Item 6-G
Council Mtg: 11/26/96 Santa Monica, CA
To: Mayor and City Council
From: City Staff
Subject: Modification of Shared Appreciation Loan Program
Guidelines
INTRODUCTION
The purpose of this report is to transmit information and
recommendations regarding proposed modifications to the Shared
Appreciation Loan Program Guidelines funded by the Tenant
Ownership Rights Charter Amendment (TORCA). This report
recommends that the City Council approve selected modifications
to Program Guidelines to: (1) strengthen program underwriting;
and (2) improve the participants' ability to obtain conventional
fixed rate financing.
BACKGROUND
The Tenant Ownership Rights Charter Amendment (TORCA), adopted
June, 1984, required that the City implement an ownership
assistance program for low and moderate income households
purchasing their units as condominiums under TORCA.
Authorization to commence a program was amended in June, 1992
when Proposition K was adopted. The program provided for
eligible households to receive City financing through a shared
appreciation approach' whereby the City would receive a share of
the appreciated value at unit resale.
During the next twelve months Program Guidelines for operation of
the program were developed and in September, 1993, they were
adopted by City Council. Soon thereafter First Federal Bank was
selected by the City to underwrite and process loan applications
for the program. All tenants of TORCA properties that had
completed or were close to completing the TORCA process were
notified of the new program in December, 1993 and First Federal
began accepting loan applications. Since then, periodic program
mailings and community orientation meetings have been organized
to inform the public about the program.
The program started slowly, but loan activity eventually picked
up in 1996. While only 5-6 loans per year were funded during
calendar years 1994 and 1995, calendar year 1996 loan approvals
have already reached 17 of which 12 have been funded. A number
of factors including improved market conditions can be attributed
to this jump in activity. However, the most significant factor
is the November 1995 modification of Program eligibility
requirements that allows current tenants to buy their units
rather than just Participating Tenants as defined in the Tenant
Ownership Rights Charter Amendment. As of September 30, 1996,
the City has funded $1,224,010 toward the purchase of 22 TORCA
units; this equates to an average loan of about $55,000 per unit.
The balance of available funds under the program is $2,850,673.
Although loan volume is up, a positive program trend, Staff has
determined that selected program modifications will strengthen
program underwriting, improve the participants' ability to obtain
conventional fixed rate financing, and facilitate broader
participation.
DISCUSSION
The proposed new underwriting criteria are summarized below with
a brief explanation regarding the purpose of each modification
and the beneficial program impact:
.
1. Current Criteria: Maximum loan amount is based on the
number of bedrooms in a unit.
Modified Criteria: Maximum loan amount should be based on
both the number of bedrooms in a unit
and household size as displayed below.
Minimum Maximum
Unit Size City Subsidy Hsehold Size Hsehold Size
Studio or
efficiency: $50,000 1 2
One bedroom
unit: $60,000 1 3
Two bedroom
unit: $75,000 2 4
Three bedroom
unit: $75,000 2 6
Four bedroom
unit: $75,000 2 8
FOR MINIMUM HOUSEHOLD SIZE: Household size limitation would not
apply to Participating Tenants defined as tenants living in
buildings at the time of condominium conversion.
FOR MAXIMUM HOUSEHOLD SIZE: A single, elderly, disabled, or
handicapped loan applicant supported by a live-in attendant
(providing at least 8 hours of care daily) who is determined to
be essential to the applicant's care or well being qualifies as a
two person household. The maximum household size per unit is
consistent with the standards of the City of Santa Monica Housing
Authority. The City may waive the maximum household size
criteria for good cause based on administrative discretion.
Purpose: By linking the number of bedrooms and household
size, a more equitable distribution of subsidy can be
achieved. Over housing' of a smaller household into a
larger unit at the City's expense (for example, $60,000 vs.
$75,000 subsidy) which is permitted under current Guidelines
can now be avoided.
