HomeMy WebLinkAboutAgenda Statement 1984/07/24 Item 10 CITY COUNCIL AGENDA STATEMENT
Item 10
Meeting Date 7/24/84
ITEM TITLE: Report: Housing Rehabilitation Program changes, program
status, and Lender Services Agreement for Rehabilitation
Pro grams
a. Resolution /17/3 Approving Agreement with Bank of America
for Housing Rehabilitation and Commercial Rehabilitation
Lending Services
SUBMITTED BY: Community Development Director 5ths Vote: Yes No X )
REVIEWED BY: City Manager
Recent changes in Community Development Block Grant (CDBG) regulations
necessitate changes in our Block Grant funded housing rehabilitation program.
Additionally, the City's agreement with Bank of America for lender services
for the housing rehabilitation and commercial rehabilitation programs has
expired. Proposals for such services have been solicited and received.
RECOMMENDATION: That the Council accept the report and approve an agreement
with Bank of America for lender services relating to the housing
rehabilitation and commercial rehabilitation programs.
BOARDS/COMMISSIONS RECOMMENDATION: Not applicable.
DISCUSSION:
CDBG Regulation Changes:
Changes in the CDBG regulations which govern the City's use of Block Grant
funds have been adopted by the Federal Legislature. Two important changes
impact the City's Community Housing Improvement Program (CHIP). Those
changes, along with analysis of their impact and recommendations for program
policy changes, are as follows:
1 . Housing rehabilitation loans for single-family owner-occupied dwellings,
including mobilehomes, can be made only to households with annual incomes
at or below 80% of median income ($22,000 for a family of four), except in
certain circumstances involving a threat to public health and safety.
Analysis
Our strategy under the old regulations has been to select target areas for
housing rehabilitation and make loans to all income levels in those target
areas, with more favorable loans going to low-income households. The
intent has been to concentrate CHIP funds in specific neighborhoods and to
induce improvement of all possible units.
_1v113
Page 2, Item 10
Meeting Date 7/24/84
The regulations changes prohibit loans for general property improvements
to households with incomes over 80% of median income. However, in cases
where public health and safety hazards exist, loans can be made to
over-income families to correct just those health and safety hazards.
Therefore, it will be possible to assist in correcting serious substandard
conditions as they are discovered, regardless of household income.
Recommendation
Continue to concentrate CHIP funds in current target areas, with 5% loans
going to low-income households and occasional 8.25% loans made on units
presenting public health and safety hazards.
2. Rental projects receiving 5% landlord assistance loans must have a
majority of the units occupied by low-income tenants.
Analysis
The CHIP Program has made 5% loans to landlords of rental units,
regardless of the income of tenants, if the owner agreed to keep rents at
or below the Section 8 Existing Rental Subsidy Program's Fair Market Rents
for 10 years. In this way, substandard rental projects have been
improved, and tenants have been protected from large rent increases as a
result of our investment. If the CHIP Program must certify that more than
50% of the tenants of an assisted project are low income, it will be
necessary to do income determinations on at least half of the tenants of
the building being considered for a loan. However, the value of improving
substandard rentals justifies the increased workload of periodically
certifying tenants' incomes.
Recommendation
Make 5% landlord assistance loans to owners of rental units after
determining that the majority of the units will be occupied by low income
tenants.
Program Status
During the eight year operation of the CHIP Program, 562 dwelling units have
been rehabilitated, including 154 single-family homes, 176 rental units, and
232 mobilehomes. In the process, $2,019,425 in program funds have been loaned
or granted.
Lender Agreement
The City has had an agreement with Bank of America for several years for
lending services for the housing and commercial rehabilitation programs.
Although the relationship has been quite satisfactory, an informal
solicitation of proposals was undertaken in March to assure that the City was
getting the best possible benefit from the rehabilitation lender services
sz__\‘-it3
Page 3, Item 10
Meeting Date 7/24/84
relationship. All banks and savings and loans with offices or branch offices
in Chula Viste were invited by letter to submit a proposal for lending
services to the CHIP and commercial rehab programs. Three lenders responded
by telephone with significant interest: Bank of America, Crocker Bank, and
Wells Fargo Bank. After Wells Fargo Bank determined that they could not
accommodate the mobilehome component of the CHIP Program, they elected not to
submit a proposal .
