[BoulderCouncilHotline] Shared equity down-payment assistance program

[Weaver, Sam]

Fellow Council Members and HOTLINE followers,

For the past five years, I have been talking with members of the community, fellow Council members, and local affordable housing advocates to try and understand some of the options for preserving middle income workforce housing in Boulder.  As a result, I had formed a high-level outline for a shared-equity middle-income home puurchase program that in 2016 came into much sharper focus.  In a long conversation with Bob Yates on the subject, Bob helped me conceive some specific financial methods the City could use to implement such a program, at a very low net cost to the City.  Once this more specific outline was in  place, I spoke with national housing policy expert Rick Jacobus to see if there were any similar programs in other communities.  The short answer is that yes, other communities use similar programs to assist in workforce homeownership, but that the Boulder program that we were discussing added one important new element: permanent affordability.

With that as background, Bob and I have written up the outline of this program concept for consideration prior to the Council retreat.  Attached to this message and included below is a white paper on a program to assist middle-income residents and workers with a home purchase resulting in permanent affordability for the purchased property.

As you will see, not all details are settled in this proposal because a robust public discussion can help us focus the program in a way that is guided by public process.  This white paper is to promote public discussion within a framework of a concept for an evergreen fund to promote permanent affordability of some of our middle income housing stock.  Regardless of the policy details, the first step as we envision it would be a limited-scale pilot over 3 years to make sure that there is demand, and to road-test whatever program details we decide upon. I look forward to the coming discussions!

All the best,

Sam Weaver
Member of Boulder City Council
weavers at bouldercolorado.gov<mailto:weavers at bouldercolorado.gov>
Phone: 303-416-6130


A Shared Equity Model for Middle-Income Affordable Housing Home Ownership in Boulder
A way to produce permanently affordable housing from existing homes with willing partners
By Sam Weaver and Bob Yates

The ideas presented here are not all our own, as we have been discussing the concept of this program for a number of years, trying to refine it to a system that is scalable and produces middle-income, permanently affordable housing in Boulder.  As we know (and consultants report to us), Boulder is doing OK at building and preserving housing for those with the lowest incomes, 30% to 60% of Area Median Income (AMI).  Our goal is 10% of our housing stock affordable at those levels and somewhat above - we are at around 8% currently.  However, as we know, we are seeing increasing difficulty for middle-income residents to be able to afford to purchase a home in Boulder.  This is because housing prices have been outpacing income growth for many years, and this is a national problem in many desirable urban areas.  Boulder is no exception, and is the most expensive non-resort town in Colorado.  The lower end of the middle-income range is being completely priced out of home ownership in Boulder.

This short overview is focused on a program to help middle-income Boulder workers or residents to purchase a home.  The program involves a deal between the City and the homebuyer(s).  The City will use its bonding capability to create a pool of money to assist middle-income home buyers to afford a home, and in exchange that home will be made permanently affordable through a deed restriction.  The deed restriction is a contractual obligation recorded with the deed filed with the County which stipulates a maximum annual appreciation for the property.  This deal will only be attractive to those who wish to live in Boulder enough that they are willing to forego market-rate appreciation, which over the long run will likely be higher than the deed restriction appreciation cap.  We expect this is likely to be the population that would never be able to assemble a down-payment large enough, or make monthly payments high enough, to afford to buy a house or condo in Boulder.

The ultimate goal of such a program is to preserve economic diversity in the City of Boulder, and potentially to reduce the in-commuting load.  The means that this program uses to reach the goal is to provide funding through market mechanisms in which some existing housing stock is preserved as affordable to middle income earners and below for ownership.  This program does not address rental housing.  Boulder currently has a smaller-scale program called H2O which promotes home ownership by essentially providing a second mortgage on a home that is paid back at some point, but does not include on-going mortgage payments nor permanent affordability.  This program is not popular, serving only a handful of buyers each year.

To build our proposed program, we will need to first define who will qualify for the program.  Since residents who are making significantly more than the Boulder Area Median Income, by definition, need little assistance (and would probably not want to forego market-rate appreciation), the program will focus on those making less than a threshold of (say) 120% of AMI.  The exact amount should be specified through a political and technical discussion.  Similarly, we do not want to be assisting with the purchase of luxury housing, so to qualify for consideration in this program, the residence to be purchased will be below the median home price of that category of housing (single-family, attached, townhouse, etc.).  Those two guidelines (perhaps with a requirement that the applicant have lived or worked in Boulder for some period of time, and perhaps limited to first-time homebuyers), would define the pool of potential applicants.

