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SR-11-D (6) . . C/ED:HSG:JG:wp City council Meeting: 12/12/89 U~2~ Santa Monica, California I , 0-; ~-OOl TO: Mayor and City Council FROM: City staff SUBJECT: Program Guidel ines for the Condominium Component of the Tenant OWnership Rights Charter Amendment (TORCA) Homeownership Assistance Program INTRODUCTION This report transmits information and recommendations regarding Program Guidelines (fIProgram Guidelines") for the condominium component of the Tenant OWnership Rights Charter Amendment (TOR- CA) Homeownership Assistance Program. The report recommends that the City council: (1) approve the Program Guidelines; (2) au- thorize the execution of agreements between local lenders and the Federal National Mortgage Association (UFannieMae") to establish special underwriting standards for households purchasing TORCA- converting units; (3) increase the maximum per unit loan amount allowed in the limited equity housing cooperative component of the HAP Program from $35,000 to $60,000; and (4) authorize the City Manager to utilize available TORCA conversion tax revenues for cooperative and condominium loans pursuant to the approved Program Guidelines. BACKGROUND The Tenant OWnership Rights Charter Amendment (TORCA) requires that the City implement an ownership assistance program for low and moderate income households purchasing their units as either .. 11- D - 1 - DEe 1 2 1989 e . limited equity housing cooperatives or condominiums under TORCA. On April 23, 1985, the City Council approved the basic design of a two-component (cooperative and condominium) Homeownership As- sistance Program (HAP) and directed staff to prepare operating guidelines for review and approval. On September 10, 1985, the city Council approved program guidelines for the limited equity housing cooperative ("cooperativelt) component of the HAP Program. These guidelines were prepared separately from the guidelines for the condominium component because of significant differences in the types of assistance required. Pursuant to the accumulation of sufficient TORCA conversion tax funds to assist a substantial number of low and moderate income households, staff is bringing the attached Program Guidelines for the condominium component of the TORCA Homeownership Assistance Program to the city Council for review and approval. DISCUSSION Determinants of proqram Design The design of the proposed Homeownership Assistance Program is based on: ( 1) the framework establ ished by the TORCA Charter Amendment; (2) additional policy guidelines approved by the City council in 1985; and (3) information generated by a recent survey of all households living in TORCA buildings. The influence of each of these factors on the proposed program design is discussed briefly in the following sections of this report. .. - 2 - . . (1) Charter Amendment Framework for Assistance proqram The TORCA Charter Amendment establishes the basic purpose and scope of the Homeownership Assistance Program. Section 2009 (a) of the Charter Amendment requires that the proceeds of the con- version tax levied on converting units be used to assist low and moderate income households in purchasing their converting units "subject to an affordable repayment plan including interest, keyed to future income increases and gains on sale. II section 2000 Cd) of the Charter Amendment additionally requires that the funds be used to "ensure the continued availability of affordable housing for Low and Moderate Income Households." (2) Additional Policy Guidelines In addition to the Charter AJnendment framework, the following policy guidelines were used to develop the program design ap- proved by the City Council in April, 1985: (1) The program should be flexible enough to meet the needs of various segments of the target population; (2) The program should make efficient use of tax dollars; (3) The program should be understandable and acceptable to borrowers and lenders; (4) The program should control the resale price of assisted units in order to accomplish the primary objective of ensuring the continued affordability of housing for low income persons: and (5) The program should attract eligible participants by offering acceptable terms and a fair return on the par- ticipant's equity. .. - 3 - . . (3) TORCA Household survey In order to assess the household characteristics and financing needs of households living in TORCA-converting units, staff dis- tributed a survey during the week of June 26-30, 1989, to every household living in a building undergoing TORCA conversion. 154 out of 655 converting households responded to the survey, and the information collected was used to establish Program loan limits and evaluate the potential effectiveness of the proposed program design. The results of the survey are attached to this report as Exhibit "A.It Homeownership Assistance proqram (HAP) Desiqn The design of the condominium component of the Homeownership As- sistance Program (HAP), which was approved by the city Council in 1985, consists of two types of loans designed to address the needs of low income condominium buyers while maintaining unit affordability over time: (1) small market-rate loans; and (2) limited appreciation mortgages. This program design was approved by the City Council after extensive public comment and in-depth staff analysis of alternative program designs, including Shared Appreciation Mortgages (SAMs), interest-only loans, and standard second trust deed mortgages. The approved design was determined to be the only program structure capable of meeting the mUltiple goals of the program, i.e. allowing a fair rate of return to bor- rowers while preserving housing affordability for future purchasers. . - 4 - . . In the past six months staff have worked with other cities, hous- ing experts, and interested community members to develop guide- lines for the condominium component of the HAP Program. The fol- lowing sections of this report describe the major features of the proposed Program Guidelines, which are attached to this report as Exhibit liB. n (1) Small Market-Rate Loans The Small Market-Rate Loan component of the HAP Program will make small ($10,000 maximum) market-rate second or third trust deed loans to eligible borrowers purchasing their converting units. The payment of principal and interest will be deferred until the sale of the units, and there will be no controls imposed on the resale price of the units. The term of the loans will be ten years, but the City may extend this term up to a total of thirty (30) years if the assisted household can demonstrate: (1) that it is still low income: and (2) that repayment of the loan would raise its housing costs over 30% of its income. In order to deter speculation in the purchase of TORCA-converting units, the City will recapture a portion of an assisted unit's appreciation if it is sold within three years of its original purchase (75' if the unit is sold in the first year, 50\ if the unit is sold in the second year, and 25% if the unit is sold in the third year). In addition, occupancy of the purchased unit as a principal residence will be required. .. - 5 - . . Borrowers will be required to demonstrate that they cannot pur- chase their TORCA units without City financial assistance in or- der to ensure that loans are made only to households which truly need them. In addition, borrowers will be required to obtain the maximum amount of private financing they can afford in order to leverage HAP Program funds as effectively as possible. This program component is designed to make homeownership afford- able to buyers of units with prices close to their affordable mortgage amounts, and/or to provide downpayment funds to house- holds which can otherwise afford to purchase their units. Given the small size of the loans, the City Council chose in 1985 not to attach resale controls to the loans. Therefore, in order to ensure that the majority of TORCA funds be used to guarantee long-term affordability, staff proposes to allocate no more than ten percent (10%) of available condominium funds to the Small Market-Rate Loan program component in any single year. (2) Limited Appreciation Mortqages The Limited Appreciation Mortgage (LAM) component of the HAP Pro- gram will make larger second or third trust deed loans to eligible borrowers purchasing their converting units. The pay- ment of principal and interest will be deferred until the sale of the assisted units. The term of the loans will be thirty years, and this term will be renewed upon assumption of the loans by subsequent eligible purchasers. In order to assist as many households as possible, maximum loan ,. limits have been set such that single households will not receive - 6 - . . inequitably large shares of available