LEGISLATIVE ANALYST REPORT

TO: The Members of the Board of Supervisors

FROM: Staff, Office of the Legislative Analyst

DATE: February 10, 2003

SUBJECT: Mortgage Assistance Programs (File #: 010719)

Summary of Request

A request submitted by Supervisor Chris Daly and approved by the Board of Supervisors asks the Legislative Analyst to study and report on mortgage assistance programs used in other jurisdictions and the necessary steps and feasibility of establishing such programs in San Francisco.

Executive Summary/Background

Low- and moderate-income households face barriers that make it difficult for them to attain homeownership. They often face rejection by conventional lenders, and personal challenges with a poor credit history, insufficient savings for downpayment, and an irregular income stream. The emergence of collaborations involving cities, non-profit housing providers, the financial industry including lenders, mortgage insurance companies and builders have created opportunities that have made it possible for under-served communities to afford home purchase. As home prices continue to escalate, it is becoming apparent to many city officials that mortgage assistance programs must also be extended to middle-income households who are also unable to afford buying homes. Cities such as New York City and Baltimore have developed innovative mortgage assistance programs for their low and middle income residents in the form of low interest first mortgages, deferred second mortgages and/or grants which assist with downpayment and closing cost expenses. These cities, together with their local partners, have developed successful housing programs that rely on homegrown solutions to address the housing needs in their communities.

Mortgage Assistance Programs

Cities around the nation, including San Francisco, Sacramento, Portland (OR), New York City, Baltimore, Washington D.C., and Los Angeles offer their residents mortgage assistance programs, which are targeted primarily at low and moderate income households who wish to become first time homebuyers. City agencies develop these programs in response to market conditions, which make it difficult for residents to afford home purchase. While city agencies do not provide direct services to prospective homebuyers, they collaborate with local non-profit housing providers, lenders, builders, other government agencies at the federal and state levels, and mortgage insurance companies to garner the expertise and resources necessary to establish mortgage assistance programs. Although many cities, including San Francisco, have developed their programs primarily for low to moderate-income homebuyers, other municipalities have expanded their programs to serve other groups, including municipal employees and middle-income buyers. Below are brief descriptions of programs created to serve residents of low, moderate and middle-income.

Homebuyer Programs for Low and Moderate Income Households

In many cities, concerns over a steep real estate market, the gentrification of some neighborhoods, and other social conditions have led city officials to develop homebuyer programs aimed at extending homeownership opportunities to individuals who otherwise would not qualify for financing under conventional lending. While there may be slight variations in the eligibility requirements, financing, and the administration of these programs, the common elements include:

Borrower Eligibility is based on strict income criteria, which are mainly based on U.S. Department of Housing and Urban Development (HUD) guidelines applicable to households. In many cities, these guidelines tend to restrict eligibility for assistance to borrowers between 80% and 100% of Area Median Income (AMI), with some cities, including San Francisco, extending income eligibility to 120% of AMI. Most programs are also restricted to first time homebuyers.

Property Eligibility may be restricted to single family residences, which in San Francisco include detached single family units, condominiums, townhouses and shared cooperative units. Many programs also require that all eligible properties be located within city limits. They also require borrowers to maintain occupancy of the property and impose penalties on any property transfers.

Financing Requirements address the level of financing borrowers can expect from outside sources, whether it is financing for a first mortgage from a participating lender or city loans and grants intended to make home purchase affordable. Secondly, borrowers are expected to make a minimum contribution toward down payment and/or closing costs from their own funds. This amount generally ranges from 3% to 5% of the purchase price. Since mortgage assistance programs are designed to promote housing affordability, second mortgages offered by cities tend to be low or zero interest deferred loans that are repayable only upon sale, transfer or rental of the property.

Homebuyer Counseling Workshops have become an important component of most mortgage assistance programs. Borrowers are required to enroll in and complete homebuyer education provided by lenders or non-profit housing providers in order to qualify for assistance. These workshops have been credited with lowering default rates and assisting new homebuyers to transition from renting to homeownership.

Homebuyer Programs for Middle-Income Residents and Municipal Employees

Cities confronted by a steep real estate market and challenges with employee retention are expanding their programs to serve groups such as municipal employees or other middle income households. Not unlike programs offered to low income homebuyers, these targeted programs are also structured as partnerships between the city and other local entities, such as non-profit organizations and lending institutions. Examples of such programs are briefly described below:

Baltimore's Home-buying Deferred Payment Loan Program is a homebuyer assistance program for police officers, fire personnel and teachers. Relying on funding from a voter-approved Bond appropriation, this program has enabled over 260 city employees to purchase homes within a 2-year period. Homebuyers must contribute $1,000 of their own funds toward home purchase. A City subsidy of $3,000 in the form of a deferred zero interest 5-year second mortgage can be used for closing costs and other settlement costs. These loans are subject to recapture upon sale or transfer of the home by a homebuyer.

