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HomeMy WebLinkAboutAgenda Statement 1978/08/15 Item 06CITY OF CHULA VISTA COUNCIL AGENDA STATEMENT Item No. 6 For meeting of 8/15/78 ITEM TITLE Resolution9.Z ~,~ Approving Agreements with Crocker Bank for Services Relative to the City's Community Housing Improvement Program SUBMITTED BY Community Development Director ITEM EXPLANATION (4/5TH'S VOTE REQUIRED YES. N0~) A major portion of this year's Housing and Community Development Block Grant funds are earmarked for a Housing Rehabilitation Loan Program. The program calls for $250,000 going i:o loans and grants to rehabilitate residential properties and mobile living units owned principally by persons of low and moderate income. To provide expertise in financing, processing loans, and leveraging Block Grant funds, staff is recommending that the City contract with a local bank for lending services. Based on staff's analysis and evaluation of the financing techniques employed by the banking community, staff is recommending that the City utilize the services of Crocker Bank for the City's Housing .Improvement Program (CHIP). CHIP Background During the past two years the CHIP program has been extremely successful in providing $210,000 in loans and grants to homeowners in the Norman Park neighborhood. To facilitate the processing of these loans, the City has employed the services of Bank of America and First National Bank of San Diego County. Both of these banks utilize. Loan Guarantee methods to finance housing rehabilitation. In this approach, the City provides to the bank on a $1 for $1 basis the full principal amount. The bank, in turn, relends the City's money according to City standards at either 3.75% or 6% interest. Under this financing technique, the City: 1) is responsible for default and runs a 100% risk on defaulted loans; 2) receives no leverage from its funds; and 3) generates a low volume of loans. Also, First National Bank of San Diego County after two years of excellent service has decided to withdraw from the program. Therefore, in an effort to continue to provide a high level and quality of service, the staff has negotiated a credit agreement with Crocker National Bank. .]TS~fow _...._____ (continued on page 2) FINANCIAL IMPACT Funds are available and have been appropriated in account 632-6320-BG54. STAFF RECOMMENDATION Adopt resolution. BOARD/COMMISSION RECOMMENDATION COUNCIL ACTION ~z~ ~_ C__ ~__ _.. .._ _ . __,, r ~ / item No. 6 For meeting of 8/15/78 Page 2 Crocker Bank Program As the City prepares to undertake rehabilitation activities with its fourth year Block Grant funds, it is important to note that the new target area (Feaster Park neighborhood) is significantly larger than the present Norman Park neighborhood. To service this area, a greater commitment from the banking community is necessary. It is staff's belief that the program developed with Crocker Bank will provide the greatest opportunity and flexi- bility for Chula Vista residents. Under Crocker's residential financing proposal, the bank will commit $600,000 of its funds and the City would deposit $150,000 with the bank. There will be a maximum term of 15 years and loans will be made to 90~ of the value of the property to be improved. The Crocker program combines three financing techniques: 1) loan guarantees; 2) deferred payment loans; and 3) interest subsidies. Currently, the City is utilizing the first two techniques quite successfully; the third technique is new. The interest-subsidy program allows the City to make available loans at 3% or 7% to borrowers. The City would be required to maintain a 10% loan loss reserve and to pay up-front interest subsidies. Program advantages: 1) Volume of loans possible is higher than present methods. 2) City exposure and liability on default by applicant is significantly reduced. Funds to cover liability are kept in Loan Loss Reserve Account. 3) Effective leverage with this program would be either 2.7 to 1 or 4.5 to 1 depending on the interest rate. 4) Bank located within walking distance of residents it would serve. Program disadvantages: 1) Interest subsidy cannot be recaptured; therefore, initial $150,000 Block Grant fund is depleted over time as loans are made. Cnnr_1 us i nn Based on staff's analysis, Crocker Bank's financing proposals have the potential to generate between 80 and 100 loans in its first year of operation compared with approximately 30-50 loans under our present financing. This program will allow the City to make an immediate and high impact on the neighborhood with the volume of loans remaining high as long as the program is funded. Z.S i A w EXHIBIT "A" TYPICAL HOUSING REHABILITATION LOAN PROCESS Loan Amount: $5,000 Term: Ten years Rate to Borrower: 3% Interest Subsidy: 7% Block Grant Interest Subsidy Payment $ 606.95 10% LossReserve Provision 500.00 TOTAL TO BANK $1,106.95 Bank loans $5,000 of its own funds and City, with Block Grant funds, pays interest subsidy of $606.95. The Loss Reserve Provision is held in a special bank account and is adjusted on an annual basis. Effective leverage is 4.5 to 1. Under the interest subsidy approach, the bank would foreclose on the property in the event of default by the borrower. If the resultant sale is not suf- ficient to retire the debt, the Block Grant Reserve would be obligated for the outstanding balance of the loan which is not recovered. These funds would come from the Loss Reserve Provision and are not a liability of the City.