Common Pitfalls in HOME Program Resale and Recapture Provisions COSCDA Housing Program Managers Training Conference – March 2015

Homebuyer Requirements Required by Section 215 of the HOME statute, § of the HOME rule: -Be single-family modest housing -Principal residence of owner who qualifies as low-income at purchase -Meet affordability requirements determined by the amount of assistance -Subject to resale or recapture provision to ensure affordability Slide 2

Requirements for HUD review and approval – HUD must determine that the requirements for resale and recapture set forth in the PJ’s Consolidated Plan are appropriate and must specifically approve them in writing before the PJ can use HOME funds for homebuyer assistance. Slide 3

Snapshot Contents of some resale and recapture provisions do not comply with the basic requirements 2010 HUD OIG audit of PJ resale and recapture provisions found – 50% of the 40 PJs sampled failed to have adequate provisions that complied with § – Inadequate provisions did not ensure the financial investment in affordable housing was sufficiently protected Slide 4

General Resale & Recapture Elements General characteristics of good provisions – Clearly describe the PJ’s homebuyer program and use of resale & recapture – Include provisions used by all partners e.g., subrecipients, State recipients, consortium members, CHDOs – Correctly explain the circumstances under which different provisions will apply – State how the provisions will be enforced Slide 5

Slide 6 RESALE PROVISIONS

What is Resale? Restricts the homebuyer’s ability to resell only to a HOME-eligible buyer and limits the sales price Can be used for any HOME-eligible homebuyer project for any type of assistance Repayment of HOME funds dependent on PJ’s mortgage financing terms

Affordability Period Under Resale Affordability period based on total HOME investment in the property – Must include $$$ of HOME assistance to buyer – PLUS total amount of HOME funds provided to developer

Affordability Period under Resale HOME affordability periods are minimums -- PJs can set longer terms Total HOME $Affordability Period < $15,0005 yrs. $15, ,00010 yrs. Over $40,00015 yrs.

Resale Provisions Required Elements §92.254(a)(5)(i): “…The participating jurisdiction must specifically define “fair return on investment” and “affordability to a reasonable range of low-income homebuyers,” and specifically address how it will make the housing affordable to a low- income homebuyer in the event that the resale price necessary to provide fair return is not affordable to the subsequent buyer.” Slide 10

Resale Provisions Required Elements When a homebuyer unit is sold or transferred, voluntarily or involuntarily, during the HOME Period of Affordability (POA): – Long-term affordability is preserved by selling the unit to another low-income homebuyer who will use property as principal residence At a price that… – Provides the original homebuyer a fair return on investment, – Is affordable to a reasonable range of low-income buyers Slide 11

Fair Return on Investment How is Fair Return on Investment Calculated? Step 1: (Homebuyer’s original investment + value of capital improvements) x objective index = Fair Return on Investment Step 2: Homebuyer’s original investment + value of capital improvements + Fair Return on Investment = Total Return to Original Homebuyer at Sale Slide 12

Fair Return on Investment… What is Homebuyer’s Investment? Original homebuyer’s investment must include: – Initial investment (e.g., downpayment, closing costs) – Capital improvements What are capital improvements? – Provisions should broadly define what the PJ considers a capital improvement – PJ’s policies and procedures must provide greater detail including: Specific capital improvements included in the calculation of fair return How the PJ will value those improvements Slide 13

Fair Return on Investment… What is a Clear & Objective Index? Provisions must identify specific index used to calculate fair return. Index or standard must be: – Publically accessible – Easily measured at time of purchase & resale Examples include: – Consumer Price Index (CPI) – % change in median sale prices over the period of ownership Slide 14

Affordable to a Reasonable Range of Homebuyers “Affordable to a reasonable range of homebuyers” is the PJ-defined target population that should be able to afford a HOME-assisted home at resale. – Often misunderstood to mean how PJ will set sale price of a HOME-assisted unit at resale. Typically defined as the percentage of income families at a specific income range may pay for PITI. (e.g., <30% of income for 65-80% AMI) Slide 15