subsidy funds. However, the loan limits have been set high enough to provide adequate assistance for low income households to purchase their units. The maximum per unit loan amounts will be as follows: Maximum Loan Amounts Per Unit Size o Bedroom 1 Bedroom 2 Bedrooms 3+ Bedrooms = $25,000 = $50,000 = $75,000 = $85,000 + $10,000 per bedroom over three As borrowers will be required to secure the maximum amount of private financing which they can afford, staff anticipates that these maximum loan amounts will not be required for every household assisted by the HAP Program. Based on the TORCA Household Survey, approximately 48% of the eligible households living in converting units, or fifty-eight (58) households, could purchase their units given these maximum loan limits. Detailed analysis of required subsidy levels for different household sizes and income levels is attached to this report as Exhibit "C." Units assisted with Limited Appreciation Mortgages may only be sold to eligible low income purchasers designated by the City, which will keep a waiting list of eligible potential purchasers. In addition, the resale price of the units will be controlled to ensure future affordability to low income households. In order to preserve the greatest amount of affordability of assisted ... units, as well as to allow a reasonable rate of return to - 7 - e . purchasers, the maximum allowable appreciation rate of assisted uni ts has been set at a simple rate of three percent (3 %) per year. According to staff analysis, allowing a higher rate of appreciation based on either the Consumer Price Index or HUD's Median Income index would allow prices to rise to the point that future purchasers could not afford the assisted units without either making prohibitively large downpayments or receiving extremely large additional subsidies from the City. Detailed analysis of the three appreciation restriction methods evaluated by staff (flat annual rate, CPI, and HUD Median Income index) is attached to this report as Exhibit ItD.n Assuming that an assisted household makes a five percent (5%) downpayment on its unit, the allowable appreciation rate of three percent (3%) per year is equivalent to a rate of return on the household's initial investment of approximately forty percent (40%) per year if the unit is sold after one year, and over fifty-five percent (55\) per year if the unit is sold after three years or more. As monthly housing costs will be constrained by private underwriting criteria and effectively reduced by income tax deductions and equity build-up, they do not substantially impact this rate of return. For example, assuming that a typical TORCA household purchases an average-priced one-bedroom TORCA unit with City assistance, and has been paying the average TORCA rent for that uni t, the household I s net monthly housing costs would remain virtually unchanged after their purchase. This program component ensures a reasonable rate of return (40- .. 55%) to the first and subsequent buyers, and maintains long-term - 8 - . . affordability without requiring additional subsidies from the HAP Program. By using resale controls this program component ensures that the units remain affordable whether or not available subsidy funds increase or decrease over time, and regardless of rapid appreciation in the market. This program component also leverages private mortgage funds with the TORCA tax proceeds, thereby enabling the Program to assist many more eligible households. "FannieMae" Private Mortgage Proqram To supplement the Homeownership Assistance Program, staff is pro- posing the establishment of special underwriting standards with local mortgage bankers and the Federal National Mortgage Associa- tion (IFannieMae") in order to allow households purchasing TORCA units to secure larger mortgage loans with smaller downpayments. These special underwriting standards will also be made available to moderate income households, which cannot be directly finan- cially assisted by the HAP Program due to the the Charter Amend- ment's targeting of assistance to low income households. Further information regarding these special underwriting standards is attached to this report as Exhibit "E," along with a sample Fan- nieMae agreement for such a program. Revision of Limited Equity Housinq Cooperative proqram Guidelines The previously-approved guidelines for the cooperative component of the HAP Program allow a maximum loan of $35,000 per unit for buildings converting to limited equity housing cooperatives .. ("cooperatives.') under TORCA. This program component has not - 9 - . . been successful in facilitating cooperative conversions because the loan limits are unrealistically low given the increasing cost of TORCA-converting units. Therefore, staff recommends that the per unit loan limit for the cooperative component of the HAP Pro- gram be increased to $60,000, which is consistent with the con- dominium component of the HAP Program and the City's housing trust funds. FINANCIAL/BUDGETARY IMPACT Pursuant to the TORCA Charter Amendment and previous Council di- rection, 51% of TORCA conversion tax revenues must be reserved to assist cooperatives being formed under TORCA. Therefore, staff is recommending that 51% of currently available TORCA conversion tax revenues, or $629,396, be used for HAP cooperative loans, and 49%, or $604,714, be used for HAP condominium loans. The actions recommended in this report will authorize the City Manager to make TORCA Homeownership Assistance Program coopera- tive and condominium loans up to a maximum amount of $1,234,110 from accumulated TORCA conversion tax revenues. In addition, revenue will be generated as Program loans are repaid, and these funds will be returned to the TORCA Fund to finance further Pro- gram loans. No other financial or budgetary impacts are antici- pated at this time. RECOMMENDATIONS It is recommended that the City Council: .. - 10 - . . (1) Approve the Program Guidelines for the condominium com- ponent of the Tenant OWnership Rights Charter Amendment Homeownership Assistance Program as presented in this report. (2) Authorize the City Manager to negotiate and execute agreements, as required, for special mortgage underwrit- ing standards for households purchasing their TORCA- converting condominium units. (3) Approve the revisions to the program guidelines for the cooperative component of the TORCA Homeownership Assis- tance Program as described in this report. (4) Authorize the City Manager to make up to $629,396 in cooperative loans pursuant to the approved program guidelines for the cooperative component of the TORCA Homeownership Assistance Program. (5) Authorize the City Manager to make up to $604,714 in condominium loans pursuant to the approved program guidelines for the condominium component of the TORCA Homeownership Assistance Program. Prepared by: Jack Gardner, Senior Development Analyst Department of commqnity and Economic Development Exhibits: "A" - Summary Results of TORCA Household Survey "B" - Proposed Program Guidelines "CII - Analysis of Necessary Subsidy Levels "0" - Analysis of Appreciation Restriction Methods liE" - SlJlIIlnary of FannieMae Community Lending Program :hap2 .. - 11 - . . EXHIBIT "A" SUMMARY RESULTS OF TORCA HOUSEHOLD SURVEY During the week of June 26-30, 1989, two surveys were mailed to a total of 655 households living in units converting (or having converted) to tenant ownership under the Tenant Ownership Rights Charter Amendment (TORCA). One survey was mailed to 191 households living in units which have completed the conversion process and been sold, and one survey was mailed to 464 households living in units which had either not yet finished the process or had finished the process but not yet been sold. A total of 154 households responded to the surveys, resulting in an average response rate of 23.5%, or almost 1 in 4. NARRATIVE ANALYSIS OF RESULTS 1. Typical Household: The typical household living in a TORCA-converting unit consists of two non-senior adults with a combined income above 120% of the median income of the Los Angeles SMSA. Approximately one in five TORCA households includes children, split evenly between one child and two children. Approximately one in five TORCA households consists of seniors, three-fourths (3/4) of which are one-person households and one-fourth (1/4) of which are two-person households. 2. Characteristics of Tarqet Population: 26% of the households responding to the TORCA Household survey are potentially eligible for HAP Program assistance (i.e. have incomes at or below 80% of the median household income of the Los Angeles SMSA) and 71% of this group intend (or desire) to purchase their converting units. Assuming that these percentages are applicable to the total population of households occupying TORCA-converting units, there would be approximately 86 households which are eligible for Program assistance and desire to purchase their units. 