Staff report for June 22 meeting by derong123

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									                COMMUNITY DEVELOPMENT DEPARTMENT
                                                     Council Meeting Date: May 5, 2009
                                                                Staff Report #: 09-061

                                                                       Agenda item #: F-2


REGULAR BUSINESS:           Consideration of Two Distinct Acquisition and
                            Rehabilitation Programs to Address the Impact of
                            Foreclosed Properties in Menlo Park, including a
                            Resolution Reserving $2.5 Million of the Below Market
                            Rate (BMR) Housing Fund for Use in the Programs, and
                            Review of and Direction on a Proposed Program
                            Designed to Prevent Pending Foreclosures


RECOMMENDATION

Staff recommends that the City Council approve two distinct programs to address the
impact of foreclosed properties in the city.

   1. The two programs are identified as the Neighborhood Stabilization Program
      (NSP) and the Habitat Acquisition and Rehabilitation Program (the Habitat
      Program).
   2. Additionally, it is recommended that the Council approve a resolution reserving
      $2.5 million from the Below Market Rate (BMR) Housing Fund for use in the two
      programs.
   3. Staff is not recommending adoption of the Foreclosure Prevention Program at
      this time but is requesting that the City Council provide direction on their interest
      in pursuing program intended to assist families facing a pending foreclosure.

BACKGROUND

Over the previous decade low interest rates, relaxed lending criteria and processes,
predatory lending practices, market speculation, and the packaging of secondary
mortgage market investment instruments combined to create a housing bubble that
resulted in unprecedented increases in home values across the Bay Area, and
throughout California and the United States. The bursting of that bubble has resulted in
historic high levels of mortgage defaults and foreclosures. As reported by
realtytrac.com, there are over 90 properties in default or foreclosure citywide, with over
80 percent of those properties located in the Belle Haven community.

As a result of these foreclosures, numerous properties are unoccupied. These homes
are either bank-owned or are in some stage of the foreclosure process. Vacant homes
are magnets for trouble in a neighborhood. They are often subject to vandalism and
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provide a potential location for illegal activities, such as drug sales and use. Foreclosed
properties are seldom maintained properly, leading to rapid deterioration of the home
and, by extension, the community. The yards are usually left to grow untended,
creating a breeding ground for pests, both insect and rodent.

While there are reported to be over 90 such properties, only a couple of dozen are
readily identifiable, as indicated by “for sale” signs in yards. Some homes have been
sold, either at auction or through market sales, typically at prices that are considerably
below market values of the past few years, and usually well below the previous sales
price of the home. Staff’s discussions with financial experts indicate that banks are
rejecting offers from investors who are looking to pick up non-performing mortgages for
20 to 30 cents on the dollar. Some homes have been purchased by homeowners and
investors looking to add to their rental stock, but there are a number of housing units
that are in such poor condition that they are not attractive to those buyers.

The Federal government has responded to the foreclosure crisis by passing legislation
and appropriating funds to try to keep families in their homes and assist cities in dealing
with the surplus of vacant housing where foreclosures have been most prevalent. The
funds have been designated to those communities who currently receive funding from
the Community Development Block Grant Program and where foreclosures are having
the greatest impact. No jurisdiction in San Mateo County, including the County itself,
has been awarded any of this funding. State funding from the program was similarly
distributed with the same result – no funding in San Mateo County.

Three programs to address the foreclosure crisis have been developed by City staff and
were presented to the Housing Commission at its April 1, 2009 meeting. The programs
were outlined to the Commissioners and each was unanimously supported with
direction to present the programs to Council for adoption. Since the Commission
meeting, complications with the implementation of one of the programs have surfaced.
For this reason, staff is bringing forward the two programs intended to address
foreclosed properties for possible adoption and is providing information and requesting
direction on a third program intended to address pending foreclosure situations.

ANALYSIS

Below Market Rate (BMR) Housing Program, Guidelines, and Fund

The primary purpose of the BMR Housing Program, Guidelines, and Fund is to increase
the supply and assist in the development of housing that is affordable to very low-, low-,
and moderate-income households. The BMR Housing Program is contained within
Chapter 16.96 of the Zoning Ordinance. The BMR Housing Program Guidelines
provide direction on the implementation of the program and use of the BMR Fund. The
BMR Guidelines are included as Attachment E. Section 10.3 of the Guidelines lists the
following uses of the Fund:
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   •   Provision of below market rate financing for homebuyers;
   •   Purchase of land or air rights for resale to developers at a reduced cost to
       facilitate housing development for very low-, low- or moderate-income
       households;
   •   Reduction of interest rates for construction loans or permanent financing, or
       assistance with other costs associated with development or purchase of very
       low-, low- or moderate-income housing;
   •   Rehabilitation of uninhabitable structures for very low-, low- or moderate-income
       housing;
   •   On-site and off-site improvement costs for production of affordable housing;
   •   Reduction of purchase price to provide units that are very low-, low- or moderate-
       cost; and
   •   Rent subsidies to reduce the cost of rent for households with limited incomes.

In addition to these approved uses listed in the Guidelines, City Council approved
additional uses on April 26, 2005, subject to review by the Housing Commission and
approval by the Council for specific proposals. They include:

   •   Funding for the purchase and rehabilitation of existing apartment buildings for
       low-income tenants;
   •   Funding the purchase of existing housing units to resell as BMR units to
       moderate-income households;
   •   Funding the purchase of BMR units until the units can be sold; and
   •   Funding loans to BMR unit owners to cover costs arising from repairs in the
       common areas of condominium projects.

The BMR Housing Fund is comprised of commercial development in-lieu fees and has a
balance of approximately $8.53 million as of June 30, 2008. A summary of the fund
balance as of the end of fiscal year 2007-2008 is included as Attachment F. The largest
recent contribution to the Fund was $2,510,300 for the Rosewood Hotel project at 2825
Sand Hill Road in the 2006-2007 fiscal year. Additional commercial and residential
development in-lieu fees and accrued interest have resulted in the current balance.

A total of $4,482,000 in BMR funding is currently committed to the Purchase Assistance
Loan (PAL) Program, a first time home buyer loan program that provides down payment
assistance to households earning less than 110 percent of the Area Median Income
(AMI). Loans are deferred for five years and then carry a three percent interest rate.
Participants are eligible for 20 percent of the purchase price of the home or $75,000,
whichever is lower.

The commitment to the PAL program is the only current designation of the BMR Fund,
leaving over $4 million in undesignated funding. Additional funds are expected from
current or pending development activities. They include:
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     110/175 Linfield Drive (residential)          $108,000
     75 Willow Road (residential)                $2,250,751
     2550 Sand Hill Road (office)                  $198,332
     1706 El Camino Real (medical office)           $88,700

The total expected from current/pending development activities is $2,645,783. The
funding from 75 Willow Road is earmarked for assistance to Habitat for Humanity for
obtaining land use entitlements for a proposed housing project adjacent to Terminal
Avenue, but will revert to the BMR fund if the project does not go forward. All the
contributions shown above are estimates pending the final sales prices of the housing
units upon which the contribution is based or changes in the final plans for each
development project.

