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					         Replacement Housing in Maine


Current Status, Limiting Factors, and Strategies for Growth




                       Carlton Pinney
                      Penquis CAP, Inc.
                       Bangor, Maine


                        March, 2007
                                             Contents

Executive Summary…………………………………………………………………………………….. 3

Preface……………………………………………………………………………………………………….. 5

I. The Problem: Old Mobile Homes…………………………………..…………………………… 8
    A. Construction
    B. Fire Safety
    C. Depreciation
    D. Insurability
    E. Emotional & Social Factors
    F. Zoning
    G. The Scope of the Problem

II. The Solution: Replacement Housing Programs ………………………………………… 16

   A. How does a Replacement Housing Program work?
   B. Factors Limiting Replacement Housing Production
   C. Strategies for Growth

III. Proposals for Community Action Agencies………………………………………………… 20

IV. Proposals for Maine State Housing Authority................................................... 23

 V. Proposals for Dept. of Economic & Community Development……………………… 24

VI. Proposals for Rural Development …………………………………………………………… 25

VII. Proposals for the Maine Home Repair Network………………………………………. 29


Appendix I – Replacement Housing Funding Sources

Appendix II – Current Replacement Housing Financing Structure

Appendix III – Statewide Replacement Housing Funding Requirements

Appendix IV – Replacement Housing Financing Case Studies

Appendix V – A Model Replacement Housing Program for Maine

Appendix VI – Replacement Housing Flow Chart

Appendix VII – Ranch-style Replacement House Floor Plans



                                                                                                        2
Executive Summary
  1. Congress adopted the Federal Manufactured Housing and Safety Standards Act
     in 1974 which directed HUD to issue construction standards for mobile homes,
     which they did in 1976.

  2. Mobile homes manufactured prior to 1976 were not designed for northern
     climates and are thus very poorly insulated and drafty. They also suffer from
     leaky roofs, rotten floors, and water-damaged electrical systems. Studies have
     shown them to be fire-traps, resulting in a much larger loss of life and greater
     property damage then in later-model mobile homes. The consensus among
     Community Action Agency staff that regularly inspects old mobile homes is that
     most have deteriorated to the point where they are unsafe and unfit to live in.

  3. Maine’s housing stock includes a very large number of old mobile homes. The
     best current estimates, based on LIHEAP data, anecdotal evidence, and
     extrapolation, indicate that there are approximately 7,500 very old (pre-1978)
     mobile homes being lived in.

  4. Many municipalities across the country have banned pre-1976 mobile homes
     from entering their jurisdiction or relocating within it.

  5. Owners of old mobile homes have lost their investment in their home……virtually
     all have depreciated to the point where they have essentially no market value.

  6. The Maine Home Repair Network, comprised of MSHA, DECD, USDA Rural
     Development, have drawn the line to insure that scarce resources are spent
     wisely – with few exceptions, owners of pre-1976 mobile homes are not eligible
     for home repair assistance. Replacement is their only option.

  7. Owners of old mobile homes have extremely low incomes. The median annual
     income of owners of old mobile homes in Penobscot County, as an example, is
     $10, 277. Those who live in old mobile homes are trapped. They can’t get help
     repairing their home and they have long since been priced out of the housing
     market. Their only hope is a Replacement Housing Program operated by their
     local CAP agency.

  8. The Maine Home Repair Network has a five year goal to produce 100 units of
     replacement housing that is intended to remove these severely substandard
     homes from service. This annual production goal of 20 units of replacement
     housing will have a negligible impact on the problem. Unfortunately, that goal is
     reasonable in light of the Network’s current production capacity.

  9. The families that live in old mobile homes, more than in any other type of
     housing, are in a desperate situation……there homes are becoming unlivable and
     are helping to keep them living in poverty. A way must be found to dramatically
     increase the production of replacement housing.


                                                                                         3
10. This paper identifies 22 factors that are currently limiting the expansion of
    replacement housing programs in Maine and proposes actions that will increase
    production.

11. To succeed we must first get our house in order…… fine-tune programs, revise
    polices, remove barriers, form partnerships…….whatever is needed to
    dramatically increase the replacement housing production capacity of the Maine
    Home Repair Network.

12. The next step is to dramatically reduce the failure rate (currently over 90%)
    among those in need of replacement housing by increasing financing
    opportunities. The most important part will be in securing a significant amount
    of funding to capitalize a Replacement Housing Revolving Loan Fund. These
    funds may come from private charitable foundations or government bonds and
    would eventually be on the order of $40 million. This loan fund would be used in
    conjunction with RD’s 502 Direct Lending Program to provide financing to those
    with subpar credit or existing debt.

13. CAP Agencies:
      a. Provide Financial Counseling services for replacement candidates
      b. Develop alternative “minimal” house designs for use w/o RD 502 funds
      c. Secure private grant funds for ‘gap’ financing
      d. Adopt standardized replacement house designs
      e. Adopt site-building as the preferred option
14. Maine State Housing Authority:
      a. Increase funding and institute a “Replacement Housing Set-aside”
      b. Provide training to CAP agency staff in replacement housing techniques
      c. Secure waiver to use DOE/Wz /CHIP funding for Replacement Housing
15. Dept. of Economic & Community Development:
      a. Increase funding and institute a “Replacement Housing Set-aside”
      b. Develop guidelines for using CDBG funds in a revolving loan fund
      c. Organize vocational schools to produce replacement housing
16. USDA Rural Development:
      a. Waive credit check fees for very-low income applicants
      b. Develop a simplified pre-application for use with replacement housing
      c. Provide post-502 Loan rejection follow-up
      d. Revise construction requirements for replacement housing
      e. Revise plan certification regulations
      f. Revise payment retainage requirements
      g. Develop alternative underwriting policy utilizing a privately funded
           revolving loan fund to increase loan qualification rates, now it’s < 10%
17. Maine Home Repair Network:
      a. Expand Network by inclusion of the MCAA as the service delivery arm
      b. Develop an ongoing outreach campaign
      c. Secure private funding to capitalize a revolving loan fund dedicated to
           replacement housing
      d. Develop a real estate tax cap mechanism to increase applicants borrowing
           capacity

                                                                                      4
Preface
        On January 8, 1964, President Lyndon B. Johnson, in his first State of the Union
speech, declared a “War on Poverty”. What followed was a series of legislative bills and
acts, creating programs such as Medicare and Medicaid, Head Start, Food Stamps,
Foster Grandparents, work study, and numerous others, many of which still exist today.
In organizing our “troops” so as to effectively combat poverty, the Community Action
Agency network was formed……these agencies were designed to be on the front line, to
be visible in our communities, to be the point where the resources of our government
were brought to bear on the causes of poverty.

       In the decade that followed that speech the national poverty rate fell from 20% to
11%, a dramatic improvement and a testament to what can be achieved by government
when a powerful leader makes a firm commitment. However, the achievements of that
decade have not been repeated….today the poverty rate hovers around 12%, virtually
unchanged since 1973.

         Poverty and substandard housing are closely related. Low-income homeowners
rarely have the income to support a schedule of preventative maintenance on their
homes. As time goes by their homes slowly deteriorate…..repairs that are made, are
usually made on an emergency basis, often without benefit of skilled labor or proper
materials. The value of their home, usually their only true asset, either decreases, or
fails to appreciate at the rate of homes in good repair, thus contributing little or nothing
to their economic health. For example, most of those people who bought mobile homes,
especially before 1985 or so, have lost their entire investment due to depreciation,
leaving them right where they started…..in poverty.

        It is that group, the owners of old mobile homes, more than any other, which
needs our help. Old mobile homes are proven firetraps; they were not designed for
northern climates, and have deteriorated to the point where they are unfit and unsafe to
live in. By and large, these homeowners are excluded, by policy, from meaningful
assistance from our publicly-funded home repair programs…….and for good reason.
Repairing a home that should be replaced makes no economic sense, nor does it offer a
long-term solution, especially in the case of a deteriorating old mobile home.

        Replacement housing programs can offer the permanent solution needed –
remove the existing home from service and build a new, low-maintenance, energy-
efficient, site-built house in its place. Site-building brings business to local vendors and
employs local labor. Replacement housing programs can create that affordable housing
option by means of a combination of cost-effective building, low-interest mortgage
monies, and grant subsidies. Along the way, the areas’ housing stock is improved,
economic development and community pride are promoted, and most importantly, the
low-income family acquires safe, decent housing, and an appreciating asset.

       The owners of the homes in need of replacement have some of the lowest incomes
of any of our citizens. The median annual income of households living in pre-1976
mobile homes in Penobscot and Piscataquis Counties is $10,226. That is the median……


                                                                                           5
Many live on a fixed income. Some have poor credit or existing debt. These people, of
all of our fellow citizens, are among the least able to help themselves. For replacement
housing programs to make a significant impact in reducing the numbers of extremely
substandard housing units, a way must be found to bring to bear all of our housing
resources, both technical and financial.

       In Maine, the resources to fund home repair programs are very limited in relation
to the need, so the funders of the Maine Home Repair Network have been forced to set
limits……they have had to draw the line somewhere to insure that those scarce resources
are spent wisely. Those who live in old mobile homes, built before 1978, face us from
the other side of that line. For them, repair is not an option, only replacement.

        Replacement housing programs within the Network have come a long way. Ten
years ago, the five-year strategic plan for Maine State Housing Authority, a Network
funder, made no mention of replacement housing. Their current five-year plan,
however, does include replacement housing and sets a goal of 100 units over a five year
period. The best current estimates indicate that there are approximately 7,500
 pre-1978 mobile homes being lived in at this time in Maine. Obviously, the goal of 100
units over five years will have a negligible impact; however, that goal is reasonable in
light of the Network’s current capacity to produce replacement housing. Currently, less
than 10% of those who apply for replacement housing are successful. It is my intent
here to identify those factors that are limiting replacement housing, and suggest what
may be done to overcome them, and thereby increase production to a meaningful level.

        We live in a state that is host to some of the nation’s most luxurious homes…..
their numbers increase steadily, in good times and bad. Over the last years, favorable
conventional mortgage financing and publicly subsidized homeownership programs
have resulted in tens of thousands of existing home sales and thousands of new
construction starts each year. Except for those living in old mobile homes, the highly
effective Maine Home Repair Network is providing comprehensive, subsidized home
repair services statewide. The American Dream of home ownership is alive and well in
Maine.

       We live in a state that is also host to some of the most severely deteriorated
homes in our country, most of them old mobile homes. We all pass them
everyday……scattered along many of our roads. Inside these homes live our
neighbors…..the elderly, the disabled, and the working poor…..for whom the dream of
owning their own home has brought them, not to a place of joy and contentment, but
rather, to a world of despair. Their hope that becoming a homeowner would someday
lead them to a place in the economic mainstream of their community, has instead led
them to a financial dead end.

        Developing effective programs to replace the most substandard housing in our
state, the worst of the worst, with new construction, is a win/win enterprise.
Everybody……our client’s families, their community, the state, even passersby, will
benefit. Considering their current housing situation, the provision of affordable, decent
housing will do more to reduce the poverty of these families than any other single act
could possibly achieve.

