April 26, 2005
SUBJECT: Report on Implementation of Homebuyer Education Component of First-Time Homebuyer Support Program and Guidelines for Down Payment Assistance Loans and Individual Development Accounts (IDAs)
REPORT IN BRIEF
This report describes the status of the educational component of the First-Time Homebuyer Program and the recommended guidelines for implementation of the two remaining program components: Down Payment Assistance Loans and Individual Development Accounts (IDAs).
During the next five years 283 housing units which are currently restricted below market rate rents will be lost, as twenty year restriction terms will be completed and conversion to market-rate rents occurs. Due to a sluggish rental housing market, very few new complexes will be built to replace these lost restricted rental units. One way to assist renters living in expiring units is to help them move into ownership housing through Down Payment Assistance Loans and Individual Development Accounts. Although many tenants housed in Below Market Rate (BMR) “at risk” rental housing are expected to benefit from the implementation of both program components, other low-income purchasers of market rate properties are also expected to utilize the programs to make it possible for them to become homeowners.
Staff recommends that both program components would be available to homebuyers with household income at or below 80% of area median income. Staff recommends that the loan terms for the Down Payment Assistance Loan include a maximum loan of $50,000, for thirty years, with deferral of payments during the first five years and an interest rate of 3% simple interest. Every five years, during the loan term, staff will review the borrower’s capacity to repay the loan in order to determine whether to continue deferral of the loan payments or to convert it to an amortized loan with monthly repayment.
Staff recommends that the City provide match funding to Individual Development Accounts (IDAs) savings deposits, whose use is restricted to the purchase of a home. The funding match is on a 2:1 ratio, to a maximum City contribution of $10,000 for $5,000 saved by the purchaser. There is no repayment of the City contribution.
Staff recommends that Lenders for Community Development, a non-profit agency that specializes in the management of IDA programs, be retained to assist the City in the administration and management of Sunnyvale’s IDA program by providing individual financial education and case management to approximately thirty households during the next three years. Funding to implement these activities has been approved by Council and a project budget has been established utilizing funds held in the BMR In-Lieu Reserve.
BACKGROUND
On July 22, 2003, City Council approved the First-Time Homebuyer Support Program and funding to implement all components of the program (RTC 03-257, Attachment A). The program is to be carried out over a five-year period beginning in 2003-2004. The program operates in tandem with the BMR Homeownership Program. The program includes contract services to provide homebuyer educational programs to assist qualified renters with household incomes at or below 80 percent of area median income and targets renters in existing BMR apartments with expiring restrictions. A key goal of the program is to move BMR renters housed in “at risk” units into first-time homeownership. 283 housing units which are currently restricted below market rate may be lost through conversion to market-rate rents in the next five years. The report indicated that detailed guidelines for the remaining two components of the program, Down Payment Assistance Loans and funding matches for Independent Development Accounts (IDAs), would be developed and brought to Council for consideration at a later date. That is the purpose of this report.
Homebuyer Education
Implementation of the homebuyer educational programs began in the fall of 2003. National studies repeatedly confirm the importance of homebuyer pre-purchase education programs and counseling as key to successful home ownership, especially for low and moderate income first-time homebuyers. The long-term benefits of homebuyer education include fewer foreclosures, bankruptcies and victimization by predatory lenders. The California Housing Finance Agency (CalHFA), and many other state and national affordable housing lenders require that borrowers complete homebuyer education programs prior to loan approval.
In August 2004, staff reviewed Neighborhood Housing Services of Silicon Valley (NHSSV) training programs and determined that they provided the most complete set of training workshops locally available. NHSSV is a charter member of the “NeighborWorks” Homeownership Center network certified by the Congressionally-chartered Neighborhood Reinvestment Corporation. NHSSV offers a sequence of three classes: a two-hour overview of the home buying process, an individual counseling session to review credit and mortgage readiness, and an eight-hour workshop on buying and owning a home. NHSSV agreed to present pre-purchase workshops to households on the Below Market Rate (BMR) Home Ownership Wait List for the City.
