SR-112696-6G!~
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Council Meeting November 26, 1996
Santa Monica, California
NOV261~
To Mayor and City Council
From Crtv Staff
Sub~eet 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 O~~'riership
Rights Charter Amendment {TORCA) This report recommends that the Cit}~ Council approve
selected modifications to Program Guidelines to { 1 } strengthen program under~i~rrting, and (2}
improve the participants ability to obtain conventional fired rate financing
BACKGROUND
The Tenant O~.vnership Rights Charter Amendment (TORCA), adopted June, 19$4. required that the
Cite implement an o~.~7lership assistance program for lots and moderate income households
purchasing their amts as condominiums under TORCA Authorization to commence a program was
amended m June. 1992 when Proposition K «~as adopted The program provided for eligible
households to receive City financing through a `shared appreciation approach" whereby the City
~rould receive a share of the appreciated value at unit resale
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During the next t~vehe months Program Guidelines for operation of the program were developed
and in September. 1993,thee- were adopted b~~ City Council Soon thereafter First Federal Bank l~-as
selected by the City to under~~rite 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 communit<- orientation meetings have been organized to
inform the public about the program
The program started slowly, but loan activinT eventually picked up m 199b While only ~-6 loans
per year were funded during calendar years 1994 and 1995, calendar rear 199b loan approvals have
already reached 17 of ~-1uch 12 have been funded A number of factors including unproved market
conditions can be attributed to this dump in actn-ity Ho«-ever, the most significant factor is the
l~TOVember 199 modification of Program eligibility requirements that allow°s current tenants to buy
their units rather than Gust Participating Tenants as defined m the Tenant 0~.~~rierslup Rights Charter
Amendment As of September 30, 199b, the City has funded $1,224,010 toward the purchase of 22
TORCA units, this equates to an average loan of about $5.000 per unit Tlie balance of available
funds under the program is $2,80.673
Although loan volume is up, a positive program trend. Staff has determined that selected program
modifications «~ill strengthen program underv~~ritmg. improve the participants` ability to obtain
conventional fixed rate financing, and facilitate broader participation
Dlscusslo
The proposed ne~~- undeni~itmg 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 m a umt
Modified Criteria Maximum loan amount should be based on both the number of
bedrooms m a umt and household size as displayed below
Minimum Maximum
Unit Size City° Subside Hsehold Size'•- Hsehold Size'
Studio or efficienc~~ 50,000 1 2
One bedroom umt 560.000 1 3
Two bedroom unit 57,000 2 4
Three bedroom unit $75,000 2 b
Four bedroom unit 57,000 2 8
'Household size limitation would not apple to Pamcipating Tenants defined as tenants living
m buildings at the time of condominium conversion
=A Single. elderly, disabled. or handicapped loan applicant supported by alive-m attendant
(prov°iding at least 8 hours of care daily} ~i~ho is determined to be essential to the applicant's
care or «'ell being qualifies as a two person household
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'The maximum household size per umt is consistent ~i~ith the standards of the Cite of Santa
Monica Housing Authority The Cite may ~.~~aive the maximum household size criteria for
goad cause based on administrative discretion
Purnose 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 CztS-~s expense (for example, $60,000 vs ~7~,000 subside) which is permitted
under current Guidelines can now be avoided
To avoid tenant displacement due to a conversion, the modified crnterna v~all not be applicable
to Partncnpatmg Tenants who are accorded a special status Additionally, those single loan
applicants that require live-nn care are considered to be a t«•o person household and therefore
qualify for the higher subsidy m the eti-ent a t~vo-bedroom umt is purchased
2. Current Criteria: Student status not addressed
viodified Criteria: Student applicant cannot be a dependent of a third party-
Puruose This modification is made to ensure that the applicant is in fact self-
supporting and can demonstrate income eingibility As long as the student applicant is not
a dependent of a third party. student status is acceptable A student ns defined as a person
«;~ho ns carrying a full or part time subject load (as defined by the institution) at an institution
with a degree or certificate program
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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
vodified Criteria: 33% targeted front end ratio for fixed rate mortgages (or any
departure from ratio w rth prior Housing Division approval based on
factors such as credit history, resen~e 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 presen~ing limned City funds so that a greater number of loan applicants can
be assisted through the City"s program The 3~% ratio for fixed rate loans is well v~~ithm
industry standards and is consistent «~ith secondan- 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 Crty up to the
lesser of 3l4% of the first trust deed loan amount, or ~~00, and (2)
closing costs financed by the Cite up to $~00
Purt?ose This modification is made to ensure the cost effective allocation of Crtti~ 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 Borro«~er, however, is not precluded by the
proposed funding cap Any individual who wishes to utilize more expensive financing
structures may do so. but Crty dollars would be applied only to these costs up to the cap_
~. Current Criteria: 20 year term for City loans «ath a 10 year extension upon approval
by the City
AZodified 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 ~;~ith
secondary- market lender under~~~riting criteria The beneficial impact of the uninterrupted
term is that conventional lenders that rely on the secondary market for liquidity ~~ll 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 leave 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 sen~ice as «~ell as repay- debt. is
significantly improved by removing the market nsk associated ~~~ith interest rate movement
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Furthermore, fixed rate loans provide a predictable level of debt sen ice ~~~hich contributes
to the financial stability of households limited to low or moderate income levels Finally,
bt- conforming to secondary= market standards a greater number of lending institutions can
participate m the Cit<~'s program thereb}' promoting competition and gi~~xng loan applicants
a «~ider range of choices
The 2d year loan term ~.~~ill remain in effect for those loan applicants who obtain financing
from lenders who do not require secondary market involvement
FII`ANCIALBtiDGETARY IMPACT
It is anticipated that the proposed modifications «~ill alloi~~ for greater utilization of existing loan
program funds through increased leveraging of City dollars In addition, repay~rrient nsk to the City
is mitigated by allo~~~ng loan apphcants to obtain coin-entional fixed rather than variable financing
No other financial or budgetary impacts are expected
CQI~GLUSIQN
It is recommended that the Cite Council
(1) Approve the modification of selected undervr°riting criteria {household size; student status.
front-end ratio. closing cast 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
Prepared by Jeff Mathieu. Director of Resource Management
Bob Vloncnef. Housing Manager
Ellen Alderman Comis. Senior Administrative Analyst
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