Proposals
Bank of America
Bank of America's proposal is in the form of a new contract which is
substantially the same as their recently expired contract with the
City. In summary, the contract offers lending services as follows:
1 . The City deposits $200,000 in an interest-bearing warehouse
account from which collateralizing funds are drawn for
individual loans as loans are made. Warehouse account funds can
be placed in money market accounts and certificates of deposit
as practical .
2. As loans are made, warehouse account funds are transferred to
collateralized loan accounts in the following amounts:
(a) 78% of loan amount for 5% loans to low-income households
and to rental property owners who agree to rent
restrictions for 10 years.
(b) 50% of loan amount for 8.25% loans to over-income
homeowners.
(c) 100% of loan amount for 5% loans to low-income mobilehome
owners.
(d) 55% of loan amount for 10% loans to over-income mobilehome
owners.
(e) 40% of loan amount for 10% loans to commercial owners or
long-term lessees.
(f) 100% on any loan not underwritten by the Bank but requested
by the City as a fully guaranteed loan.
Collateralized loan accounts do not earn interest; additionally,
the funds in the collateralized loan accounts collateralize the
loan and are at risk in case of default on the loan. These two
factors make possible the reduced interest rates to the program
borrower.
Page 4, Item 10
Meeting Date 7/24/84
The yield rate on which the above collateralization percentages
are based is fixed for the first four months of the contract
period. Thereafter, it could be amended at any time with
fifteen day notice. The yield rate, and therefore the loan
collaterization amount, have not increased from the previous
year's contract.
3. After the first 180 days of the contract, the excess balances in
the collateralized loan accounts are paid back into the City's
warehouse account, where the funds once again earn interest and
can be used to collateralize new loans.
4. When loans become delinquent, the bank pursues normal collection
procedures for 90 days. If unsuccessful after 90 days, the bank
may withdraw the funds from the collateralized loan account and
continue to pursue collection of the balance of the loan. Any
funds in excess of the loss to the bank will be credited to the
collateralized loan account.
5. Deferred loans are made by the bank using Agency money for a
modest servicing fee.
Crocker National Bank:
Crocker Bank's proposal is in letter form and offers services as
follows:
1 . The City deposits $200,000 in an interest-bearing general
account from which collateralizing funds are drawn for
individual loans as loans are made. General account funds can
be placed in money market accounts and certificates of deposit
as practical .
2. As loans are made, general account funds are transferred to
consideration accounts, loan loss reserve accounts, and
collateralized loan accounts in amounts determined by the bank's
prevailing Community Development Market Rate (CDMR), which would
likely fluctuate during the period of the bank agreement.
(a) Consideration accounts are set up for loans which meet the
bank's underwriting standards. Discussion with Crocker
Bank regarding clientele profiles suggest that 60% to 70%
of the loans in the CHIP Program might be so classified.
The funds in a consideration account do not collateralize
the loan and are not at risk. They provide interest-free
funds to the bank, which results in the lowered interest
rate to the program borrower.
x_\\1'3
Page 5, Item 10
Meeting Date 7/24/84
Crocker Bank has provided a chart of necessary deposit
amounts in the consideration accounts, depending on the
prevailing CDMR. The current CDMR rate is 16%. Based on
the Crocker Chart and a 16% CDMR, the consideration
accounts would require the following deposits:
(1 ) 84% of loan amounts for 5% loans to low-income
homeowners and to rental property owners who agree to
rent restrictions for 10 years.
(2) 58% of loan amounts for 8.25% loans to over-income
homeowners.
(3) 100% of loan amounts for all mobilehome owner loans.
(4) 44% of loan amounts for 10% loans to commercial owners
or long-term lessees.
(b) Consideration accounts plus loan loss reserves are set up
for loans the bank considers marginal credit risks. The
same percentage of the loan amount is required as for
underwritten loans, but 10% of the loan amount is placed in
an at-risk loan loss reserve and the balance required is
placed in a consideration account. Commercial loans would
not be made in this category.
(c) Collateralized loan accounts are set up for loans which do
not meet standard or marginal credit criteria. 100% of the
loan amounts for all loan categories must be placed in the
at-risk collateralization account.