3. Averaqe Sales Prices: The average sales prices of the units occupied by eligible households break down as follows: Unit Size Income Ranqe o BR 1 BR $110,000 $90,667 2 BR $119,667 $151,557 3 BR $239,000 NA Very Low (<50%) Low (51%-SO%) NA $66,600 4. Income Eliqibility: section 2009 (b) of the TORCA Charter Amendment states that up to one-sixth (1/6) of the revenues generated by the TORCA conversion tax may be used to assist moderate income households, i.e. households earning up to 120% of the median household income of the Los Angeles SMSA, if the City Council, by at least five affirmative votes, determines that the assistance needs of low income households in TORCA-converting units have been fully satisfied. .. - 1 - . . Given the level of low income need demonstrated by the TORCA Household Survey, such a determination cannot currently be made. Therefore, only low income households will be eligible for Program assistance at this time. Assistance will be provided to moderate income households through the establishment of special loan underwriting standards in cooperation with the Federal National Mortgage Association ("FannieMae") and local lenders. Direct financial assistance from the City could conceivably be made available to moderate income households when the subsidy needs of all low income households in converting units have been met. STATISTICAL RESULTS Survey #1: Units which have been purchased 1. Response Rate: 41 out of 191 households responded to the survey, for a response rate of 21.5%. 2 . Tenure: 60% of the responding units after the TORCA application submitted, while only 40% were application. households moved into their for their building had been in place at the time of 3. Household Size: The average responding household has 1.8 members. The responding households break down as follows: 1 Person: 39% 2 Persons: 44% 3 Persons: 12% 4 Persons: 5% 4. Seniors: Only 12% of the responding households include members over 62 years of age. Of this 12%, 5% have one senior member and 7% have two senior members. Virtually all of the households which include a senior member are made up exclusively of seniors. 5. Children: 80% of the responding households include no members under 18 years of age, while 10% include one minor and 10% include two minors. 6. Income Levels: very low income (<sot): 2% Low income (<Bot): 2\ Moderate income (<120%): 18% Higher income (>120%): 78% In other words, only 4% of the responding households would have been eligible for city assistance per the requirements of the TORCA Charter Amendment. .. 7. Monthly Rents: The average monthly rents of the responding households prior to purchasing their units were as follows: - 2 - . . 1 Bedroom units: 2 Bedroom units: 3 Bedroom units: $438 ($245-$520) $627 ($250-$1,200) $957 ($380-$2,000) 8. unit Sizes: 1 Bedroom units: 27% 2 Bedroom units: 54% 3 Bedroom units: 19% 9. Purchase Prices: 1 Bedroom units: 2 Bedroom units: 3 Bedroom units: $114,500 Average ($86,000-$170,000) $154,100 Average ($75,000-$260,000) $166,938 Average ($127,000-$212,000) 10. Price Chanqes: 42% of the responding households purchased their units for the original prices listed in the TORCA applications for their buildings, while 22% bought their units at other prices and 36% did not know whether or not their purchase prices were those listed in the applications. 11. Financinq Information: the following information purchases: The responding households provided regarding the financing of their A. Downpayment: 18% Average B. Source of Downpayment: Savings: 80% Family: 10% Other: 10% C. Interest Rate: (4%-50%) 8.84% Average 10.66% Average D. Loan Term: 27 years Average years, and 5% @ other terms} E. Financing Institutions: Citicorp Savings (a), Home Federal Savings (5), Coll1mhia Savings (3), First Federal Savings (3), Bank of America (3), TORCA owners (3), Great Western (2), and 13 other institutions which made one loan each. F. Second Mortgages: 10% of the responding households used second mortgage financing in their purchases (for an average amount of 11.3% of their purchase prices). (adjustable) (fixed) (80% @ 30 years, 15% @ 15 Survey '2: Units Which have NOT been sold 1. Response Rate: 113 out of 464 households responded to the survey, for a response rate of 24.4%. ... 2. Tenure: 98.3% of the responding households occupied the ir units at the time of the TORCA application, while only 1.7% moved into their units since the TORCA application had been submitted. This is consistent with the recent dates of application for many of the buildings surveyed; very little tenant turn-over has occurred since the dates of the TORCA applications. - 3 - . . 3. Household Size: The average responding household has 1. a members. The responding households break down as follows: 1 Person: 45% 2 Persons: 37% 3 Persons: 14% 4 Persons: 3% 4. Senior Households: 27% of the responding households include members over 62 years of age. Of this 27%, 18% have one senior member and 9% have two senior members. Virtually all of the households which included a senior member are made up exclusively of seniors. 5. Children: 85% of the responding households include no members under 18 years of age, while 10% include one minor, 3% include two minors, and 2% include three minors. 6. Income Levels: Very low income (<50%): 8% Low income (<80t): 18t Middle income (<100%): 3% Moderate income (<120%): 19% Higher income (>120%): 51% The survey results indicate that 26% of the responding households would be potentially eligible for City assistance per the provisions of the TORCA Charter Amendment. 7 . Monthly Rent: The average monthly rents of the responding households per unit size are as follows: 0 Bedroom units: 1 Bedroom units: 2 Bedroom units: 3 Bedroom units: 8. Unit Sizes: 0 Bedroom units: 1 Bedroom units: 2 Bedroom units: 3 Bedroom units: 9. Purchase Prices: 0 Bedroom units: 1 Bedroom units: 2 Bedroom units: 3 Bedroom units: $293 (only 1 unit) $408 ($230-$550) $721 ($260-$2,000) $1,014 ($520-$2,400) 1% 24% 56% 19% $66,600 (only 1 unit) $96,622 Average ($67,000-$195,000) $190,099 Average ($92,500-$478,000) $253,700 Average ($95,000-$473,000) 10. Two-Year Option Period: 96.5% of the responding households are still within their two-year purchase option periods, while 3.5t either don't know or have let their periods expire. .. - 4 - . . 11. Intent to Purchase: 62.7% of the responding households which are still wi thin their two-year purchase option periods intend (or desire) to purchase their units, while 18.6% do NOT intend to purchase their units and 18.6% are unsure. 12. Financing Information: The responding households which intend to purchase their units provided the following information regarding the potential financing of their purchases: A. Downpayment: 15% Averaqe B. Source of Downpayment: Savings: 68% Family: 18% other: 14% C. Interest Rate: (2%-30%) 9.625% Average (adjustable) 10.86% Average (fixed) D. Loan Term: 27 years Average (77% @ 30 yrs, 22% @ 15 yrs) E. Financing Institutions: citicorp Savings (2), California Federal Savings (1), Western Security Mortgages (1) I and Great California Mortgage (1). The large majority of the responding households had not yet arranged financing. E. Second Mortgages: None of the responding households anticipated using second mortgage financing. 13. Reasons for Not Buyinq: The responding households which do NOT intend to purchase their units gave the following reasons for their decisions (more than one reason could be chosen): Unit is simply too expensive: 91% Could not afford monthly payments: Could not afford the downpayment: Preferred to Rent: 66% 100% 91% In addition, several senior households stated that they did not wish to purchase property at this stage in their lives, and several other households cited the poor condition of their units as the reason they chose not to buy. 14. Interest in City Assistance: 85\ of the responding households expressed interest in low-cost City financing if it were available, while 11% expressed no interest in such financing and 4% were unsure. :torcsurv .. - 5 - . . EXHIBIT "B" TORCA BOHEOWNERSBIP ASSISTANCE PROGRAM (HAP) CONDOMINIUM PROGRAM GUIDBLIBBS DEFINITIONS ClEO: Department of community and Economic Development , City of Santa Monica. This department will administer the Homeownership Assistance Program. Low and Moderate Income Households: Households with incomes below 80t of the median household income of the Los Anqeles Standard Metropolitan statistical Area (SMSA), adjusted for household size, as published by the U.S. Department of Housing and Urban Development (HUD) from time to time. Maximum Low and Moderate Income levels per