# D - Board Presentation Subsidy Sustainability Policy final 020810

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```					     U.S. House Pricing Policies
and
Calculating the Price of a Habitat Home

Frank Gorman
Field Operations Manager
State Support Organizations
Overview
• A Brief Primer on Subsidy

• Establishing the Appropriate House Price

• Using the House Pricing Worksheets

A Brief Primer on Subsidy

How much does it really cost to build
a Habitat house?

And……how much of the cost is paid
by the homebuyer and how much is
subsidized by the affiliate, with
resources raised from the community?
Sustainability Achieved Through
• Recapture of subsidy
 through Second Mortgage recapture and/or
Shared Appreciation agreements
• Recapture of capital
 Through using shortest term appropriate and
mortgage finance (AAR)
• Correct pricing
 to minimize unnecessary subsidy
Sample Affiliate
• Builds 10 houses a year
• Direct development costs (land, materials, labor, construction
management, etc.) \$103,400
• Indirect support costs (office, administrative, fundraising, etc.) per
house \$46,140
• First mortgage (0%) determined by affordability is \$100,000
• House is appraised for \$110,000 and a second mortgage is
added for \$10,000 to cover the difference

Note: This example is for illustration purposes only. Each affiliate should
determine their own level of subsidy using the tools provided by HFHI.
Sample Affiliate
Does the affiliate capture the full cost of a house in the price
Total affiliate expenses           Affiliate expenses
Number of houses    per year                           incurred per house                 Habitat Mortgages
built in a year     (direct development and indirect   (Total affiliate expenses / # of   (1st and 2nd)
support costs)                     houses built)

10                   \$1,495,400                   \$149,540 per house                       \$110,000

*Amount determined from
annual budget for year; see
= (\$1,495,400 / 10)                = (\$100,000 + \$10,000)
sample House Pricing and
Subsidy Calculator

Answer: No. All expenses associated with operating the affiliate are not included in the
mortgages. Therefore, the affiliate is subsidizing \$39,540. This is known as “the expense
subsidy,” the difference between the expenses incurred by the affiliate per house and what
is recaptured by the mortgages.
Sample Affiliate
What else is the affiliate subsidizing?
Habitat Mortgage @ 0% interest    Fair Market Value     Expenses incurred by the
(appraised value)     affiliate per home (Total
affiliate expenses (direct and
indirect) / # of houses built)

\$100,000                     \$110,000                  \$149,540

Equity Subsidy - \$10,000   Expense Subsidy - \$39,540
(difference between total expenses incurred
by the affiliate per house and what is
recaptured by first & second mortgages)

“Silent” or “soft” second mortgage = \$10,000. This is the difference between the
Fair Market Value and Habitat mortgage. Some affiliates do not require the second
mortgage to be repaid. If the second mortgage is not repaid, it becomes another
subsidy known as “the equity subsidy.”
Sample Affiliate
What else is the affiliate subsidizing?
Habitat Mortgage       Habitat Mortgage

Amount                 \$100,000               \$100,000

Interest Rate          0%                     0%

Term                   25 years               30 years
Present value of                                                 Calculated using the current
\$45,106                \$39,727
the mortgage                                                     “discount rate” of 7.5%*
Difference             -\$54,894               -\$60,273

The “finance subsidy” is the cost of not charging interest on a mortgage over 25 or
30 years. The longer the term of the mortgage, the higher the amount of this
subsidy.

* See discount rate explanation in notes section.
Summary: Affiliate Sample
Total Amount Subsidized – 25 Year Loan

The difference between the total expenses
Affiliate operation
incurred by the affiliate per house (direct
costs not included in   \$39,540    Expense Subsidy
and indirect) and the amount recovered by
the house price
the affiliate (the mortgages).

Silent second                                        The difference between the appraised
\$10,000    Equity Subsidy
mortgage, if forgiven                                value and the Habitat mortgage.

Cost of not charging                                 Habitat affiliates cannot charge interest.
interest on first       \$54,894    Finance Subsidy   However, there are strategies to help
mortgage                                             reduce these costs.

TOTAL                   \$104,434         TOTAL SUBSIDIZED BY AFFILIATE PER HOUSE
What does this mean?
• U.S. affiliates may not be aware how much they are
subsidizing each home.
• Long-term sustainability may be at risk.
• Fewer number of families served.

However, there are strategies available to affiliates
to help reduce the amount of subsidy.
•Appropriate House Pricing
•Shared Appreciation
Appropriate House Pricing
• Initial monthly payment shall not exceed 30% of the
household’s gross income
• Included in monthly payment:
 Loan principal
 Local real estate/property taxes
 Homeowner’s hazard insurance
 Mortgage insurance & loan services fees (where
applicable)
• The maximum length of a mortgage is now permitted for
up to 40 years if necessary to achieve the income and
affordability thresholds
HOUSE PRICING POLICY (2010)
Sale price can include:
• Costs of land and infrastructure
• Legal and recording fees
• Direct cash construction costs for labor and materials
• Pro-rated share of program costs such as site supervisors,
AmeriCorps, vehicles, volunteer coordination, etc.
• Value of In-kind donations of materials and services
• Licenses, permits, insurance and fees
• Admin costs up to 10% of direct construction/development
costs
Step 1: How Much Does it Cost?
• Review Policy 23, 2.0 paragraph 2
 Include all direct costs of construction, land,
engineering, fees, or “value” if donated.
 Include all indirect costs of construction, which
can include certain “program” costs that facilitate
construction – example portion of volunteer
coordinator’s time in coordinating volunteers that
do construction
 Include GIK and value of donated professional
labor
Step 1: How Much Does it Cost?
(continued)
• This becomes the maximum house price based
on allowable costs (MHP) or “full development
cost”, not necessarily the contract sales price
 This is typically the HFH “first mortgage”