Proposed Programs for Foreclosed Properties

Staff proposes to address the foreclosure problem through a combination of two distinct
programs. The first program is a City-run effort to acquire and rehabilitate vacant
housing units and resell those units to households on the BMR waiting list. The second
would be a similar Habitat for Humanity effort that would do the same thing, but for a
lower income clientele. Staff and the City Attorney have reviewed the proposed
programs to ensure that they are consistent with the intent of the BMR program.
Additionally, both programs are based on a model proposed by Federal legislation, but
not funded for any jurisdiction in San Mateo County. The Federal program is called the
Neighborhood Stabilization Program. Its purpose is to ensure the viability of
communities hard hit by the foreclosure crisis by buying vacant properties, rehabilitating
them, and reselling them to new homebuyers. Staff is proposing to adopt both the
name and the purpose of the program in attempting to address the situation in Menlo
Park.

The two programs are generally described below. Attachments B and C provide more
specific information on each of the programs.

Neighborhood Stabilization Program (NSP)

The specific details of the NSP are provided in Attachment B. The program would
identify foreclosed properties for sale in the city where the cost of acquisition would fit
within the program budget, purchase appropriate homes, develop a complete scope of
work for rehabilitation of the homes, and resell the finished homes to eligible
households on the BMR wait list. The program would target households earning
between 60 and 110 percent of the area median income (AMI), which is currently
$95,000. The properties most likely to be included in the program are the least likely to
be purchased by investors or homebuyers due to their poor condition. The finished
product would be equivalent in condition to a new housing unit. Rehabilitation efforts
would target modernization of the electrical system, complete insulation of the unit, new
cabinets and fixtures in baths and kitchens, sustainable materials for floor coverings,
and repair of any exterior problems, such as roof or wall damage.
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The specific objectives of the NSP are:

   •   Relieve the stress on neighborhoods caused by the presence of vacant
       properties;
   •   Improve the condition of the housing stock in the neighborhood;
   •   Provide new homeownership opportunities for households on the BMR wait list;
   •   Utilize green building standards on rehabilitation activities, thus reducing utility
       costs for the homeowners;
   •   Strengthen the community by ensuring more homeownership opportunities; and
   •   Meet statutory time requirements for the designation of BMR funds for the
       development of affordable housing.

Staff is proposing to designate $2 million from the BMR fund for the program with the
expectation that 10 to 15 units can be bought, rehabilitated, and resold through the
program. The process from purchase to resale is expected to take approximately six
months. The sale of each unit to a household on the BMR wait list is expected to result
in a net loss to the program of between $50,000 and $150,000 per unit, depending on
the cost of purchase and rehabilitation. The program will be evaluated after five years
to determine if its continuation is needed to bolster the health of the community. As
detailed in Attachment B, cost estimates prepared by the City’s Rehabilitation Specialist
substantiate these production goals.

Habitat Acquisition and Rehabilitation Program (The Habitat Program)

This program will be sponsored by Habitat for Humanity. The Habitat Program would
be similar to the City-run acquisition and rehabilitation program (NSP), but with some
cost-saving features peculiar to Habitat’s typical model. As with the City program,
Habitat would identify and purchase vacant, foreclosed housing units and determine the
repair needs of each home. Where the City would require the identification of a
contractor to perform that rehabilitation work, Habitat would utilize their own project
managers and volunteer labor to do most of the work. The cost saving to Habitat, along
with their mortgage program that provides zero percent interest loans to their
homebuyers, would provide opportunities to households earning between 40 and 60
percent of the AMI. Homes purchased through the program would be offered to
households on the City’s BMR wait list first, and to other Habitat families if none can be
identified through the City’s list. Details on the Habitat Program can be found in
Attachment C. As shown in the attachment, the City’s participation in the program
would be a $100,000 contribution toward the purchase of each foreclosed home. A total
of five homes would be purchased, rehabilitated, and resold through the program for a
total participation of $500,000 from the City’s BMR Fund. An additional $500,000 may
be requested at a later time if the program proves to be successful. An evaluation of
the program will be conducted after the first five units have been completed or at the
end of five years, whichever comes first.

Staff would note that recent news articles have prompted some discussion of the merits
of both proposals, both as letters to the editor in the newspapers and through calls or
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email. The main issues that have been raised are summarized below. Staff has also
provided additional information in response to the issues raised.

    1. The money proposed to be used for the program would be better spent on the
       City’s budget deficit.

        Staff would clarify that the funds for the proposed programs would come solely
        from the BMR Fund which can only be used for the provision of affordable
        housing and not to otherwise balance the budget. As noted earlier, the BMR
        Fund is comprised of development in-lieu fees and interest earnings.

    2. It is inappropriate for the City to manage rental units.

        The program does not include any provisions for rental units and instead
        promotes home ownership. The housing units, once rehabilitated, will be sold to
        persons on the City’s BMR wait list.

    3. There is a lack of City expertise to implement the programs.

        The City currently operates a BMR Program in which housing units are both
        purchased and sold. The proposed program would use current staff and
        contract assistance with expertise in these areas to implement the program. In
        addition, the City’s Rehabilitation Specialist is a licensed contractor with years of
        experience doing rehabilitation work and managing contractors undertaking
        government financed rehabilitation work.

    4. The City should not be trying to flip properties for a profit.

        The proposed programs are not designed to make a profit for the City. As noted
        above, the programs will realize some degree of loss on each unit. This loss is
        considered an appropriate use of the BMR Fund in order to promote additional
        affordability in the city.

    5. The City should allow the private market to correct the current foreclosure crisis.

        Although there may be some validity to this approach, it is highly dependent on
        the market’s ability to make the necessary corrections which could take an
        extended period of time. The proposed programs would target housing units in
        need of extensive rehabilitation and of less current interest to the private market.
        Staff also believes that the foreclosure situation provides an opportunity to build
        on its affordable housing programs by providing additional home ownership
        opportunities. Additionally, the number of units the programs would be able to
        purchase, rehabilitate, and sell would be limited. The private market would need
        to continue to be a significant part of the overall solution.
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        There may also be some concern that by bringing properties into the BMR
        Program, which includes long-term affordability restrictions and limits equity
        gain, the programs would result in lost opportunities for home buyers to
        recognize equity gain as market conditions improve. This is one of the key trade
        offs that need to be considered when implementing a BMR program.
        Essentially, the BMR program recognizes the importance of promoting housing
        affordability and the creation of homeownership opportunities for those who may
        not otherwise be in a position to own a home and accepts the additional
        limitations that are a part of the program.

Proposed Program To Prevent Pending Foreclosures

Unlike the two proposed programs that address properties which have been foreclosed
and are currently vacant, staff is also considering a third program that would assist
families facing a pending foreclosure. The third program is called the Foreclosure
Prevention Program (FPP) and is detailed in Attachment D. The FPP was suggested by
a Los Gatos company, The EARN Group, which has developed an equity concept that
has applications for the current foreclosure crisis.

The program involves the identification of homeowners in default on their current
mortgage and working with their mortgage company to attempt to negotiate a new
mortgage at the home’s current market value. If a new mortgage cannot be negotiated,
a new loan would be originated through a neighborhood credit union if the current
mortgage holder will accept market value as payoff for the existing mortgage. The
mortgage amount would be reduced further with a City-funded deferred loan. Under
either scenario, the desired result is a performing mortgage for the mortgage company
and an affordable mortgage payment for the homeowner. The program would take
advantage of partnership arrangements with a homeowner counseling agency (most
likely Northern California Urban Development) and the EARN Group, with participation
by City staff to ensure that the City’s interests are protected. Staff is recommending
dedicating $1 million to the program. A total of 10 to 12 households are expected to be
assisted through the program over a five-year period, with an assessment of the need to
continue the program at that point.