household size are currently as follows: Household Size Maximum Annual Income 1 2 3 4 5 6 7 8 $21,300 24,300 27,350 30,400 32,300 34,200 36,150 38,000 Middle Income Households: Households whose incomes exceed 80% but are less than 120% of the median household income of the Los Angeles SMSA, adjusted for household size, as published by HUD from time to time. Maximum Middle Income levels per household size are currently as follows: Household Size Maximum Annual Income 1 2 3 4 5 6 7 8 $31,900 36,500 41,000 45,600 47,650 49,700 51,750 53,800 Limited Equity: Programs subject to the restrictions set forth in the Health and Safety Code section 33007.5 and other programs which limit, to a similar extent and time, the owner's return at resale. .. - 1 - . . Rehabilitation: Repairs made to structural or functional systems to correct existing or incipient defects to bring the unit up to code and ensure the safety and habitability of the unit. Resale Control Price: For units receiving assistance under the Limited Appreciation Mortgage Program, the original price of the assisted unit, plus the value of any capital improvements approved in writing by the City under this Program, increased at a simple rate of 3% per year for each year of ownerShip. Tenant Participating Conversion: Any conversion to tenant ownership implemented under Article XX of the Santa Monica city Charter. Unit: Housing unit currently occupied by applicant and intended for purchase as a condominium. INTRODUCTION Deferred loans shall be made available to eligible Borrowers to make up the financial gap between available non-TORCA loan sources, including Borrower's equity and private financing, and the cost of acquiring the Borrower's converting unit. Two types of loans ar~ available to eligible Borrowers, depending upon their assistance needs: (1) Small Market-Rate Loans. (2) Limited Appreciation Mortgages (LAMs). (1) Small Market-Rate Loans: These loans are intended to make homeownership possible for buyers who (1) have adequate incomes to support a mortgage, but do not have the necessary downpayment or closing costs, and (2) have incomes almost large enough to support a mortgage for the full price of the unit being purchased. Low and Moderate Income Households are eligible for Small Market-Rate Loans (SMRLs). The maximum loan amount is $10,000, and the minimum loan amount is $2,000. Loans carry a market rate of interest which is deferred and accrued until the unit is sold. In order to deter speculation, the Borrower is required to pay a portion of the assisted unit's appreciation to the City in lieu of interest if the unit is sold in less than three years from the date of purchase. (2) Limited Appreciation Mortqaqes (LAMs): These loans are intended for buyers who need more substantial financial assistance in order to purchase their units, but will still be securing the balance of the necessary financing from private financial institutions. Low and Moderate Income Households are eligible for Limited Appreciation Mortgages (LAMs). The maximum loan amount is based on the Borrower's borrowing capacity and varies based on unit size. The resale price of the assisted unit is restricted as a condition of the financing, and assisted units may be resold only to eligible purchasers referred by the City of Santa Monica. No payments of principal or interest are required either during the term of the loan, or upon resale if the City allows assumption of .. - 2 - . . the loan by the next eligible purchaser. In the case that the City is unable to find an eligible purchaser in a timely manner, the assisted unit is sold for a market price and the principal amount of the city's loan is due and payable, along with the difference between the Resale Control Price and the market price in lieu of interest. All loans will be available only to eligible borrowers whose borrowing capacity is determined to be insufficient to purchase their units on their own. All loans will be secured by a Deed of Trust recorded against the assisted unit, and in the case of Limited Appreciation Mortgages, a Loan Agreement establishing the unit's Resale control Price. ELIGIBILITY REQUIREMENTS Borrowers: Low and Moderate Income Households residing in buildings undergoing Tenant participating Conversions (TPCs), who have resided in their units from the date of passage of TORCA or for at least six months prior to submittal of the TPC application. Borrowers may not currently own another residence. Non-profit public benefit corporations may, at the sole discretion of the City, be designated as eligible Borrowers upon resale of assisted units. Uses: Acquisition (including eligible closing costs) of units in buildings undergoing a Tenant Participating Conversion to condominium ownership. Units must meet federal Housing Quality Standards (HQS) at the time of loan closing. Eligible closing costs include typical escrow and title insurance fees and reasonable financing fees for a private institutional loan. APPLICATION SUBMITTAL AND REVIEW PROCEDURES .. Application Submittal and Review Process: 1. Eligible borrowers may pick up an application and information packet at any time before or during the processing of their building's TPC application. Housing Oivision staff will be available by appointment to answer questions about the TORCA Homeownership Assistance Program and application procedures. Staff will also explain how Borrower eligibility and maximum potential private loan amounts are determined. Applicants will be encouraged to seek their own advisors regarding their decision to buy. 2. Applicants may submit applications for assistance only after their buildings have received approval from the California Department of Real Estate, or where such approval is not required, approval of the building's final map by the City Engineer. A complete application will include: - completed application form - A copy of the completed application to the private lender 3. - 3 - . . (required after step 6 below) Verification of income (most recent W2 form or verification from employer) - Three previous years' federal and state income tax returns 4. Upon receipt of an application Housing Division staff will log in the application and assign an application nlll~,-ber. The application will be reviewed for completeness and for minimum eligibility requirements. The status of the TPC application will be verified with the Planning and Zoning Division. within two weeks, the applicant will be given written notification of their eligibility and additional information will be requested if necessary. 5. Completed applications will be considered on a first come - first served basis. 6. A preliminary commitment letter will be prepared by the Housinq Division and reviewed and signed by the Director of ClEO. The letter shall state the maximum HAP Program assistance amount reserved for the Borrower and list all additional conditions, documents and steps that must be taken by the Borrower to obtain a firm commitment of TORCA funds. 7. The Borrower shall complete the loan approval process with the primary (private) lender. When the lender has given final approval of the loan, which may be contingent upon a final funding commitment from the City, the Borrower shall submit final loan closing documents to the City for review. Housing Division staff shall work with the Borrower and the private lender to assure that the Borrower's credit history is accurate and that they are borrowing the maximum possible amount from the private lender. 8. The Housing Division shall prepare a final commitment letter and the closing documents for the TORCA loan. The Director of CIED shall review and sign the final letter and package. 9. The Director of C/ED shall authorize release of the deferred loan funds into the escroW' account established for the loan closing with instructions for disbursement. 