SunnyvaleRTC

June 1, 2004

SUBJECT: Below Market Rate (BMR) Housing Program Update including Fee Provision Ordinance Amendment and Budget Modification No. 43 to Appropriate Funds for BMR Homeownership Program Audit Costs

REPORT IN BRIEF

This report is to provide Council with a progress report on actions taken in response to the audit of the Below Market Rate (BMR) Home Ownership Program. It requests approval by Council of an amendment to Section 19.66 of the Municipal Code to include fees for specific staff services related to the BMR program. The fees would be effective on or about July 8, 2004. Council approval is also requested for Budget Modification No. 43 to recognize revenues, appropriate funds to the BMR Audit project for expenditures related to the resolution of the audit findings, and reduce the budget for the First Time Homebuyer project. The BMR Audit expenditures include additional staff time related to the resale of the properties, costs for services of an independent investigative firm, costs for representation by independent counsel on a bankruptcy and foreclosure matter, and the anticipated cost of litigation to force the sale of a BMR property.

The audit provided evidence that up to 48 BMR owners may have moved out of their property and rented it to others, in violation of the BMR program requirements. Further investigation and enforcement by staff has resulted in 16 forced sales and one additional property requiring litigation in order to force the sale. The City has received over $171,000 in penalties from FY 2001/2002 to date due to the audit findings. In FY 2004/2005, the City is expected to receive approximately $52,000 in penalties pending the resale of two properties. The City may also receive another $45,000 in penalties if it is successful in the litigation to force the sale of the property that is identified as in violation of the program.

The audit also revealed that 29 owners of BMR units violated the restrictions on refinance and had obtained loans that exceeded the allowable resale value. Staff has taken actions necessary to prevent these and others from continuing this practice including the development of a Deed of Trust, required endorsement of the Deed of Trust from all owners in violation of program restrictions, notification to their lenders, and correspondence to all BMR owners on the value of their homes and the proper process to follow to obtain approved loan refinance.

This report also describes the efforts undertaken to educate BMR program participants on the rules and regulations of the program, develop administrative procedures in accordance with the February 2003 revision of Chapter 19.66 of the Municipal Code, and create the Home Ownership Wait List.

BACKGROUND

Resolution of Audit Findings in the BMR Home Ownership Program:

Council has been kept apprised of progress in the resolution of ongoing audit findings related to the BMR Home Ownership Program that began in October 2001. Periodically staff has provided Council interim status reports and requested authorization to accommodate BMR unit purchases, and to appropriate funds for expenditures related to the ongoing audit actions.

On March 5, 2002, a Status Report on the ongoing Audit of the BMR Purchase Program was presented to the City Council (RTC 02-076). This report provided Council with information on the results and findings of a City audit of the 181 housing units in the BMR Purchase program, certifying that 133 of them were properly occupied by the owner in accordance with the program requirements.

The deed restrictions under the BMR Program require that each owner continuously occupy the unit as their principal residence. Through the City’s audit and from information received from the community, there were 48 occurrences of possible breaches in occupancy restrictions. In addition, 29 owners had obtained loans that exceeded the amount allowable per the program valuation formula.

On April 16, 2002, Council approved Budget Modification Number 26 to appropriate $38,750 in funds from BMR Code Revenues for expenditures related to the BMR Purchase Program audit costs (RTC 02-132. The budget modification recognized the need for the services of an independent investigative firm and other related ongoing audit costs. The continued services of an independent investigative firm were a valuable tool and allowed for the successful resolution of the forced sales. The research and investigation resources were helpful to determine occupancy of BMR units; provide the current address of the owner; provide name(s) of tenants, rental amounts collected, and length of time units have been rented; and provide sufficient evidence to pursue legal remedies.

On June 11, 2002, a report which included a Budget Modification was presented to the City Council (RTC 02-234). The budget modification provided sufficient funds to accommodate two purchase transactions and approved the purchase of one property. On October 8, 2002, a report to approve the purchase of another property was presented to the City Council (RTC 02-391).