There are several funding options and challenges related to the program. Funding
options include use of housing set-aside funds from the Redevelopment Fund, the BMR
Housing Fund, and the General Fund. Given the current economic climate and impacts
on the City’s General Fund, as well as having separate and distinct funding sources for
the City’s affordable housing programs, staff does not believe the General Fund should
serve as a source for the proposed program. That said there are additional limitations
associated with the use of housing set-aside funds or the BMR Fund. Both funds would
have housing affordability restriction requirements associated with their use, possibly
resulting in households assisted through the program being required to agree to 55 year
resale restrictions that would keep the unit affordable to future buyers. In essence, the
home would become part of the BMR Program with provisions to limit the profit realized
by the homeowner at the time of sale to ensure that the cost of the home is affordable to
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the next buyer. Staff has received feedback from the Silicon Valley Association of
Realtors about these provisions indicating that current homeowners are not likely to
agree to those restrictions and one of the EARN Group partners indicated a reluctance
to participate if the program were to be designed with those restrictions in place.

Since there have been changes to the program design since it was presented to and
approved by the Housing Commission, staff would like direction from Council on
whether to proceed with the program design with affordability restrictions (to be
determined by the Housing Commission) and brought back to Council at a later date or
to discontinue work on the program altogether.

IMPACT ON CITY RESOURCES

The total funding request for the two recommended programs is $2.5 million, including
$2 million for NSP and $500,000 for the Habitat Program. The BMR fund, as of the end
of the 2007-2008 fiscal year had a total of $8.53 million, including $4,482,000 in funds
designated to the PAL first time homebuyer loan program and $4,052,592 in
undesignated funds.

State regulations require that BMR funds held for five years or more (excluding interest
earned) must be dedicated to affordable housing programs or projects. If funds are not
dedicated during this time frame, the funds would need to be returned to project
developers. The PAL program designation of $4,482,000 is currently serving to meet
the State requirement. However, the City will see a spike in the amount of funds
needing to be designated to a specific affordable housing program in the 2011-12 fiscal
year due to the BMR in lieu fees paid by the Rosewood Hotel project in the 2006-07
fiscal year. Dedication of $2.5 million of the BMR Fund for the proposed foreclosure
programs would help to fulfill the State requirement in future years.

The Federal government is currently preparing a Notice of Funding Availability for a
competitive round of funding for federal Neighborhood Stabilization Program. Staff will
continue to monitor that potential source of additional funding.

POLICY ISSUES

The proposed foreclosed properties programs and pending foreclosure prevention
program are consistent with the purposes of the BMR Program as stated within the
BMR Guidelines and as further refined by City Council in 2005. Specifically, the BMR
Guidelines and subsequent clarification by Council allow for the use of BMR funds for
the rehabilitation of uninhabited structures and the purchase and rehabilitation of
housing for resale as BMR units. The NSP and Habitat programs would help to
implement these broad purposes of the BMR Program. Additionally, the BMR
Guidelines allow the use of funds for the provision of below market rate financing for
homebuyers and the reduction of home purchase prices to provide affordable units,
which is consistent with the intent and structure of the FPP proposal. The designation
of BMR funds to the acquisition and rehabilitation programs acknowledges the need to
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address a pressing concern in the community which has been hard hit in the foreclosure
crisis.

ENVIRONMENTAL REVIEW

The foreclosure program activities are not projects under the current California
Environmental Quality Act Guidelines.



________________________                                               ________________________
Douglas Frederick                                                      Arlinda Heineck
Housing Manager                                                        Community Development Director
Report Author


PUBLIC NOTICE

Public Notification was achieved by posting the agenda, with this agenda item being
listed, at least 72 hours prior to the meeting. City staff presented details of the program
to the Belle Haven Homeowners Association on April 1, 2009 and numerous articles
have appeared in local newspapers around the bay area in recent months.


ATTACHMENTS

A.     Resolution
B.     Neighborhood Stabilization Program Description
C.     Habitat Acquisition and Rehabilitation Program Documentation
D.     Foreclosure Prevention Program Description
E.     BMR Guidelines
F.     Summary of BMR Fund


h:\Staff Reports\City Council\2009\050509 - Foreclosure Programs.doc
                                                            ATTACHMENT A

                              RESOLUTION NO. _____

  RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MENLO PARK
   AUTHORIZING TWO DISTINCT ACQUISITION AND REHABILITATION
 PROGRAMS TO ADDRESS THE IMPACT OF FORECLOSURES IN MENLO
  PARK AND RESERVING $2.5 MILLION OF THE BELOW MARKET RATE
        (BMR) HOUSING FUND FOR USE IN THE PROGRAMS

WHEREAS, the foreclosure crisis that has had an impact on communities cross
the country has been felt in Menlo Park; and

WHEREAS, the City of Menlo Park wishes to prevent the crisis from causing
deterioration in Menlo Park neighborhoods through the implementation of an
acquisition and rehabilitation program that turns foreclosed homes into
homeownership opportunities for low- and moderate-income households on the
BMR wait list; and

WHEREAS, Habitat for Humanity has petitioned the City for funding to perform
similar services to purchase and rehabilitate homes for sale to very low-income
households on the BMR wait list;

NOW, THEREFORE, IT IS RESOLVED: That the City of Menlo Park is hereby
authorized to dedicate $2.5 million from the BMR Housing Fund for the
Neighborhood Stabilization Program ($2 million) and the Habitat Acquisition and
Rehabilitation Program ($500,000) and proceed with implementation.

I, Margaret S. Roberts, City Clerk of Menlo Park, do hereby certify that the above
and foregoing Council Resolution was duly and regularly passed and adopted at
a meeting by said Council on the fifth day of May, 2009, by the following votes:

AYES:        COUNCIL MEMBERS:

NOES:        COUNCIL MEMBERS:

ABSENT:      COUNCIL MEMBERS:

ABSTAIN:     COUNCIL MEMBERS:


IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Official
Seal of said City on this fifth day of May, 2009.


Margaret S. Roberts, MMC
City Clerk
Menlo Park Neighborhood Stabilization
Program

Introduction

As part of H.R. 3221, the U.S. Congress passed
legislation to fund the Neighborhood Stabilization
Program (NSP), designed to fund acquisition and
rehabilitation of foreclosed properties in areas where
the number of foreclosures were high. The formula
used by the U.S. Department of Housing and Urban
Development did not identify Menlo Park or San Mateo
County for funding in the program. A similar formula
utilized by the State of California for distribution of its
allocation of NSP funding also overlooked Menlo Park and San Mateo County.
As a result, City staff has designed a local program based on the NSP model
using resources from Below Market Rate (BMR) fund. The proposed program
would dedicate $2,000,000 of the BMR fund, which as of the end of Fiscal Year
2007-2008 had a total of $4,052,492 in undesignated funds from a total fund of
$8,534,592. The PAL program was funded for $4,482,000, the remainder of the
fund. The program would work to stabilize the Belle Haven neighborhood, where
the majority of foreclosures in Menlo Park are concentrated, by bring the
properties in the program up to like-new condition and selling those homes to
households on the BMR wait list at prices that are affordable to those households
according to the typical price calculation for the BMR program.