In the fall of 2003, at the request of the City, Project Sentinel conducted a specially designed workshop to review the requirements of the BMR Home Ownership program to over 150 owners of BMR housing. In the summer of 2004, staff again requested that Project Sentinel develop specially designed pre-purchase workshops for BMR Wait List Applicants. These BMR workshops are offered in two modules: The Rights and Responsibilities of BMR Homeowners and The Application to Purchase a BMR Home. The first module provided detailed information on the program restrictions and on how BMR ownership differs from market rate ownership. This assists potential buyers to understand the drawbacks of BMR ownership, prior to a purchase of a BMR home. The second module provides applicants with technical information related to completion of the City Application and documentation of preferences.
The Below Market Rate Home Ownership Administrative Procedures requires completion of all of the workshops before the purchase of a BMR unit. By the end of fiscal year 2004, 826 applicants on the BMR Ownership Wait List will have attended the series of workshops offered by Project Sentinel and NHSSV.
EXISTING POLICY
Housing and Community Revitalization Sub-Element: January 1999-June 2005 (January 2002):
Goal E. Maintain and increase housing units affordable to households of all income levels and ages.
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 U.S. Department of Housing and Urban Development. The 2001-2005 Strategic Plan includes planned activities to expand the city’s BMR program and support rental and home buyer assistance.
Community Development Strategy, February 2003
Chapter VI, Programs - This Community Development Strategy recommends creation of a new First-Time Homebuyer Support Program to assist qualified renters (generally 70 to 120 percent of median income), particularly those in existing BMR at-risk apartments, to move into first-time homeownership. The program would include: homebuyer education workshops, Independent Development Accounts (IDA), with matching contributions.
DISCUSSION
Down Payment Assistance Loans
Due to the high price of housing and the high cost of living in the Santa Clara Valley, first-time homebuyers find it difficult to save an adequate amount of cash assets for a down payment and escrow closing costs. Lower income families are especially challenged to accumulate sufficient funds for a down payment, qualify for a high loan amount and afford mortgage payments and other housing costs including private mortgage insurance. If there is less than 20% down payment or secondary financing available, the primary lender will require private mortgage insurance to protect their loan. Private Mortgage Insurance (PMI) is calculated at 0.11% of the balance of the first mortgage, and can cost $200 or more per month. Down Payment Assistance Loans in the First-Time Homebuyer Support Program are a way to expand the number of eligible low and moderate-income families able to achieve homeownership.
The City’s Below Market Rate (BMR) Housing Program has demonstrated success in making home ownership opportunities accessible to families at 80% to 120% of area median income (AMI). Further assistance is needed to help those households earning at or below 80% of median income achieve homeownership.
When designing the Housing for Public School Employees, City Employees and ChildCare Teachers Program (HPCC), the City examined similar programs in neighboring jurisdictions. In addition to those examples previously reviewed, the following are addition examples of down payment assistance programs for First-Time homebuyers reviewed by staff:
|
Jurisdiction |
Amount |
Eligibility |
Interest/Repayment |
|
City of Campbell |
$25,000 |
Up to 110% AMI; |
0% interest; deferred payment due on sale or 30 years; equity share if not sold to qualified buyer |
|
City of San Jose* |
6% of Purchase Price
|
Up to 80% AMI;
|
Deferred repayment 3% simple interest; Due in 30 years, on transfer or if non-owner occupied; |
|
City of San Mateo |
$50,000 -$60,000 |
Up to 120% AMI; |
Due on sale; 0% interest if sold to eligible buyer; City retains right to purchase, resale restrictions apply |
*San Jose programs address multiple income levels; the program described is the most relevant example.
The following discussion is organized around the issues considered by staff in the design of the Down Payment Assistance Loan Program. Of primary concern is the ability of the loan, including the loan amount and other terms, to assist a household at a certain income level to be able to purchase and then afford a home.
Example of BMR Property Purchase with Down Payment Assistance
If a household of four were purchasing a new Sunnyvale BMR unit containing three bedrooms, the following example shows how a down payment loan would enable a family at 70% of AMI to purchase a BMR housing unit:
Effect on Affordability Without/With Down Payment (DP) Assistance Loan for a 4-person Household Purchasing a Three-bedroom BMR unit
Model One (Without) Model Two (With)
|
Sales Price |
$243,669 |
$243,669 |
|
Approximate Closing Costs |
$ 3,000 |
$ 3,000 |
|
Max. City Down Payment Assistance Loan |
$ 0 |
- $ 50,000 |
|
Buyer Down Payment (Minimum 3%) |
- $ 7,310 |
- $ 7,310 |
|
Amount to be Financed |
$239,359 |
$189,359 |
|
Monthly Payment @ 5.9%-30yrs Fixed |
$ 1,420 |
$ 1,123 |
|
Private Mortgage Insurance* |
$ 263 |
$ 0 |
|
Annual household income of 70% of AMI |
$ 73,850 |
$ 73,850 |
|
Max. Monthly housing expense @ 30% of income |
$22,155
|
$22,155
|
|
30 year fixed loan at 5.9%, |
$17,037 |
$13,478
|
|
Insurance/HOE /Replace Res.