                                                                                           6
       The people who are living in old mobile homes in Maine are in a desperate
situation…..their homes are crumbling around them……. government agencies, acting
through our Community Action Agencies, can offer little assistance……….and they have
been, long ago, priced out of the housing market. It is my hope, that those of us who are
devoted to the social services, will find a way around and through all the reasons why
not……that we will find a way to finally banish the specter of thousands of old mobile
homes that scar not only our landscape…..but more importantly, the lives of thousands
of our neighbors and friends. We have found reasons to exclude them from home repair
programs…..it is our challenge to find ways to include them in what is, for many, their
last hope….a Replacement Housing Program.

        In my years at Penquis CAP, my work has taken me into hundreds and hundreds
of homes here in Maine. My visit always started by sitting around the kitchen table and
chatting…….. getting to know something about those I had come to serve……this
experience has been a privilege and an inspiration. Without fail, those who were the
most destitute, those who had the very least….. were the ones that would offer me a cup
of coffee. The offered cup was but a symbol of the goodness that was in their heart, and
of their determination to rise above their impoverishment, if only in the smallest way.
Later, I would inspect their homes, and see the grim reality of their lives.

         Many of those who have invited me into their homes are elderly, who, even after
a lifetime of hard work, could still put nothing by for retirement. Many are disabled…..
some from arthritis after too many years pulling lobster traps from the cold sea…….. or
crippled from a steel beam that, on some construction site long ago, fell and crushed
their legs……..or they are simply, “all used up”, from a lifetime working in the woods.

      When we lie in our beds….snug and warm…. on a bitter winter’s night, the cold
wind howling outside...….or when we lie there listening to the sound of thunder on a
warm summers night, we feel the contentment of living in a good and decent
home……and we know that, regardless of what our bank statements say, we are rich
beyond measure. Giving our neighbors living in substandard housing a chance to
become rich in the same way, is yet another battle in a war not yet won.




Carlton Pinney
Bangor, Maine
March, 2007




                                                                                           7
I. The Problem: Old Mobile Homes.
         Recent housing studies have indicated that in excess of 54,000 homes in this
state are classified as substandard. Of these, approximately 32,000 units are owner-
occupied single family homes. These substandard homes are divided into two groups:
first, stick-built houses with a variety of significant deficiencies such as inadequate
insulation, malfunctioning heating systems, or structural issues, and, second, all mobile
homes built before 1976.




       It is this second group, pre-1976 mobile homes, that contains many of the most
severely deteriorated housing units in the state. These are the homes which have
presented the biggest challenge to the home repair and weatherization programs
administered by our Community Action Agencies. By and large, they are simply beyond
the scope of these programs to remedy…..they are the “walk-aways”.

        The problem then, simply stated, is that Maine has a significant number of people
living in extremely substandard housing that publicly-funded programs are unable to
help. More over, most of these people are trapped ….unable to rehabilitate their home,
or remove it and replace it with something better, or sell it at a price that would allow
them to enter the housing market and buy a higher quality home.

       They are trapped because they have very low incomes and because the home that
they bought, typically a pre-76 mobile home, has depreciated until it has basically no
market value.


   A. Construction
       What’s so special about 1976? In response to the high number of personal
injuries and deaths resulting from defects in mobile homes, the United States Congress
adopted the Federal Manufactured Housing and Safety Standards Act in 1974, which
regulates the construction and safety of manufactured housing. Congress gave the
Department of Housing and Urban Development (HUD) the authority to develop a


                                                                                         8
nationwide construction code intended to increase the health and safety of occupants,
reduce insurance costs and property damage, and improve the quality and durability of
manufactured housing.

       The “HUD Code,” as it’s referred to, applies to every “manufactured home” built
on or after June 15, 1976. It governs design and construction, covering topics such as fire
safety; body/frame construction; thermal protection; plumbing systems; heating,
cooling, and fuel-burning systems; and electrical systems.

      So what we are left with, here in Maine, all these years later, are a large number
of mobile homes that were designed and constructed so poorly that their further
production was outlawed. These are not mobile homes that were thus remanded to
some junkyard…….no….. these are the homes of thousands of our low-income citizens.




      What was so bad about these old mobile homes that caused the Congress to
outlaw them?
          1) Start with the roofs……thin metal sheets seamed together and supported
             by flimsy trusses. They don’t bear up very well in Maine……frost action
             can rack the mobile home, heavy snow and ice loads can deflect the
             panels…in the end, the seams open up and the water pours in. Once that
             happens, the structure is in serious trouble. The thin insulation in the
             ceiling is degraded, the ceiling lights fill with water and short out, the fiber
             ceiling panels weaken and sag. Water leaks into the walls, degrading
             insulation and shorting out entire electrical circuits, and then, finally finds
             its way down to the particle board floors, which soon weaken and fail,
             sometimes catastrophically.

          2) The walls of pre-1976 mobile homes are built with 2” x 2” studs. The
             standard for the last 20+ years has been 2” x 6” wall studs. The “HUD
             Code” upgraded the wall insulation to R-7….. the wall insulation in pre-76
             mobile homes is around R-3.5….not much more than an inch of fiberglass
             insulation. The standard for the last 20+ years has been R-19 in the walls.

                                                                                            9
        The ceiling insulation is about R-7…..today the minimum standard is R-
        38. Clearly, these homes were not designed for northern climates, and the
        cost to heat them is a burden to a low income family. They are cold in the
        winter, and hot in the summer.

     3) The electrical systems in pre-1976 mobile homes are prone to short
        circuits from water intrusion and overloading due to inadequate circuitry.
        Between 1967 and 1971, mobile homes were wired with aluminum wiring.
        Aluminum wiring for branch circuits has been outlawed due to the high
        incidence of electrical fires.

B. Fire Safety

        Mobile homes of this era are proven fire traps. Here are two examples
        from the literature regarding fire safety in pre-1976 mobile homes:

     a.) Housing Assistance Council, Manufactured Housing In Nonmetropolitan
           Areas: A Data Review, 1996

        “Fire safety is one issue that has been measurably impacted by the HUD
        Code. Fire has been a particular concern with manufactured homes
        because of the flammability of some of the materials used to construct
        them, and because of the problems with escape from fire in older units.”




         “Lucky to Be Alive” - Mobile Home shown on Pg. 8 -After the Fire

        "Improved standards significantly reduced problems associated with
        inadequate flame-spread protection around kitchen ranges and cabinets,
        emergency egress, natural gas pipeline connectors, improper furnace
        installation, defective water heaters, and glass on closet doors."

        “In addition, the rate of deaths by fire in post-1976 homes fell by 74
        percent and the fire injury rate by 34 percent, according to a study
        examining fires that occurred in the 1980-87 period.”



                                                                                   10
  b.) The Manufactured Housing Association of Oklahoma:

        “Another report entitled, "Fire Experience in Manufactured Homes," by
        Dr. John R. Hall, Jr., which appeared in the May/June 1992 National Fire
        Protection Association Journal, concluded that manufactured homes built
        to HUD standards present a much lower risk of death and a significantly
        reduced risk of injury in fires than units that were not built to HUD code
        requirements. The study showed that in fires occurring between 1980 and
        1989 that the fire death toll per 100 fires in post-HUD homes is two-
        thirds to three-fourths lower than pre- HUD homes. The fire injury is
        approximately one-third lower than pre-HUD homes for the same period
        of time.”

C. Depreciation.
               Economically, homeowners suffer asset depreciation, rather than
        asset building, which only helps to keep them in poverty. Old mobile
        homes are a depreciating asset due in part to the fact that they have a
        relatively short life expectancy:

        Housing Assistance Council, Manufactured Housing In Nonmetropolitan
        Areas: A Data Review, 1996

        “almost half the residents of nonmetro mobile homes lived in units
        fabricated before 1976, and therefore faced a greater risk of injury or
        property damage than residents of post-Code units. Anecdotal evidence
        suggests the lowest income families occupy the oldest and most decrepit
        units. A local organization in Wisconsin, for example, notes that "the
        poorer the family, the older the mobile home, the longer they live there
        and the worse the condition."

        “A 1995 study for the Manufactured Housing Institute found that new
        manufactured units, occupied year-found, have a life expectancy of
        approximately 55.8 years. The life expectancy of older manufactured
        homes, fabricated before current methods and technologies were
        available, can be assumed to be shorter. “


D. Insurability.
               Most pre-1976 mobile homes are uninsurable due to their
        deteriorated condition, or, if they are insurable, the cost is very high
        relative to the income of the owner. This puts virtually all the owners’
        assets and personal property at risk of total loss.




                                                                                   11
E. Emotional & Social Effect on Owners.

                Emotionally, living in substandard conditions compromises one’s
        self-esteem and emotional well being. There is a social stigma attached to
        living in severely substandard housing, especially old mobile homes.
        Home ownership has become a burden, not a joy.




F. Zoning

         Municipalities throughout the country are trying to phase out pre-1976
  mobile homes or prevent them from being brought into their areas. Here is a
  small sampling of these efforts:

        1.) The Colorado Springs Gazette, February 15, 2006

        “Regional building officials have released documents defending a new
        policy that phases out older mobile homes in El Paso County.

        The documents portray mobile homes manufactured before 1976 as
        firetraps. The information, released Thursday to El Paso County
        commissioners, is intended to bolster a building-code change that
        prohibits mobile homes built before 1976 from being moved into or within
        El Paso County. There are about 2,700 pre-1976 mobile homes in the
        county.

        ….. compiled a list of pre-1976 mobile homes destroyed by fire in El Paso
        County and elsewhere. Some of the fires killed or injured residents. Three
        mobile homes in unincorporated El Paso County -- two of them pre-1976
        models -- have been destroyed by fire in the past two months….


                                                                                  12
….Many mobile homes built before 1976 didn't have bedroom windows or
had windows too small or high for people to escape through during a
fire… Some models lack smoke alarms or have hazardous aluminum
wiring, highly flammable interior walls or inadequate circuitry.

…..Because older mobiles are difficult to heat, many owners and renters
use space heaters, wood stoves, ovens and propane-fueled heaters,
increasing the fire risk, the report says. Federal housing standards now
require central heating systems.”




  Family continues to live in mobile home while new house is built


2.) Mobile Home Ordinance: Polk County, North Carolina

“Section 104. Jurisdiction

These regulations shall govern the entrance, movement and set-up of any
and all pre 1976 mobile homes within Polk County, North Carolina. No
person or persons may locate or cause to be located, any mobile home
manufactured prior to 1976 on any lands situated with Polk County,
North Carolina at anytime after the adoption of this ordinance. Owners
of pre 1976 mobile homes currently inhabited shall not be affected by this
ordinance but movement of said mobile home is restricted to relocation
and inhabitance by the lawful owner or his or her spouse, parent,
grandparent and/or child. Mobile homes manufactured prior to 1976
inhabited and/or set up within a mobile home park if owned by someone
other than the park owner may be sold to the park owner or anyone, but
cannot be relocated from its current location.”




                                                                         13
G. The Scope of the Problem


  1. Exclusion from Repair Programs.

         Major housing repair projects undertaken by the Maine Home Repair
  Network (MHRN) in recent years typically cost from $15,000 to $20,000, and
  can easily go higher if certain health/safety issues are present. Two of the
  funders of the MHRN, MSHA and the Dept. of Economic & Community
  Development (DECD), specifically prohibit the repair of any mobile home
  constructed prior to 1978. In MSHA’s case, the only exception is that
  health/safety and access issues in pre 78 mobile homes can be addressed with a
  small number of elderly hardship grants capped at $5,000 each.