10. All Borrowers shall be required to provide the City with title insurance and shall name the City as additionally insured on hazard insurance policies, which shall be in amounts acceptable to the city. f.URTHER INFORMATION Further information regarding the City of Santa Monica's TORCA Homeownership Assistance Program can be obtained by calling the Housing Division of the Department of Community and Economic Development at (213) 458-8701. .. - 4 - . . SMALL MARKET-RATE LOANS LOAN TERMS Term: The term of a Small Market-Rate Loan will be ten years. At the sole discretion of the City, the term of the loan may be extended for two additional ten-year periods to a total of thirty years, upon demonstration by the Borrower (1) of continued status as a Low and Moderate Income Household, and (2) that repaying the loan would increase Borrower's housing costs over thirty percent (30%) of Borrower's gross income. Interest Rate: Interest rates shall be set upon loan commitment at a rate equal to two percent (2%) above the average prevailing rate for fixed rate mortgages from private financial institutions. Interest shall be calculated as simple interest. Payments: No payments of principal or interest will be required during the term of the loan. Principal and accrued interest become due and payable at the end of the loan term or upon default by the Borrower on any of the financing used to acquire the assisted unit. Security: The loan shall be secured by a Deed of Trust and promissory Note which, at the sole discretion of the City, may be subordinated to Deeds of Trust securing loans from private financial institutions or seller take-back financing. Downpayment: The Borrower must make a downpayment equal to at least five percent (5%) of the assisted unit's purchase price. Restrictions: 1. The Borrower shall occupy the assisted unit as their primary residence. The unit shall not be rented or used for commercial purposes. 2. The Borrower shall not encumber the assisted unit without the prior written consent of the City. 3. The city's loan program is not intended to allow speculation in the purchase of converting units. Therefore, in the event that the assisted unit is sold within three (3) years of its purchase, the Borrower shall pay to the City a share of the profits from the assisted unit's sale in lieu of interest on the loan. The amount of profits shall be divided as follows: (a) For units sold less than 12 months from the date of purchase: City shall receive 75% of the profits; Borrower shall receive 25% of the profits. (b) For units sold at least 12 months but no more than 24 months from the date of purchase: City shall receive 50% of the profits: Borrower shall receive 50% of the profits. w - 5 - . . (c) For units sold more than 24 months but no more than 36 months from the date of purchase: City shall receive 25% of the profits; Borrower shall receive 75% of the profits. (d) For units sold more than 36 months from date of purchase: City shall receive the principal amount of its loan plus accrued interest based on the market interest rate established at loan commitment. Profits shall be defined as the difference between the price at Which an assisted property is resold (minus C105 ing costs, real estate commissions, and any other legitimate costs incurred by the Borrower in selling the assisted property); and the original purchase price of the property plus the value of any capital improvements for which the Borrower received prior city approval under this Program. Maximum loan amount: Maximum loan amount is $10,000, or the maximum amount necessary to enable a Borrower to purchase their converting unit, whichever is less. Borrowers shall be required to obtain the maximum amount of private financing possible. Minimum loan amount: $2,000. UNDERWRITING GUIDELINES Borrowers shall demonstrate that they do not have sufficient assets available to purchase the unit without City financial assistance. A Borrower shall be determined to be unable to acquire the unit without city financial assistance if: 1. the monthly cost for payment of principal, interest I taxes, and insurance of the combined loans being obtained by the Borrower from a private financial institution and/or the seller would exceed twenty-eight (28%) of the household's gross monthly income; and 2. the household's assets do not exceed the total of the following: (a) the amount necessary to pay the estimated closing costs and downpayment for the property to be purchased; (b) the amount necessary to pay six (6) months of the monthly housing costs associated with the unit to be purchased: and (c) five thousand dollars ($5,000). These underwriting guidelines may be adjusted to conform with the underwriting standards utilized by a private lender which is providing financing to a Borrower under this Program. . Assets: For the purposes of the Program, I.assets" means the value of a household's savings and any equity in stocks, bonds I real - 6 - . . property, or other forms of capital investment. "Assets" does not include items reasonably necessary for the personal use of the household, such as personal effects, furniture, appliances, automobiles, and real or personal property used in a business or undertaking which is the primary source of livelihood for the household. Loan to value ratio: The total amount of all loans secured by the assisted unit, including the City's loan, shall not exceed 95% of the appraised value of the assisted unit.. An appraisal of the assisted unit shall be provided by the Borrower and shall be subject to City appro~al. Wherever feasible, the City shall utilize appraisals prepared by or for private lending institutions providing financing for the assisted unit. Creditworthiness: The City may decline an application for a loan where staff have determined that the Borrower's income, employment history, or creditworthiness is not sufficient to ensure repayment of the proposed loans being sought for the unit. Senior Financing: The City reserves the right to approve or disapprove the terms of all senior financing. If the TORCA loan is to be subordinate to a variable payment or adjustable rate loan, the Borrower must submit a schedule showing the maximum possible increase in debt service per year and the proposed means for meeting the debt service requirements. Variable payment or adjustable rate loans shall not be allowed unless the Borrower's ability to meet such payments can be demonstrated to the satisfaction of the city. .. - 7 - . . LIMITED APPRECIATION MORTGAGES LOAN TERMS Term: The term of a Limited Appreciation Mortgage (LAM) and its associated resale controls will be 30 years. The term of the resale control will renew with each change of ownership. Borrowers who remain in their unit for the full term of the loan will be released from any resale controls. Interest Rate: There will be no interest charged on the loans. Payment: No payment of principal or interest will be required on Limited Appreciation Mortgages (LAMs) unless the Borrower defaults on the loan or, in the event that the City is unable to find an eligible subsequent purchaser of the assisted unit, upon sale of the property at a market price. The difference between the Resale Control Price and the market price received will be paid to the City in lieu of interest, in addition to the principal amount of the City's loan. Security: The loan shall be secured by a Deed of Trust and Promissory Note which, at the discretion of the City, may be subordinated to Deeds of Trust securing loans from private financial institutions or seller take-back financing. In addition, a Loan Agreement will be entered into and recorded against the assisted unit which will contain the specific covenants required by the Program, including the allowable Resale Control Price of the assisted unit and the eligibility of subsequent purchasers. Resale Controls: 1. The Borrower shall occupy the assisted unit as their primary residence. Except where the Borrower is a non-profit corporation (upon subsequent transfers of the assisted unit), the assisted unit may not be rented or used for commercial purposes. 2. On subsequent sales the assisted unit shall only be sold to the City or an eligible Low and Moderate Income Household or non-profit corporation designated by the City. 3. The resale price of the assisted unit shall increase at a simple annual rate of 3% from date of purchase, but in no case shall exceed the fair market value of the unit. 4. The city of Santa Monica or its Designee shall have first option to purchase the assisted unit. s. If the city or its Designee does not exercise its option to purchase the assisted unit within 120 days of receipt of Owner's Notice of Intention to Sell, then the unit may be sold for its fair market value, as approved by the city I to any buyer. The unit may not be sold for less than 95% of its appraised fair market value. The difference between the .. - 8 - . . Resale Control Price and the price received on the market will be paid to the City in lieu of interest, in addition to the principal amount of the city's loan. 6. The Borrower shall not encumber the assisted unit without the prior written consent of the city. 7. The Borrower may make any improvements to the assisted unit they wish. However, only the value of those capital improvements which have received prior written approval of the City under this Program shall be added to the Resale Control Price of the assisted unit. 8. Resale controls will remain in effect for a period of 30 years and will renew with each change in ownership. Maximum Loan Amount: The maximum loan amount will be based upon the Borrower's borrowing capacity, assets available for downpayment, and the unit size. The loan amount shall be no