HomeMy WebLinkAbout09/03/2002, B2 - EMPLOYEE MORTGAGE ASSISTANCE PROGRAM council
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CITY O F SAN LUIS O B I S F 0
FROM: Ann Slate,Director of Human Reso ces
Bill Statler,Director of Finance
SUBJECT: EMPLOYEE MORTGAGE ASSISTANCE PROGRAM
CAO RECOMMENDATION
Adopt guidelines for a mortgage loan assistance program and authorize the CAO to finalize
actions necessary for implementation.
REPORT IN BRIEF
The recruitment of public employees, particularly senior management employees, is becoming
increasingly difficult. Changing demographics combined with rising housing costs contribute to
this recruitment dilemma. The baby boomer generation is beginning to leave the workplace as
retirees, a smaller population is entering the workplace with fewer entering public service and
California housing costs are skyrocketing while local housing supplies are dwindling. Cities
throughout California are making greater use of housing assistance programs to attract qualified
employees and enable them to transition into their communities.
While the City has entered into housing assistance agreements in the past with two former City
Administrative Officers and one former City Attorney, it is time to expand that case-by-case
approach and develop an ongoing program. Because of fiscal uncertainties related to the State
budget crisis and an unstable economy, staff recommends a cautious start, limiting a mortgage
loan assistance program initially to new Department Heads and Council-appointed positions.
Staff also recommends that the Council adopt clear parameters in guiding the development and
implementation of a mortgage loan assistance program.
These proposed guidelines draw heavily upon the City of Santa Barbara's Employee Mortgage
Loan Assistance Program (EMLAP), but have been tailored to better reflect local real estate
market conditions. As discussed in more detail below, key proposed program components
include:
1. The City's assistance will be in the form of second mortgages up to 15% of the purchase
price to help with down payments.
2. The maximum amount of the second mortgage will be $87,500, and employees will be
required to make a minimum down payment of 5% of the purchase price.
3. The interest rate on the second mortgage will be variable based on the City's interest yield
from its investments in the Local Agency Investment Fund(LAIF).
4. The term of the loan will not exceed ten years.
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5. Only employees who are relocating to this area will be eligible, and must live within the city
limits to be eligible for the full program, or within a 30-minute commute.
Staff believes that implementing a mortgage loan assistance program along these lines will
greatly enhance recruitment efforts for anticipated department head replacements.
DISCUSSION
Background
In July 2001, the Council approved a recruitment incentive and hiring program in response to the
increasing difficulty public employers are facing in attracting and recruiting new employees to
some public employment positions. The most difficult recruitments are those where our City
must compete in the external marketplace to field a sufficient pool of qualified candidates
(statewide or even national recruitments). This program consists of three components:
1. Individually-tailored cash incentives to new management employees such as reimbursement for
moving expenses,temporary housing and other transitional expenses.
2. Referral bonus for City employees who refer candidates to City employment that are
ultimately hired by the City.
3. Conceptual approval of a housing assistance program that would use City funds otherwise
available for investment to provide home mortgages to new management employees, with
direction to return to Council with the specifics of this program.
It is now time for the Council to establish a mortgage loan assistance program and determine the
parameters for program implementation.
Fiscal Context
Since last summer when the Council first considered such a program, the City's financial
situation has become less certain. The state's dire financial condition with a projected budget
deficit of at least $24 billion, and the economic downturn that has occurred since September 11,
2001, have resulted in the City taking a very conservative approach in funding new programs.
Therefore, staff is recommending a cautious beginning to a mortgage loan assistance program.
On the other hand, in order for the City's mortgage loan assistance program to have a real
impact, it must offer something that is more attractive than what is already available through the
regular marketplace. It cannot merely duplicate what is already available through banks or other
commercial real estate lenders.
Affordable Housing
There is significant debate locally and elsewhere in California about affordable housing. It is
important to note that while housing costs on the Central Coast are skyrocketing, the focus of
this program is not on affordability,but on attracting senior managers to City employment.
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Accordingly, the recommended parameters are intended to assist new Department Heads and
Council-appointed positions in moving into the community to accept employment with the City.
They are not intended to address the broader issue of housing affordability, which is a function
of complex economic and market forces that are beyond the scope of this focused recruitment
tool. In this context, staff is proposing a housing assistance program solely as an employee
benefit designed to enable the City to recruit and retain the highest-quality senior management
employees to this area, not as a broader initiative to address housing affordability for our
employees in general or the community as a whole.
At some point, it may make sense for the City to develop a housing program that deals more
directly with the affordability issue and is available to a broader group of employees—but this is
something for future consideration, particularly given the economic uncertainties local
government is currently facing and the fiscal impact of these programs. At this time, staff views
a housing assistance program as a necessity for a competitive recruitment effort in attracting
senior management employees to the City.