The deed restrictions allow the City to purchase the BMR property when the unit might be lost from the City’s BMR housing stock. The time limit during which the City must find a buyer and close escrow on a for-sale unit is limited.

On June 3, 2003, a report of audit actions was presented to the City Council (RTC 03-197). At that time Council approved the appropriation of $900,000 to allow staff to take action to purchase seven forced sales that were in progress. Council’s direction to staff, at that time, was to take all actions necessary for the resolution of the audit findings. Although funds were allocated to facilitate the City’s purchase of these seven units, additional funding for the expenditures related to the resale was not requested by staff. The report to Council noted that the transactions would take considerable time and effort to accomplish, however, staff omitted a request for appropriation of funds for these expenditures at that time.

The completion of the Below Market Rate Home Ownership Program audit has resulted in 16 forced sales and one additional property requiring litigation in order to force the sale. The City has received over $171,000 in penalties from FY 2001/2002 to date due to the audit findings. In FY 2004/2005, the City is expected to receive approximately $52,000 in penalties pending the resale of two properties. The City may also receive another $45,000 in penalties if it is successful in the litigation to force the sale of the property that is identified as in violation of the program.

As of the date of this report, 14 of the forced sale units have been resold to qualified BMR purchasers. To complete these transactions, staff managed the rehabilitation of eight of the BMR resale units. Of the $171,000 collected to date, only $38,750 has been appropriated to cover audit costs; the remainder has been added to the fund reserves for the program.

Over financed loans on BMR properties:

The audit revealed that 29 units were over financed due to loans obtained for amounts ranging from $2,300 to $312,000 above the BMR value, calculated by following the valuation formula for the calculation of resale prices. The calculation is fully described in the recorded deed restrictions and included in the Sunnyvale Municipal Code Section 19.66.060.

Housing staff and Office of City Attorney staff met with the top five over financed property owners in one-on-one meetings from December 2002 through March 2003; subsequently, 16 others attended a meeting in June, 2003. All but one of the 29 owners agreed to record a Deed of Trust, developed by staff, to re-secure the program restrictions. Utilization of the Deed of Trust will insure that future lenders will be more clearly aware of the program restrictions, including those related to resale value. Each lender of an over financed property received notification from the City regarding the status of the property, with detailed information related to the BMR program. Each BMR owner has received notification of the BMR value of their home, and the restrictions related to refinance of loans.

Educational Workshops for BMR Home Owners:

In August 2003, the Housing Division developed a curriculum with Project Sentinel tailored to reeducate BMR homeowners on the restrictions of the BMR program. Project Sentinel conducted the workshops for BMR homeowners on behalf of the City. Project Sentinel is a non-profit organization that provides landlord/tenant mediation and fair housing counseling services to the City and is certified by the U.S. Department of Housing and Urban Development to provide homeowner counseling.

Eight workshops were held between September 6 and October 30 on evenings and weekends, and attended by 156 owners of 120 units. One workshop was translated into Mandarin and Cantonese. The workshop included a discussion of BMR program restrictions, credit education and predatory lending practices. The workshop was videotaped to provide a continuing resource for new program participants and for owners requesting approval to refinance their property. A notebook with program information, a certificate and an affidavit was presented to attendees to assist them in continued program compliance.

Repeated mailings and direct phone contacts were made to all owners to encourage them to attend a workshop. Owners who did not attend were notified that a video of the workshop is available for viewing. Owners have been informed that refinance actions will only be approved by the City for owners who have viewed the video or attended the workshop.

The workshops were well received and provided invaluable information to owners. Since November 2003, 15 people, including prospective buyers, representatives of lenders, and realtors, have viewed the videotape to enhance their comprehension of the programmatic restrictions.

An ongoing investment in pre-purchase and post-purchase educational programs about BMR Program requirements is essential and will help to reduce enforcement costs because home owners and rental property managers will be more familiar with program requirements.