more than is necessary to enable a Borrower (1) obtaining maximum affordable private financing, and (2) utilizing personal assets, to purchase the assisted unit. In no case shall LAMs exceed the following maximum amounts per unit size: o 1 2 3+ Bedroom Bedroom Bedrooms Bedrooms = $25,000 = $50,000 = $75,000 = $75,000 + $10,000 per bedroom over two UNDERWRITING GUIDELINES Price Test: The price of an assisted unit must be comparable to or below the price of similar units in the same building. Borrower must take advantage of seller discounts whenever feasible. Loan to Value and Equity Requirements: The total amount of all loans secured by the assisted unit, including the City'S loan, shall not exceed 95% of the appraised value of the property. An appraisal of the assisted unit shall be provided by the Borrower and shall be subject to City approval. Wherever feasible, the City shall utilize appraisals prepared by or for private lending institutions providing financing for the assisted unit. Private Financing: All borrowers will be required to seek maximum private financing for the purchase of the assisted unit. A final commitment of Program assistance will not be made until the Borrower has received a commitment from a private lender. Borrowers shall demonstrate that they do not have sufficient assets available to purchase the unit without City financial assistance. A Borrower shall be determined to be unable to acquire the property without City financial assistance if: . 1. the monthly cost for payment of principal, interest, taxes, and insurance of the combined loans being obtained by the - 9 - . . Borrower from a private financial institution and/or the seller would exceed twenty-eight (28%) of the household's gross monthly income; and 2. the household's assets do not exceed the total of the following: (a) the amount necessary to pay the estimated closing costs and downpayment for the property to be purchased; (b) the amount necessary to pay six (6) months of the monthly housing costs associated with the unit to be purchased; and (c) five thousand dollars ($5,000). These underwriting guidelines may be adjusted to conform with the underwriting standards utilized by a private lender which is providing financing to a Borrower under this Program. Assets: For the purposes of the Program, "assets" means the value of a household's savings and any equity in stocks, bonds, rE!al property, or other forms of capital investment. "Assets" does not include items reasonably necessary for the personal use of the household, such as personal effects, furniture, appliances, automobiles, and real or personal property used in a business or undertaking which is a primary source of livelihood for such a household. Senior Financing: The City reserves the right to approve or disapprove the terms of all senior financing. If the TORCA loan is to be subordinate to a variable payment or adjustable rate loan, the Borrower must submit a schedule showing the maximum possible increase in debt service per year and the proposed means for meeting the debt service requirements. Variable payment or adjustable rate loans shall not be allowed unless the Borrower's ability to meet such payments can be demonstrated to the satisfaction of the city. Seller Financing: The City will review each seller financing proposal on an individual basis. The City reserves the right to refuse a LAM if the terms of the seller financing jeopardize the continued affordability of the unit. Refinancing Primary Loan: If the Borrower desires to refinance the primary debt, or borrow additional funds from a source other than the City after the initial purchase of the assisted unit, the City shall review and approve the terms and conditions of the proposed loan and the proposed use of the proceeds. The City may prohibit such refinancing if it will negatively affect the future affordability of the unit, or otherwise adversely affect the City'S interests. In no case shall the Borrower be allowed to encumber any equity in the assisted unit which is in excess of the equity allowed the Borrower under the assisted unit's Resale control Price. .. - 10 - . . Creditworthiness: The City may decline an application for a loan where staff have determined that the Borrower's income, employment history, or creditworthiness is not sufficient to ensure repayment of the proposed loans being sought for the unit. PROGRAM MANAGEMENT Resale Procedures: ~. The city will establish and maintain a list of eligible households desiring to purchase units financed through the Homeownership Assistance program. The waiting list may categorize households by unit size, location, price, or other important characteristics. 2. When a Borrower decides to sell their assisted unit they must provide written notice (a "Notice of Intent to Sell") to the City of such intent as required by the recorded Loan Agreement and Deed of Trust. 3. Within 120 days of receipt of the Borrower's Notice of Intent to Sell, the City must notify the Borrower of its intention to exercise its right to purchase or designate a purchaser. If the City does not notify the Borrower, the Borrower may sell the assisted unit to any buyer for the unit's fair market value. The Borrower may not refuse a reasonable fair market value offer. The assisted unit shall not be sold for less than 95% of its fair market value as determined by an appraisal approved by the City. The difference between the assisted unit's Resale Control Price and its selling price will be paid to the City in lieu of interest, in addition to the principal amount of the city's loan. 4. The City or its Designee will conduct an inspection of the assisted unit and establish the Resale Control Price as described in the Loan Agreement. The Resale Control Price will take into account the value of any substantial improvements for which an increase in value will be allowed, the increase in price allowed during the period of ownership, and any costs necessary to place the assisted unit in condition for sale. s. The City will notify the first five or more households on the waiting list who have indicated an interest in such a unit of the availability of the assisted unit. Potential purchasers may arrange with the seller to see the unit, and must submit a detailed application to the City for the right to purchase the unit and assume the existing City loan, within two weeks of notification of availability. The City will requalify the eligibility of such households to confirm their continuing eligibility for the Program. Where more than one household submits the required application within the allowable two-week period and they are determined to be eligible, a purchaser will be selected based on the time and date of their submittal of the completed application. '" - 11 - . . Households on the waiting list who do not submit an application to purchase a unit after five such notifications of availability will be dropped from the waiting list. Households who apply but are not selected to purchase a unit shall retain their place on the waiting list without prejudice. 6. The City shall enter into an Assignment of Right to Purchase with the selected household which shall make a refundable good faith deposit to escrow of $1,000. The household must secure financing and provide documentation of its ability to fund the downpayment within six weeks of the Assignment. If the household does not secure financing within this time period, the unit will offered to the next household which submitted an acceptable application. In the event that no other acceptable applications were submitted, the City will notify a second group of households on the waiting list, and repeat the application procedure until an acceptable household is found. 7. In the event that an eligible household cannot be found in a timely manner, the City shall have the right, at its sole discretion, to either purchase the unit itself for subsequent transfer to an eligible household, or to designate a non-profit corporation as the purchaser of the unit for use as affordable rental housing, subject to the terms of a Regulatory Agreement between the city and the corporation and the By-laws of the applicable homeowners' association. S. In the event that the City or its Designee is unable to secure financing and purchase the unit within six months of Borrower's Notice of Intent to Sell, the City shall relinquish its Right to Purchase the assisted unit. The assisted unit may then be sold by the Borrower as if the Ci ty had not exercised its Right to Purchase, as described in step 3 above. Default and Foreclosure: A default -on the Borrower's private loan is automatically considered a default on the City'S loan. The City may elect to remedy, through additional assistance to the Borrower, Borrower's default on the private loan if Borrower's difficulties are deemed temporary and such action is deemed to serve the purposes of the Program. The City may also intervene in a foreclosure by buying the assisted unit itself or by causing the unit to be sold to another eligible household. In the case of a foreclosure sale, the amount due and payable on the City's LAM shall be (1) the LAM's original principal amount, plus (2) the difference between the foreclosure sale price and the allowable Resale control Price established by the Loan Agreement recorded against the assisted unit. .. :torcahap - 12 - . . N - 0000' U"I 0' M ,.... ON~O .... 