         The other network funder, USDA’s Rural Development (RD), does allow
  the repair of old mobile homes, but only if all major health/safety issues can be
  addressed with the funds available. However, this funding, except for a small
  number of elderly hardship grants, is in the form of amortizing loans…..loans that
  require good credit and sufficient income to provide repayment ability.

        Clearly, the low income owners of old mobile homes are excluded from
  most publicly funded home repair programs.




                  Four bedroom model prior to removal of mobile

  2. Priced out of the Housing Market.

        A recent analysis of data collected annually by MSHA indicated that the
  median annual household income of homeowners who live in pre-1976 mobile
  homes is $10,226 in Penobscot and Piscataquis counties, and $10,723 in Knox
  County.


                                                                                   14
       In 2005, the median home price in Maine was $184,000. Median home
prices had risen 67% over the previous five years, while household incomes had
risen only 14%. The median income in Maine in 2005 was $43,370, while the
income required to purchase a median-priced home was $61,648. The
affordability index in Maine, as it relates to purchasing a home, has fallen from
.95 in 2000 to .70 in 2005.

      Clearly, since the home they own has little or no resale value, low income
owners of old mobile homes are excluded from the conventional housing market,
simply due to insufficient income.

      With no ability to make substantial repairs to their homes, and no means
to purchase another home, these homeowners are trapped in severely
substandard housing.

3. Significant Numbers.

       A recent analysis of housing data collected annually by MSHA showed a
solid count of 4,139 pre-1976 mobile homes being lived in by LIHEAP recipients
throughout the state. Other data indicates that the true number of very low
income families living in pre-1976 mobiles is about 5,000.

      Since many old mobile homes are owned by residents with incomes above
the LIHEAP limit, and thus not counted, the total number of these old mobile
homes currently being occupied is unknown. A conservative estimate would be
2,000 to 3,000 units.

       Add to that the unknown number of stick-built homes that need to be
replaced. If only 5% of that group required replacement, that would add nearly
2,500 units to the total. All told then, the total number of homes in Maine
needing immediate replacement is at least 10,000.




           Two Bedroom Model on slab/frost wall foundation

                                                                                    15
II. The Solution: Replacement Housing Programs
A. How does a Replacement Housing Program Work?

       In Maine, replacement housing candidates may be referred from a home repair
program or respond to some form of outreach, but regardless, the first step is applicant
screening. The screening process insures that the applicant is income-eligible, owns
property that appears to be a good replacement candidate, and is otherwise eligible for
the subsidy funds that the Maine Home Repair Network (MHRN) allocates to the CAA.

        Those applicants that pass the screening are then referred to USDA’s Rural
Development (RD), which, because of their low-interest 502 Direct Loan Program (RD
502) serves as the primary first mortgage lender for replacement housing programs. RD
first determines program eligibility and then determines whether the applicant can be
prequalified for a home mortgage loan. While insufficient income can prevent
prequalification, the more common reasons are poor credit rating and existing debt. If
successful, the applicant is referred back to the CAA with their borrowing capacity
defined.

       Next, the CAA staff visits the applicant and performs a site evaluation. Site
conditions are noted and a standardized replacement house plan is selected, based on
household size and site considerations. This evaluation leads to a preliminary project
plan and budget. See Appendix IV for an example of current financing packages. The
project bid documents are prepared and competitive bids are obtained. The CAA staff
then goes about securing various forms of subsidy financing to supplement the RD502
mortgage, as required. These funds are normally deferred/forgivable loans and grants
from the MHRN, and grants from private foundations, when available. The process of
assembling a financing package that satisfies the budget can be difficult and time-
consuming. Eventually, the financing package is secured with funding commitments
and a pre-construction conference is held to review the project details. Then the project
moves to the loan closing phase.




                        Two Bedroom Model on full foundation


                                                                                        16
        After the closings, the CAA issues the contractor a Notice to Proceed and
construction begins. Normally, the new house is built very close to the existing house, in
order to facilitate connection to the utility systems. The replacement client continues to
live in their home while the new house is built. The construction is inspected by RD and
the CAA and progress payments made by both funders. When construction is complete,
electric service is switched to the new house and the client moves in. Transfer of the
remainder of their personal property and furnishing takes place over the next week or
so. When the client is fully moved, the contractor demolishes the old home and grades
and seeds the site.

      The need is great. As an example, when replacement housing became an option
through Penquis CAP, a CAA, the demand quickly exceeded available resources. In
2003 and 2004 combined, there were a total of 190 recorded requests for replacement
housing at Penquis CAP, in spite of the fact that their Replacement Housing Program
was not widely publicized. At the same time, average annual production was five units.


B. Factors Limiting Replacement Housing Production

       The biggest obstacle to producing a significant volume of replacement houses is
the inability of program applicants to obtain affordable first mortgage financing. The
low-interest mortgages from RD normally form the foundation of the project’s financing
package, followed by one or more subordinate mortgages in the form of
deferred/forgivable loans from MSHA and DECD, then followed by one or more grants
from DOE-Wz and private foundations. If the applicant fails to get RD funding, their
chances of getting a replacement house are slim. Sometimes it’s possible to build very
small, one bedroom homes, for individuals or a couple without RD funding, but this
requires a large amount of scarce subsidy funding, and can’t be sustained by any CAA
developer with the current level of MHRN funding.




                     Four bedroom model on full foundation

                                                                                       17
       Currently, then, obtaining RD 502 funding is the limiting factor, and if that was
overcome, then the various forms of subsidy funding would become the chokepoint.
Subsidy funds, deferred/forgivable loans and grants, are also in heavy demand within
the MHRN for home repair projects, thus severely limiting the amount that can be
allocated for replacement housing.

        One CAA’s experience over the last six years is that in excess of 90% of all clients
that apply for replacement housing fail to obtain RD 502 funding, thus ending their
quest for a solution to their housing dilemma.

       Fortunately, the obstacle presented by the very low incomes of some of the
applicants is greatly assuaged by the centerpiece of the RD502 program…..1% money.
Therefore, the most common reasons for the rejection of a RD502 application are poor
credit and excessive debt. Existing debt secured by real estate can be retired with
additional RD502 funds, assuming the applicant has the borrowing capacity, as part of
the replacement house project budget. However, consumer debt, or medical-related
debt, cannot be retired with any MHRN funding…..and thus, even in relatively small
amounts, it can stand between the client and a new home.

       If you are offering a much needed service, in this case, a replacement housing
program, and over 90% of your customers can’t access it, for whatever reason, then it’s a
stretch to describe the provision of that service as successful, in any but the narrowest
terms. We have in excess of 5,000 very old mobile homes and another 50,000 or so
substandard stick-built housing units in Maine. It is impossible to say we are attacking
the problem of severely deteriorated housing in Maine, when the only agent with the
resources to attack, the MHRN, has annual replacement housing production, in a good
year, of 15 or 20 units.




                 Two bedroom model replacing mobile home on Page 9

       Given the large volume of housing units that need to be replaced in Maine,
combined with the very low income of owners of these severely substandard homes,
replacement housing programs need to be capable of bringing to bear a wide range of
technical and financial resources. Success in this endeavor will require that every

                                                                                           18
component in the delivery system must align itself in such a way that obstacles and
disincentives to production are absent. Our housing organizations must learn to adapt
and improvise on this battlefield, if the specter of severely deteriorated housing is to be
defeated. In the following pages, I have identified many of these limiting factors, and
proposed strategies to eliminate them.

C. Strategies for Growth

       As I have said many times, when discussing replacement housing, “It’s all about
money”. To increase production of replacement housing to a level that will have a
measurable impact on the problem, we will need another source of low-interest
mortgage monies, and one that can be used as necessary, without limiting regulations,
to increase financing opportunities. This should take the form of a privately funded
revolving loan fund dedicated solely to replacement housing. These funds will be used
to complement the RD 502 mortgage funds in such a way that we are able to serve many
of those that are currently excluded.

        But first, the Network needs to get its house in order……to take a close look at
what are the impediments to growth and what can be done to remove them. If we
undertake this and succeed in rem0ving the structural barriers, then when the revolving
loan fund is available, the Network will have the capacity to produce in proportion to its
ability to provide financing.

       The next step is to dramatically reduce the 90%+ failure rate among those in
need of replacement housing by increasing financing opportunities. The most
important effort will be in securing a significant amount of funding to capitalize a self-
sustaining Replacement Housing Revolving Loan Fund. These funds may come from
private charitable foundations or government bonds and should eventually be on the
order of $40 million. This fund would offer amortizing and forgivable mortgage loans
from 0% to 3%. This loan fund would be used in conjunction with RD’s 502 Direct Loan
Program to provide financing to those with subpar credit or existing debt.

       Our first goal should be to increase replacement housing production to 100 units
per year. Appendix III, “Statewide Replacement Housing Funding Requirements”
shows a projection of funding requirements to produce 100 units of replacement
housing per year distributed over three basic types of projects. This would be a fivefold
increase in annual production, but would still represent only about 1% of all the housing
units that need replacement.

       The first group, comprising 30% of all projects, serves a client with good credit
and no existing debt. The second group, comprising 20% of all projects, serves clients
with good credit and an existing mortgage. These two groups are currently being served
by the available funding options. The third group, comprising 50% of all projects, serves
clients with subpar credit and existing medical or consumer debt. This group,
representing the vast majority of families needing replacement housing, has rarely been
served, and certainly not in a sustainable way. Making replacement housing available
and affordable for this group will require a revolving loan fund dedicated to replacement
housing and accommodating underwriting guidelines at RD.

                                                                                          19
III. Proposals for Community Action Agencies

              PROPOSAL CAA 1: FINANCIAL COUNSELING PROGRAM

CAA’s should develop a standardized financial counseling program designed
specifically for applicants who fail to be pre-qualified for an RD 502 mortgage. These
counseling services would be offered in-house at the CAA or CDFI and would assist
motivated applicants to resolve income, budget, and credit issues that are preventing
them from obtaining an RD 502 mortgage. Possible sources of funding for such a
program are CDBG Public Service Grants, private foundation grants, and program
income.

Rational: The current 90+% failure rate in obtaining an RD 502 mortgage must be
lowered substantially if replacement housing production can ever be increased in
proportion to the need. At present, applicants that are rejected for a mortgage accept
the verdict, give up hope, and just drift away. No “Plan B”, so called, is afforded them.
The only option is financial counseling, probably lasting a year or more, that can lead
them back to RD and a successful prequalification. With such a high attrition rate now,
it will only require a modest percentage of rejected applicants to be rehabilitated in this
way for it to have a major impact on the volume of replacement projects.


                  PROPOSAL CAA 2: ALTERNATIVE HOME DESIGNS

CAA’s should develop a design for a one-bedroom ranch-style replacement house that
meets the CABO One & Two Family Dwelling Code, but not all the features that RD
requires. This would represent the lowest cost solution for an individual or couple,
and would use only MSHA, DECD, and private grant monies to finance.