Administrative Procedures

Chapter 19.66 of the Sunnyvale Municipal Code, pertaining to Affordable Housing and Single Room Occupancies, contains the framework for the City’s Below Market Rate housing program. The Chapter, as amended by ordinance on February 4, 2003, contains references to “administrative procedures that more fully outline the terms and conditions of the BMR program, consistent with this Chapter.” Upon adoption of the ordinance, staff began the development of the administrative procedures, with the intention of incorporating the issues related to the audit, and the modifications to the program restrictions and the updating of the prior processes used to manage the program.

On September 30, 2003, (RTC 03-332) the City Council approved Priority Preferences Criteria that would be applied to the BMR Wait List for Home Ownership and Rental units. These approved preferences are incorporated into the administrative procedures.

Throughout the fall and winter, Housing Division staff worked closely with the City Attorney’s Office and Planning Division to develop the Administrative Procedures for all aspects of the program, including guidelines for developers of ownership and rental projects, guidelines for applicants and owners of BMR units, and guidelines for renters and owners/property managers of BMR rental units. As part of a continuous improvement process to identify and incorporate applicable procedures into the BMR program, staff reviewed best practices from inclusionary housing programs nationally, and identified key issues and weaknesses that had been revealed by the audit. The Developer Guidelines were completed and posted on the City’s website in March, the procedures for the Homeownership program were posted in April, and the procedures for Rental projects in June. Attachment A includes the administrative guidelines for Developers, and Homeownership Programs.

Opening the Wait List for Home Ownership Program:

In June, 2002, the City terminated the contract with the Santa Clara County Housing Authority for administration of the BMR Waiting List for the BMR Ownership Program and closed the list for two years in anticipation of both ordinance and programmatic revisions. This also allowed for reduction of the number of applicants (from over 200) on the existing list. By March 2, 2004, the wait list had been reduced to 40 households remaining on the “Priority 1” list (live or work in Sunnyvale), 23 people on the “Priority 2” list (live and work outside of Sunnyvale) and 826 on the “interest list” who wished to be notified when the wait list opened.

Staff opened the Wait List on February 1 to March 1, 2004 to receive applications. The opening of the list was advertised with multiple ads in the Sunnyvale Sun and the San Jose Mercury News, distribution of Public Service Announcements (PSAs) to local newspapers, radio and television stations, distribution of flyers in City employee paychecks, at the four school district offices which serve Sunnyvale. The Communications Officer assisted by conducting five television and radio interviews. Staff distributed a direct mailing of 7,000 flyers to persons on the mailing list from the previous BMR Wait List and Interest List, to BMR renters, to attendees of the Sunnyvale Homebuyer Housing Fair of August 2003, to local child care service providers, and to participants of Sunnyvale’s first-time homebuyer workshops. Flyers and 100 posters were distributed to the Chamber of Commerce, Library, Columbia Neighborhood Center, Credit Union, Senior Center, and Neighborhood Associations and to all Boards and Commissions. An announcement was presented at a Council meeting. A fact sheet and application were posted to the website, with an announcement on the main City website. Staff responded to a combined total of over 500 phone calls, emails and inquiries at the One Stop Counter during the month of February.

A total of 825 applications were submitted; duplicates, incompletes and applications from ineligible households were withdrawn yielding a total of 724 bona fide applications. A data base was developed to manage the wait list applications, the current BMR owners’ information and all rental property BMR information. The data base provides a better way to manage information, conduct audits, retrieve relevant program data, and conduct mailings. It also includes an automated procedure to calculate and recalculate the preference points associated with ranking of wait list positions.

Housing staff manually reviewed all of the applications for completeness and discrepancies when entering information into the data base. On May 1, the BMR Subcommittee of the Housing and Human Services Commission devoted five hours to reviewing sample applications and comparing manually calculated priority preference points to the Wait List data base calculations. They concluded that the database functioned well and was assigning points correctly and objectively.