|
$ 3,000 |
$ 3,000
|
|
Private Mortgage Insurance(PMI)*
|
$ 3,160
|
$ 0
|
|
Prop. Taxes @ 1.10% of Sale Price |
$ 2,680
|
$ 2,680
|
|
Total Annual Housing Expense |
$25,877 |
$19,158 |
Model Two provides affordability to households at and below 70%AMI, should favorable interest rates remain available. *PMI is no longer required with 20% down payment. Model One housing expense exceeds affordability threshold for low income households at 70%AMI, since 35% of gross household income is required to pay for annual housing expense.
Alternatives include making loans in amounts of less than $50,000; however this amount would be consistent with the HPCC Down Payment Assistance Program. Previous Council analyses determined that the loan amounts have to be high enough to make a sizeable impact on the down payment and/or the overall purchase price. These examples depict current sales prices and interest rates which may rise and affect the ability to purchase; therefore examples of lower loan amounts were not included. Program restrictions could limit the loan amount to an amount needed to facilitate the purchase, but not to exceed the loan maximum.
Maximum Purchase Price
Although a majority of the loans would be utilized by low income households purchasing BMR homes, if there are no programmatic limits on home purchase price, the Down Payment Assistance Loan could help homebuyers purchase market rate units in addition to BMR units. Homebuyers would be able to purchase whatever they are able to afford according to the underwriting criteria of participating lenders.
Maximum Income
Sunnyvale Municipal Code Section 19.66 provides that BMR ownership units be made available to households from 70% to 120% of area median income.
As previously mentioned, lower income households have a very difficult time saving a down payment. The lower the income the more limited the ability to meet living expenses and accumulate sufficient savings for a down payment. Although secondary financing is commonly used by upper income families, limited income households may be unable to increase their monthly expenses by the amount needed for multiple loan payments and other new housing expenses.
Loan Term and Repayment
Design of the loan term and repayment requirement are critical factors in creating a loan with long-term affordability so that the first time homebuyer can successfully remain in the home. Affordability and flexibility are key issues, due again to the very limited resources of lower income homebuyers. However, as in all other Sunnyvale loan programs, repayment should occur as soon as it is possible. Repayment returns the funds for additional loans or other programs and provides benefits to many more residents.
Eligibility
In addition to limiting eligibility according to income, it is important to consider other program priorities that may limit eligibility. Again, the goal would be to consider and incorporate previously established goals of Council in relation to the design of this new program and the group of beneficiaries. When approved by Council in July 2003, the identified needs group included low or very low income households living in BMR Rental Housing and currently on the City’s BMR Home Ownership Wait List; or living in BMR rental units with restrictions expiring in less than five years. Targeting benefits to these groups would be consistent with utilizing funding from the BMR In-Lieu Reserve fund supporting this project and would assist families “at risk” due to loss of restricted rental units by assisting them into homeownership. Other eligibility requirements could include either living or working in Sunnyvale, as this would be consistent with other established programs and their priorities. The loans would not be available to applicants who are eligible for other types of loans through the City, to avoid a duplication benefits.
All limitations for first-time homebuyers, including homebuyer education, ownership, residency, and occupancy established for other programs would apply to this new program.
Individual Development Accounts
Council approved the inclusion of an IDA component in the First-Time Homebuyer Support Program in its action of July 22, 2003. IDAs are generally intended to assist cash-poor households with incomes below 80% of area median income. IDAs were developed throughout the United States in the 1990s as an innovative wealth creation strategy to help move people out of poverty. Matched savings accounts and financial education help low-income families accumulate several thousand dollars for wealth creation investments, for uses such as education, small business start-up expenses or a family home. Program participants are inspired when every dollar saved is matched by one to nine dollars, depending on local resources available. The Bay Area was one of twelve major pilot program sites. Significant foundation funding and university involvement helped create a national network to share “best practices”. The program’s many successes have proven that financial education, individual counseling, and matching funds are a winning combination and foster life-long habits of saving.