Rational: This approach would bring replacement housing to many individuals and
couples that can’t get adequate RD 502 funding and are living in a housing that presents
health/safety issues. By building a “bare-bones” home……frost-protected floating slab,
space heating, T-111 siding, and ultra-compact layout…..the cost can be in the range
where it can be built without RD 502 mortgage monies. The financing package would
include a small 1% amortizing loan using private or DECD funds, deferred/forgivable
loans(s), and private grant funds, where available.




                                                                                          20
                     PROPOSAL CAA 3: PRIVATE GRANT FUNDS

CAA’s should institute the practice of seeking and securing grant funds from private
charitable foundations to be used as gap-financing and debt reduction in replacement
housing financing packages.

Rational: A common occurrence in replacement housing is that the client cannot
borrow enough money to balance the budget and the available deferred/forgivable loans
from MSHA and DECD fall just short of erasing the shortfall. A fund of true grant
monies is then necessary to provide gap financing. The final gap is usually not
large….just a few thousand dollars…..but still sufficient to deny the client replacement
housing.

Another obstacle to successful financing is the client’s existing debt. Currently, existing
mortgages that encumber the property upon which the replacement house is to be built
are paid off at the RD closing, providing the client can be pre-qualified for a sufficient
amount of mortgage money. Consumer and/or medical-related debt cannot be retired
by any of the current MHRN funders as part of the project, and in some cases this
existing debt load eliminates the possibility of obtaining a mortgage.

The CAA’s can deal with this, in cases where the existing debt load is not excessive, by
securing private foundation grant funds that can be used to retire enough of the debt to
allow the project to go forward. Some may object to paying off a client’s personal debt,
for whatever reason. However, a common symptom of poverty is debt. If we are
attempting to serve those who live in poverty, than a means to deal with debt, to remove
it as an obstacle to the permanent solution to their housing situation, is required.



                 PROPOSAL CAA 4: STANDARDIZED HOUSE PLANS

Each CAA should develop or obtain a set of standardized plans and specification for a
fixed portfolio of replacement houses, ranging in size from 1 to 4 bedrooms. As a
guide, 4 bedroom models should be no larger than 1200 sqft, 3 bedroom models should
be between 1000 and 1100 sqft, 2 bedroom models should be between 750 and 900 sqft,
and 1 bedroom models 700 sqft, or less.

Rational: Increased production of replacement houses requires building houses quickly,
economically, and with consistently high quality. This can be achieved through
standardization of a limited portfolio of compact, one-storey designs. The construction
costs and quality can be stabilized through this “cookie-cutter” approach. Project
planning and budgeting can be simplified as well, serving to lower development costs.




                                                                                          21
                   PROPOSAL CAA5: PREFERRED HOUSING TYPE

CAA’s, when developing replacement housing, should favor site-built construction over
manufactured or modular construction. The use of mobile homes as replacement units
should be the choice of last resort.

Rational: Manufactured housing, when compared with standardized, “cookie-cutter”,
site-built housing, offers no price or quality advantage, especially when the site-builder
has become familiar with the portfolio of standardized designs. The choice between
using housing manufactured in a distant factory, or site-built construction is a simple
one……if there is no significant price or quality difference between the two, then the
economic advantage of employing local labor and purchasing materials from local
vendors decides in favor of site-building. Also, warranty service provided by a local
builder is superior to factory-based customer service. The only exception to this should
be modular homes built by vocational schools.

The use of mobile homes as replacement units should be considered a last resort for
clients that cannot afford stick-built construction. Replacement housing should be an
exercise in asset building. Mobile homes are a depreciating asset.




                                                                                         22
IV. Proposals for Maine State Housing Authority


                     PROPOSAL MSHA 1: INCREASED FUNDING

MSHA should increase the amount of funding it allocates to the MHRN by funding a
“Replacement Housing Set-aside” dedicated solely to replacement housing projects.
These funds should be deferred/forgivable loan funds, capped at $25,000 per project
with waivers available on a case-by-case basis up to a maximum of $30,000 per
project. Include an allocation of these funds in each CAA contract. Reallocate among
CAA’s in June and September to insure all the funds are expended each year.

Rational: In order for production to rise to a level that has a significant impact on the
quantity of severely deteriorated housing, the primary funders of the MHRN, those that
provide the critical subsidy funding, must increase the proportion of their available
funding that is earmarked for replacement housing.

Using this dedicated funding approach, the “Replacement Housing Set-aside”, will
encourage CAA’s to produce more units of housing, or stand to lose the potential
earnings available through origination fees. This would apply to deferred/forgivable
loans from MSHA.

                      PROPOSAL MSHA 2 – PROVIDE TRAINING

MSHA should develop a training program for CAA staff that intend to produce
replacement housing. The training would be an on-going program covering both
technical and financial aspects of developing replacement housing.

Rational: In order to produce replacement housing in the numbers necessary to impact
the demand, replacement housing program staff must be adept at all aspects of the
process……this will insure the housing is produced efficiently, quickly, and with
consistently high quality….. and at the lowest possible cost.

                 PROPOSAL MSHA 3 – SECURE DOE/WZ FUNDING

MSHA should seek a waiver from Dept. of Energy that allows the use of DOE
Weatherization grant funds in replacement housing projects where the client has not
been Weatherized previously. Also seek a waiver to allow the use of LIHEAP
Weatherization and CHIP funds in replacement housing projects.

Rational: The use of DOE Weatherization funds in the financing of replacement housing
has been used extensively and, when used, accounts for from 3% to 6% of the total
financing package. In replacement housing financing, every dollar is critical, as the
typical client has very low income and limited borrowing capacity. It makes more sense
to invest the Weatherization and CHIP funds in a new, highly energy-efficient
replacement house than it does to insulate/CHIP a house or old mobile that is severely
deteriorated.


                                                                                       23
V. Proposals for Dept. of Economic & Community Development

                     PROPOSAL DECD1 - INCREASED FUNDING

DECD should increase the amount of CDBG funding allocated to housing programs in
general, from the current 20% to 35%. This additional funding should be used to fund
a “Replacement Housing Set-aside” dedicated solely to replacement housing projects.
These funds should be available for use as deferred/forgivable loan funds or 1%
amortizing loan funds as necessary, capped at $25,000 per project with waivers
available on a case-by-case basis up to a maximum of $30,000 per project.

Rational: In order for production to rise to a level that has a significant impact on the
quantity of severely deteriorated housing, the primary funders of the MHRN, those that
provide the critical subsidy funding, must increase the proportion of their available
funding that is earmarked for replacement housing.

Using this dedicated funding approach, the “Replacement Housing Set-aside”, will
encourage CAA’s to produce more units of housing, or stand to lose the potential
earnings available through origination fees. This would apply to deferred/forgivable
loans from DECD.

                    PROPOSAL DECD 2 – LENDING GUIDELINES

Develop guidelines and policies that would enable CAA’s to use CDBG funds as low-
interest amortizing loans in replacement housing revolving loan funds. Interest rates
would be as low as 1%, with a variable term. Local CDFI’s could be used to administer
the loan funds.

Rational: In order to have the best chance of assembling a workable financing package,
funding needs to be as flexible as possible, the better to accommodate a wide variety of
situations encountered in replacement housing. Defining how CDBG funds can be used
as amortizing loans will add that flexibility to CDBG funds.

                    PROPOSAL DECD 3 – VOCATIONAL SCHOOLS

Organize the vocational schools that offer construction technology courses to produce
replacement housing. Each participating school would produce one or two modular
homes and would then sell them to their local CAA for use as replacement housing.
MSHA or DECD could offer the schools low interest loans to finance the construction of
the homes.

Some vocational schools already produce modular homes, but not for use as
replacement housing. Properly organized and funded on a statewide level, these schools
could be a significant source of low cost replacement homes for use by CAA’s.




                                                                                       24
VI. Proposals for USDA Rural Development

                       PROPOSAL RD1 - CREDIT REPORT FEE

Remove the barrier of up-front credit report fees charged in the prequalification
process by waiving the fees for applicants with incomes < 50% of area median.

Rational: Some replacement housing applicants withdraw when asked to pay for a
credit report. For very low income individuals, the credit report fee can be burdensome,
not only because of the amount but also because of its speculative nature. Credit
problems are a common occurrence for people living in poverty and many of these
applicants have been denied credit in the past, and so they may not be willing to pay a
fee to tell them what they think they already know. With the failure rate for RD 502
financing so high and the need for replacement housing production to increase
dramatically, even small barriers need to be removed.


                        PROPOSAL RD2 - PRE-APPLICATION

Institute the use of simplified replacement housing pre-applications to collect
information as required to determine pre-qualification ability. Transfer this
information to a RD 410-4 application if the project will go forward to completion.

Rational: Filling out an RD410-4 Federal Mortgage Application can be a very daunting
task for replacement clients, many of whom are elderly, disabled, or are unfamiliar with
banking documents. This may be the reason why many clients don’t return their
applications. An alternative may to be to use a simplified pre-application that can be
used to gather information necessary for the pre-qualification process.




                                                                                      25
                  PROPOSAL RD3 - POST REJECTION FOLLOW-UP

Institute a follow-up policy for replacement housing RD 502 applicants that are
rejected after being found eligible. This follow-up should include referrals to a CAA
financial counseling program and/or income goal-setting for cases of insufficient
income.

Rational: The current 90+% failure rate in obtaining an RD 502 mortgage must be
lowered substantially if replacement housing production can ever be increased in
proportion to the need. Currently, in cases where the client fails to qualify for a
mortgage, RD sends a rejection letter and the case is essentially closed. An alternate
approach would be for RD to formulate a special rejection letter for replacement
housing applicants that outlines a fall-back plan. In cases of poor credit or excessive
debt, the applicant would be referred to a financial counseling program run by a CAA.
In cases where the applicant just lacked sufficient income, the letter outline a
hypothetical project budget, based on current average project costs, and indicate the
minimum income necessary to make the plan viable. This goal-setting exercise may
help the client to eventually qualify for financing.

                PROPOSAL RD 4 - CONSTRUCTION REQUIREMENTS

Revise construction requirements, by means of waiver, for replacement housing to
allow all building methods that comply with the CABO One & Two Family Dwelling
Code, as long as the appraised value of the home supports the loan. Allow the use of
direct-vent, thermostatically-controlled space heaters in small ranch-style homes
under 1000 sf.

Rational: Replacement housing must be built at the lowest possible cost consistent with
producing a code-compliant, high-quality home. RD, the primary mortgage lender,
should take the position, as regards replacement housing construction, that the houses
meet only two requirements – first, that the construction meets the CABO One and Two
Family Dwelling Code, and second, that the appraised value of the new home support
the mortgage loan with an acceptable loan-to-value ratio.

Arbitrary restrictions that override the code, such as disallowing frost-protected floating
slabs and frost wall/crawl space foundations, both of which meet code requirements,
serve only to increase the cost of construction. Further, other arbitrary restrictions,
such as the use of space heaters, should be waived. Using current building techniques,
the replacement houses being built are extremely tight and energy efficient. While the
considerable expense of a central heating system makes sense in the larger models, to
assure good distribution, the smaller floor plans are very adequately heated with high
efficiency, thermostatically controlled, direct vent space heaters. Penquis CAP has
installed these units in three small homes where RD funds were not involved, and the
owners are completely satisfied. Taken together, many of these restrictions and
requirements can increase the costs to the point where the home is no longer affordable
to very low income clients. While full basements and hot water baseboard heat are
desirable features, some of our clients simply can’t afford them. They should not be an
obstacle to replacement housing.