In May each applicant received a letter informing them of their total point score. Each applicant has been asked to notify the Housing Division of any inaccuracy in the calculation of their points. The top scoring 400 households will be added to the Wait List and will be invited to prepare themselves for the purchase of a BMR unit by attending a BMR homebuyer educational program, and obtaining pre-qualification from a lender. The City will begin homebuyer pre-purchase workshops this summer. An applicant household will submit documentation of each of the priority preference points claimed prior to receiving an offer to purchase a home.

Enforcement of Procedures for Rental Properties:

In June, each property owner and manager of rental BMR units will receive a copy of the Administrative Procedures for Rental Properties and an invitation to attend a workshop in June, to discuss the procedures with City staff. After the workshop, they were asked to submit their annual report of BMR tenants and units by June 28, 2004. Field reviews of these reports will be conducted by Housing staff during the summer months.

EXISTING POLICY

Land Use and Transportation Sub-Element (1997):

GOAL C2: Ensure ownership and rental housing options in terms of style, size, and density that are appropriate and contribute positively to the surrounding area.

Housing and Community Revitalization Sub-Element: January 1999-June 2006 (January 2002):

GOAL D: Maintain a diversity in tenure, type, size, location and cost-of-housing to permit a range of individual choice for all current residents and those expected to become city residents

GOAL E: Maintain and increase housing units affordable to households of all income levels and ages.

E.1.b. Comprehensively review and update the Below Market Rate programs to better address affordable housing needs.

The Housing Sub-Element also encourages the City to continue the resale control elements of the BMR program.

City of Sunnyvale Consolidated Plan, 2000-2005 (April 3, 2000)

The Consolidated Plan describes the City’s strategy to be followed in carrying out grant programs funded by the Department of Housing and Urban Development. The 2001-2005 Strategic Plan includes planned activities to expand the City’s BMR program and increase the supply of affordable housing.

Chapter 19.66 Sunnyvale Municipal Code (Revised February 4, 2003): The purpose of this chapter is to enhance the public welfare by ensuring that future housing development contributes to the attainment of the housing goals set forth in the general plan of the city of Sunnyvale by increasing the production of residential units affordable by households of very low, low and moderate income.

DISCUSSION

BMR Ordinance Amendment

Staff recommends that Council approve an amendment of Ordinance 19.66 Affordable Housing and Single Room Occupancies to include a fee provision to grant the City with authority to assess fees related to the BMR program (See Attachment C. Amendment to Section 19.66 and Exhibit A)

The proposed fees are described in the June 1, 2004-Public Hearing – FY 2004/2005 Budget Resource Allocation Plan. Once the amendment to the ordinance is approved by Council, the City Fee Resolution will be modified to include these BMR fees for the budget adoption on June 15, 2004. The BMR fees will become effective on or about July 8, 2004, 30 days after second reading of the ordinance. The cost for nearly all of the staff hours has already been incurred, through reallocation of resources from the First Time Homebuyer Program. It was not anticipated last year that this level of staff effort would be required. The commitment of staff hours to this program increased as corrective mechanisms were developed, including the forced sales, the preventive actions regarding over-financing, the reeducation of BMR owners, and the development of extensive administrative procedures.

The implementation of the First Time Homebuyer Program was delayed because of the reallocation of staff resources, and so that the all of the sequential actions that were required to reestablish the operations of the BMR Program could be accomplished. Until these actions took place, implementation of the First Time Homebuyer Program would not have been possible. Outreach to applicants on the BMR Wait List who will participate in the First Time Homebuyer program is now ready to beginning in FY 2004/2005, these fees will be tracked in the City’s Housing Fund/Other Grant Supported Sub-Fund.

BMR Audit Project

800 hours ($39,653) of staff time incurred related to all audit activities including the processing of resales of forced sale properties during FY 2003/2004.
$5,150 for services of an independent investigative firm.
$6,000 for developing a curriculum and conducting 8 workshop meetings for 156 BMR owners.
$5,500 to develop a complex database to manage detailed program information for buyers, owners and renters.
$4,000 for representation by an independent counsel of a bankruptcy and foreclosure matter of an over financed property.
Anticipated cost of $30,000 in litigation fees to force the sale of a BMR property.