Need for the Program

While foreclosures in Menlo Park as a whole have been relatively light when
compared to other areas of the state, the Belle Haven neighborhood has been
severely impacted. As of March 2009, the website realtytrac.com showed a total
of 91 homes in Menlo Park that are somewhere in the foreclosure process. That
total included 36 bank-owned homes, 12 homes at auction, and 43 homes in
default, but not yet foreclosed. Almost all the homes listed on the site are in the
Belle Haven neighborhood. Not all of these homes are currently vacant and only
a few of them are identified as for sale, as evidenced by for sale signs in yards.
A recent survey of the Belle Haven neighborhood by Housing Division staff
indicated a total of 12 properties for sale, three of which were identified as
foreclosure properties. There were others homes in the neighborhood that
appeared to be vacant, but no signs were present to indicate their status as for
sale or in foreclosure. A large number of vacant homes in a neighborhood can
have a destabilizing effect through lack of maintenance and vandalism. While
the banks that own foreclosed properties are responsible for the maintenance of
the home and grounds, few live up to these responsibilities. This program will
cure some of these problems, creating new homeownership opportunities for the
BMR wait list.


Design of the Program

Conceptually, the operation of the program is simple. Housing Division staff will
monitor the list of foreclosed properties for sale, evaluate the rehabilitation needs
of units that fit within the parameters of the program relative to purchase price,
and purchase those homes where the total projected costs are estimated to be
within $150,000 of the projected sales price. The City will place a bid on the
home through a real estate agent or through direct negotiations with the bank.
The City’s Rehabilitation Specialist will prepare a scope of work for each home
purchased in the program, put the work out to bid, select a responsible bidder,
and oversee the rehabilitation of the property. Upon completion of the work a
buyer will be selected from the BMR wait list to buy the home at a price
determined by the typical calculation used for BMR homes. Staff expects that
each home ushered through the program will result in a net loss to the program
fund, ranging from $50,000 to $150,000 depending on the cost of the home and
the rehabilitation needs. Each sale will include the BMR program’s 55 year deed
restriction to assure continued affordability.


Program Objectives

The specific objectives of the NSP are:

   •   Relieve the stress on the Belle Haven neighborhood caused by the
       presence of vacant properties;
   •   Improve the condition of the housing stock in the neighborhood;
   •   Provide new homeownership opportunities for households on the BMR
       wait list;
   •   Utilize green building standards on rehabilitation activities, thus reducing
       utility costs for the homeowners;
   •   Strengthen the community by ensuring more homeownership
       opportunities; and
   •   Meet statutory requirements for the designation of BMR funds for the
       development of affordable housing.


Costs of the Program

The costs associated with the program will include:

   •   The price of the home ($200,000 to $300,000 expected);
   •   Closing costs on the purchase of the home (generally about 3% of the
       sales price);
   •   Rehabilitation expenses ($100,000 to $150,000 depending on condition);
   •   Commission for the City’s realtor on the sale to a BMR household (about
       $9,000 per unit);
   •   Purchase Assistance Loan (PAL) to assist the buyer in the purchase of the
       home (a maximum of $75,000 or 20 percent of the sales price whichever
       is less); and
   •   Closing costs on the sale of the home (generally about 3% of the sales
       price).

The costs will be partially offset by the sale of the home.

Negotiations with Banks

Where possible, negotiations with banks could result in a coordinated effort to
purchase bank-owned properties at reduced prices. If this approach is
successful, banks that own multiple properties in the Belle Haven neighborhood
might find it beneficial to deal with the City to reduce their costs of sales. In the
case of short sales (sales of pre-foreclosure units), the banks can save the costs
of foreclosure on those units where the owners have already abandoned the
properties. Staff will pursue these options in coordination with Habitat for
Humanity which proposes to conduct a similar program for very low-income
households (see Targeted Clients section below).


Green Building Practices

The program will incorporate green building practices into the rehabilitation of all
properties to reduce owner utility costs and the impact of the home on the
environment. These practices will include:

   •   Solar panels where possible;
   •   Energy Star rated double pane, low-e windows and doors;
   •   Energy efficient heating system;
   •   40 to 50 year reflective cool composition shingles;
   •   High R recycled content, low formaldehyde insulation in ceilings and walls;
   •   LCD lighting;
   •   Energy Star rated appliances;
   •   Bamboo, linoleum, or engineered flooring;
   •   Water efficient fixtures;
   •   Tankless water heaters;
   •   Water cycling system;
   •   Materials made from recycled content (carpets, wood, etc.);
   •   Sun tunnels for natural lighting; and
   •   Engineered roof systems (where a new pitched roof is required).


Target Clients

The target income range for the program will be from 60 to 110 percent of the
area median income, adjusted for family size. Habitat for Humanity is preparing
a similar program that will serve clients from 40 to 60 percent of the area median
income as a compliment to the City’s program.


Target Area

The program will primarily address housing in the Belle Haven neighborhood.
There could be instances, however, where individual properties in other areas of
Menlo Park are identified that fit within the program cost guidelines. If such
properties are located, they will be included in the program.


Funding Authorization and Limitations

The program proposal requests a total of $2,000,000 from the BMR fund for
project activities. While the cost of each home will vary according to the
condition of the home and rehabilitation needs, the target limit will be $500,000
per home. With sales prices to BMR buyers expected to be approximately
$350,000, each unit could lose up to $150,000 per sale. If that were the case, 13
homes could be bought, rehabilitated, and sold through the program. As will be
shown in the examples below, these costs may be considerably lower given the
individual circumstances of a particular property. There could be instances
where a home sale might actually break even, extending the program resources
to address more units. Target properties will be priced at below $350,000 or
perhaps a little higher if lower rehabilitation costs are expected to compensate for
the high price. Funds received from the sale of homes will be rolled back into the
program for use in the purchase and rehabilitation of another home. The
program would be allowed to run for a span of five years and reviewed by
Council for extension or termination based on the success of the program and
the strength of the housing market at that time.


Example Projects

Two homes in Belle Haven have been toured by City staff. Cost estimates for
the rehabilitation of each unit were prepared by the City’s Rehabilitation
Specialist. These two units are expected to be at the lower end of what might be
expected for the program since the two units were the lowest priced units
currently available for sale in Belle Haven. Both houses have been on the
market for a relatively long time (332 and 133 days) and are reasonably priced
($250,000 and $270,000). The Rehabilitation Specialist took detailed notes in
order to calculate expected rehabilitation costs for each home.

Example 1: The cost estimate for the home priced at $250,000, which has two
bedrooms and one bath, includes new water service, new low-e windows,
complete insulation of the home, new electrical service, new sheetrock, LED
lighting throughout the home, new central heating, tankless water heater, new
kitchen cabinets, new range, granite countertops with tile backsplashes, new
bathroom fixtures, all new flooring (tile in kitchen and entry, carpet in bedrooms
and hallway, laminate flooring in living room), three foot-wide doorways
throughout (for accessibility), new entry doors, new garage overhead door,
colorcoat stucco exterior, and a back patio and walkway. The total cost of these
improvements would be approximately $86,000. The addition of solar panels
would cost approximately $30,000 net of rebates and tax credits. The total costs
to the program would be approximately $366,000. With the reduced energy
costs resulting from the solar panels and energy efficiency improvements and no
homeowner association fees, the approximate sales price to a BMR buyer would
be around $320,000. In this instance, recognizing that the purchase price is the
lowest of the currently listed foreclosure homes, the net loss to the program
(purchase price + rehab costs – sales price) would be about $46,000. There
would be some additional costs related to closing that would increase that figure
by a few thousand dollars. With a $64,000 PAL loan, the estimated income
requirement for a buyer would be around $68,000 per year. For a two person
household, that would be about 89 percent of the area median income.