                                                                                          26
                       PROPOSAL RD 5 - PLAN CERTIFICIATION

Revise building plan approval and certification regulation, by means of waiver, as
they apply to standardized replacement houses, only. Review and approve such plans
using in-house licensed professionals.

Rational: The plan certification regulations imposed by RD require that all house plans
be approved by an architect, engineer, or a code enforcement official certified by a
certain few national code organizations. Further, each individual house that is built
must have a separate certification. This adds time and expense to each project,
especially when architects and engineers are involved.

In order to be built quickly and at the lowest possible cost, replacement housing should
use standardized plans and specifications for a limited number of house models. This
allows the contractor to become very efficient and helps to control price increases and
quality. RD should require that CAA’s use the standardized, cookie-cutter approach in
replacement housing. Repeatedly paying licensed architects or engineers to certify
plans for simple ranch houses, or having to deal with code officials in every town where
these houses are built, impedes the growth of replacement housing.

RD should take the approval and certification of standardized house plans in-house.
RD’s own technical staff is fully capable of reviewing and approving plans for small
ranch houses, and there should be no issue of conflict of interest. Since these homes
become the collateral securing the loan, it is in the lenders interest to insure they are
built properly; who better to protect their interests then the lenders own licensed
professionals? This exception to the regulations would apply only to standardized
replacement housing.


                       PROPOSAL RD 6 - PAYMENT RETAINAGE

Revise payment retainage requirements, by means of a waiver, as they apply to
standardized replacement house construction. Contractors must have good local
references, trade credit at vendors, and a line-of-credit sufficient to maintain cash flow
throughout the construction period. Contractors meeting those requirements will have
retainage set at 20%, to be reduced to 10% for builders who demonstrate a history of
problem-free construction of RD – financed replacement homes.

Rational: Increasing production volume of replacement housing will be very difficult if
established, reputable, local builders are required to suffer a 40% retainage when
building a simple, modestly appointed, ranch-style home. Especially when the designs
are standardized and built repeatedly.

Small contractors are best for replacement housing as they have the lowest overhead,
however they are the least able to deal with the credit line/cash flow issues. Their
subcontractors are also small businesses and need to be paid promptly. We need to be
able to compete for the best builders and there is sufficient other work available that
does not have this retainage burden.

                                                                                            27
Reducing the retainage initially to 20%, and then to 10% for builders who demonstrate
their continued trustworthiness, will serve to greatly increase the production capacity
available for replacement housing. Since RD will only pay for completed work in place,
the interests of the government and buyer will be adequately protected.




                 PROPOSAL RD7 - ALTERNATIVE UNDERWRITING

Develop underwriting guidelines that will allow RD 502 mortgage lending to
applicants with sub par credit when their existing non-housing debt is low and loan-
to-value ratios are capped at 50%.

Rational: The attrition rate of 90%+ at RD/RHS is caused, in part, by credit and existing
debt load issues. Post-rejection follow-up and financial counseling may be able to lower
this failure rate, however, to make a significant impact on the large numbers of
substandard homes, a way must be found to lend to homeowners with sub par credit.
Penquis CAP has never had a replacement house repossessed due to the failure of the
homeowner to make their mortgage payments, even though many of the clients had
annual incomes < 50% of area median. Though they may struggle occasionally to pay all
their bills on time, the mortgage always gets paid first.

Proposal MHRN 3 - Revolving Loan Fund, recommends that the MHRN secure private
grants to capitalize a “Replacement Housing Revolving Loan Fund”, administered by a
local CDFI for statewide use. Interest rates would be as low as 1%, with a variable term.
This loan fund could be supplemented with CDBG funds converted from
deferred/forgivable to 1% amortizing loans

This revolving loan fund would serve to extend RD 502 mortgage lending to those with
marginal credit in this scenario: RD would provide an RD 502 mortgage for a portion of
the required mortgage funds, limited to a maximum loan-to-value ratio (LTV) of 50%.


                                                                                       28
However, the RD mortgage would still hold first position. The privately funded
revolving loan fund would lend the remainder of the required mortgage funds and take
second position. Subsidy funds in the form of deferred/forgivable loans and grants
would comprise the third and fourth layers of the financing package. The revolving loan
fund would thereby limit RD’s exposure and, if the applicants existing debt load was not
excessive, allow them to lend to a client they would have otherwise rejected. This would
bring a large number of people into replacement housing programs, and then, with good
credit and an appreciating asset, into the economic mainstream of their communities.




VII. Proposals for the Maine Home Repair Network


                 PROPOSAL MHRN 1 - NETWORK ORGANIZATION

Expand the MHRN by including the Maine Community Action Association (MCAA),
Community Development Financial Institutions (CDFI), and other housing-related
agencies. Formalize the expanded network with Memorandum of Understanding, or
other appropriate agreement.

Rational: The MHRN has matured and grown into a very effective delivery system of
home repair and replacement services. The members of the Network fund millions of
dollars of successful home repairs and replacements every year through the CAA
delivery system. This success should be built on…….the range and variety of its
programs expanded.

The Network needs to formalize and solidify the interrelationship between its members,
and thereby empower its management team for two reasons. First, so that the Network
can take effective action to improve the Network by dealing with such issues as staff
training and underserved areas. Second, to form an entity that can secure additional
funding to fuel an expanded statewide replacement housing effort.


                                                                                      29
                          PROPOSAL MHRN 2 – MARKETING

Develop and finance an ongoing advertising campaign to educate the public about
replacement housing programs, using paid and public-service advertising.

Rational: Currently, most information about replacement housing programs is passed
by word-of-mouth and occasional media coverage of replacement projects. An
alternative approach would be for the MHRN funders to pool resources and finance a
professional annual advertising campaign with the intent of increasing public awareness
of replacement housing programs, and to advocate for increased funding dedicated to
replacement housing.


                   PROPOSAL MHRN 3 - REVOLVING LOAN FUND

Secure grants from private charitable foundations to capitalize a “Replacement
Housing Revolving Loan Fund”, administered by a local CDFI, for statewide use. This
loan fund would provide mortgage loans with interest rates as low as 1%, with
variable terms.

Rational: The attrition rate of 90%+ at RD/RHS is caused, in part, by credit and existing
debt load issues. Post-rejection follow-up and financial counseling may be able to lower
this failure rate, however, to make a significant impact on the large numbers of
substandard homes, a way must be found to lend to homeowners with sub par credit.
Penquis CAP has never had a replacement house repossessed due to the failure of the
homeowner to make their mortgage payments, even though many of the clients had
annual incomes < 50% of area median. Though they may struggle occasionally to pay all
their bills on time, the mortgage always gets paid first.

Proposal RD 7 – Alternative Underwriting, recommends that RD develop underwriting
guidelines that would allow lending to applicants with sub par credit. These guidelines
in combination with the revolving loan fund would serve to extend RD 502 mortgage
lending to those with marginal credit in this scenario: RD would provide an RD 502
mortgage for a portion of the required mortgage funds, limited to a maximum loan-to-
value ratio (LTV) of 50%. However, the RD mortgage would still hold first position.
The privately funded revolving loan fund would lend the remainder of the required
mortgage funds and take second position. Subsidy funds in the form of
deferred/forgivable loans and grants would comprise the third and fourth layers of the
financing package. The revolving loan fund would thereby limit RD’s exposure and, if
the applicants existing debt load was not excessive, allow them to lend to a client they
would have otherwise rejected. This would bring a large number of people into
replacement housing programs, and then, with good credit and an appreciating asset,
into the economic mainstream of their communities.




                                                                                       30
             PROPOSAL MHRN 4 - REPLACEMENT HOUSING TAX CAP

Develop a real estate tax cap mechanism that can be used to increase the borrowing
capacity of very-low income replacement housing candidates.

Rational: The typical replacement housing applicant lives in such substandard housing
that their property taxes are very low. However, when their replacement home is built
their property taxes increase dramatically, sometimes to the point where the amount of
household income going towards paying the taxes reduces their repayment ability, and
thus their borrowing capacity, such that they can’t borrow enough RD 502 mortgage
money to afford the new house. A property tax cap specifically for replacement housing
would serve to eliminate this barrier.

For instance, say an applicant was living in an old mobile home in poor condition and
the property tax was $25 per month, a typical amount in many areas. The value of the
new site-built replacement house would increase their property taxes to $100 per
month, which would in turn reduce their borrowing capacity to the point where the
project could not go forward. Under this proposal, the applicant would apply to their
town for a Replacement Housing Tax Cap, which, if approved would cap their property
taxes on the new home to, say, $50 per month, thus increasing their borrowing capacity
and allowing the project to go forward. The tax cap could be limited to a certain period
of time or for as long as the recipient owned the home, but eventually the property taxes
would rise up to normal levels. This mechanism can effectively double the borrowing
capacity of very-low income applicants. The homeowner benefits from a new home that
appreciates in value, and the town is ahead because it has removed a very substandard
home, while still receiving twice the property tax that it had been getting, and improved
the future tax base.




                                                                                       31
                                                          Penquis CAP, Inc.
                                                 Replacement Housing Funding Sources

  $1,800,000
                   $1,591,344
  $1,600,000

  $1,400,000

  $1,200,000

  $1,000,000

   $800,000

   $600,000

   $400,000                     $340,074

                                           $187,047
   $200,000
                                                      $64,550   $49,989   $30,000   $28,000   $21,500   $10,643   $10,281   $10,000   $9,500   $6,500
              $0




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                                Appendix II

         Current Replacement Housing Financing Structure


This is a typical financing package used currently to make
replacement housing affordable to low/moderate applicants. This
particular budget uses the average amounts from a group of 8
replacement houses built in 2005 and 2006 by Penquis CAP. This
group consists of 1, 2, 3, and 4 bedroom ranch models, using both
frost wall/slab and full basement foundations.

Mortgage payments in this group of projects ranged from $225 per
month, taxes and insurance included, for a one bedroom model, to
$525 per month, taxes and insurance included, for a four bedroom
model.