All of the cost of the staff hours outlined above has already been incurred, through reallocation of staff time originally programmed in the First Time Homebuyer project. It was not anticipated that this level of staff effort would be required when the budget for the BMR Audit project was prepared in the FY 2003/2004 Budget Adoption. The work hours utilized for the BMR program increased as corrective mechanisms were developed, including the forced sales, the preventive actions regarding over-financing, the reeducation of BMR owners, and the development of extensive administrative procedures. As a result of the reallocation of staff resources to the BMR Audit project, the implementation of the First Time Homebuyer Program was delayed. However, it was necessary that all sequential actions that were required to reestablish the operations of the BMR Program could be accomplished. Until these actions took place, implementation of the First Time Home Buyer Program would not have been possible. Outreach to applicants on the BMR Wait List who will participate in the First Time Homebuyer program is now ready to begin.

FISCAL IMPACT

The current budget for the BMR Audit project is $20,000, which was planned for the ongoing audit and staff costs required to implement the BMR audit findings. As a result of the completion of the BMR audit, staff now anticipates an additional $70,303 is needed to complete the audit actions. $10,802 of this increase would be funded by the additional BMR Code Violation revenues the City has received this year. The remaining $59,501 is recommended to be funded by the Housing Fund 20 Year Resource Allocation Plan Reserve, which has been accumulated through BMR Code Violation revenues and penalties assessed on BMR forced sales the City has received in prior years. As noted in the Discussion section of this report, $39,653 in staff costs originally planned for the First Time Homebuyer program were redeployed to complete the BMR Audit actions. The First Time Homebuyer program is funded by the BMR In-Lieu Reserve. Staff proposes to reduce the budget for the First Time Homebuyer program by $39,653 and return the funds to the BMR In-Lieu Reserve.

This budget modification request would increase the BMR Audit project budget to $90,303 and reduce the budget for the First Time Homebuyer project to $500,347.

Budget Modification No. 43

FY 2003/2004

Housing Fund

Current

Increase

(Decrease)

Revised

Revenue:

BMR Code Violation -

Project 823750 BMR Audit

$20,000

$10,802

$30,802

Expenditures:

Project 823750 BMR Audit

$20,000

$70,303

$90,303

Project 824470 First Time Homebuyer

$540,000

($39,653)

$500,347

Reserves

Housing Fund Resource Allocation Plan

$431,699

($59,501)

$372,198

BMR In-Lieu Reserve

$2,769,741

$39,653

$2,809,394

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s office.

ALTERNATIVES

1. Approve Amendment of Section 19.66 of the Sunnyvale Municipal Code to authorize fees to be charged to applicants in the BMR Home Ownership Program and Rental Program, effective July 8, 2004.

2. Approve Budget Modification No. 43 to recognize $10, 802 in additional BMR code violation revenues, appropriate an additional $70,303 to the BMR Audit project for expenditures related to the resolution of the audit findings, and reduce the budget for the First Time Homebuyer project to $500,347.

3. Do not approve amendment of Section 19.66 of the Sunnyvale Municipal Code to authorize fees to be charged to applicants in the BMR Home Ownership Program and Rental Program.

4. Do not approve Budget Modification No. 43.

RECOMMENDATION

Staff recommends Alternatives 1 and 2.

Prepared by:

Annabel Yurutucu
Housing Officer

Reviewed by:

Robert Paternoster
Director, Community Development

Mary Bradley
Director, Finance

Approved by:

Amy Chan
City Manager

Attachments

A. BMR Housing Program Administrative Procedures: Developer and Home Ownership Program (both in pdf format)

B. Proposed Section 3.14 of FY 2004/2005 Fee Schedule (pdf format)

C. Amendment to Section 19.66 and Exhibit A (pdf format)