In New York City, uniformed officers in the Police Department, who meet certain established financial and credit requirements, can participate in NYPD Home, a city mortgage assistance program. Applicants must be first time homebuyers who want to purchase one to three family homes as their primary residences in New York City. This program involves a collaboration of city officials, local non-profit housing providers, and local lenders who offer mortgages financed at 95% to 100%. In addition, lenders offer grants in the form of closing cost assistance up to $3,500 for each approved loan. Purchasers must make a minimum contribution of 3% to 5% of the purchase price toward closing costs. Mortgages originated under this program can be sold to Fannie Mae. The City has also secured low cost mortgage insurance financing for borrowers from the Residential Mortgage Insurance Corporation.

New York City's Department of Housing Preservation and Development (HPD) oversees a second program, Averne by-the-Sea. This is a comprehensive large-scale development plan in Southeast Queens, which includes new housing for middle income families, retail, as well as employment and recreational opportunities for residents. The housing will be built over 25 years and will include a mixture of 200 single and two-family units financed through a partnership of city agencies, local community groups, and the business community. While this program lacks the affordability component of NYPD Home, City involvement helps keep these market rate homes reasonably priced.

The Sacramento Housing and Redevelopment Agency provides several services to low- to moderate-income homebuyers. First-time homebuyers defined as low income (≤ 80% of AMI) or homebuyers (first-time or otherwise) earning ≤ 115% of AMI seeking to buy in one of five targeted redevelopment areas are eligible to receive an interest-free, deferred payment loan of up to $5,000 to cover downpayment and closing costs. Homebuyers (first-time or otherwise) earning ≤ 80% of AMI are also eligible to receive a grant of up to $2,500 for downpayment and closing costs through the Homebuyer Assistance Program. First-time homebuyers earning ≤ 80% of AMI are also eligible to receive a 3% interest, deferred payment loan.

Unrestricted Homebuyer Programs

A few cities have also developed programs that are available to any City resident. Depending on need, residents can qualify for special financing available under these programs. The cities described below - Baltimore and New York City - exemplify the level of complexity and innovation involved in the financing and administration of such programs. Because these programs serve a broad clientele, they rely on and utilize multiple funding sources involving federal, state, local and private dollars. Additionally, a reasonably priced real estate market in these cities, including the availability of city-owned properties, enables buyers to purchase homes with relatively low downpayment.

New York City's HomeWorks Program is available to all city residents who wish to purchase homes. The City rehabilitates its own small, vacant buildings into one to four family units, which are then sold to homebuyers at market prices. Five percent of the homes are reserved for members of the Police Department and the rest are offered to buyers by lottery, of which 30% to 40% of the homes are earmarked for residents of the communities in which these homes are located. In order to keep these homes affordable, the City conveys these properties to builders at nominal prices who in turn sell the homes to buyers at reasonable prices. The City further `partners' with local lenders and Freddie Mac to secure the financing for buyers. The City further utilizes federal HOME funds to subsidize zero interest second mortgages ("silent" second mortgages) that evaporate after 6 years if the buyer maintains occupancy in the purchased property. Buyers can also apply for a 5-year partial property tax exemption.

Through its Settlement Expenses Loan Program (SELP), Baltimore's Department of Housing provides prospective homebuyers of all incomes with home purchase assistance. The purchase price is capped at $275,000, and City financing (loans) for closing cost expenses can go up to $5,000 at an interest rate of 9.25% over 10 years. Homebuyers must contribute at least $1,000 toward their downpayment and enroll in homeownership counseling. Baltimore has established an elaborate financing scheme to support this program. In 1998, the City entered into a Note Purchase Agreement with Fannie Mae, which allowed Baltimore to access a $20 million line of credit. The Fannie Mae Agreement requires the City to reserve $4 million (Housing Development Bond) as collateral against default. A trustee selected by the City, and acting under instructions from the City's Loan Servicer, wires funds available under the Downpayment Assistance Program Notes to participating lenders upon approval of first mortgages. To date, the City has purchased $18 million of the Fannie Mae funds.