Project Expenses                                    % of Total

Construction Contract                      92,500     75.26%

RD Mortgage Closing Costs                   3,250       2.64%

Project Development & Management Costs      5,900       4.80%

Payoff Existing Mortgage                   21,250     17.29%

Total Project Expense                    $122,900


Project Financing                                   % of Total

1st Mortgage - RD 502                      84,150     68.47%

2nd Mortgage - MSHA D/F                    25,000     20.34%

3rd Mortgage - CDBG D/F                     5,000       4.07%

Grant - DOE Wz                              3,000       2.44%

Grant - Private Foundations                 2,500       2.03%

MSHA Loan Origination Fee                   2,500       2.03%

DECD Loan Origination Fee                    750        0.61%

Total Project Financing                  $122,900
                                                      Appendix III

                                Statewide Replacement Housing Funding Requirements



 Replacement Units per Year = 100

                                              30%                   20%                50%
                                           Good Credit         Good Credit         Subpar Credit
Project Expense                          No Existing Debt   Existing Mortgage    Med/Consumer Debt

Construction Contracts                       92,500 91.1%         92,500 73.7%         92,500 87.6%

Closing Costs                                 3,250 3.2%            3,250 2.6%          3,250   3.1%

Existing Mortgage Payoff                          0               24,000 19.1%              0

Existing Non-Real Estate Debt                     0                     0               4,000   3.8%

Project Development & Management Fees         5,800 5.7%            5,800 4.6%          5,800   5.5%

Total Project Cost                        $101,550              $125,550             $105,550


Project Financing

1st. Mortgage - RD 502, LTV=50%              68,650 67.6%         92,650 73.8%         35,075 33.2%

2nd. Mortgage - Revolving Loan Fund               0                     0              35,075 33.2%

3rd. Mortgage - MSHA D/F Loan                25,000 24.6%         25,000 19.9%         25,000 23.7%

4th. Mortgage - DECD D/F Loan                 5,000 4.9%            5,000 4.0%          5,000   4.7%

Grant - Private Foundation                        0                     0               2,500   2.4%

Grant - MSHA/DECD Loan Origination Fee        2,900 2.9%            2,900 2.3%          2,900   2.7%

Total Project Financing                   $101,550              $125,550             $105,550


Annual Funding Requirements                                                                            Total Per Year

RD 502 Direct                             2,059,500             1,853,000           1,753,750            5,666,250 52.3%

Revolving Loan Fund                               0                     0           1,753,750            1,753,750 16.2%

MSHA D/F Loan & Orig. Fees                  814,500              543,000            1,357,500            2,715,000 25.1%

DECD D/F Loan & Orig. Fees                  172,500              115,000              287,500             575,000 5.3%

Private Foundation Grants                         0                     0             125,000             125,000 1.2%

                                         $3,046,500           $2,511,000           $5,277,500          $10,835,000
                                Appendix IV

              Replacement Housing Financing Case Studies


        Assembling a workable financing package for replacement projects can be
difficult since the clients borrowing capacity may be very limited and the
available funding sources each have their own regulations governing their use.
Sometimes it seems like an equation with too many variables.

       The first exhibit is a “Replacement Housing Financial Worksheet” that I
designed to assist in developing a workable project budget. This worksheet
allows one to estimate the RD 502 borrowing capacity of a client based on their
financial data, and then calculate the amounts of subordinate financing that are
needed. It automatically checks Debt-to-Income and Loan-to-Value ratios for
any given plan.

       The second exhibit is a group of four case studies of replacement projects
and the associated project budgets that offer a solution utilizing all available
resources. Each case study represents a different set of circumstances that arise
in replacement projects.
                           MAINE HOME REPAIR NETWORK
                    REPLACEMENT HOUSING FINANCIAL WORKSHEET

                                                                                                                  ENTRY FIELD
        PROJECT:             John Doe
        DATE:                  3/1/2007

            1. MHRN INCOME ELIGIBILITY                                      4. PROJECT FINANCING
                                                                         RHS MORTGAGE TERMS
         ANNUAL GROSS HOUSEHOLD INCOME                    SELECT Adjusted 100% Median Income            $43,750
 ENTER INCOME INCLUSIONS            $/MONTH                      MEDIAN INCOME PERCENT                  26.51%
       Wages                              0                      ANNUAL INTEREST RATE                    1.00%
       Business Income                    0               SELECT TERM (33yrs.or 38yrs.)                    38     OK
       Payments In Lieu of Earnings       0
       Pensions/VA Benefits               0                        ESTIMATED RHS MORTGAGE LIMIT
       Social Security/SSD              1,000                    MAX Monthly Total Debt             $424
       SSI                                0                      Monthly Non-Housing Debt            100
       TANF                               0                      MAX PITI @ 29% Limit                300
       Child Support, Alimony             0                      MAX PITI @ 33% Limit                341
       Welfare                            0                      MAX New PITI @ 41% DTI              324
       Other                              0                      MAX New PITI                        300
       Other                              0                ENTER SET Estimated Taxes, $/Month        100
       TOTAL INCLUSIONS                $1,000              ENTER SET Estimated Insurance, $/Month     35
                                                                 MAX New Principle & Interest      ($165)
 ENTER INCOME EXCLUSIONS                  $/MONTH         SELECT RD Area Loan Limit               $152,100
       Medical Expense Reimbursement           0                 MAX RHS MORTGAGE                 $62,448         OK
       Trainng Program Benefits                0
       Income from Children                    0                         TOTAL PROJECT COST
       Foster Care Payments                    0           ENTER Construction Contract                  $75,000
       Other                                   0           ENTER Closing Costs                           3,200
       TOTAL DEDUCTIONS                       $0          SELECT Development Fee %                       4.0%
       Monthly Gross Income                 $1,000               Development Fee Amount                  3,128
                                                           ENTER Existing Debt Pay-Off                     0
        ANNUAL GROSS INCOME               $12,000                TOTAL PROJECT COST                     $81,328

SELECT No. in Household          1                                      FINANCING PACKAGE
SELECT Adjusted 80% Median Income         $27,600          ENTER SET RHS MORTGAGE AMT                   $56,328   OK
                  ELIGIBLE?                YES       OK
                                                           ENTER SET GRANTS:                               $
                                                                 DOE Weatherization                        0
           2. RHS INCOME CALCULATIONS                             Other Grant                               0
            RHS REPAYMENT INCOME                                  Other Grant                               0
 ENTER INCOME INCLUSIONS                  $/YEAR                  TOTAL GRANTS                             $0
       Annual LIHEAP                        400
       Annual Food Stamps                    0                    UNFUNDED BALANCE                      $25,000
       Earned Income Credit                  0
       REPAYMENT INCOME                   $12,400          ENTER SET MSHA DEF/FOR LOAN                  $25,000   OK

          RHS ADJUSTED FAMILY INCOME                              DECD DEF/FOR LOAN                        $0     OK
 ENTER INCOME DEDUCTIONS                # OR $
       Number Of Children In HH            0                      TOTAL PROJECT FINANCING               $81,328
       Enter "1" If Elderly OR Disabled    1
       Annual Childcare Expenses          $0
        Annual Medical Expenses             $0                        5. NEW DEBT TO INCOME RATIO
        Annual Disability Assistance        $0                                                        $/MONTH
        ADJUSTED FAMILY INCOME            $11,600                 Monthly Non-Housing Debt                $100
                                                                  RHS Mortgage Principle & Interest       $149
        3.CURRENT DEBT TO INCOME RATIO                            Estimated Hazard Insurance               $35
 ENTER CURRENT NON-HOUSING DEBTS          $/MONTH                 Estimated Real Estate Taxes             $100
       Car Loan                              50                   MONTHLY HOUSE PAYMENT                   $284
       Child Support/Alimony                  0                   NEW PITI RATIO                         27.44%   OK
       Total Credit Card Payments            50                   NEW DTI RATIO                          37.12%   OK
       Other                                  0
        Other                                 0                           6. LOAN TO VALUE RATIO
        TOTAL NON-HOUSING DEBT              $100
                                                                  MORTGAGES                                 $
 ENTER CURRENT HOUSING EXPENSES           $/MONTH                 RHS                                    56,328
       Mortgage                                0                  MSHA Deferred/Forgivable Loan         25,000
       Hazard/Mortgage Insurance              30                  DECD Deferred/Forgivable Loan             0
       Real Estate Taxes                      25                  TOTAL LOAN AMT.                       $81,328
       TOTAL CURRENT PITI                    $55
                                                           ENTER PROPERTY VALUE                         $90,000
        TOTAL CURRENT DEBT                 $155
                                                                  LTV RATIO                              90.36%   OK
          CURRENT DTI RATIO                15.0%     OK

                                             FINANCING PACKAGE
           AMORTIZING LOANS                GRANTS            TOTAL AMORTIZING LOANS                     $56,328
        RHS Mortgage        $56,328 DOE Wz Grant          $0 TOTAL DEF/FOR LOANS                        $25,000
            DEF/FOR LOANS           Other Grant           $0 TOTAL GRANTS                                 $0
        MSHA Def/For Loan   $25,000 Other Grant           $0
        DECD Def/For Loan        $0                          TOTAL ALL                                  $81,328
Replacement Housing Financing

Case Study 1 - Existing Mortgage

The client is a man living with one child in his household. He earns $15,300 per year, and
has good credit. The household receives LIHEAP and has never been Weatherized.

They live in a 1977 mobile home in poor condition. There is a good well and septic on
the property. The client purchased the property, including the mobile home, some years
ago but still owes $19,000 to a mortgage company.

Step 1: Client completes a pre-application which screens for eligibility and suitability for
replacement housing. It looks acceptable.

Step 2: Forward the client’s pre-app to Rural Housing Service for low-interest mortgage
money. RHS reports that his borrowing capacity, without gross-up, is $98,000,
and that closing costs for the mortgage are estimated at $2500.

Step 3: Using standardized plans for a 3 bedroom ranch with full foundation, pre-
approved by RD, you solicit bids. Your contractor quotes you a lump sum fixed price of
$80,500, which includes removal and disposal of the mobile home and associated site
work.

Step 4: Assess resources. Your MSHA and DECD Home Repair Network money has
already been allocated to other projects, but you do have $6000 of grant money from a
private foundation for use on replacement housing. You need to make a development fee
of between $4000 and $5000.

Show a budget and financing package for this project.
                             REPLACEMENT HOUSING PROGRAM

                                         PROJECT BUDGET



Project:        Case 1- Existing Mortgage
Date:

PROJECT EXPENSE BUDGET                                             $

Construction Contract                                          80,500

Closing Costs                                                   2,500

Subtotal                                                       83,000

Development Fee                                                 4,500

Existing Mortgage Pay-off                                      19,000

Total Project Expense                                      106,500



PROJECT FINANCING

1st. Mortgage - Rural Housing Service                          98,000

Subordinate Mortgages:

Maine State Housing Authority                                      0

DECD - CDBG                                                        0

Grants:

DOE -Weatherization                                             2,500

Other - Private Foundation                                      6,000

Other -                                                            0

Total Project Financing                                    106,500


Send Check for $6000 to RHS Mortgage Closing Attorney

Receive Fee Check from Attorney for $4500

Have your Contractor send Invoice to Weatherization for $2500

Weatherization performs energy audit after house is complete
Replacement Housing Financing

Case Study 2 – Tradeoff

The client is a woman living alone. She is partially disabled and also receives Social
Security. Her income from all sources is $14,000 per year. Her credit is marginal. She
receives LIHEAP, and her home was weatherized six years ago.

The client is a member of a very active local church whose members help her out when
she is in need.

She lives in a small stick built house in extremely poor condition. The client owns the
property free and clear. The old steel cesspool that served for the septic system has failed
and sewage is running into the roadside ditch. There is a good drilled well on the
property.

Step 1: Client completes a pre-application which screens for eligibility and suitability for
replacement housing. It looks acceptable.

Step 2: Forward the client’s pre-app to Rural Housing Service for low-interest mortgage
money. RHS reports that due to her very low pre-qualification amount, they are rejecting
her. You call RHS and find that they would approve her, but her borrowing capacity is
severely limited due to income and credit, and even with gross-up, is only $12,000. RHS
estimates that closing costs for the mortgage are estimated about $3000.