The next consideration is how the mechanics of the home purchase will work.  What follows is an illustrative example.  The income-and asset-qualified purchaser(s) have located a home they want to buy which is below the median price for that type of housing.  But, the buyers' income is only sufficient to qualify for a bank loan for 67% ($400,000) of the value of the home ($600,000), and they have a down-payment of only 10% of the home value ($60,000).  This leaves the buyers with a big gap of 23% of the home value or $140,000.  Under the proposed program, the City receives their application, agrees with the bank that they are credit-worthy for their monthly payment, and that the home qualifies.  The City then provides the 23% of the home value towards the purchase in cash as part of the transaction, and through contractual agreements, receives a 23% share in the equity ownership of the home.  The other part of the contractual agreement with the buyer is that the future sale price of the home can have no more than a (say) 4% per year annual appreciation. This shared equity arrangement continues until the home is sold, at which time the City receives its principal, as well as its share of the 4% annual appreciation.  A potential option for the program design is that Boulder be guaranteed its 4% annual rate of return regardless of whether the home actually appreciates at 4% per year or not - this puts all of the risk on a sub-4% appreciating real estate market onto the buyer(s).  With the sale, the City financial position is restored, and these funds can be deployed for another home purchase, or to pay off the bond-holders that supplied the funding.  The only cost to the City has been the opportunity cost for the funding (which could be financially small), but the great benefit is that another home has become permanently affordable to middle-income buyers.  If the bonds are set up correctly such that the annual bond rate is roughly equal to the appreciation cap (in this example 4%), this program to preserve middle-income housing affordability could be run with no significant cost to the City of Boulder.

There are a myriad of questions that arise when we describe this program to interested parties.  We will address a few:


1)                  Will buyers take advantage of this program?  They did not too much in the 1990's and 2000's.


Personally, we think the answer is 'yes'. Times have changed a LOT since the 1990's and 2000's, when home costs were lower, down payments were lower, and the market appreciation was so high that there would have to be a big incentive not to take any deal that required limiting appreciation.  But the proof is in the pudding - our thought is to run a limited pilot to see how popular a larger program would be, and if it is not popular it stops; if it is popular Boulder goes to the bond markets for substantial funding to expand the program.


2)                  Will banks go along with this program, since there are other parties involved?


>From discussions we have had with national housing experts, we believe the banks consider this to be an acceptable arrangement.  We will be exploring this further, but since the buyers will not have to make monthly payments on what is essentially the City-owned equity, and since both the bank's and the city's loans will be secured by mortgages on the property (with the bank in the first position), we expect this arrangement to pass lender muster.  As far as loan-to-value, either way it would be calculated (with City ownership of a portion, or without) the standard guidelines would typically be met.  So, yes, we think this will work from the bank loan side.


3)                  What about home improvements?  Buyers will not want to keep up these homes if they do not re-coup the value from the improvements.


This is a very important point.  We can deal with this through establishing the basis (purchase price) which can only appreciate at (say) 4% per year, and keeping track of material non-maintenance improvements (a room addition, a kitchen remodel, etc.) which increase the value of the home.  These substantial improvements can be accounted separately from the basis, and the value of those improvements can be allowed to appreciate at market rates, ultimately rewarding the owner at the time of a sale.  Since a major portion of the value of the property is in the land value, the homes will still remain substantially affordable even with a (relatively small portion) appreciating at market rates.


4)                  Once owners are in this program, they will never have any incentive to leave, so the funding will be tied up forever.


This is also an important point, but we can test its validity.  One approach is to try it and see if the normal life circumstances, career advancement, etc., keep the turnover at around the 7 year average occupancy duration we currently see.  If, however, program participants are effectively tying up needed funds for new program houses, a balloon element can be added.  This would require a home re-finance (or sale) at, say, 7 or 10 years after the City contribution, after which the City principal and appreciation are returned to go to work on a new purchase.


5)                  Will the bond markets be interested?


Again, we think the answer is 'yes'.  We believe these could be tax-free municipal bonds, effectively increasing their yield over whatever market appreciation rate is allowed for the underlying residential appreciation.  We can easily find out as we study and prepare for a pilot program.


6)                  Have other cities implemented programs like this one?


Yes, San Francisco and Los Angeles both have similar programs.  The main distinction between this program proposal and the ones in other cities is that permanent affordability is achieved with this proposal, while in the other cities market rate appreciation is allowed.

In summary, we have worked on this idea with many partners, including fellow Council Members and City staff Bob Eichem and Kurt Firnhaber.  We welcome comments from the community, and hope to find proposal weaknesses or hear about potential program improvements from the Boulder community.


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