• Note: The contract sales price in a HUD-1 may
be different
Step 2: How Much can the Family
Afford? (Maximum Affordable Mortgage)
• Per Policy 23, 2.0, paragraph 1.
 Affiliates shall conduct their home sales….to
assure that the initial monthly payment…shall
not exceed 30 percent of household’s gross
income.
• The longer the term, the greater the amount of
the maximum sales price can be captured and
the less subsidy.
Step 3: What is the FMV?
• What is the appraised value of the home?
• Per Policy Advisory Statement: Policy 23
 The sales price should not exceed the FMV
• Some relief for depressed markets
• Consider shared appreciation clause
   Example: Costs \$100K and FMV \$80K
   First Mortgage \$80K
   Soft Second \$0
   Shared Appreciation: On sale or refinance,
the first \$20K of appreciation is paid to affiliate
Step 4: What is Sales Price?

• It is the lesser of:
 Maximum House Price or
 Maximum Affordable Mortgage or
 FMV

• Per Policy Advisory Statement: Policy 23
House Pricing
Worksheet Exercise
What is Shared Appreciation?
• A shared appreciation mechanism enables an
affiliate to share in the market appreciation of
a Habitat house that occurs after closing.

• Important Note: This is not the same as a
“silent second” mortgage, which protects
equity existing at closing.
What is Habitat policy?
Policy 24 states:

“Affiliates may incorporate into the mortgage (or have as a
separate document) a shared appreciation provision, allowing the
affiliate to claim some percentage of the increase in the
appreciation in the value of the home over and above the initial
appraised value of the home and excluding capital improvements
made to the home by the homeowner.”
Why consider using shared appreciation?
• Long-term affordability
 Treats the relationship with the partner family as a
bigger partnership to benefit the community (not just
the individual family)
• Repurchase right
 Enables the affiliate to repurchase the Habitat home on
a resale. The shared appreciation formula should tie
into an affiliate’s right of first purchase.
• Funds available for partner family to reinvest in a
replacement affordable home
Why consider shared appreciation, cont’d?
• Equity protection
• Protects against predatory lenders or property flipping
in a rapidly appreciating market

• Development subsidy
• Affiliate may recover a greater percentage of its
development costs on an upside down house

• Sustainability of the affiliate

22
Other considerations for Shared
Appreciation
• Affiliates and their boards have the discretion of whether or
not to use shared appreciation, and to determine the
appropriate formula. Establish standards up front.
• There should be a thorough discussion at the board level
before implementation.
• Develop “talking points” for your board, donors, partner
families and community stakeholders.
evaluate different shared appreciation models and their
outcomes for the affiliate and the homeowner.
Example
Recovery of Development Subsidy

Closing        Year 5     Year 10    Year 15    Year 20

FMV             \$ 80,000       \$ 90,000   \$100,000   \$115,000   \$120,000
Dev. Subsidy    \$ 20,000
Appreciation                   \$ 10,000   \$ 20,000   \$ 35,000   \$ 40,000
Apprec. Split   Habitat
recovers
dev. subsidy
Habitat’s                      \$ 10,000   \$ 20,000   \$ 20,000   \$ 20,000
Share of App.
Homeowner’s                    \$ 0        \$ 0        \$ 15,000   \$ 20,000
Share of App.
Example:
5% Earned by Partner Family Per Year
Closing    Year 5     Year 10    Year 15    Year 20

FMV             \$100,000   \$105,000   \$110,000   \$115,000   \$120,000
Dev. Subsidy    N/A
Appreciation               \$ 5,000    \$ 10,000   \$ 15,000   \$ 20,000
Apprec. Split                 75/25     50/50      25/75        0/100
(Habitat/
Homeowner)
Habitat’s                  \$ 3,750    \$ 5,000    \$ 3,750    \$         0
Share of App.
Homeowner’s                \$ 1,250    \$ 5,000    \$11,250    \$ 20,000
Share of App.
Relevant Resources
• Policy 23: House Pricing
 Policy Advisory Statement, Policy 23
• Policy 24: Mortgages
 Policy Advisory Statement, Policy 24
• Policy 23 House Pricing Worksheet
Relevant Resources
• House Pricing and Subordinate Mortgages
Conference Call
 http://my.habitat.org/kc/audiorecording-
detail/g35ac0/House-Pricing-and-Subordinate-
Mortgages-2012-68-minutes
• Shared Appreciation Conference Call
 http://my.habitat.org/kc/audiorecording-
detail/g35e16/Shared-Appreciation-and-Mortgages-
An-Overview-of-How-to-Use-Shared-Appreciation-
2012-58-minutes

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