None of these accounts pay interest on the City funds, which
results in the lower borrowing rates to program clients.
3. Semi-annually, the excess balances in the consideration
accounts, loan loss reserve accounts, and collateralized loan
accounts are paid back into the City's general account, where
the funds once again earn interest and can be used to
col l ateral ize new loans.
4. The procedure for delinquencies and defaults as it applies to
loan loss reserve accounts and collateralized loan accounts has
not been negotiated with Crocker at this point in time.
5. For a modest servicing fee, deferred loans and all mobilehome
loans would be made by the bank using Agency money.
Analysis
In comparing these two proposals, the most important considerations are
degree of leveraging versus degree of risk and processing and service.
Page 6, Item 10
Meeting Date 7/24/84
Housing rehabilitation and commercial rehabilitation programs are usually
designed to maximize leverage, the application of public program dollars
to the generation of private capital investment. Rather than pay all the
costs of rehabilitation with program dollars, programs attempt to stretch
program dollars by combining them with private dollars or by recapturing
program dollars. Lending agreement with banks such as those proposed
typically accomplish that leveraging. The collateralizing accounts
accomplish leveraging by setting aside only a portion of the required
rehabilitation loan amount to generate a bank loan for the full amount at
a below-market interest rate. These compensating balance accounts have
the added advantage of resulting in the recapture of the program funds,
which may then be used again and again for additional rehabilitation
loans, each time increasing the leverage factor of the initial program
funds.
The most advantageous agreement for the City would be the one which
leveraged best, used the least program funds to commit bank funds. Given
the proposals received and the yield rates quoted, the Bank of America
provides the best leverage as the table below reveals:
Required Collateralization (Percentage of Total Loan Amount)
Loan Rate To Borrower Bank of America Crocker Bank
5% Homeowner Loans 78% 84%
8.25% Over-Income Homeowner Loans 50% 58%
10% Commercial Loans 40% 44%
In the area of deferred loans, mobilehome loans, and loans not
underwritten by the bank, both institutions require a 100% commitment of
program funds, thus providing no leverage.
Regarding risk, the most advantageous agreement appears to be that
proposed by Crocker Bank, as the table indicates:
AT RISK AMOUNTS
LOAN TYPE BANK OF AMERICA CROCKER BANK
CONSIDERATION
CONSIDERATION ACCOUNT + LOAN COLLATERALIZED
ACCOUNT* LOSS RESERVE** ACCOUNT***
5% Homeowner
Loans 78% 0% 10% 100%
8.25% Over-Income
Homeowner Loans 50% 0% 10% 100%
10.0% Commercial
Loans 40% 0% __**** 100%
* Meet Bank 's underwriting standards
** Marginal credit risk
*** Cannot be underwritten by Bank
**** Bank will not make marginal commercial loans
Page 7, Item 10
Meeting Date 7/24/84
As Crocker Bank indicates that 60% to 70% of CHIP clients should qualify under
the Consideration Account category, the program funds should be at
substantially less risk than under the Bank of America proposal .
It should be pointed out, however, that over the eight-year life of the CHIP
Program and the three year life of the Commercial Rehabilitation Program, with
over $2.2 million loaned, we have had two significant delinquencies totaling
$6,830.00. Both delinquencies were mobilehome loans, which would have carried
100% risk factors for the program under either proposed agreement. Given the
infrequency of either delinquency or default, the lesser risk requirement of
Crocker Bank seems less important than the leveraging differential in Bank of
America 's favor. Additionally, Bank of America 's refusal to accommodate
Private Mortgage Insurance (PMI) under their agreement does not seem an
important consideration. PMI would seem to be unnecessary additional cost to
the borrower given the loss rate experienced by the program.
Finally, in the area of processing and service, Bank of America is a known
quantity, providing excellent response over the years through the use of local
branch processing. Crocker Bank service utilizes local branch processing with
main branch approval and is possibly quite efficient, but is an unknown.
In summary, the Bank of America is recommended for the following reasons:
1 . Leveraging is greater.
2. Greater risk level seems of slight importance given program loss
history.
3. Service history is excellent.
FISCAL IMPACT: $223,000 in Community Development Block Grant will be drawn
down from HUD and deposited with Bank of America as a result of approval of
the resolution.
WPC 0894X
Dates __.
\113