Step 3: Using standardized plans for a 1 bedroom ranch with frostwall - supported
concrete slab, pre-approved by RD, your contractor quotes you a lump sum fixed price of
$58,000. You ask for a price on the same house but on a CABO approved frost-protected
floating slab, and with a space heater in place of the boiler, and receive a price of
$46,500. Neither of these prices includes demolition and removal of the existing home.
RHS will not approve the use of the floating slab or space heat.

Step 4: Assess resources. You have access to MSHA and DECD Home Repair Network
funds; however your MSHA funds are limited to $25,000. The town the client lives in
has won a CDBG Housing Assistance Program grant and is about midway through
spending their funds. You have $5500 of private foundation grant funds that are to be
used for replacement housing. Your Wz. funds are thin and the client was served once
already. You need to earn a development fee of between $4000 and $5000.

Step 5: The client already has a design for a new septic system. With that you solicit bids
and receive a lump sum fixed price from your contractor for $6500 for a new septic
system.


Show a budget and financing package for this project.
                                   REPLACEMENT HOUSING PROGRAM

                                                 PROJECT BUDGET

Project:             Case 2- Tradeoff
Date:

PROJECT EXPENSE BUDGET                                                $             With RHS

Construction Contract                                            46,500                  58,000

Septic System                                                     6,500                   6,500

Closing Costs                                                         0                   3,000

Subtotal                                                         53,000                  67,500

Development Fee                                                   2,500                   2,500

Existing Mortgage Pay-off                                             0                        0

Total Project Expense                                            55,500                  70,000



PROJECT FINANCING

1st. Mortgage - Rural Housing Service                                 0                  12,000

Subordinate Mortgages:

Maine State Housing Authority                                    25,000                  25,000

DECD - CDBG - Town                                               25,000                  25,000

Grants:

DOE -Weatherization                                                   0                        0

Other - Private Foundation                                        5,500                   5,500

Other -                                                               0                        0

Total Project Financing                                          55,500                  67,500

Tradeoff: Using RHS loan brings with it higher building costs, creating a shortfall in this case.
            You can't use your HRN DECD funds in a town that has a CDBG grant.

Have Contractor Invoice Agency for MSHA & Foundation Funds

Have Contractor Invoice Town CDBG Program for their funds

Retain $2500 of Private Foundation funds for Development Fee

Receive approx. $2000 fee from MSHA for originating the HRN loan

Clients gets volunteers from her church to remove existing house from site
Replacement Housing Financing

Case Study 3 – Pushing the Envelope

The client is a woman living alone. She works part-time at a low-paying job and earns
$7,000 a year. She receives food stamps. She has no credit history. She receives LIHEAP
and her home has never been weatherized

The client lives in a 1969 mobile home with a large stick built addition, both in poor
condition. The furnace is original equipment and has been condemned. The addition was
built in 1972. The property is owned outright and has a good septic system; however she
gets her domestic water piped underground from her parents well next door.

Step 1: Client completes a pre-application which screens for eligibility and suitability for
replacement housing. It looks marginal, but worth a try.

Step 2: Forward the client’s pre-app to Rural Housing Service for low-interest mortgage
money. RHS reports that they are working with the client to have her increase the
number of hours she works per week. They report back some time later and report her
borrowing capacity, with gross-up, is now $39,700. RHS estimates that closing costs for
the mortgage are estimated at about $3000.

Step 3: Using standardized plans for a 1 bedroom ranch with frostwall - supported
concrete slab, pre-approved by RD, you solicit bids. Your contractor quotes you a lump
sum fixed price of $58,800, which includes removal of the existing mobile home.

Step 4: Assess resources. Your agency has $4550 in recycled CHDO funds that it
received when a homeownership program client sold their home before the soft second
mortgage was forgiven. They also have $5500 in private foundation funds earmarked for
replacement housing. At the time, the only MSHA Housing Repair Network funds
available to you were 1% amortizing repair loans and Rehab Lead Grants. You have no
DECD funds available. Due to the above average amount of time required for this project
(2 years), you need to earn a development fee of between $5000 and $7000.


Show a budget and financing package for this project.
                                  REPLACEMENT HOUSING PROGRAM

                                                PROJECT BUDGET

Project:        Case 3- Pushing the Envelope
Date:

PROJECT EXPENSE BUDGET                                       $

Construction Contract                                      58,800

Closing Costs                                                3,000

Subtotal                                                   61,800

Development Fee                                              5,250

Existing Mortgage Pay-off                                        0

Total Project Expense                                      67,050



PROJECT FINANCING

1st. Mortgage - Rural Housing Service                      39,700

Subordinate Mortgages:

CHDO                                                         4,550

Grants:

Other - Private Foundation                                   5,500

MSHA - Rehab Lead Grant                                    10,000

DOE -Weatherization                                          3,500

LIHEAP CHIP Grant                                            2,500

Other:

RD - 504 Repair Loan                                         1,300

Total Project Financing                                    67,050

Send check for $5,500 to RHS mortgage closing attorney

Receive check from closing attorney for fee - $5,250

Have Contractor Invoice Agency for MSHA, CHDO, DOE, LIHEAP Funds

Weatherization will do energy audit after house complete

Receive $1800 fee from MSHA for originating Rehab Lead Grant
            part of which was spent on Change Orders for unforseen costs

The well issue was handled by easement.
Replacement Housing Financing

Case Study 4 – Liens, Waivers, and Automation

The client is a woman who lives alone but has an older child that stays with her from time
to time. She is disabled and receives about $10,000 per year from Social Security and
food stamps. She receives LIHEAP and her home has never been weatherized. Her credit
is good, but she has some non-tax liens against her property.

The client lives in a 1968 mobile home in extremely poor condition. She owns the
property outright and has a good septic system and drilled well.

Step 1: Client completes a pre-application which screens for eligibility and suitability for
replacement housing. It looks marginal but worth a try.

Step 2: Forward the client’s pre-app to Rural Housing Service for low-interest mortgage
money. RHS works with the client to remove the liens and then reports her borrowing
capacity, with gross-up, is $53,175. RHS estimates that closing costs for the mortgage
will be about $3000.

Step 3: Using standardized plans for a 2 bedroom ranch with frostwall - supported
concrete slab, pre-approved by RD, your contractor quotes you a lump sum fixed price of
$79,000, which does not include removal of the existing mobile home. However, the
local fire department has agreed to take the mobile home to use for training.

Step 4: Assess resources. You have access to MSHA Housing Repair Network funds, but
your DECD funds have been expended. You need to earn a development fee of about
$5000.

See how the Replacement Housing Financial Worksheet was used to prepare a budget
and financing package.
                           MAINE HOME REPAIR NETWORK
                    REPLACEMENT HOUSING FINANCIAL WORKSHEET

                                                                                                                 ENTRY FIELD
        PROJECT:             John Doe
        DATE:                 4/29/2005

            1. MHRN INCOME ELIGIBILITY                                     4. PROJECT FINANCING
                                                                        RHS MORTGAGE TERMS
         ANNUAL GROSS HOUSEHOLD INCOME                   SELECT Adjusted 100% Median Income            $43,450
 ENTER INCOME INCLUSIONS            $/MONTH                     MEDIAN INCOME PERCENT                  23.05%
       Wages                             0                      ANNUAL INTEREST RATE                    1.00%
       Business Income                   0               SELECT TERM (33yrs.or 38yrs.)                    38     OK
       Payments In Lieu of Earnings      0
       Pensions/VA Benefits              0                        ESTIMATED RHS MORTGAGE LIMIT
       Social Security/SSD              730                     MAX Monthly Total Debt             $381
       SSI                               0                      Monthly Non-Housing Debt             25
       TANF                              0                      MAX PITI @ 29% Limit                269
       Child Support, Alimony            0                      MAX PITI @ 33% Limit                306
       Welfare                           0                      MAX New PITI @ 41% DTI              356
       Other                             0                      MAX New PITI                        269
       Other                            138               ENTER SET Estimated Taxes, $/Month         99
       TOTAL INCLUSIONS                $868               ENTER SET Estimated Insurance, $/Month     30
                                                                MAX New Principle & Interest      ($140)
 ENTER INCOME EXCLUSIONS                  $/MONTH        SELECT RD Area Loan Limit               $152,100
       Medical Expense Reimbursement          0                 MAX RHS MORTGAGE                 $53,175         OK
       Trainng Program Benefits               0
       Income from Children                   0                         TOTAL PROJECT COST
       Foster Care Payments                   0           ENTER Construction Contract                  $79,000
       Other                                  0           ENTER Closing Costs                           3,000
       TOTAL DEDUCTIONS                      $0          SELECT Development Fee %                        4%
       Monthly Gross Income                 $868                Development Fee Amount                  3,280
                                                          ENTER Existing Debt Pay-Off                     0
        ANNUAL GROSS INCOME               $10,416               TOTAL PROJECT COST                     $85,280

SELECT No. in Household          1                                     FINANCING PACKAGE
SELECT Adjusted 80% Median Income         $27,250         ENTER SET RHS MORTGAGE AMT                   $52,780   OK
                  ELIGIBLE?                YES      OK
                                                          ENTER SET GRANTS:                               $
                                                                DOE Weatherization                      2,500
           2. RHS INCOME CALCULATIONS                            Other Grant                               0
            RHS REPAYMENT INCOME                                 Other Grant                               0
 ENTER INCOME INCLUSIONS                  $/YEAR                 TOTAL GRANTS                           $2,500
       Annual LIHEAP                        400
       Annual Food Stamps                   324                  UNFUNDED BALANCE                      $30,000
       Earned Income Credit                  0
       REPAYMENT INCOME                   $11,140         ENTER SET MSHA DEF/FOR LOAN                  $30,000   Too High !

          RHS ADJUSTED FAMILY INCOME                             DECD DEF/FOR LOAN                        $0     OK
 ENTER INCOME DEDUCTIONS                # OR $
       Number Of Children In HH            0                     TOTAL PROJECT FINANCING               $85,280
       Enter "1" If Elderly OR Disabled    1
       Annual Childcare Expenses          $0
        Annual Medical Expenses             $0                       5. NEW DEBT TO INCOME RATIO
        Annual Disability Assistance        $0                                                       $/MONTH
        ADJUSTED FAMILY INCOME            $10,016                Monthly Non-Housing Debt                 $25
                                                                 RHS Mortgage Principle & Interest       $139
        3.CURRENT DEBT TO INCOME RATIO                           Estimated Hazard Insurance               $30
 ENTER CURRENT NON-HOUSING DEBTS          $/MONTH                Estimated Real Estate Taxes              $99
       Car Loan                               0                  MONTHLY HOUSE PAYMENT                   $268
       Child Support/Alimony                  0                  NEW PITI RATIO                         28.89%   OK
       Total Credit Card Payments            25                  NEW DTI RATIO                          31.58%   OK
       Other                                  0
        Other                                0                           6. LOAN TO VALUE RATIO
        TOTAL NON-HOUSING DEBT              $25
                                                                 MORTGAGES                                 $
 ENTER CURRENT HOUSING EXPENSES           $/MONTH                RHS                                    52,780
       Mortgage                                0                 MSHA Deferred/Forgivable Loan         30,000
       Hazard/Mortgage Insurance              25                 DECD Deferred/Forgivable Loan             0
       Real Estate Taxes                      60                 TOTAL LOAN AMT.                       $82,780
       TOTAL CURRENT PITI                    $85
                                                          ENTER PROPERTY VALUE                         $90,000
        TOTAL CURRENT DEBT                 $110
                                                                 LTV RATIO                              91.98%   OK
          CURRENT DTI RATIO                11.8%    OK

                                             FINANCING PACKAGE
           AMORTIZING LOANS                GRANTS            TOTAL AMORTIZING LOANS                    $52,780
        RHS Mortgage        $52,780 DOE Wz Grant      $2,500 TOTAL DEF/FOR LOANS                       $30,000
            DEF/FOR LOANS           Other Grant           $0 TOTAL GRANTS                               $2,500
        MSHA Def/For Loan   $30,000 Other Grant           $0
        DECD Def/For Loan        $0                          TOTAL ALL                                 $85,280
                                          PENQUIS C.A.P., INC.