Subsequent Purchase by Low-income Family at Resale Provisions must ensure long-term affordability for duration of POA. Sales price at resale must: – Ensure fair return to seller – Be affordable to PJ’s identified range of low- income homebuyers Subsequent purchaser must: – Meet HOME income eligibility requirements – Use unit as principal residence Slide 16

Presumption of Affordability under Resale Certain housing may be presumed to meet the resale restrictions during the period of affordability without the imposition of enforcement mechanisms by the participating jurisdiction. The presumption must be based on a market analysis of the neighborhood subject to HUD review and approval. §92.254(a)(5)(i)(B) specifies the requirements Underutilized option, administrative ease Slide 17

Slide 18 RECAPTURE PROVISIONS

What is Recapture? Homebuyer may sell home: – To any willing buyer – At any price – At any time PJ must collect part or all of HOME assistance from the net sale proceeds (if sufficient)

Use of Recapture Recapture can only be used when: – Provide direct subsidy to homebuyer – Must have an amount that can be recaptured Resale can be used for any HOME-assisted homebuyer

Recapture Provisions Required Elements Recapture provisions must ensure when homebuyer unit is sold or transferred, voluntarily or involuntarily, during the HOME POA: – Subject to available net proceeds, PJ recovers all or a portion of the direct HOME subsidy provided to the homebuyer. Slide 21

Direct HOME Subsidy Recapture provisions must specifically state that the PJ will recapture the direct subsidy provided to the homebuyer. Direct subsidy is the amount of HOME assistance, including PI, that enabled the homebuyer to buy the unit. – e.g., downpayment, closing cost assistance, direct subsidies the reduced the purchase price from market value to an affordable price. Slide 22

Amount Subject to Recapture, cont. Market value of home (if development HOME assisted) - Sales price of home = Discount benefiting homebuyer + HOME funds provided directly to homebuyer = Amount subject to recapture

Affordability Period Under Recapture Affordability period based on total direct subsidy benefiting homebuyer – Known as “amount subject to recapture” Does not include HOME amounts to subsidize development when that cost exceeds market – Known as development subsidy

Affordability Period under Recapture HOME affordability periods are minimums -- PJs can set longer terms Direct HOME subsidy to HB Affordability Period < $15,0005 yrs. $15, ,00010 yrs. Over $40,00015 yrs.

Development Subsidy Example Subdivision of 15 town homes Total development costs of $2,400,000 or $160,000 per home Development subsidy: Cost per home: $ 160,000 Market value: $ 130,000 Development subsidy: $ 30,000 per home Under recapture, this subsidy not included when determining affordability period

Recapture Affordability Period Example $50,000 HOME development assistance to CHDO – Of this, $10,000 left in deal to write sale price below market $6,000 HOME downpayment assistance to homebuyer Total direct subsidy: Affordability period: $16, years

Net Proceeds Recapture provisions must specifically state that the PJ will recapture the direct HOME subsidy from available net proceeds. Net proceeds are calculated as follows: Sales price – Superior Loan Repayment(s) – Closing Costs = Net Proceeds Slide 28

Acceptable Recapture Models Four acceptable models are defined in the HOME regulations: – PJ recaptures entire direct HOME subsidy – Reduction during POA – Owner investment returned first – Shared net proceeds PJ may develop and use own model subject to HUD approval. Slide 29

PJ Recaptures Entire Direct HOME Subsidy PJ recaptures the entire direct HOME subsidy from available net proceeds. Insufficient net proceeds may prevent PJ from recapturing entire direct HOME subsidy. – PJ is NOT required to repay the difference between total direct subsidy and amount PJ is able to recapture from available net proceeds. Slide 30

