135,000 mortgage with a fixed 10 percent interest rate would pay up to $1,185 in monthly principal and interest payments. Using a 20 percent MCC, the net monthly outlay by the purchaser would be reduced to $961. By adjusting his/her W-4 to reduce the amount of tax withheld by his/her employer, the purchaser will receive the benefit of the tax credit with each paycheck. The example shows that the first year of mortgage payments corresponds to the amount that would be paid on a mortgage with an interest rate of 7.7 percent without an MCC. In other words, the MCC gives the buyer an effective reduction of 2.3 percent ftom the underlying 10% interest rate. TABLE 1: EFFECTIVE INTEREST RATES WITH AND WITHOUT A MORTGAGE CREDIT CERTIFICATE . Without MCC With MCC First Mortgage Amount $135,000 $135,000 Mortgage Interest Rate 1 185 Monthly Mortgage Payment (P&I) $1,1885 5 $1,1 Mortgage Credit Certificate Rate not applicable 200$% Monthly Credit Amount not applicable $224 "Effective" Monthly Mortgage Payment $1,1885 $9611 "Effective" Interest Rate * Represents a dollar-for-dollar tax credit 117211 MORTGAGE CREDIT CERTIFICATE PROGRAM The first part of a homeownership program would be a joint County-cities Mortgage Credit Certificate (MCC) Program. The County and participating cities would make application to the State for authority and would sub- sequently create a joint program administered by the County. Under the Program, MCC authority could be reserved to specific cities and unincorporated areas for the first 9-12 months of the 18 month Program. During that period, Mc-C's would be identified to neighborhoods and/or populations designated by a city. At the end of the initial period, MCC authority could flow anywhere in the County where overall program guidelines would permit, thus insuring full use of the authority. While each city would have control over program criteria, all participants would benefit from the joint, coordinated appli- cation progess, the central administration of the Program, the sharing of start-up costs (expected not to exceed $4,000 per participant) and a co- ordinated lender outreach and education program. The application to the State for MCC authority would be strengthened by the, participant's Supplemental Mortgage Assistance Programs. With a Mortgage Credit Certificate, the IRS allows an eligible purchaser to take a specified percentage (say, 20 percent) of his or her annual mortgage interest payments as an annual dollar-for-dollar tax credit against federal personal income tax. This tax credit is in addition to the usual deduction of mortgage interest from gross income before calculating federal income tax, which the homeowner can utilize for the remaining 80% of the mortgage interest amount. The prospective homebuyer goes through the normal process of choosing a realtor, finding a house, and arranging financing with a participating lender. Lenders and realtors will be alerted to the Program and will identify eligible houses (new houses under $159,300, and existing homes under $149,400) and eligible purchasers (first time buyers with incomes under $43,100 [for one and two person householdsJ) • The lender would then fill out an MCC application form and send it to the County. The County would verify the eligibility and issue the MCC. After the eligibility of the homebuyer and the house to be purchased were established, the MCC would be issued and the escrow closed, the homebuyer could take the annual tax credit as long as he/she maintains the original mortgage and lives in the house as his or her principal residence. The table on the following page illustrates how an MCC may be used to assist the qualifying homebuyer to obtain an effective reduction in the monthly mortgage payment. In the example, a purchaser who obtains a 30-year $135,000 mortgage with a fixed 10.5 percent interest rate would pay $1,235 in monthly principal and interest payments. Using a 20 percent MCC, the net monthly outlay by the purchaser would be reduced to $1,002. By adjusting his/her W-4 to reduce the amount of tax withheld by his/her employer, the purchaser will receive the benefit of the tax credit with each pay check. The example shows that the first year of mortgage payments corresponds to the amount that would be paid on a mortgage with an interest rate of 8.2 percent without an MCC. In other words, the MCC gives the buyer an effective reduction of 2.3 percent from the 10.5% note rate. r TABLE 1: EFFECTIVE INTEREST RATES WITH AND WITHOUT A MORTGAGE CREDIT CERTIFICATE WITHOUT MCC WITH MCC First Mortgage Amount $135,000 $135,000 Mortgage Interest Rate 10.5% 10.5% Monthly Mortgage Payment (P&I) 1,235 1,235 Mortgage Credit Certificate Rate Not Applicable 20% Monthly Credit Amount Not Applicable 233 "Effective" Monthly Mortgage Payment 1,235 1,002 "Effective" Interest Rate 10.5% 8.2% * Represents a dollar-for-dollar tax credit on interest portion of payment. 