Example 2: The second home, a three bedroom one bath home priced at
$270,000, would require just over $100,000 in rehabilitation costs, including
similar rewiring, new fixtures, insulation, low-e windows, and finishes described
for the first home above. Again, solar panels would add an additional $30,000 to
the cost. The total cost for the home would be around $400,000, plus some
closing costs. The sales price would be about $370,000. The loss to the
program from the sale would be about $30,000, plus closing costs associated
with the sale. With a $74,000 PAL loan, the estimated income requirement for a
buyer would be about $76,000 per year. For a three person household, that
represents approximately 89 percent of the area median income.


Prevailing Wage Requirements

The City Attorney has determined that the rehabilitation work performed on these
units will require staff to monitor the wage rates paid to workers. All labor rates
will have to comply with published prevailing wages. Staff expects that this
requirement will add 30 to 40 percent to the cost of rehabilitation.
Impact on the Community

The desired impact on the Belle Haven community that should be fostered
through this program is the replacement of vacant housing stock in relatively poor
condition with owner-occupied housing in good-as-new condition. The owners
will live in energy efficient units, with solar panels that generate sufficient power
to meet most of their energy needs. Over time, as property values increase once
again, future buyers will see the rehabilitation effort as an example of possible
improvements to the existing housing stock in Belle Haven. Most importantly, the
vacant properties will no longer be eyesores in the community, nor potential
locations for vandalism.


Conclusion

The Neighborhood Stabilization Program will be a cost-effective tool for the
creation of new BMR units, address the impact of foreclosures on the Belle
Haven neighborhood, improve the condition of housing stock in Belle Haven, and
fulfill the City’s obligation to designate part of the BMR fund within its statutory
deadline. All processes are currently in place to allow this program to move
forward, including the ability to evaluate the housing rehabilitation needs of each
unit considered for the program and the identification of buyers through the BMR
program. There is also a large number of potential buyers on the BMR wait list.
Undesignated funding is available for the program through the BMR fund, with
additional funding remaining to address other program needs that might be
identified in the future.


H:\Staff Reports\City Council\2009\050509 - Attachment B Neighborhood Stabilization Plan.doc
                                  Neighborhood Revitalization Program
                                  Proposal to Partner with the City of Menlo Park

Executive Summary

          In the face of our nation's foreclosure crisis, a rapid and coordinated response is critical as an un-
precedented number of foreclosures are leaving vacant homes that are falling victim to blight and putting
communities at risk of destabilization. The Belle Haven community of Menlo Park is suffering an alarming
rate of foreclosures, jeopardizing the significant strides this community has taken over the past decade to
build a safe, strong and vibrant neighborhood. In response to this very immediate need, Habitat for Human-
ity Greater San Francisco plans to implement their Neighborhood Revitalization Program.
          Habitat for Humanity Greater San Francisco is uniquely poised to provide a long-term solution to
the foreclosure crisis and to prevent the destabilization of this community. By relying on its proven model
of success, Habitat Greater San Francisco proposes a simple yet effective plan to:

    1) Acquire vacant bank-owned (REOs) homes in the Belle Haven neighborhood of Menlo Park;

    2) Refurbish them with the help of volunteer labor, soliciting participation from Belle Haven residents
    in addition to selected families’ required “sweat equity” participation;

    3) Refurbish them with as many green building features as economically possible, including energy
    efficient appliances, hard surface flooring for improved indoor air quality, and sustainable replacement
    building materials,

    4) Transform blighted houses into beautiful, well maintained Habitat family homes;

    5) Start family selection outreach from the City BMR list, then if necessary to families who live and/or
    work in Menlo Park;

    6) Sell them to qualified families with low to very low incomes at no down payment and with a zero
    percent interest mortgage.

Partnership Overview

          Habitat proposes to serve households in its traditional income range of 40-60% of Area Median
Income. If the City implements a similar program, that will serve households above 60% of Area Median
Income.
          To avoid competing in bids for available properties Habitat and their broker will maintain open
communication with City staff regarding potential acquisitions. Furthermore, for properties where City
funding will be applied, Habitat is willing to clear their offers through the City prior to formal submittal to
the listing party.
          Habitat is requesting the City initially allocate $500,000 to Habitat’s first phase of their Neighbor-
hood Revitalization Program. If this first phase of the program proves successful, Habitat intends to request
an additional $500,000 of funding to supplement the second phase. At this stage, the first phase would pro-
vide housing to five households earning 40-60% AMI. Habitat would apply $100,000 of City funds to each
property, the balance of funding from Habitat committed funds and community support.

For each property that Habitat acquires and refurbishes using City funding, Habitat will provide:

    •    Pro forma and budget displaying sources and uses
    •    Schedule of performance identifying milestones vetted with City staff
    •    Forecasted sales prices and mortgage calculations for range of income
    •    Final cost data reconciling City disbursements
REO Program

Overview of Acquisition Process:


1) Site Identification

   a) Identify candidate sites through comparative analysis.

   b) Perform preliminary site evaluations to determine probable rehabilitation costs.

   c) Define offer price on the basis of best available facts.

2) Offer and Due Diligence – Part I

   a) Prepare offer including contingency for fee inspections and reports.

   b) Once offer is accepted, open escrow with negotiated earnest money. (=< 3% of purchase price,
      assumption is 1%).

   c) Obtain and review Preliminary Title and Environmental Reports for incurable issues.

   d) Order reports and inspections as appropriate.

       i)   Termite, Foundation, Major Systems.

3) Offer and Due Diligence – Part II

   a) Availability of Insurance.

       i)   Confirm availability of suitable homeowner’s insurance.

   b) Lead Pain, Asbestos, Mold Inspection and Remediation.

            (1) Contingent upon red flags, age of property, etc.

   c) Seller Disclosures and other Red Flags.

       i)   Perform appropriate inspections for issues revealed in reports and disclosures.

4) Final Assessment and Renegotiation

   a) Summarize costs of unanticipated issues.

   b) Determine go/no-go.
   c) Renegotiate purchase price as appropriate.

   d) Cancel and obtain refund of earnest money.         OR

   e) Remove contingencies and close escrow.

5) Closing Process

   a) Title Company prepares final closing documents.

   b) Habitat Greater SF prepares funds for closing.

   c) Parties sign, Title insures clear title (premium policy is purchased, not standard).

   d) Escrow records transfer of ownership.

   e) Due diligence to closing may be from 30 to 60 days.

6) Variables

   a) If properties are offered prior to being listed with a real estate agency, the offer process,
      allocation of costs, and necessity to order certain reports may differ from properties which are
      already listed and may have some acceptable report and due diligence provided.

   b) Depending upon whether the property is listed we may or may not need a real estate brokerage to
      represent Habitat Greater SF.