Washington D.C.'s First-Time Homebuyer Individual Income Tax Credit offers a federal tax credit of up to $5,000¹ to first-time homebuyers in the District of Columbia. This dollar-for-dollar tax liability reduction² became available August 5, 1997 after Congress enacted the Taxpayer Relief Act of 1997 and, unless amended, will sunset January 1, 2004. To claim the credit, the homebuyer must (a) have purchased a main house during the tax year in the District of Columbia that was not acquired by gift or inheritance, (b) not own any other main home in the District of Columbia during the 1-year period ending on the date of purchase, (c) not have previously claimed this credit for a different home, (d) not have a modified adjusted gross income of more than $90,000 as an individual or $130,000 if married filing jointly, and (e) must complete federal forms 1040 and 8859.

Mortgage Assistance In San Francisco

Current City Programs

San Francisco has also developed mortgage assistance programs to extend homeownership opportunities to the City's residents. Three programs administered by the Mayor's Office of Housing (MOH) and one by the San Francisco Redevelopment Agency (SFRDA) serve the City's low- to moderate-income households who qualify under separate criteria and requirements established by these agencies. These homebuyer requirements tend to mirror those established in other cities. Additionally, a network of government, non-profit organizations, and participating lenders have banded together to make homeownership affordable for low and moderate-income households in San Francisco. Despite these efforts, the City continues to face serious housing needs, including for rental housing. Below is a summary of programs offered by MOH and the SFRDA.

Mayor's Office of Housing (MOH)

Low- and moderate-income homebuyers can apply for any of the three homebuyer programs offered by MOH. The level of financial assistance is based on the buyer's income level and need. MOH operates the following three programs:

1) The Downpayment Assistance Loan Program (DALP) administered by MOH in conjunction with 5 participating lenders assists first-time homebuyers with income below 100% purchase homes. This program is funded from Proposition A Affordable Housing Bond funds. DALP funding is allocated over a 5-year period at approximately $3 million per year. Loan amounts are based on household income - if household income is below 80% of AMI, the maximum available loan is up to $100,000; at or below 100% of AMI, DALP loans can be up to $50,000. Loans are deferred for a 40-year term if the home remains owner-occupied. Borrowers must obtain a first mortgage approval for a single family residence (including a detached single family home, condominium or townhouse) from a participating lender as well as contribute a minimum downpayment of 5% of the purchase price (3% from borrower and remaining 2% may be a gift or grant).

2. The City Second Loan Program is a zero interest deferred payment second mortgage (40 year term) offered to eligible first time homebuyers with total household income at or below 120% of area median. The City will loan up to 30% of the purchase price to qualifying borrowers under this program. The City subsidy is in second position in title to the buyer's first mortgage and can be repaid at any time ("silent second"). Qualification criteria require buyers to purchase 1 to 3 bedroom units from designated privately owned developments monitored by the City. There are currently 8 eligible properties whose units are available at market prices. In lieu of interest, MOH requires repayment to include a shared appreciation in the value of the property at the time of resale. As with the DALP, the level of assistance is based on the buyer's income level and need.

3. The Mortgage Credit Certificate Program allows homebuyers with qualifying incomes to benefit from an annual income tax credit for as long as they maintain occupancy in the home and have the original mortgage for that home. Once a buyer has found a home and secured a first mortgage with the City's participating lender, the lender will determine if the buyer qualifies for an MCC, and forward the application forms to the City for review and approval for an MCC certificate. The MCC provides buyers with a federal income tax advantage in an amount equal to 15% of the mortgage interest paid annually on a dollar for dollar basis.

The San Francisco Redevelopment Agency (SFRDA)

SFRDA's Affordable Homeownership Program provides homeownership assistance that enables low and moderate income households to purchase homes in San Francisco's designated redevelopment areas. SFRDA's subsidies provide first time homebuyers with a Reduced Land Price, funds to reduce the cost of construction, and second mortgages with 40-year repayment terms. The San Francisco Housing Development Corporation, a local non-profit organization, works with prospective buyers assisting them to qualify for this program. Buyers can purchase one to four bedroom units. Buyer eligibility is based on the following prioritization: Individuals displaced by redevelopment activity ("Certificate Holders"); residents of Hunters Point/Western Addition; large households; and finally, selections made on a first-come first-served basis. Strict resale restrictions help to keep the housing affordable. This program can be combined with the MCC Program, which gives eligible homebuyers up to 15% of their annual mortgage interest payment as a credit against their federal income taxes, thus reducing their monthly mortgage payments.