Reduction During POA Subject to available net proceeds, PJ pro rates amount recaptured based on # of years homeowner occupied the unit measured against POA. # of Years Homebuyer Occupied Home ×Total Direct HOME Subsidy Period of Affordability Provisions must include or describe pro rata formula and limit to available net proceeds. Slide 31

Owner Investment Returned First PJ permits homebuyer to recover entire investment before recapturing direct HOME subsidy. – Homebuyer’s investment includes downpayment, capital improvements Subject to available net proceeds – PJ is NOT required to repay the difference between total direct subsidy and amount PJ is able to recapture from available net proceeds. Slide 32

Shared Net Proceeds Most commonly used recapture model, often in combination with pro rata reduction. Proceeds to Homebuyer = Homebuyer investment X Net Proceeds Direct HOME Subsidy + Homebuyer Investment Recaptured amount = Direct Home Subsidy X Net Proceeds Direct HOME Subsidy + Homebuyer Investment Slide 33

Recapture Requirements Regardless of model used, provisions must: – Clearly describe each recapture model used and circumstances under which each model will apply – Address circumstances that trigger recapture Voluntary or involuntary sale of transfer – Specifically state that recapture amount is based on direct HOME subsidy to homebuyer – Limit recapture to available net proceeds – New Rule: subsequent buyer may assume recapture obligations Slide 34

New Flexibility under Recapture §92.254(a)(5)(ii): “…Recapture provisions may permit the subsequent homebuyer to assume the HOME assistance (subject to the HOME requirements for the remainder of the period of affordability) if the subsequent homebuyer is low-income, and no additional HOME assistance is provided.” Slide 35

Slide 36 Common Pitfalls in Resale and Recapture Provisions

Common Errors Failing to describe circumstances under which different provisions or models will be used Failing to describe either resale or recapture but merely refer to § Using recapture provisions when no direct subsidy is provided to homebuyer Slide 37

Common Errors Hybrid provisions mixing resale and recapture Not limiting recapture to net proceeds Failing to clearly define “fair return on investment” Failing to clearly define “affordable to a reasonable range of homebuyers” Failing to include the principal residency requirement Slide 38

Common Errors Conflating events that trigger the resale or recapture requirements (voluntary or involuntary transfer of the unit) with noncompliance (e.g. vacating or renting the unit). Failing to state how determination of HOME POA differs in resale vs. recapture Failing to state that the PJ will monitor Slide 39

Enforcement Mechanisms PJs must legally enforce the HOME affordability requirements Acceptable resale mechanisms include: – Recorded deed restrictions – Covenants running with the land Acceptable recapture mechanisms include: – Lien – Deed restrictions Slide 40

Noncompliance Noncompliance requires repayment of full HOME investment – Repayment amount dependent on PJ’s program design Noncompliance with resale or recapture requirements means: – Violation of principal residency requirement (owner vacated or rented out the unit) – Applicable resale or recapture provisions were not enforced. Slide 41

Monitoring the Resale or Recapture Agreement Monitor ownership – Review tax records – Request copy of insurance bill – Establish system for flagging pending sales Recommend monitoring principal residency: – Request copy of insurance and/or utility bill – Send out letter and certification form with “Do Not Forward” PJs typically monitor annually

Program Design Considerations (cont) Strategies for identifying pending sales and foreclosures – Periodic communication with real estate agents, lenders, and title companies – Provide list of assisted addresses to taxing entity and request notification – Others?

Enforcing the Written Agreement in case of Noncompliance If owner doesn’t sell but fails to occupy unit as principal residence for duration of POA or meet another PJ condition: – Project is in noncompliance – PJ must take legal action to restore principal residency or collect funds – Total outstanding HOME investment must be repaid to PJ’s HOME account Minus HOME $ paid back, if applicable – Funds collected are “repayment funds” (returned funds in IDIS) NOT program income or recaptured funds – Activity must be canceled in IDIS Slide 44

For detailed guidance… Notice CPD : Guidance on Resale and Recapture Provision Requirements under the HOME Program Ask your CPD Representative Slide 45