7) Customary Transaction Costs – San Mateo County

   a) Seller

       i)   Natural Hazard, Environmental Report.

       ii) County Tax, 50% of City Tax if applicable.

       iii) REO properties: often lender pays for escrow and owner’s policy of title insurance but not
            absolute. Habitat Greater SF may prefer to have control over that.

       iv) Real estate commission if applicable.

   b) Buyer

       i)   All inspection reports.

       ii) Escrow and title fees.

       iii) 50% of City Transfer Tax if applicable.
8) Customary Transaction Costs – Marin County

   a) Seller

      i)   Real estate commission if applicable.

      ii) Document preparation fees for the deed.

      iii) Documentary Transfer Taxes.

      iv) Payoffs for all loans against the property.

      v) Judgments, liens, etc. against the seller.

      vi) Recording charges to clear documents of record against the property.

      vii) Prorated taxes.

      viii)    Any unpaid HOA dues

      ix) Any tax delinquencies.

      x) Notary fees incurred by seller.

      xi) Bonds or assessments (as agreed in contract).

      xii) Home warranty (as agreed in contract).

   b) Buyer

      i)   Title insurance.

      ii) ALTA inspection fees.

      iii) Escrow fees.

      iv) Applicable document preparation fees.

      v) Recording charges for documents cast into buyer’s name.

      vi) Prorated taxes.

      vii) HOA transfer fees.

      viii)    Loan charges. (N/A)

      ix) Interest on new loan(s) from the date of funding to 30 days prior to date of first payment.
          (N/A)
x) Inspection fees (Pest, Home, Roof, etc.).

xi) Homeowners’ policy’s first year.

xii) Notary fees incurred by buyer.

xiii)   Bonds or assessments (as agreed in contract).

xiv) Home warranty (as agreed in contract).
                                 Neighborhood Revitalization Program
                                 Proposal to Partner with the City of Menlo Park


SELECTION CRITERIA

Eligibility for Application
    • Family members must have lived together for 12 consecutive months at time of selection (so as to
          establish consistent household)
    • Family must have lived or worked in the city where Habitat home will be for at least one year at
          time of selection.*
    • Must not have owned or co-owned real estate for three years at time of selection.
    • All household members over 18 years old who are not full time students, whose income will con-
          tribute to the household gross income, must be a U.S. citizen or a legal permanent resident of the
          U.S. (green card).

*If all efforts have been exhausted by Habitat to find a family that lives or works in the city where the NRP
development is located, selection can be opened to any family within the county where the REO resides. At
time of final selection, priority is given in the following order:

    •    Households that live or work in the city where NRP development is located, who are part of a pre-
         established housing preference program (ie: BMR families)
    •    Households that live or work in the city where NRP development is located
    •    Households that live in the county where NRP development is located


Beyond eligibility requirements, selection of a household for the Habitat Greater San Francisco Homeown-
ership Program is based on three primary criteria:

Need for Housing
    • Examples include unsafe living conditions, temporary housing, burdensome cost, unsanitary living
         conditions, overcrowding, etc...
Ability to Pay a Mortgage
    • Family falls between 40%-60% of the area median income, has steady employment history, mini-
         mum credit score of 650, debt-to-income ratio below 45%
Willingness to Partner with Habitat
    • Family is willing to participate in whole of Habitat program including sweat equity, homeowner
         education workshops, attendance at Habitat events (such as groundbreakings and dedication), par-
         ticipation in interviews, etc.
                                  Neighborhood Revitalization Program
                                  Proposal to Partner with the City of Menlo Park

OUTREACH/SELECTION TIMELINE

When Habitat Greater San Francisco is aware of an upcoming project or available home, informing the pub-
lic is the next step. Outreach for selection of a family can take between 3-6 months. The outreach/selection
process is comprised of several steps as outlined below with approximate timelines:

    •    (ongoing ) Before location of development is even final, Homeowner Development assembles a list
         of all businesses, organizations, non-profits, schools, public agencies, etc... in possible NRP devel-
         opment locations, who are interested in posting/distributing information for upcoming selection
         process.
    •    (week 1) Dates for orientations set (usually 2, with one on a weekday evening and one on the
         weekend).
    •    (week 2) Flyers and mailers created by HDD to alert public of upcoming selection process, orienta-
         tion dates, and pre-requisites of the Habitat program. Flyers sent to all persons/groups on contact
         list. Mailer sent to all residents in .5 to 1 mile radius (depending on density) of NRP development
         site and any family in qualified areas in Habitat's database (families who have previously joined
         Habitat's mailing list by filling out a Pre-Application).
    •    (Recruitment for family selection committee members is ongoing) Family selection committee con-
         tacted about assisting with selection process.
    •    (week 5) Leafleting of area immediate to NRP development location.
    •    (week 6 Applications distributed at orientations. Turn-in meeting dates announced.
    •    (week 8 & 9) Applications accepted at turn-in meetings.
    •    (week 9) Preliminary financial review done by HDD staff .
    •    (week 10) Applications sent to financial institution for official financial review and credit report-
         ing .
    •    (week 13)Home interviews scheduled. Home interview takes place at home of applicant (with all
         household members in application present) and is facilitated by 2 members of family selection
         committee.
    •    (week 17) After all home interviews have been conducted, family selection committee meets to
         discuss remaining eligible households for selection. Committee makes recommendations. If more
         families are recommended than there are homes, a randomized drawing will take place of those
         applicants.
    •    (week 18) Family notified of selection.
    •    (week 19) Family signs partnership agreement with Habitat in order to move forward and begin
         Sweat Equity.

*At any point in selection process, if a family no longer meets program qualifications, a letter is sent stating
exact reason they will no longer be moving forward in the selection.
                                 Neighborhood Revitalization Program
                                 Proposal to Partner with the City of Menlo Park

SWEAT EQUITY

Each selected household must complete 500 hours of sweat equity toward owning their home. Friends and
family can help contribute towards the completion of the Candidate Applicants’ sweat equity hours. Candi-
date Homeowners will have about 3.5 months to complete their sweat equity and must work onsite at least
once per month until the completion of their development or their hours.

     Number of Applicants       Candidate Applicants              Family, Friends, &       Total Hours
     to be listed on title of   Must Complete a Minimum           Community Members
     home                                                         Can Contribute
     1                          125                               375                      500
     2                          250                               250                      500

As the time frame for completion of sweat equity is so short for the NRP development, Habitat will play a
strong role in assisting the applicants with finding family, friends, and community members to assist them.

Acceptable Forms of Sweat Equity
   • Construction (age 16 and up)
   • Office work (age 14 and up)*
   • Document translation (credited per word)
   • Interpretation at a Habitat event
   • Construction team leader (worker must be trained and certified by construction staff in this role)-
        hours will be credited 1.5 for hours served in this capacity only.
   • Public relations (defined as a media interview or public speaking engagement arranged by Habitat
        only)-hours will be credited x2
   • Childcare for other families during Habitat activities (age 17 and up) - hours will be credited per
        time worked and not per child cared for
   • Assistance at special events (e.g. house dedications, fairs, etc.)
   • Special projects as requested by Habitat
   • Attendance at Habitat sponsored trainings/workshops by Candidate Homeowners
   • Preparation of food for Habitat events (if requested by Habitat only)
   • Travel time to project (credited only on request if a long commute is required for a special project;
        travel to and from the office and construction site is not credited)
   • Each “A” on Candidate Family’s children’s report cards will count toward 1 hour of Sweat Equity
        (copy of report card must be given as proof.)
   • Volunteer work with other organizations local to development's community (must be pre-approved
        by HDD)
   • Taking ESL or Money Management workshops/classes (must be pre-approved by HDD)

*Reasonable accommodations can be granted under extraordinary circumstances through written petition
to the Homeowner Development Department
                              March 2009




                  Neighborhood Revitalization Program
                  Proforma for the City of Menlo Park