0 N CO . .... It'\ -=r N N M - 10 .. .. .. CO CXI 10 CO U"I CO CXI N ..c q)o - CO M V> - - N 00\0-4' .... '" CO t"'t 01""'1""'\0 .... lI'l \D M .--:rCIQ N .... CO ,.... 0 .. ,.... '" 0 .... ..:t r, .... N 'i' q)o N 0' 4 ~ .... 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W 0'" C 0::: loC '::l loot 0 :I:: III 0 CIJ't:IU .::E: 0 CIl 0 .... .... c C 4-' ::c ....u .... III CIO<otlIl I'll El Ul C. Ql C C .... III ~"'C < >. IV e .... -IUl.... "l;I e ... "l:l "t:l "'C "'l:l U III :l 111 a lI.l Ql II) Q,l 0 . 0- Ql ClI ClI ClI :.::: III - III .... ... :l loC 0 X l.l s....... .0 = /:Q llCI - C C 0 II) c (oj ~ CIl.... a........... f-<< ::c -< ... .... ::Cf.<U H~-<< 0 - N l""I . . EXHIBIT liD" ANALYSIS OF APPRECIATION RESTRICTION METHODS Under the design for the TORCA Homeownership Assistance Program approved in concept by the City Council in 1985, second or third trust deed loans would be made to eligible households purchasing their units as condominiums under the TORCA Program. These loans would not require payment of principal or interest until the assisted unit was sold. In order to make the units affordable to subsequent eligible buyers without additional City subsidies, the Program would limit the appreciation of the price of the assisted unit. Three alternative methods for limiting the rate of price appreciation of assisted units were examined. The three methods examined consisted of the following: (1) Limiting appreciation to the rate of increase in the ItMedian Income" index published by the u.S. Department of Housing and Urban Development (RUD). (2) Limiting appreciation to the rate of increase in the Consumer Price Index (CPI). (3) Limiting appreciation to a specific flat rate. Based upon staff's evaluation of the impact that each of these methods would have on (1) future affordability of assisted units to Low and Moderate Income households, and (2) the rate of return to the previous purchaser, it is recommended that an annual price appreciation rate of 3% be allowed for units assisted under the Homeownership Assistance program. Median Income Index HUD publishes a "Median Income" index for the Los Angeles-Long Beach Standard Metropolitan statistical Area (SMSA) each year. Under many housing programs, increases in rents and housing prices are tied to this index. Under such a formula, for example, if the median income index were to rise 10% between the time of purchase of an assisted unit and its subsequent sale, the sales price of the assisted unit would be allowed to increase 10%. .. There are several difficulties involved in using this index. First, HUD does not use a consistent data base to compute the index. This can result in substantial fluctuations in the index from year to year. For example, BUD median income increased from $21,800 in 1980 to $27,400 in 1981 - an increase of over 25% in one year. Also, HUD computes the figures at differing time intervals (sometimes a new index is not available for two years) . For these and other methodological reasons, HUD staff recommends against using the median income index for the purpose of - 1 - . . computing homeownership resale prices (as opposed to affordable rent levels). In addition, there is evidence to support the contention that the increases in the Median Income index published by HOD overestimate the increases in the earning power of low and moderate income households. This is because the Median Income index attempts to determine the midpoint of all household incomes in the SMSA. The index is therefore effectively based on the composition of the population being examined by HUD. Thus, the index may change because of changes in the examined population, as opposed to any change in the incomes of that population. An influx of higher income households into the measurement group will increase the median income of the group without the incomes of the lower portion of that group changing at all. Table 1 shows the impact that use of the Median Income index would have on sales prices, if the index continues to rise at an average annual rate of 7.8%, as it did between 1979 and 1989. Assuming that the real income of wage-earners increases at an average annual rate of only 4.5%, as it did between 1970 and 1980 according to the U.S. Census, the downpayment required of a two person household to purchase the average-priced one-bedroom TORCA unit increases from $4,975 (5% of purchase price) currently to almost $62,000 in eight years. Alternatively, the city would have to provide additional subsidies of over $56,000 to enable an eligible household to purchase the unit at that time. In addition, the original Borrower would receive an average annual rate of return on their original investment in the property of over 150%. Consumer Price Index The Consumer Price Index (CPI) is an alternative method of restricting the rate of increase in sales prices. The CPI is used, ~n part, by the Rent Control Board in determining the amount of rent increase allowed in rental properties controlled under the Rent Control Charter Amendment. Use of this index for that program is rational because the rent a landlord receives must cover the cost of operating expenses that may increase from year to year. Sales prices for units, however, do not need to reflect increasing costs of purchasing goods and services. Between 1983 and 1989, the CPI increased over 30%, or about 5% per year. Table 2 shows the impact that such a rate of increase would have on the affordability of units and the annual rates of return to buyers. Assuming CPI increases similar to those of the last six years, buyers making a downpayment of 5% on their assisted one-bedroom unit would receive an average annual rate of return of over 100%. While the initial buyer made a downpayment of $4,975, a subsequent buyer who assumed the City'S loan in year eight would have to make downpayment of over $27,000. Alternatively, the City would have to provide additional subsidies of over $22,000 to enable the subsequent buyer to purchase the unit at that time. .. - 2 - . . Constant Rate of Return A flat rate of return would allow sales prices to increase at a predetermined rate, regardless of the actual rate of inflation experienced in the future. Use of such a rate has the advantages of being predictable to both the buyer and the City, and of being easy for Borrowers to understand. Table 3 shows the effect that a flat appreciation rate of 3% would have on an average one-bedroom TORCA unit. Under this scenario, buyers making a downpayment of 5% would receive an average annual rate of return of approximately 60% upon sale of the assisted units. Subtraction of required closing costs reduces this rate of return to approximately 40% if the unit is sold in first year, 55% if the unit is sold in the third year, and over 60% if the unit is sold in the seventh year or thereafter. Required downpayments for subsequent eligible buyers would increase only slightly, from $4,975 at original purchase to $6,457 in year eight. 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" 0 0 < o ell eo ... ... .... ... ...a . . .. ... =.. . .. .. ... .. II " . . .... Do . :0.0 .. CIl. .=........ II ..... "III .. ... a < ... . .. ... .. ...- .. .. .oa .. .. a. ... .. u..... ::l ........ .. .. .. .. II Q .. II 0 .:.. ... '" '" . .. .. " II II .. .. u ... u c: ... tw :a ... 0 ... 0 c... . > I> ~ I> .. C c: c 0 .... 0.. .. II 1-<100 < < <<<...