While all City employees are important, department head positions are among the hardest to fill,
and yet it is these few people that essentially compose the executive leadership of the City,
making major personnel and funding decisions, and significantly influencing policies and
projects that will affect the City for years to come.
Housing and Labor Market Forces
The need for this type of program is driven by two factors:
1. The increasing difficulty of attracting qualified senior managers due to shortages of highly-
qualified public sector managers in the work force and the high cost of housing.
2. In response to these market pressures, many cities have successfully adopted housing
assistance programs. Cities without a housing assistance program are at a significant
disadvantage in competing for highly-qualified candidates from the limited applicant pool.
City of Santa Barbara Housing Assistance Program
In considering the parameters that make the most sense, staff examined programs in place in
other cities. Based on this research, staff believes that the City of Santa Barbara's program
provides us with an excellent model that responds to a very difficult housing situation but does
so in a way that limits costs and risks.
The Santa Barbara program focuses on providing second mortgages at below-market interest
rates in order to assist with making down payments. This is somewhat different from programs
seen in a number of other California cities. More commonly, those cities offer eligible
employees low-interest, first trust deed mortgages financed with city funds at a variable interest
rate pegged to the return on their short-term investments, such as LAIF. However, those
programs require a large commitment of city funds allocated to the mortgages. Since the
mortgage amount required for a home in the current local real estate market can easily exceed
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$400,000, three or four such loans could significantly impact the City's available fund balance,
and reduce the kind of financial flexibility our current policies are designed to promote.
Impact on Fund Balance. The Governmental Accounting Standards Board (GASB), which sets
generally accepted accounting principles for state and local governments, requires reporting
loans of this type as a formal "reservation" of General Fund balance. Due to their long-term
nature, they reduce the level of"spendable" resources available to the Council for appropriation.
Accordingly, these loans would be drawn against the City's unreserved, undesignated fund
balance. While these loans are not expenditures, the end result on the City's balance sheet is the
same, since they would reduce available fund balance. In short, this means that a mortgage loan
program competes with other City funding priorities in ensuring that fund balance does not go
below minimum policy levels.
(Note: Staff researched an alternative presentation of these loans as City investments, which
would not have an adverse impact on available fund balance. However, the research
concluded—confirmed by the City's independent auditors—that this is not an option under
generally accepted accounting principles, since the underlying purpose of the loan is not to make
an investment, but to attract prospective employees. Given current concerns in this area and in
light of recent events in the private sector in fairly presenting financial condition, staff believes it
is especially important to assure the highest levels of accounting and disclosure of these loans.)
Because the Santa Barbara program does not require the use of large amounts of city money to
fund first trust deeds, it provides the City of San Luis Obispo with a prudent model for limiting
the extent of our financial participation. Staff proposes a similar program that supports the
following scenario for a home purchase in this area:
1. A conventional first mortgage that funds 80% of the purchase price combined with a City-
funded second trust deed covering 15% of the purchase price results in the potential for 95%
financing.
2. The employee would be required to make a down payment of at least 5%, and the City's
maximum second mortgage contribution would be $87,500.
3. This would support a home purchase price of $583,000 within the City, which is realistic
given our local real estate market.
Proposed Program Guidelines
The following sets forth our recommended program guidelines:
1. Eligibility. The program would only be open to new Department Head and Council-
appointed employees. Because the intent of the program is to assist employees in moving to
the area to accept a City position and to help make their entrance into the local
homeownership market possible, participation would be limited to first-time homebuyers in
the local area. The City program would not be available for refinancing homes already
owned in the area or for upgrades from existing local homes.
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2. Principal Residence. The home purchased must be the employee's principal place of
residence, and remain so during the term of the City's loan.
3. Amount Financed For a home purchased within the City, the program would provide a
second mortgage up to 15% of the purchase price. Assuming a conventional first mortgage
covering 80% of the purchase price, this would generate a loan of up to 95% of the purchase
price, with the maximum second mortgage from the City of$87,500 based upon a purchase
price of $583,000. The program would require the employee to make a minimum down
payment of at least 5% of the purchase price. We believe that 100% financing is not
appropriate, and that participants ought to make at least a 5% down payment in order to
establish a minimum level of employee buy-in.
Based upon a purchase price of $583,000 and using the 95% loan-to-value maximum
referenced above, would result in a maximum combined loan of $554,000 with $466,500
(80%) through a conventional first mortgage and $87,500 (15%) via a City-funded second
mortgage. If an employee wishes to purchase a more expensive home, the employee would
have to make up the difference by making a larger down payment.