Hard Costs
Acquisition                                          $       300,000
Permits & Approvals                                  $         1,500
Site Development                                     $         1,500
Site Supervision / Volunteer Management              $         6,400
Construction Materials                               $        16,000
Greening / Energy Efficiency (windows, appliances,   $        12,000
HVAC, native landscaping)
Architects / Engineers                               $         1,000
RE Taxes during Construction (6 mos. @ 1.1%)         $         1,600
SUB-TOTAL                                            $      340,000

Soft Costs
Contingency – 5%                                     $        15,000
Closing                                              $         3,000
Legal                                                $         2,000
Admin. Overhead                                      $         5,000
Developer’s Fee                                      $         5,000
Debt Service                                           $            -
Construction Interest                                  $            -
SUB-TOTAL                                            $       30,000

Total                                                $      370,000

Funding
Habitat                                              $   (200,000.00)
Rebate of Buyer's Broker Commission                  $     (8,000.00)
Menlo Park Subsidy (Request $125,000)                $   (100,000.00)
Community Support                                    $    (37,000.00)
SUB-TOTAL                                            $   (345,000.00)
Funding Gap                                          $    (25,000.00)

Total                                                $      (370,000)
                                                                                          March 2009




                                             Neighborhood Revitalization Program
                                         Mortgage Calculator for the City of Menlo Park


           Annual Homeowner expenses                                                  San Mateo County Median Income FY 2008        Average Monthly Payment                $      1,562.45
           Taxes                     $                4,750.00                        Household Size Median Income                  Average Mortgage Term                       22.61
           Insurance                 $                  600.00                                    4 $                 95,000.00     Average Mortgage Term Very Low              29.53
           Utilities                 $                  600.00                                    5 $                102,600.00     Avereage Mortgage Term Low                  15.70
           HOA ($320/mo.)            $                     -                                      6 $                110,200.00
           Subtotal before Principal $                5,950.00                                    7 $                117,800.00
           Principal / Sale Price       $         380,000.00

                                                                        Very Low                                                                                               Very Low
Assume family of 4 annual income $                                  $    56,550.00                     Assume family of 5 annual income $                                  $      61,050.00
Total Housing (30% of gross annual income)                          $    16,965.00                     Total Housing (30% of gross annual income)                          $      18,315.00
Mortgage principal (annual)                                         $    11,015.00                     Mortgage principal (annual)                                         $      12,365.00
Mortgage principal (monthly)                                        $        917.92                    Mortgage principal (monthly)                                        $       1,030.42
Mortgage term years @ sale price of    $380,000                            34.50                       Mortgage term years @ sale price of             $380,000                      30.73
Ideal 30 yr. mortgage                                               $ 330,450.00                       Ideal 30 yr. mortgage                                               $    370,950.00

                                                                        Very Low                                                                                               Very Low
Assume family of 6 annual income $                                  $    65,600.00                     Assume family of 7 annual income $                                  $      70,100.00
Total Housing (30% of gross annual income)                          $    19,680.00                     Total Housing (30% of gross annual income)                          $      21,030.00
Mortgage principal (annual)                                         $    13,730.00                     Mortgage principal (annual)                                         $      15,080.00
Mortgage principal (monthly)                                        $     1,144.17                     Mortgage principal (monthly)                                        $          1,256.67
Mortgage term years @ sale price of    $380,000                              27.68                     Mortgage term years @ sale price of             $380,000                          25.20
Ideal 30 yr. mortgage                                               $ 411,900.00                       Ideal 30 yr. mortgage                                               $    452,400.00


                                                                       Low                                                                                                       Low
Assume family of 4 annual income $                                  $  90,500.00                       Assume family of 5 annual income $                                  $      97,700.00
Total Housing (30% of gross annual income)                          $  27,150.00                       Total Housing (30% of gross annual income)                          $     29,310.00
Mortgage principal (annual)                                         $  21,200.00                       Mortgage principal (annual)                                         $      23,360.00
Mortgage principal (monthly)                                        $   1,766.67                       Mortgage principal (monthly)                                        $       1,946.67
Mortgage term years @ sale price of $380,000                               17.92                       Mortgage term years @ sale price of             $380,000                       16.27
Ideal 30 yr. mortgage                                               $ 636,000.00                       Ideal 30 yr. mortgage                                               $    700,800.00

                                                                       Low                                                                                                       Low
Assume family of 6 annual income $                                  $ 104,950.00                       Assume family of 7 annual income $                                  $    112,200.00
Total Housing (30% of gross annual income)                          $ 31,485.00                        Total Housing (30% of gross annual income)                          $     33,660.00
Mortgage principal (annual)                                         $ 25,535.00                        Mortgage principal (annual)                                         $      27,710.00
Mortgage principal (monthly)                                        $   2,127.92                       Mortgage principal (monthly)                                        $       2,309.17
Mortgage term years @ sale price of $380,000                               14.88                       Mortgage term years @ sale price of             $380,000                       13.71
Ideal 30 yr. mortgage                                               $ 766,050.00                       Ideal 30 yr. mortgage                                               $    831,300.00




        For City of Menlo Park Housing and Redevelopment DIvision                             1                                          Habitat for Humanity Greater San Francisco
                                                                                     10/2/2009
                                                                                 Homeowner Selected
                              4/1/2009            6/4/2009
                                Offer         Close of Escrow                                           12/1/2009
                                                                                                  New Homeowners Move In

            1/23/2009 - 4/1/2009    4/2/2009 - 6/3/2009                                                                              3/1/2010
              Site Identification      Due Diligence                      6/5/2009 - 12/1/2009                                Sweat Equity Completed
                                                                         Construction & Repairs




      2/1/2009 3/1/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/1/2009 9/1/2009 10/1/2009 11/1/2009 12/1/2009 1/1/2010 2/1/2010

1/12/2009                                                                                                                            3/1/2010

                                                      4/2/2009 - 10/3/2009                                10/5/2009 - 2/26/2010
                                                Outreach & Homeowner Selection                                Sweat Equity


                                                                                                         12/1/2009
                                                                                                   Construction Complete


                                                                                                                                                Page 1
Menlo Park Foreclosure Prevention
Program

Introduction

As part of H.R. 3221, the U.S. Congress passed
legislation to fund the HOPE for Homeowners
Program, designed to help households embroiled in the
foreclosure process. The program provides
homeowners in financial trouble the opportunity to
refinance their sub-prime home mortgage into a fixed
rate 30 year mortgage. Interest rates will be based on
prevailing rates in the market. Borrowers must meet
certain eligibility criteria and agree to share any market
appreciation with the Federal government upon sale of the property.
Unfortunately, the conditions in the local housing market make this program
difficult to use. Homeowners must get their mortgage companies to agree to
reduce the mortgage payoff amount by at least 10 percent and initiate a new
mortgage with one of a list of lenders approved by the U.S. Department of
Housing and Urban Development. Individually, most homeowners have had little
success getting access to the appropriate person at their mortgage company to
have the discussions necessary to get mortgage reduction agreements, and in
California the reduction needed to approach current market values is
approximatley 40 percent, which is unacceptable to most lenders. As a result,
any attempt at foreclosure prevention must combine the assistance of financial
counselors with access to mortgage lenders with a process that can identify
homeowners that could qualify for a restructured mortgage with some chance of
successfully maintaining that mortgage and to oversee the management of the
process of negotiating with the lenders to resolve the market value issues.


