[BoulderCouncilHotline] Middle Income Downpayment Assistance Pilot

[Yates, Bob]

Council colleagues:


This post supplements the memo prepared by city staff for this evening's discussion on the proposed Middle Income Downpayment Assistance Pilot. First, we want to thank staff for the hard work they have done over the last several months in crafting and adjusting the proposed pilot. They have been aided along the way by advice and input from lawyers, bankers, and financial analysts, and the resulting product is better for it. Similarly, staff has done a good job of presenting the proposed pilot in their memo for tonight's meeting, so we need not repeat it here. However, we did want to emphasize a few points that council will want to consider this evening, as follows:


  1.  AMI Limit: Council previously instructed staff to limit participation in the downpayment assistance program to those families earning at or below 120% of the Area Median Income (AMI), and we support that. However, council will need to give some consideration to whether a similar limit should apply to subsequent purchasers of the deed-restricted home. In a perfect world, it would. However, depending on where we end up on the appreciation cap (next issue below), we may need to relax this limit for subsequent purchasers to a higher limit (say 200% of AMI), or no AMI limit at all. That is because, historically, AMI has increased at a relatively low rate over time. If we feel that this rate is too low to attract program participants and a higher appreciation cap is used, the math inevitably leads you to conclude that, at some point, the deed-restricted home will no longer be affordable to a family earning 120% of AMI.
  2.  Appreciation Cap: We have a few choices: If the appreciation cap is pegged to AMI increase (which has historically averaged about 2% per year), then the deed-restricted home should always be affordable to a family earning 120% of AMI. But, this rate may be too low to entice participants and we may have few or no takers to the program. Alternatively, we could set the appreciation rate at a higher number, say 3% or 4% (or the inputed rate of interest on the loan). This would have the advantage of likely attracting more participants. But the downside would be that the home eventually would be too expensive for subsequent purchasers earning 120% of AMI (assuming AMI does not increase as much as the appreciation cap). In short, we either set the cap low and risk low participation, or we set the cap higher and acknowledge that subsequent buyers may not be subject to the 120% AMI test.
  3.  Size of Program: TABOR requires that we state in the ballot measure the amount of the borrowing and the assumed interest rate. We support staff's suggestion for the pilot at $10 million in loan authorization, with average interest rate over the life of the loan not to exceed 5%. We could assume a seven-year loan term, as this is the average period of home ownership for the type of purchases we would be supporting. In other words, the first downpayment loans should start to be repaid as the city's borrowing window closes, allowing the program to be evergreen. Alternatively, we could consider making the city's loan window eight to ten years, to increase flexibility, but this would increase the total interest outlay by the city.
  4.  Cost and Yield: At $10 million in borrowing authority, and assuming an average downpayment loan of $150,000 (the cap would be $200,000), the initial phase of the program could yield about 67 deed-restricted houses (setting aside whether even more houses could be deed-restricted by the evergreen nature of the program). If these loans were made steadily over a period of seven years, the total interest outlay by the city (at 4%) would be about $1.7 million. Nearly half of this (i.e., the interest in the early years of the program) could be paid from the $820,000 sitting idle in the existing H2O loan program. And all of this interest would be paid back when the homes were sold or the loans matured. So the true cost to the city is the time value of advancing this $1.7 million in interest and eventually getting it back. This true cost of the interest advance over a seven-year program, using a 4% discount rate, is about $200,000, or about $3,000 for every house that is deed-restricted.


We look forward to a thorough discussion of this topic this evening.


Best,


Sam & Bob
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