4. Location. Initially, much consideration was given to a policy that would limit a mortgage
assistance program to the purchase of homes only within the City limits. Unfortunately,
there are relatively few homes for sale in the City. By expanding the eligible program area to
a larger area, the stock of available homes is increased, as is affordability. Therefore, staff
recommends that the program area include housing within a 30-minute commute of the City
under normal driving conditions. However, the City's loan amount would be limited to
$57,500 in this case (versus $87,500 if located in the City). This will provide some incentive
to locate in the City while still providing reasonable flexibility to employees in making
housing decisions.
5. Existing Equity. A new Department Head or Council-appointed official who currently owns
a home outside the San Luis Obispo area that wishes to purchase a home within the area
would be eligible for the program. However, the employee would be required to "roll over"
all of the equity in their existing home into the new home to be eligible for the City program.
Staff strongly believes that the program should not be used to extract equity for non-housing
related purposes. City assistance should be used for home acquisition only. A reasonable
period of time will be provided for the employee to purchase a new home before selling their
current one, which will be determined by the Loan Oversight Committee on a case-by-case
basis depending on market conditions at the time.
6. Interest Rate. This is the most powerful of the variables under the City's control, and a
below-market rate is used by virtually all of the other public agency programs. While the
first mortgage will be based on market interest rates as set by the lending institution, we
recommend that the City-funded second mortgage be made at the LAIF rate. Under this
proposal, the City-funded loan would be a variable loan tied to the LAIF rate and adjusted
annually. Currently this rate is 2.74%.
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7. Term. Staff recommends that the City's second mortgage have a maximum tern of 10 years,
which at the employee's option, can be amortized up to 30 years. If the employee selects the
extended amortization option, a required "balloon" payment must be made at the end of the
ten-year period. Paying the balance due at that time or refinancing will be the sole
responsibility of the employee. Staff also recommends that the City's second mortgage
become due and payable 180 days after the employee leaves City employment for any
reason.
8. Participating Lenders. Through a competitive process, City staff will select up to three
financial institutions to be authorized mortgage loan providers under the City's program. In
addition to providing the first mortgage, the lender would be responsible for administering
the City's second trust deed and handling all of the loan paperwork. A request for proposals
(RFP) will be developed inviting local lending institutions to participate in the selection
process.
Staff recommends authorizing more than one financial institution to serve as an approved
lender in order to provide a choice for employees and the additional competition. To ensure
that the program offers reasonable flexibility, the new Department Head or Council-
appointed official may apply to one or more one of these financial institutions.
9. Underwriting Criteria. Staff recommends using industry-standard underwriting criteria in
qualifying employees for these loans from a credit and income perspective, as determined by
the lending institution's prevailing practice. Staff does not believe that it is appropriate to
lower underwriting standards.
10. Closing Costs. Employees will be responsible for paying all normal buyer closing costs,
such as loan origination fees, title reports,credit reports, appraisals and escrow fees.
11.Administration. Staff will create a Loan Oversight Committee, which will be responsible for
administering the operation of the mortgage loan program. It will be comprised of three
members with representatives from Administration, Finance and Human Resources. The
Committee will also be responsible for evaluating the program, and with the approval of the
CAO, making minor modifications as needed for effective administration. Any
modifications with significant policy implications will require Council approval.
Buying Down the First Mortgage Interest Rate
Santa Barbara's program has an additional assistance provision that is not recommended at this
time. They further assist their employees by buying down the interest rate on the conventional
first mortgage by covering closing costs. For example, lenders typically charge borrowers
"points" when a loan is originated ranging from 1.0% to 2.0% of the purchase price. If a
borrower chooses to pay more points, the interest rate can be lowered. The cost for a $460,000
mortgage would be about $5,500 for each per quarter point reduction in the interest rate. Santa
Barbara covers this cost if the employee stays in city employment for a certain number of years.
In addition to providing even greater housing assistance, it also serves as a retention incentive.
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Because the recommended City program will be initially limited to Department Head and
Council-appointed positions where the salary should be adequate to enable a borrower to qualify
for a large loan, staff is not recommending an interest rate buy-down component at this time,
especially given that the interest rate available in the marketplace is about 6.5%, a relatively low
rate. However, should the rate increase substantially, staff recommends offering an interest rate
buy-down component. As such, staff recommends that the program include this feature if the
interest rate for 30-year first mortgages grows to 8%, with a maximum initial buy-down of four
points.
In this case, we recommend that 25% of the value of the points be forgiven if the employee
remains with the City for a period of five years after the date of the loan; and that 50% of the
value of the points be forgiven if the employee remains with the City for a period of ten years
after the date of the loan. Based upon the program maximum purchase price, the most the City
would pay in points on behalf of any one employee would be $18,600. Therefore, the maximum
benefit an employee could receive from forgiveness of points is $9,300 (based upon the ten-year
threshold). This is equivalent to an additional $930 per year in compensation for the ten-year
period. Staff believes that this is equitable compensation for an employee with that level of
tenure. The amount of points due to the City at the time of the employee's separation will be due
and payable within 180 days of separation.