Extensive research in the national IDA network showed that it would be more economical and efficient to contract with outside experts with a proven track record to administer the program, rather than hiring additional City staff. In August 2004, the City invited Lenders of Community Development (LCD) of San Jose to submit a proposal for program administration (Attachment B). LCD was incorporated in 1993 as a multi-bank community development corporation and converted to a 501(c) (3) non-profit in 2000. In 1999, LCD launched its IDA program, the largest and among the most effective IDA programs in the country. To date, 1,326 low-income households have enrolled in the IDA program and LCD has helped 97 people to purchase homes with their IDA savings. LCD staff possesses multi-cultural sensitivity and fluency in languages other than English. Savers are from varied backgrounds (e.g. 19% Asian-Pacific Islander, 36% Latino, 10% African American) and some are refugees from international conflicts including Bosnia and the Sudan.
Working in conjunction with NHSSV, staff has learned that some income qualified eligible households on the BMR Home Ownership Wait List are not “mortgage ready” because they do not have sufficient cash assets for the down payment and closing costs. Lenders for Community Development believes that these families could become homeowners in three years if they were to establish a pattern of diligent savings and the savings are matched 2 to 1. If the program were also open to other low income prospective homeowners who are not currently on the BMR Wait List, they might be able to buy non-BMR market-rate housing.
Program Administration
After the initial period of orientation and training of the participants, administration of an IDA program is labor intensive due to monthly contacts, case management and mailings. Staff lacks the expertise and the capacity to administer this program due to the demands of administering the BMR Home Ownership Program and the BMR Rental Program.
As noted above, staff has been in discussion with LCD as a possible vendor to administer this program. LCD’s proposed services include: screen IDA program participants, conduct one-on-one interviews and a group orientation, conduct personal finance training and provide ongoing case management. LCD would monitor each saver’s monthly savings deposits in an account held at Citibank’s Sunnyvale branch. Savers who do not save reliability do not remain in the program and would not able to assess the matching funds. LCD case-managers would monitor available matching funds and evaluate each withdrawal request to ensure that it complies with program guidelines.
LCD proposed handling 33 IDA Saver households at a cost of $1,500 per IDA over the three and a half year life of the program. An agreement for $379,500 would include $330,000 for savings matches plus LCD staff services which include case-management, financial literacy training, interfacing with Citibank, preparing and providing bank statements, and assisting each Saver with Account withdrawals. The City would transfer into a restricted escrow account the City share of the savings match funds on a quarterly basis as the Saver’s savings accumulate. Any funds not used for the savings match due to early withdrawals or other circumstances would be returned to the City.
Maximum Purchase Price
Although a majority of the IDA accounts would be utilized by low income households purchasing BMR homes, if there are no programmatic limits on home purchase price, the IDA funds could help homebuyers purchase market rate units in addition to BMR units providing additional flexibility for participants.
Maximum Income
Sunnyvale Municipal Code Section 19.66 provides that BMR ownership units be made available to households from 70% to 120% of area median income.
As previously mentioned, lower income households have a very difficult time saving a down payment. The lower the income the more limited the ability to meet living expenses and accumulate sufficient saving for a down payment. As the examples on affordability indicated, households with income limits below 80% of median income will require assistance to accumulate funds towards a down payment to facilitate a home purchase.
Repayment
The IDA model is to use match fund contributions as an incentive to saving and to enable the participant to accomplish their goal. However, equally important is that the participant learns the skill of saving and managing their finances to achieve their goal. This is a life lesson that once learned, will provide ongoing benefits to the family, and to the community. City funds used to match contributions by participants would not be repaid.
Eligibility
In addition to limiting eligibility according to income, it is important to consider other program priorities that may limit eligibility. Again, the goal would be to consider and incorporate previously established goals of Council in relation to the design of this new program and the group of beneficiaries. When approved by Council in July 2003, the identified needs group included low or very low income households living in BMR rental housing units and currently on the City’s BMR Home Ownership Wait List; or living in BMR rental units with restrictions expiring in less than five years. Targeting benefits to these group would be consistent with utilizing funding from the BMR In-Lieu Reserve fund supporting this project and would assist families “at risk” due to loss of restricted rental units by assisting them into homeownership. Other requirements for funding could include either living or working in Sunnyvale, as this would be consistent with other established programs. The IDA participants would be eligible for other types of loans through the City.