2354A FIRST MORTGAGE MCC PROGRAM QUESTIONNAIRE 1. Is your city interested in a joint Mortgage Credit Certificate (MCC) Program with Alameda County and other Alameda County cities (assuming an 18 month organization period)? Yes No 2. If so, do you have a rough idea-of what volume of mortgages you would like to apply the Program toward in your city (assuming an 18 month organiza- tion period)? $ million 3. What type of targeting would you like to have for the MCC Program in your city (e.g. specific neighborhoods, specific development projects, income levels below the program maximums, families, etc.) 4. Are there lenders in your community with whom you would like to work to design and implement an MCC Program? If so, please list them. Lender Name Contact Phone Lender Name Contact Phone Lender Name Contact Phone 2354A SUPPLEMENTAL MORTGAGE ASSISTANCE PROGRAM There are many types of supplemental mortgage assistance that cities could use in conjunction with the MCC program to increase affordability. Two supple- mental assistance techniques are discussed here as examples: 1) a deferred payment second mortgage and 2) further "buydown" of the first mortgage rate. Deferred Payment Second Mortgages could be made to bridge the gap between the maximum first mortgage buyers can qualify for and the cost of available housing. For instance, assume that a buyer has a $10,000 downpayment and can qualify for a $110,000 loan using a mortgage credit certificate subsidized first mortgage: MCC & Supplemental Assistance No Assistance First Mortgage $110,000 $89,871 MCC Effective Mortgage Rate 8.2% Not Applicable MCC Effective Monthly Payment $823 Not Applicable Second Mortgage Amount $25,000 Not Applicable Total First and Second Mortgage $135,000 $89,871 Effective Current Interest Rate on First And Second Mortgages 6.15% 10.5% Total Outlay Available To Purchase Home $145,000 $99,971 Because there are no current interest payments on the second mortgagethe buyer can thereby enter the market. In the example, the combination of an MCC Program and a $25,000 second mortgage would allow a buyer who could otherwise only purchase a $100,000 home to purchase a $145,000 home. Though the per unit cost of such a program is initially high (equal to the size of the second mortgage) the City can ultimately expect to recover its investment plus the deferred interest, with the interest rate set anywhere between 0 percent and the first mortgage rate. First Mortgage Interest Rate Buydown. By prefunding escrow accounts for first mortgages originated through the MCC Program, cities can reduce the effective interest rate further. For example, monthly payments on an MCC subsidized mortgage can be reduced by $1,116 per year with a 1% buydown: Size Of First Mortgage $135,000 Rate Without MCC 10.5% Monthly Payment Without MCC $1,235 MCC Effective Rate 8.2% Monthly Payment $1,002 With MCC and 1% Buydown Rate 7.2% Monthly Payment $916 The cost of providing such a subsidy would be about $1,032 per year of subsidy, (or $5,160 for 5 years) . However, the city would not recoup au-0t its funds. 2354A SUPPLEMENTAL MORTGAGE ASSISTANCE PROGRA14 QUESTIONNAIRE 1. Is your city interested in a Supplemental Mortgage Assistance Program in conjunction with the MCC Program? Yes No Other (Please describe) 2. What general form of supplemental assistance would you like to initiate in your city? Deferred Payment First Mortgage Second Mortgage Interest Rate Reduction How much? $ How much? $ Other Types of Supplemental Mortgage Assistance (Please describe) 3. Would you apply the same targeting priorities to the Supplemental Assist- ance Program as to the fiC:C Program? Yes No (If no, how would the targeting differ?) 4. What is the source of monies your city would use to fund such a program? }iow much money from each source would you like to devote to homeownership assistance? Source of Funds Amount 2354A