                              REPLACEMENT HOUSING PROGRAM

                                            PROJECT BUDGET

Project:    Case 4 - Liens, Waivers & Automation
Date:       (Financial Worksheet produces Budget Sheet)

PROJECT EXPENSE BUDGET                                        $

Construction Contract                                       79,000

Closing Costs                                               3,000

Subtotal                                                    82,000

Development Fee @        4.00%                              3,280

Existing Mortgage Pay-off                                     0

Total Project Expense                                       85,280




PROJECT FINANCING

1st. Mortgage - Rural Housing Service                       52,780

Subordinate Mortgages:

Maine State Housing Service                                 30,000

DECD - CDBG                                                   0

Grants:

DOE -Weatherization                                         2,500

Other -                                                       0

Other -                                                       0

Total Project Financing                                     85,280

Specify that RHS closing attorney issue you a check for fee - $3,280

Apply to MSHA for Waiver to increase deferred/forgivable loan to $30K

Have contractor invoice Wz. For $2500

Wz. will do an energy audit when house is complete

Receive approx. $2000 origination fee from MSHA
                                APPENDIX V


          A Model Replacement Housing Program for Maine
1. Developer. The ideal developer of replacement housing is a Community Action
       Agency (CAA) that administers Maine Home Repair Network (MHRN)
       programs.

2. Client Eligibility Requirements. In order to afford the greatest number of families
   the opportunity to replace their homes, the basic eligibility requirement must be
   limited to these three:
       o Steady Household income < 80% of area median
       o Property ownership as evidenced by deed
       o Have a home that cannot be economically rehabilitated to meet minimum
          standards, i.e. rehabilitation costs exceed 50% of the homes market value.

 3. Participating Funders. In order to be able to offer the variety of financing
packages that replacement housing requires, the Developer must form partnership
relationships with all these funders and learn to access their resources:
       o USDA Rural Development through their Rural Housing Service (RHS)
              502 Direct Loan Program
              Housing Preservation Grants

      o Maine State Housing Authority (MSHA)
          Fed HOME MHRN funds
          State HOME MHRN funds
          Housing Finance Revenue Bond funds (HFR)
          Maine Municipal Bond Bank (MMBB) funds
          U.S. Dept. of Energy (DOE) Weatherization funds
          Maine DHHS Central Heating Improvement Program (CHIP) funds

      o Dept of Economic & Community Development (DECD)
          Community Development Block Grant (CDBG)
          Public Service Grants

      o Community Development Financial Institutions (CDFI)
          Loan fund management services
          Loan closing services

      o Private Charitable Foundations
           Grant funds

   4. Financing Packages. Current financing packages are able to bring
   replacement housing to only 10% of those in need. In order to serve a significant
   portion of those in need, a wide range of innovative financing arrangements that
   include three types of funding are required:
   a. Amortizing Loans:
       o RHS: Conventional 502 Program lending with interest rates as low as
         1%, term max. 38 yrs., Client: good credit, low/moderate existing debt
         load, LTV= 40% - 100%, lender in 1st. position

      o RHS - Alternate 502 Program lending with interest rates as low as 1%,
        term max. 38 yrs. Client: below-par credit, no/very low existing debt
        load, LTV= 40% max, lender in 1st. position

      o MSHA – Fed HOME or HFR funds, Interest rate1%, term 15 yr.

      o MSHA – MMBB funds, Interest rate 1%, term 15 year, septic systems
        only

      o DECD – CDBG Revolving Loan Fund, Interest rate 1%, term 20 yr.,
        administered by CDFI

      o Private Foundation Grant Revolving Loan Fund ( RLF), Interest
        rate1%, variable term, administered by CDFI

   b. Deferred/Forgivable Loans:
       o MSHA – Fed HOME funds, 5 year non-incremental forgiveness.

      o DECD – CDBG funds, 10 year non-incremental forgiveness

   c. Grants:
       o MSHA - DOE Weatherization grants

      o MSHA – DHHS CHIP grants

      o USDA - RD Housing Preservation Grant

      o Private Foundation Grants

5. Replacement House Designs. In order to produce replacement housing
quickly and at the lowest possible cost, the Developer will need:
       o Standardized designs for 1 – 4 Bedroom, Ranch-style, low-
          maintenance, energy efficient homes, with compact floor plans
       o Lender-approved Plans & Specification documents
       o Standardized contract bid documents for competitive bidding

6. Contractor Pool. Successful project execution will depend on local contractors
that are:
       o Fully insured
       o Have adequate Line-of-Credit to handle payment retainage
       o Capable of high-quality, production workmanship
       o Good with client relations
       o Interested in building replacement housing
                 MAINE HOME REPAIR NETWORK
               REPLACEMENT HOUSING FLOW CHART

                              CAA OUTREACH
ADVERTISING COPY &
    BROCHURES


                                CAA INTAKE
 REPLACEMENT HOUSING
   PRE-APPLICATION                                           DENIALS


                             CAA PRE-SCREEN
FINANCIAL WORKSHEET


                             CAA REFERRAL TO RHS




                 RHS PRELIM. ELIGIBILITY
                   DETERMINATION
                                                        DENIALS
                                                                        FINANCIAL
                                                                        COUNSELING

                       RHS CREDIT CHECK
                        & VERIFICATION




                            RHS CERTIFIES ELIGIBILITY
                             SETS MAX LOAN AMOUNT



SITE EVALUATION FORM         CAA SITE EVALUATION                       DENIALS




FINANCIAL WORKSHEET          CAA PROJECT PLAN & PRELIM. BUDGET




                                CAA PREPARE BID DOCUMENTS
 STOCK HOUSE PLANS
 STANDARD SPECIFICATIONS



                                     CAA BIDS OUT & OPEN



                             CAA PROJECT PLAN REVIEW/REVISION


     FINANCIAL WORKSHEET
                                  CAA FINAL PROJECT BUDGET
       MHRN REPLACEMENT HOUSING FLOWCHART, CON’T.


                            CAA PREPARES MHRN
                          REPLACEMENT PROPOSAL
PROPOSAL FORM



                      SUBMIT TO MSHA/DECD FOR APPROVAL


                       CAA PREPARES MHRN LOAN DOCUMENTS

MHRN FORMS

                            CAA & RHS CONDITIONAL
                            COMMITMENT OF FUNDS




                          CAA PRECON & LOAN CLOSING
                               FOR MHRN FUNDS




                       CAA SUBMITS LOANS FOR APPROVAL



                     RHS PRECON MEETING & CONTRACT SIGNING


                              RHS FINAL REVIEW &
                             OBLIGATION OF FUNDS



                             RHS MORTGAGE CLOSING




                                                    3 DAY RIGHT
                                                    OF RECISION


NOTICE TO PRO FORM


                                 CAA GIVES NOTICE TO
                              PROCEED TO CONTRACTOR




                       CAA & RHS INSPECTIONS & PARTIAL PAYMENTS

 MHRN FORMS


                       CAA & RHS FINAL INSPECTION & CLOSE-OUT
                               Appendix VII

              Ranch-style Replacement House Floor Plans


The exhibits include a portfolio of standardized replacement house designs
developed at Penquis CAP. The table shows the specifics of each model and its
status as regards RD approval for use with the 502 Direct Loan Program.

A version of Model 2430 SL has been built in the past without RD 502 mortgage
funding using a combination of MSHA, DECD, and private foundation funding.
That model used a frost-protected slab instead of a frost wall–supported slab,
and a direct vent space heater in place of the HWBB system. However, building
this design at current building costs would be difficult.

Model 2424 SL was designed specifically to be built without RD 502 funding to
serve the needs of a couple or individual that cannot qualify for mortgage
financing. It was designed to be affordable with the combination of MSHA and
DECD deferred/forgivable loans, DOE Weatherization grant funds, and a small
amount of private grant money, when available. With MSHA’s recent regulation
forbidding the use of DOE funds in replacement housing, the financing is
problematical.

The three and four bedrooms models are built on a full foundation with oil-fired
HWBB heat. One and two bedroom models funded by RD are built on either a
frost wall/slab or full foundation, and have a wall-mounted gas-fired boiler for
HWBB heat.
                                                       PENQUIS CAP, INC.
                                                 REPLACEMENT HOUSING PROGRAM
                                                       DESIGN PORTFOLIO


                ALL DESIGNS MEET CABO 1& 2 FAM. DWELLING CODE, NFPA 101, L.S.C., CABO MODEL ENERGY CODE



                                     ARCHITECT      RURAL DEV.      MSHA/DECD
     # BEDRMS     MODEL       AREA    APPROVED      APPROVED        APPROVED           FOUNDATION                           HEAT

1       1         2424 SL     576       NO         DISALLOWED          YES      FROST PROTECTED SLAB-ON-GRADE           SPACE HEATER

2       1         2430 SL     720       NO         DISALLOWED          YES      FROST PROTECTED SLAB-ON-GRADE   SPACE HEATER OR HWBB(GAS/WALL)

3       1         2430 SLW    720       YES            YES             YES          SLAB-ON-FROST WALL                 HWBB (GAS/WALL)

4       1         2430 CS     720       NO         DISALLOWED          YES        CRAWL SPACE/FROST WALL        SPACE HEATER OR HWBB(GAS/WALL)

5       2         2432 SL     768       NO         DISALLOWED          YES      FROST PROTECTED SLAB-ON-GRADE          HWBB (GAS/WALL)

6       2         2432 SLW    768       NO             YES             YES          SLAB-ON-FROST WALL                 HWBB (GAS/WALL)

7       2         2630 FB     780       YES            YES             YES             FULL BASEMENT                HWBB (DIRECT VENT/OIL)

8       2       2634ADA-SLW   884       NO             YES             YES          SLAB-ON-FROST WALL                 HWBB (GAS/WALL)

9       3         2836 CS     1008        1 BUILT W/ RD $, NOW DISALLOWED         CRAWL SPACE/FROST WALL            HWBB (DIRECT VENT/OIL)

10      3         2836 FB     1008      YES            YES             YES             FULL BASEMENT                HWBB (DIRECT VENT/OIL)

11      4         2842 FB     1176      YES            YES             YES             FULL BASEMENT                HWBB (DIRECT VENT/OIL)

12      4         2846 FB     1288      YES            YES             YES             FULL BASEMENT                HWBB (DIRECT VENT/OIL)

				
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