Other Homeownership Opportunities in San Francisco

The AFL-CIO Housing Investment Trust Program enables union members and municipal employees with incomes up to 100% of area median to purchase existing homes in San Francisco. This program is a collaboration of Fannie Mae and the AFL-CIO with participation by the City. Households with a combined annual income up to $89,800 can purchase single family residences, townhouse or condominiums using first mortgage loans up to $227,150. Buyers can also reduce their mortgage interest through a special rate "buy down" that is available for the first five years. The "buy down" reduces the buyer's mortgage interest rate by as much as half a percentage point below the market rate. Homebuyers must contribute at least 3% of their own funds toward the down payment and closing costs. This program works in conjunction with the City's mortgage assistance programs described previously.

The Feasibility of Expanding the City's Mortgage Assistance Programs

San Francisco already administers first time homebuyer programs for the City's residents. The mortgage assistance available to low- and moderate-income borrowers provides the additional financing needed by borrowers to cope with a steep real estate market. Even though home purchase is restricted to designated housing units, a program such as the City Second Loan Program reaches a broader borrower base in that income limits extend to 120% of area median, unlike other programs which restrict income eligibility to households earning up to 100% of area median. Additionally, the deferred second mortgages provided by the City combined with the MCC credit help reduce first mortgage payments for borrowers, thus reducing the burden of home purchase for borrowers.

Deciding whether these programs should be expanded will depend on various factors, including the following:

Market Conditions. Even though the real estate market is expected to soften, a report issued by the California Association of Realtors and Real Estate Solutions indicates that median home prices in California increased by 10.6% from July 2000 to July 2001. In the San Francisco Bay, median home prices rose by 4.6% to $481,280 during this period. These price increases place a greater burden on both buyers and government by requiring buyers to either increase their downpayment and/or their first mortgages if they are unable to obtain subsidies from MOH or the SFRDA sufficient to cover the shortfall created by market conditions.

Level of Need. The high cost of housing in San Francisco has made it difficult for most households to afford purchasing homes. To address this need, the City introduced programs in the 1990s to enable low- and moderate-income households to purchase homes. The Downpayment Assistance Loan Program (DALP) alone, administered by MOH, has assisted over 180 households low-income households. However, in order to serve middle income households that earn over 100% of area median, and in order to curb the migration of essential individuals, such as police, fire personnel, and teachers, the City will need to determine ways of addressing this challenge. It must determine whether, as a matter of policy, new programs are necessary to make homeownership affordable for these groups, and what the level of such assistance shall be.

Available financing. Currently, the City's homebuyer assistance programs are financed through subsidies from Proposition A Bond dollars, SFRDA tax increment dollars and federal HOME funds. Fannie Mae also works with participating lenders to provide the bulk of the financing for first mortgages that benefit the City's residents. As noted, any increase in home prices places further strain on the City's homeownership programs and on efforts to expand these programs to other groups in the City. While there are myriad financing strategies utilized by cities to promote homeownership, San Francisco will need to work with other principals in housing to find solutions that will help the City's housing needs.

Property availability. Unlike New York City and Los Angeles, San Francisco faces geographic constraints that make property availability difficult. Nonetheless, the City has broadened its property eligibility criteria, under its mortgage assistance programs, to include detached single family residences, condominiums, townhouses and shared cooperative units. Designing flexible property eligibility guidelines helps increase the supply of units that homebuyers can access.

Strong Partnerships. A serious shortage of affordable housing has stretched the resources of local government forcing many cities, including San Francisco, to collaborate with local non-profit organizations, and lenders to address homeownership needs in under-served communities. Even broader networks involving complex financing in New York City and Baltimore have enabled these cities to create successful homeownership programs that extend beyond the provision of second mortgages by government. For example, lenders working with cities not only provide first mortgages; they also provide grants borrowers can utilize to reduce their closing cost expenses.

Conclusions

Market conditions in San Francisco have made homeownership an unattainable goal for many people in the City. However, programs offered by MOH, SFRDA and through the Housing Investment Trust have made homeownership affordable for some low and moderate income households. Rising home prices and the out migration of some essential City employees and families are challenging City officials to devise innovative ways of reversing these trends. This will require a policy change on the part of City officials and a dedication of new resources to address these growing challenges.

Appendix A: Mortgage Assistance Programs in Other California Cities

¹ if single, married filing jointly, head-of-household, or qualifying widow(er). May be less ($2,500) if married filing separately or if the purchase price of the home is less than $5,000.

² Tax credits reduce tax liabilities by the amount of the credit whereas tax deductions reduce the amount of income that is taxable. Equivalent tax credits, therefore, reduce tax liabilities much greater than do tax deductions.