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HomeMy WebLinkAbout02/20/2007, C2 - CITY POLICY ON SUBORDINATION AGREEMENTS FOR AFFORDABLE HOUSING UNIT LOANS. C O Un G l t hk ring Dee AQcnba uEpont lwmNum� Gz o7 CITY O F SAN LUIS O B I S P O FROM: John Mandeville, Community Development.Director Prepared By: Peter Brown, Housing Programs Manool' SUBJECT: CITY POLICY ON SUBORDINATION AGREEMENTS FOR AFFORDABLE HOUSING UNIT LOANS. CAO RECOMMENDATION Adopt the resolution endorsing the proposed policy which outlines the circumstances under which the City is willing to subordinate its position to other loans on deed-restricted affordable housing units. DISCUSSION When affordable housing units are initially sold to a qualifying purchaser, the City retains a second deed of trust and a promissory note that restricts the re-sale price of the unit for a period of 30-45 years. The agreement specifies that if the unit is sold, it must be sold for an affordable price to a qualifying buyer as defined by the State. Within the last two years, the City has been approached by lenders with requests to subordinate to new loans on properties that have affordability restrictions. In two instances, City staff has recommended approval of the loans based on the individual circumstances. Based.upon a recent request, however, it is clear that the City needs to establish guidelines by which to evaluate subordination requests. In that request, staff was unable to justify subordinating the City's position to the first mortgage because it was for an amount that exceeded the affordable sales price by nearly $90,000. Most banks are willing to offer such loans because there is no risk to the bank's investment: In the event of foreclosure, the bank would be able to sell the house at market rate which is well above the restricted affordable sales price. For the City to agree to subordinate their second deed of trust to a mortgage sum that exceeds the affordable resale value on the house would be poor fiscal management by an equity sharing partner (City) and would increase the risk of losing the affordable unit. The following will clarify under which circumstances the City will sign onto subordination agreements. The policy aligns well with what is being practiced in the City of Paso Robles and the County of San Luis Obispo and has the concurrence of the Finance Department. Purpose of this Policy The policy's purposes are to 1) ensure that designated affordable units remain as affordable units in the City's housing stock for existing and future occupants for the longest period legally allowed, and 2) decrease the possibility of foreclosure on the affordable unit due to increased financial risks associated with property owner indebtedness. GZ-i i CAR-Loan Subordination Policy for Affordable Housing Units Page 2 Criteria to Allow Subordination If all five of the below conditions are met, the City will agree to loan subordination. 1. The amount of the new loan (and any other loans on the property other than the City's second trust deed) cannot exceed the restricted amount for which the home can be resold based upon the Affordable Housing Standards and the City's most current information. 2. The proceeds of the new loan shall only be used to pay off the existing loan, loans superior to the city's loan, to pay closing costs, or to pay for home improvements. 3. The new loan must achieve a better financial situation for the borrower, such as a lower interest rate, lower payments, or improved debt-to-income ratio. 4. If the funds from a new loan are proposed for a home improvement project, evidence of issued building permits and contractors' estimates for the work must be submitted to the Community Development Department of the City prior to subordination of the loan. 5. The terms of the City's promissory note and second deed of trust have not been violated. CONCURRENCES The City Attorney and the Finance Department concur. The five point policy above is based on existing policies in place at the County of San Luis Obispo's Planning and Building Department, City of Paso Robles, and the City of San Jose FISCAL IMPACT Adopting the Subordination Policy will allow the City to subordinate its position on loans to affordable housing units only when certain conditions are met. Meeting these conditions ensures that the City has taken necessary steps to not put affordable housing units at risk for foreclosure resulting in their loss from the City's affordable housing stock. In the event such a foreclosure occurs, the City has the potential to lose hundreds of thousands of dollars of investment in the creation and preservation of affordable units. There is no cost to the City to implement this policy. ALTERNATIVES 1. The Council can decide not to adopt the resolution endorsing policy on Subordination. This is not the recommended approach.. To date, staff has had to evaluate individual requests without a guiding policy. 2. The Council can adopt a resolution endorsing a policy with revised criteria. 3. The Council can task staff with specific direction to return with modified criteria. ATTACHMENT Resolution CO_PLANpbrown/subordination/CC_Subordination_consent n RESOLUTION NO. (2007 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO ADOPTING CRITERIA FOR EVALUATING SUBORDINATION REQUESTS FOR LOANS ON DEED-RESTRICTED AFFORDABLE HOUSING UNITS WHEREAS, the City of San Luis Obispo has received requests for loan subordination on deed-restricted affordable housing units; and WHEREAS, each subordination request has, in the past, been evaluated on a case-by- case basis with no policy direction; and WHEREAS, a recent request would have resulted in a loan amount on a deed-restricted affordable housing unit that exceeded the affordable sales price allowed by$90,000; and WHEREAS, other jurisdictions that administer deed-restricted affordable housing units have strict policies in place for when loan subordination is appropriate; and WHEREAS, the intent of a policy is to decrease the possibility of foreclosure on the affordable unit due to increased financial risks as with property owner indebtedness and to maintain a stock of affordable housing units for existing and future occupants.; and WHEREAS, the City of San Luis Obispo should have a written policy that can be referenced when making subordination decisions; NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows: SECTION 1. The City will consider subordination of its position to other loans on deed- restricted affordable housing units if all five of the below conditions are met; 1. The amount of the new loan (and any other loans on the property other than the City's second trust deed) cannot exceed the restricted amount for which the home can be resold based upon the Affordable Housing Standards and the City's most current information. 2. The proceeds of the new loan shall only be used to pay off the existing loan, loans superior to the City's loan, to pay closing costs, or to pay for home improvements. 3. The new loan must achieve a better financial situation for the borrower, such as a lower interest rate, lower payments, or improved debt-to-income ratio. 4. If the funds from a new loan are proposed for a home improvement project, evidence of issued building permits and contractors' estimates for the work must be submitted to the Community Development Department of the City prior to subordination of the loan. 5. The terms of the City's promissory note and second deed of trust have not been violated. R C ,-�3 Resolution No. (2007 Series) Page 2 Upon motion of , seconded by and on the following vote: AYES: NOES: ABSENT: The foregoing resolution was adopted this day of 2007. Mayor David F. Romero ATTEST: Audrey Hooper City Clerk APPROVED AS TO FORM: Jo P. Lowell City Attorney Cz - y