All limitations for first-time homebuyers, including homebuyer education, ownership, residency, and occupancy established for other programs would apply to this new program.
FISCAL IMPACT
There is no fiscal impact to the General Fund. The First-Time Homebuyer Support Program is funded for five years from the BMR In-Lieu Reserve Fund. On July 22, 2003, the council appropriated $540,000 for initial implementation of the First-Time Homebuyer Support Program (RTC 03-257).
Conclusion
The goal of Council when it approved the design of this new program in July 2003 was to target benefits to low or very low income households living in BMR rental housing units and currently on the City’s BMR Home Ownership Wait List; or living in BMR rental units with restrictions expiring in less than five years. Targeting benefits to these groups is consistent with utilizing funding from the BMR In-Lieu Reserve fund supporting this project and would assist families “at risk” due to loss of restricted rental units by assisting them into opportunities for homeownership. Council goals of maintaining and increasing the level of homeownership in Sunnyvale will also be supported by the implementation of these programs.
Down Payment Assistance Loan Program
The selection of criteria and guidelines for the Down Payment Assistance Loan Program are designed to assist households of 80% or less of AMI to become first-time homebuyers. To the extent possible, these should be consistent with the requirements of other City housing programs, including the BMR Home Ownership Program and the Program of Housing for Public School Employees, City Employees and Child Care Teachers.
Staff believes that the loan terms and eligibility criteria contained in Attachment C-Program Criteria and Eligibility satisfy the above objectives and adequately protect the City’s interests and the long-term viability of the Program. Staff has the capacity and expertise to administer the Down Payment Loan Assistance Program and is best able to coordinate implementation in conjunction with other City housing programs.
INDIVIDUAL DEVELOPMENT ACCOUNT PROGRAM (IDAs)
Staff believes that implementation of the IDA program component requires specialized staff to provide services to participants and to coordinate financial interactions between the financial institution, the City and the participants. Council could direct staff to undertake these services; however this would require hiring staff with the expertise to provide the case management and other services. The resulting program implementation delay and additional operating costs are an impractical choice. Lenders for Community Development (LCD) has provided the City with the opportunity to select them to provide their services to Sunnyvale residents. LCD is nationally recognized as an experienced service provider in the highly specialized field of IDA program management. Therefore, staff believes that the most practical and economical choice is to enter into an agreement with LCD to administer the fiscal management and client services for the operation of the IDA Program. A proposal describing the program operational roles of LCD and operating costs is included in Attachment B of this report.
Staff believes that the program restrictions, terms and eligibility criteria for the implementation and administration of the Individual Development Accounts (IDAs) contained in Attachment C-Program Criteria and Eligibility will best meet the needs of the client population while adequately protecting the City’s interests and the long-term viability of the Program.
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 in the City Clerk’s office.
ALTERNATIVES
1. Approve the Down Payment Assistance Loan Program eligibility criteria and loan terms as described in Attachment C.
2. Approve and the Individual Development Account Program eligibility criteria described in Attachment C.
3. Direct and authorize staff to prepare and enter into an agreement for services between the City and Lenders for Community Development in the amount of $379,500 to include the maximum City match contribution of $330,000 and payment for services not to exceed $49,500.
4. Modify any and all eligibility criteria described in Attachment C of this report for the Down Payment Assistance Loan Program and the IDA Program.
5. Take no action.
RECOMMENDATION
Staff recommends Alternatives 1, 2 and 3.
Reviewed by:
Robert Paternoster, Director, Community Development
Prepared by: Annabel Yurutucu, Housing Officer
Approved by:
Amy Chan
City Manager
Attachments
A. RTC 03-257 - July 22, 2003 – Establish First-Time Homebuyer Support Program and Budget Modification Number 6 (.pdf file)
B. Proposal from Lenders for Community Development to administer IDA Program (.pdf file)
C. First Time-Homebuyer Support Program – Program Criteria and Eligibility (.pdf file)