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RM:Housing:JM:BM:EAC\F:\HOUSING\SHARE\Word\Staff Reports\TORCA Loan Prog Mod 07-05doc
Council Meeting: July 23, 2002 Santa Monica, California
Mayor and City Council
City Staff
Subject:
Modifications to the TORCA Shared Appreciation Loan Program Guidelines
Introduction
This report recommends selected modifications to the Shared Appreciation Loan Program
Guidelines. These modifications are intended to liberalize underwriting standards and
streamline the application process to facilitate participation in the program.
Backqround
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. In December,
1989 the City Council approved a program with limited appreciation whereby buyer equity
was limited to a fixed amount of appreciation annually. The first and only TORCA loan with
limited appreciation was made in 1991. Program Guidelines were subsequently amended
in 1993 to allow eligible households to receive City financing through shared appreciation,
whereby the City would receive a share of the appreciated value at unit resale.
Since program inception, a total of 51 loans have been made with peak activity in 1996 and
1997 and limited activity since that time (see Attachment A). Loan activity spiked during
1996 and 1997 as a result of a confluence of factors, including changes to the TORCA
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Loan Program, vacancy controls and real estate market conditions. More particularly, in
1995 the TORCA Loan Program was modified to allow any resident of the building to apply
for a loan rather than limiting participation to residents who lived in a unit at the time of the
TORCA conversion. Then, in 1997, policy was changed to authorize use of multiple
lenders, thereby facilitating the flow of private loans to potential borrowers. Throughout this
period, sluggish real estate market conditions brought few prospective buyers on the open
market. In addition, stricter vacancy control in place before the Costa Hawkins Act of 1995
limited rental property income. In the environment of stricter vacancy controls and a
sluggish sales market, the TORCA Loan Program flourished because it provided property
owners with a market for their units.
Since 1997, loan volume has declined. This decline is attributable to three main factors:
1. In the wake of the Costa Hawkins Act, which gradually phased in full vacancy de-control
between January 1996 and January 1999, the incentive for owners to sell TORCA units
was dramatically reduced. Property owners can now increase rents to market levels when
a new tenancy is established, making the sale of TORCA units comparatively less
attractive.
2. For tenants who remained in the TORCA units, escalating condominium sale prices
since 1997 have made home ownership significantly more expensive than continuing to
rent under rent control.
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3. Prior to 1997, the real estate market in the City was depressed In this buyers' market,
owners were willing to deal with the time consuming process of finding tenants who were
interested in buying a TORCA unit and qualifying for a TORCA loan. Since that time,
owners have been able to find buyers who qualify for private financing much more easily as
a result of the strong real estate market.
During the past year, the Housing Commission has met on a number of occasions (June,
July, September, November of 2001 and January of 2002) to review and evaluate the Loan
Program. Public input regarding program strengths and weaknesses was obtained from
lenders and borrowers at the July 2001 Commission meeting. Both staff and the Housing
Commission believe that selected modifications to the Program Guidelines will strengthen
program operations, improve efficiency, improve access to very low income applicants, and
ultimately facilitate increased participation
Discussion
As approved by the Housing Commission, the proposed modifications to existing
Guidelines are summarized below with a brief explanation regarding the purpose and
beneficial program impact:
1. Current Criteria Maximum subsidy is $75,000 for any eligible buyer
Modified Criteria Maximum subsidy is increased for low income buyers (80% of
median income or below):
-$110,000 for low income buyers
Note: subsidy remains the same at $75,000 for moderate income
buyers (81%-120% of median income)
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Rationale: A subsidy increase from $75,000 to $110,000 is proposed for low income
buyers based on an estimated housing gap (difference between available financing,
buyer equity, and purchase price). This will provide greater assistance to those buyers
with the least amount of borrowing capacity.
Subsidy limits have not been a barrier to approving City TORCA loans for moderate
income borrowers. Recent loans to moderate-income households have been below
existing subsidy limits. This can be explained in part by the fact that the majority of
tenants in TORCA units are long time renters who typically live in older buildings that
are generally priced at the lower end of the real estate market.
2. Current Criteria Down Payment of 5%
Modified Criteria Down Payment of 3%
Rationale: Most private lenders require a 5% down payment for conventional loans.
By reducing the City's current 5% down payment requirement to 3%, it will be easier
for applicants of limited means to qualify for financing.
3. Current Criteria Buyer allowable assets* can not exceed $5,000
Modified Criteria Buyer allowable assets* can not exceed $10,000
Rationale: In order to liberalize the current personal asset* amount and avoid the
potential disqualification of otherwise eligible applicants, a $10,000 limit is proposed
which is double the existing amount.
* Assets exclude personal effects, furniture, automobiles, IRA accounts, retirement
funds, and real or personal property used in a business which is the primary source of
household livelihood.
4. Current Criteria Program costs financed by the City are limited to (1) $500 for closing
expenses and (2) 0.75% of bank loan for mortgage broker fees
Modified Criteria Program costs financed by the City are limited to (1) $4,000 for
closing expenses and (2) 1 % of bank loan for mortgage broker fees
Rationale: Allowable program costs for closing expenses and mortgage broker fees
were established in 1996. It is reasonable to update allowable costs to market level.
The proposed increases are based on recent real estate cost information.
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5. Current Criteria TORCA loan closings are handled by a designated escrow company
Modified Criteria TORCA loan closings can be handled by any escrow company
Rationale: Difficulties were experienced prior to 1998 with escrow companies
unfamiliar with the City loan program. As a result, the City designated a single escrow
company to handle the TORCA loan closings. Streamlining of the City funding process
in late 1997 has simplified closing such that the designation of a single escrow
company is no longer necessary.
6. City Application Procedures
Obiective
Expedite and improve the application process
Rationale: Every effort will be made to monitor loan processing time, expedite the
approval process, and improve borrower understanding. Staff proposes the
establishment of several new procedures:
Applicants would notify the City once application materials have been submitted
to a Bank (outside funding is a City requirement). A new notification form will
be included in the City's application package with instructions on when to
complete.
City application materials will be revised to include information on home buyer
education programs.
A new disclosure form will be included in the City's application package to
explain that 1) every applicant may not be entitled to the maximum City subsidy
and 2) loan amounts are based on specific criteria such as applicant's
borrowing capacity, available down payment, household size, etc.
Budqet/Financiallmpact
It is anticipated that the proposed modifications will facilitate the use of existing loan
program funds. No other financial or budgetary impacts are expected.
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Recommendations
It is recommended that City Council:
(1) Approve the increase in the maximum subsidy amount for low income buyers
(80% or below of median income) from $75,000 to $110,000; and
(2) Approve the modification of selected underwriting criteria (down payment,
allowable assets, program costs) and selected administrative procedures
(designated escrow, application process).
Prepared by: Jeff Mathieu, Director Resource Management
Bob Moncrief, Housing and Redevelopment Manager
John Read, Housing Coordinator
Ellen Alderman Comis, Senior Administrative Analyst
Attachments: A - TORCA Loan Activity
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