To avoid tenant displacement due to a conversion, the
modified criteria will not be applicable to Participating
Tenants who are accorded a special status. Additionally,
those single loan applicants that require live-in care are
considered to be a two person household and therefore
qualify for the higher subsidy in the event a two-bedroom
unit is purchased.
2. Current Criteria: Student status not addressed.
Modified Criteria: Student applicant cannot be a dependent
of a third party.
Purpose: This modification is made to ensure that the
applicant is in fact self-supporting and can demonstrate
income eligibility. As long as the student applicant is not
a dependent of a third party, student status is acceptable.
A student is defined as a person who is carrying a full or
part time subject load (as defined by the institution) at an
institution with a degree or certificate program.
3. Current Criteria: 28% front end ratio. Front end ratio
defined as monthly cost for housing
(payment of principal, interest, taxes,
homeowner association fees, and
insurance) as a percent of the
household's gross monthly income.
Modified Criteria: 33% targeted front end ratio for fixed
rate mortgages (or any departure from
ratio with prior Housing Division
approval based on factors such as credit
history, reserve levels, or ratio of
total obligations to income) but in any
event no less than 28%.
Purpose: This modification is made to allow applicants to
maximize outside financing sources, thus preserving limited
City funds so that a greater number of loan applicants can
be assisted through the City's program. The 33% ratio for
fixed rate loans is well within industry standards and is
consistent with secondary market lenders who play a critical
role in providing liquidity to the conventional lending
market.
4. Current Criteria: Unlimited mortgage broker fee and
closing costs financed by City loan
funds.
Modified Criteria: Limitation of (1) mortgage broker fee
financed by the City up to the lesser of
3/4% of the first trust deed loan
amount, or $500, and (2) closing costs
financed by the City up to $500.
Purpose: This modification is made to ensure the cost
effective allocation of City loan funds. Closing costs
(including broker fees) have ranged from $350 to $2,300 per
transaction depending on the lender. It is in the City's
best interest to limit its costs to reasonable amounts.
Freedom of choice for the Borrower, however, is not
precluded by the proposed funding cap. Any individual who
wishes to utilize more expensive financing structures may do
so, but City dollars would be applied only to these costs up
to the cap.
5. Current Criteria: 20 year term for City loans with a 10
year extension upon approval by the
City.
Modified Criteria: 30 year term for City loans that require
secondary market involvement to obtain
conventional lender fixed rate
financing.
Purpose: By establishing a 30 year loan term up front, City
loans will conform with secondary market lender underwriting
criteria. The beneficial impact of the uninterrupted term
is that conventional lenders that rely on the secondary
market for liquidity will be willing to make fixed rate
first trust deed loans since their loans can be resold in
the secondary market. (First trust deed loans to date have
been limited to less attractive variable rates because
lenders have previously been unable to (1) make portfolio
loans on a fixed rate basis and/or (2) gain access to the
secondary market).
The quality of City loans, based on the buyer ability to
service as well as repay debt, is significantly improved by
removing the market risk associated with interest rate
movement. Furthermore, fixed rate loans provide a
predictable level of debt service which contributes to the
financial stability of households limited to low or moderate
income levels. Finally, by conforming to secondary market
standards a greater number of lending institutions can
participate in the City's program thereby promoting
competition and giving loan applicants a wider range of
choices.
The 20 year loan term will remain in effect for those loan
applicants who obtain financing from lenders who do not
require secondary market involvement.
FINANCIAL/BUDGETARY IMPACT
It is anticipated that the proposed modifications will allow for
greater utilization of existing loan program funds through
increased leveraging of City dollars. In addition, repayment
risk to the City is mitigated by allowing loan applicants to
obtain conventional fixed rather than variable financing. No
other financial or budgetary impacts are expected.
CONCLUSION
It is recommended that the City Council :
(1) Approve the modification of selected underwriting
criteria (household size, student status, front-end
ratio, closing cost caps) presented in this report; and
(2) Approve the loan term extension from 20 to 30 years for
those loans that require secondary market involvement
to obtain conventional lender, fixed rate financing.