-... ...z IIl<CIlU 60111 . . EXHIBIT "E" SUMMARY OF FANNIE MAE COMMUNITY LENDING PROGRAM In order to increase the flow of capital to housing on a nation-wide scale, FannieMae was created by the U.S. Government to purchase mortgages from local lenders through the "secondary" mortgage market. Lenders must comply with FannieMae's underwriting standards when originating their loans in order to be able to sell them to FannieMae after origination. FannieMae's underwriting standards typically require a downpayment of at least ten percent (10%), household savings account balances equaling three months' housing costs, and allow no more than twenty-five to twenty-eight percent (25-28%) of a household's income to go towards housing costs. These standards both restrict the ability of low income households to secure private mortgage funds and also reduce the size of the mortgages wh~ch they can secure. Staff has been discussing the possibility of arranging such underwriting standards for eligible TORCA households with Fannie- Mae and several mortgage lenders, including countrywide Fundlnq Corporation (the second largest mortgage lender in the United states) and Beverly Hills Securities, both of which have ex- pressed great interest in becoming involved with the HAP Program. Special underwriting standards as described above could be made available to two different groups of households in TORCA- converting buildings: (1) low income households being assisted by the TORCA Homeownership Assistance Program, and (2) moderate income households not receiving HAP Program assistance (these households would be required to purchase private mortgage in- surance as part of their financing package). A sample FannieMae agreement for such a program, a "Model Whole Loan Purchase Community Lending Transaction" agreement, is at- tached for your review. Information regarding loans available through a FannieMae Program will be added to the approved Program Guidelines at the time agreements are executed. :exe .. . ~ . . Model Whole Loan Purchase community Lending Transaction Teras and Conditions El i9 i.ble Lenders Eligible Properties XiniJDUlIl/KaXiJIlum Oriqinal Mortqage Amounts Kaximua Loan- to-Value Ratio MaxiJDua Combined Loan-to-Value Ratio Loan Terms .. The Fannie Mae Regional Office has approved the following lender(s) to originate and service loans under this program: Additional lenders may be approved by Fannie Mae's Low- and Moderate-Income Housing Investment Officer in the Regional Office. One-family owner-occupied principal and planned unit residences, including units in condominiums, cooperatives, and planned unit developments (PUDs). Properties lnay be new, existing, or rehabilitated, and may be located in stable neighborhoods or neighborhoods targeted for revitalization. Rehabilitation must be completed prior to sale of the loan to Fannie Mae. There is no minimum loan size. Maximum mortgage amounts are the standard Fannie Mae limits as stated in the Selling Guide, Part III, Chapter 2, Section 208. Because of our community lending household income limits, we do not expect the maximum amount limits to apply. If subordinate financing is used, the maximum loan-to-value will be negotiated. Normally this ratio will not exceed 75 percent. Up to 95 percent: first mortgage plus subordinated secured financing. Loan-to-value ratios are normally defined as the lower of the sales price or appraised value. If the owner-occupant mortgagor has completed the rehabilitation, then the percentages are based on lower of: (1) acquisition cost plus rehabilitation cost, or (2) appraisal value after completion of rehabilitation. IS-year and 30-year fixed-rate, level payment m.ortqages!, . ---- ~ Servicing Pee Excess Yield and Buydown Funds Mortgage Instruments Mortgage Insurance Title Insurance Reporting Systems Borrower Income Counseling Subordinate Financing . . -~ . The standard Fannie Mae fee of 3/8 percent will apply. Retained by Lender. Current Fannie Mae/Freddie Mac uniform instruments. Fanne Mae requires private mortgage insurance from a Fannie Mae-approved insurer on loans where the loan-to-va1ue ratios are greater than 80 percent. Amounts in excess of 75 percent of value must be covered by mortgage insurance. standard Fannie Mae mortgage insurance requirements apply. Required on all loans per Selling Guide requirements. LASER Actual/Actual only (whole loan purchases) . Borrower's income will be 80 percent of the area median income as calculated by HUD. The lender must verify income for two full consecutive years in order to determine its adequacy and continuance. The Selling Guide details the types of income Fannie Mae considers acceptable (e.g., salary, wage, Social Security, military, commission, overtime. bonus, al imony , and other income) and the methods for calculating certain types of income. Borrowers must participate in a homeownership and personal finance counseling program by a recognized community organization or in a counseling session arranged by the lender. This must be documented by a letter in the loan file from the lender or a community group. The terms of the subordinated financing provided by the city of will be as follows: The subordinate financing documents and any changes thereto must be approved in advance of loan deliveries. Conta.ct the Low- and Moderate-Income Housing Investment Officer in the Regional Office. Kaximtm Month1y Housing Expense- Inco.e Ratio Maxuum Total Obliqations-to- Income Ratio Self-Employed Borrowers Downpayment Closing Costs .. . . -)- The maximum monthly housing expense-to-income ratio is 28 percent of the borrower's stable monthly income. Monthly housing expense is defined in the Fannie Mae Selling Guide. Any secured subordinated financing which is fully deferred, fully forgivable, and requires no payments that would add to the borrower's monthly housing expenses should not be included in the calculation of this ratio. The maximum total obligations-to-income ratio is 36 percent of the borrower's stable monthly income. This ratio is defined in the Fannie Mae Selling Guide. Fannie Mae regards any individual with a 25 percent or greater ownership interest in a business as self-employed. Income from self-employment is considered stable if 'the borrower has been self-employed for two or more years. Anyone self-employed between one and two years must have at least two years previous continuous employment in the same occupation to be eligible for financing. Anyone who has been self-employed for less than one year has not established a history of stable self-employed earnings and is not eligible for financing. The equity requirement is the appropriate percentage, specified in the Fannie Mae Selling Guide, but no less than five percent on a 95 percent loan-to-value ratio loan. Closing costs and other prepaid items must be paid by the borrower from personal resources, if such resources are available. If they are not, the borrower may tund closinq costs with grants or unsecured loans that may be maae available, subject to the downpayment requirements described above. The repayment ot any unsecured loans made as part of the home financing must be included as a monthly obligation in calculating the income ratios described above. ---- . Gifts and Contributions Cred! t History and Credit Report Appraisals Project Standards Inspections .. . -4- Gifts can be used as part of the cash for closing if the donor is a family member. Also, grants from governments, foundations, or other charitable organizations are allowable as gifts. In addition to the gift, the borrower must make a cash downpayment of at least five percent from their own resources. Fannie Hae requires a residental mortgage credit report from an independent credit reporting agency that meets the requirements stated in the Selling Guide. The credit report should reflect the borrower's overall credit history and a public record search for each locality in which the borrower has lived during the two-year period that precedes the report's issuance. The borrower's demonstrated willingness and ability to repay may be documented also by verifications from utility companies, current and previous landlords, and other sources of credit or service where the borrower was or is required to meet a regular financial obligation as indicated in the selling Guide, part IV, Chapter 2, Section 205. Where other non-subsidized newly-constructed comparables exist, appraisals should not be based on comparable properties that use subordinate financing, due to resulting distortions in the measure of fair market value. All condominium projects must be approved in advance by Fannie Mae under our Project Standards guidelines, in Part IV of the Fannie Hae Selling Guide. Under these guidelines, a proj ect' s legal documentation I budget, architect, and engineer reports should be reviewed by the lender and submitted to Fannie Hae's Project standards group in the regional oft ice. Fannie Mae requires the lender to perform a final inspection of each rehabilitated or neWly-constructed unit prior to settlement so as to assure that the property has been rehabilitated or constructed in accordance with program requirements. Fannie Mae reserve$"- the right to perform its own inspection of any unit prior to settlement. ". 1 . -5- . Co_i bent Period six, nine, or twelve months to be negotiated. COllOId bent Amount $ Standby Commitment Pee standard fee will be waived. standby Conversion Fee standard fee will be waived. Low- and Moderate- Inco1lle Rousing Investment Officer The contact is: Scott Van Dellen (818)568-5338. ,.