Need for the Program

While foreclosures in Menlo Park as a whole have been relatively light when
compared to other areas of the state, the Belle Haven neighborhood has been
severely impacted. As of April 2009, the website realtytrac.com showed a total of
91 homes in Menlo Park that are somewhere in the foreclosure process. That
total included 36 bank-owned homes, 12 homes at auction, and 43 homes in
default, but not yet foreclosed.


Design of the Program

The program design is similar to what the Federal government has authorized
through the HOPE for Homeowners Program, but with an additional provision for
assisting the homeowner in their negotiations with their mortgage lender and the
inclusion of City funds in an equity position to reduce the mortgage amount to
make it more affordable for the homeowner. The program would have four steps,
listed below:

   1. Identify qualified applicants – the program would work with homeowners
      who are in relatively good financial condition, with the exception of their
      ability to meet their mortgage obligations. They must be current on their
      credit cards and auto payments. They must meet the income qualification
      of redevelopment fund assistance; earning below 110 percent of the area
      median income (AMI). Additionally, the resulting mortgage payment and
      other housing expenses combined must be less than 35 percent of the
      income of a household earning 110 percent of the AMI for the applicant’s
      household size. Northern California Urban Development, which funded
      the Community Trust Credit Union, is active in East Palo Alto and Menlo
      Park and might be an appropriate resource for this process.

   2. Negotiate with the current mortgage holder – the program would work with
      the homeowner to open negotiations with their current mortgage holder to
      attempt to reduce the mortgage principal to reflect the current market
      value of the home. Early discussions with area mortgage lenders indicate
      some receptiveness to this. Lenders have been receiving offers from
      investors to purchase their non-performing loans, but at 20 to 30 percent
      of the mortgage amount. Lenders appear to be resisting this level of loss.
      Discussions indicate, though, that they would be interested in proposals
      that limit their loss to 40 to 50 percent of the mortgage amount and could
      also be interested in originating the new mortgage themselves. Since
      market values in parts of Menlo Park have dropped by about 40 percent,
      based on recent market sales, the prospects for success seem
      reasonable. The EARN Group, discussed below, would assist the
      homeowner with these negotiations.

   3. Originate a new mortgage at market value – lenders agreeing to reduce
      the mortgage payoff to market value would then have the opportunity to
      write the new loan themselves or take their payoff from a different lender.
      Representatives from the Community Trust Credit Union, a creation of
      Northern California Urban Development in East Palo Alto, have offered
      assistance with a new mortgage if the existing mortgage holder is not
      interested in holding it themselves.

   4. Reduce the mortgage amount with a deferred second mortgage from the
      City of Menlo Park – while the reduction of the mortgage amount to the
      current market value would be helpful in making the payment affordable
      as described above, some homeowners will need additional assistance in
      meeting those provisions. In those cases the City will loan up to 30
      percent of the current market value of those homes, based on the
      homeowner needs in meeting the affordability guidelines above. The
       City’s loan will be protected by a Deed of Trust. The loan will be repaid
       upon sale of the property by the homeowner. According to the provisions
       of the current BMR Guidelines, the use of the City loan will bring the home
       into the BMR program and invoke affordability and resale restrictions
       similar to those in force for the BMR program. The affordability restrictions
       will run for a period of 55 years. Future sales of the home will be arranged
       through the City of Menlo Park Housing Division to BMR wait list
       households at a price determined by the BMR resale guidelines and
       according to the resale provisions found in the guidelines in Section 5.5.
       Alternatively, Council could direct the use of General fund for this purpose
       without long-term affordability restrictions.


Program Objectives

The specific objectives of the Foreclosure Prevention Program (FPP) are:

   •   Assist homeowners in their efforts to avoid foreclosure;
   •   Prevent the introduction of more vacant properties; and
   •   Provide mortgage holders with alternatives to foreclosure.


Costs of the Program

The costs associated with the program will include:

   •   A deferred loan from the City of up to 30 percent of the current market
       value of each home;
   •   Closing costs on the new mortgage (borne by the homeowner); and
   •   A fee to the homeownership counselor to be determined, most likely to be
       paid by through a service contract with the City.


The EARN Group

The EARN Group is owned by David Shapiro who has extensive experience in
the finance industry with a concentration in retirement investments. The concept
that they are promoting grew out of an idea Mr. Shapiro had to help homeowners
diversify their investments, moving equity out of their homes and into other
securities that reduce their risk of loss in a down housing market. Unfortunately,
the housing market went down before the idea could be fully vetted. As a result
of the market downturn, however, the concept of selling home equity as a means
of foreclosure avoidance became an option that the EARN Group is discussing
with a few jurisdictions around the country. The EARN Group is based in Los
Gatos and they would like to see their concept tested on the peninsula and hope
to have a positive impact on the current market situation. They are offering their
services to negotiate with the current mortgage holders at no charge.


Target Clients

The target income range for the program will be up to 110 percent of the AMI
adjusted for family size. Clients would have to be current in their non-housing
debt obligations (credit cards and auto loans).


Target Area

The program will be available to any qualifying household in Menlo Park (see
Target Clients above).


Funding Authorization and Limitations

The program proposal requests a total of $1,000,000 from the BMR fund for
project activities. Funding for each home will be determined by evaluating the
needs of the applicant household. A maximum of $100,000 per home will be
allowed, amounting to no more than 30 percent of the market value of the home.
A total of 10 to 12 homeowners are expected to be assisted by the program. The
program would be allowed to run for a span of five years and reviewed by
Council for extension or termination based on the success of the program and
the strength of the housing market at that time.


Example Project

Below is an example of how the process would work.

     Current mortgage amount - $500,000
     Current monthly payment (principal and 9% interest) - $4,023.
     Current market value - $300,000
     Bank would write-off - $200,000
     City deferred loan (maximum) - $90,000
     New mortgage amount - $210,000
     New monthly payment (principal and 5% interest - $1,127.


Impact on the Community

Success with the FPP would work toward stemming the tide of foreclosed
properties in Menlo Park. It would reduce the number of potentially vacant
properties in the community that have the potential of becoming nuisances. It
would assist existing homeowners in their efforts to remain in their homes.

Conclusion

The Foreclosure Prevention Program is a cutting-edge effort to address the
foreclosure crisis with an emphasis on keeping the current homeowner in the
home. It addresses the apparent weaknesses in the Federal program with a
partnership between the City, the EARN Group, and a homeownership
counselor. The effort would impact 10 to 12 households, with minimal financial
risk to the City.


h:\Staff Reports\City Council\2009\050509 - Attachment D Foreclosure Prevention Program.doc
                                              BELOW MARKET RATE HOUSING RESERVE
                                                        BALANCE SHEET
                                                       6/30/07 AND 6/30/08


                                                                          6/30/2007      6/30/2008
                      ASSETS

                      BMR Housing Reserve Cash                          6,720,885.00   6,647,362.00

                      BMR Interest Receivable                             73,701.00      63,499.00

                      PAL Loans Receivable                              1,060,227.00   1,823,731.00


                      TOTAL ASSETS                                      7,854,813.00   8,534,592.00


                      FUND BALANCE

                      Designated for PAL Loans                          4,482,000.00   4,482,000.00
                      Designated for Housing
                      Project                                                      -              -
                      Designated for Unrealized
                      Investment Gain                                              -              -

                      Undesignated                                      3,372,813.00   4,052,592.00


                      TOTAL FUND BALANCE                                7,854,813.00   8,534,592.00

Source: 2007-2008 BMR Annual Report


H:\Staff Reports\City Council\2009\042109 – Attachment F BMR Fund.doc

								
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