Next Steps
After approval of the program guidelines, staff recommends that Council authorize the CAO to
finalize the actions necessary to begin implementing a mortgage loan assistance program,
including:
1. Appointing members of the Loan Oversight Committee.
2. Preparing policies and procedures for managing this program consistent with the guidelines
approved by the Council.
3. Preparing and issuing an RFP to local lenders to participate in the City's mortgage loan
assistance program. Selecting up to three providers in offering lender choices to our
employees.
4. With assistance from the City Attorney and in consultation with the selected lenders,
preparing appropriate loan documents.
5. Offering the program to the recently-hired Fire Chief, and all new Department Heads and
Council-appointed officials that qualify for the program. In all likelihood the next
opportunity to use this program would be with the Police Chief recruitment, if the chosen
candidate is from outside the area.
6. Evaluating the program on an ongoing basis to ensure that it is effective in meeting the City's
recruitment needs, and making administrative changes as appropriate. Any significant
changes that affect the program objectives or key features will require Council approval.
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ALTERNATIVES
1. Do Not Implement a Mortgage Assistance Program. Based on the Council's direction,
staff has researched and developed a program that would provide a competitive recruitment
incentive to assist new departments heads and Council-appointed officials in relocating to the
San Luis Obispo area Housing costs and lack of availability have presented a deterrent to
several management candidates in past years. While the City has been fortunate in recent
years to attract local candidates and have been able to promote employees into top-level
management positions, the City cannot rely solely on the local labor market. In order to
attract and retain the highest quality candidates and to compete with other municipalities that
offer housing assistance, a mortgage assistance program is necessary.
2. Adopt a More Aggressive Program. Because of the economic uncertainties facing local
government due to the potential of state takeaways and the slow economy, staff is not
recommending a more aggressive program. The limits on purchase price and the requirement
of a 5% down payment are simply good business practices and are in accordance with sound
underwriting principles. Although the City of Santa Barbara's program is open to all city
employees and is a housing program that encourages home ownership for all city employees
who are first time homebuyers, our staff cannot recommend such a broad-based program at
this time. Staff believes a limited program, at least initially, that serves as a recruitment tool
for attracting and retaining highly qualified department head and Council appointed
employees is the prudent first step. If after time, it becomes apparent that bolder steps need
to be taken to recruit and retain other employees, staff can return to Council with an
expanded program recommendation.
3. Extend the Program to Other Senior Managers. For the reasons stated above and because
it is difficult to estimate how many employees may take advantage of this program in the
near future, staff recommends a limited program. The reimbursement for travel and
transition expenses related to accepting employment with the City is available to other
management employees. If further incentives in the form of mortgage assistance are
determined to be necessary in recruiting management employees, staff will return to the
Council for direction.
FISCAL IMPACT
Impact on Fund Balance. As noted above, second mortgages funded through this program will
result in a reduction in available fund balance. However, this adverse impact is limited by
restricting this program to second mortgages for a term not to exceed ten years, with a maximum
loan amount of$87,500. For example, assuming at some point four department heads participate
in this program at the maximum loan amount, available fund balance would be reduced by
$350,000. Placing this in context, this represents a relatively small portion of our current
minimum fund balance target, which is currently$6.1 million based on our policy of maintaining
an available General Fund balance of at least 20% of operating expenditures. If a reserve of
$350,000 were in place for this purpose today, the City would still meet the 20% minimum fund
balance policy. It represents about 1% of our annual operating costs, and the 2002-03 Budget
shows an ending available fund balance that is 21%of operating expenditures.
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While it would be preferable to not have to make this type of fiscal commitment at all, given
current labor market forces and our need to attract qualified department heads and Council-
appointed employees, we believe the benefits of the proposed program offset the modest impact
it is likely to have on the City's financial condition.
Impact on Interest Earnings and Relative Risk. Since the below-market interest rate will be
tied to current LAIF earnings and adjusted annually, there will not be any direct impacts on City
interest earnings under the proposed program. However, it should be noted that taking a 15%
"second position" on a 95% loan-to-value note does present higher risk to the City than an
investment in LAIF, which is highly secure and highly liquid. City funds would be tied-up for
up to ten years and there is the possibility of a loan default with less equity than the remaining
loan balance. However, in considering the benefits of this program and due diligence measures
staff will take via industry-standard underwriting criteria, staff believes that the risk is relatively
small and acceptable.
Impact on Staffing. There will be modest impacts on staff support in finalizing program
policies and procedures, selecting lending institutions and administering the loan program.
However, after initial start-up efforts, the goal is to shift most of the program administration
efforts to the third-party lenders. Again, staff believes that the benefits of the program offset the
effort that will be required to develop and implement it.
G:Agenda Reports/Mortgage Assistance Agenda Report