#7 Subordination Policy Amendment
NEIGHBORHOOD SERVICES MEMORANDUM
March 12, 2009
TO: Community Development Authority
FROM: Carrie Clark, Housing Financial & Rehabilitation Specialist
SUBJECT: Agenda Item #7 -Review and Action on Policy Revision relating to the
subordination of City’s interest to allow for refinancing superior debt – Down
Payment & Closing Cost (DPCC) and Home Improvement Programs (HIP)
Executive Summary / Recommendation:
Neighborhood Services currently operates two programs, the Down Payment & Closing Cost
Program and Home Improvement Program where we are providing financing to Program participants
in the form of a secured loan. The financing is secured by a lien against their primary residence. The
lien acts as protection to the City so we may recoup our liability should the borrower default on their
first mortgage.
Each Program currently has a set criteria regarding the position of our lien in relation to the first
mortgage lien. This criteria is also considered when Program participants desire to refinance their
first mortgage debt. Reasons for refinancing first mortgage debt vary and could include: taking
advantage of lower interest rates, paying off other debt, and taking advantage of equity to make
home improvements, among others. A refinance of first mortgage debt triggers a request to the City
that we subordinate our interest in the participant’s property to allow for the new loan. In some
cases, allowing for additional new/debt to be placed ahead of the City’s lien places our lien at a
higher risk should the borrower default.
Recently, staff has received a number of requests from Program participants to subordinate the
City’s interest in their property to allow for new/superior debt as the result of a refinance of first
mortgage debt that would allow them to lower their first mortgage interest rate. Thus, the amount of
the new proposed loan exceeds their current loan typically by the amount of closing costs involved in
the refinance.
Under our current policy, closing costs may be ‘rolled-into’ the loan when they do not exceed $1,000.
Staff has been unable to administratively approve these requests because closing costs typically
exceed $1,000 and ultimately they must be presented to the CDA for consideration and approval. In
today’s lending market, it is very typical to incur somewhere between $1,200 to $1,800 in closing
costs to refinance a first mortgage.
It is staff’s desire to update our policy regarding these requests in order to bring the criteria more in
line with current market conditions. In doing so, we hope to alleviate the number of requests the CDA
must consider and also eliminate the potential waiting period between the time of the participant’s
request and CDA decision. Whereas staff also desires to maintain an affordable homeownership
program, we would also propose another level of review to determine if the borrower can recoup
their closing costs within a reasonable amount of time. Staff is recommending a policy change to
both the Down Payment Assistance Program and Home Improvement Program manuals to allow for
administrative discretion to approve subordination requests to refinance first mortgage debt only
where closing costs rolled into the new loan do not exceed $1,500 and can be recouped through
monthly payment savings within 18 months. All other requests that may be adding new or other debt
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to the property or exceed the new criteria will continue to be brought before the CDA for
consideration.
Current Policy:
The current subordination policy for the Down Payment Program allows for administrative approval of
requests where new and/or superior debt does not exceed 95% of the value of the property and
closing costs added to the loan do not exceed $1,000.
DPCC Manual, page 9: VIII. LOAN SUBORDINATION REQUESTS
The Housing Director or his designee may approve requests to subordinate Down Payment
and Closing Cost Forgivable Loan Program loans if the additional debt, which the City’s loan is
being subordinated to, does not exceed a 95% loan-to-value ratio. A current appraisal or the
equalized assessed value shall be used to determine the value of the property.
Proposed Policy
: DPCC Manual, page 9: VIII. LOAN SUBORDINATION REQUESTS
The Neighborhood Services Director or his/her designee may approve requests to
subordinate Down Payment and Closing Cost Forgivable Loan Program loans if the proposed new
loan, which the City’s loan is being subordinated to, is equal to or no greater than $1,500 than the
current first mortgage, or mortgage to be repaid through the refinance AND any amount added to the
first mortgage must consist of closing costs only AND upon evaluation of the proposed new debt
structure, such closing costs can be recouped through monthly payment savings within 18 months or
less.
The current subordination policy for the Home Improvement Program allows for administrative
approval of requests where new and/or superior debt does not exceed 75 % of the value of the
property and closing costs added to the loan do not exceed $1,000.
Home Improvement Program Manual, page 29-30:
VII. APPROVAL OF REFINANCING SUPERIOR MORTGAGES
A. The Housing Director shall have the authority to approve requests of clients to
refinance mortgages superior to the CDA loan under the following circumstances:
1. No additional debt is added to the balance of the superior mortgage.
2. A portion of the closing costs may be added to a superior mortgage, not to exceed
$ 1,000. Normally the portion of the closing costs added to the superior mortgage
will not exceed 50 percent of the total closing costs
3. New or additional debt may be approved provided that the additional debt is used
in a way which protects the interests of the Home Improvement Program in the
property, funds handicapped accessibility improvements, or funds improvements
to the home which maintain or increase its value; and the total debt ratio on the
property does not exceed 75% of the appraised or equalized assessed value of
the property, whichever is greater.
4. For clients 60 years of age or older, disabled, or handicapped, new or additional
debt may be approved provided that the total debt ratio on the property does not
exceed 50% of the appraised or equalized assessed value of the property,
whichever is greater.
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5. Decisions of the Housing Director may be appealed to the Community
Development Authority (CDA). All such appeals must made in writing and
received within fourteen (14) days of the date the client was notified of the
decision of the Housing Director.
Proposed Policy:
Home Improvement Program Manual, page 29-30:
VII. APPROVAL OF REFINANCING SUPERIOR MORTGAGES
1.The Neighborhood Services Director shall have the authority to approve requests of clients to
refinance mortgages superior to the CDA loan under the following circumstances:
1. Additional debt may be added to the superior first mortgage up to $1,500 where such
additional debt consists of closing costs only and it can be demonstrated that such costs
can be recouped through monthly payment savings in 18 months or less.
2. New or additional debt may be approved provided that the additional debt is used in a
way which protects the interests of the Home Improvement Program in the property,
funds handicapped accessibility improvements, or funds improvements to the home
which maintain or increase its value; and the total debt ratio on the property does not
exceed 75% of the appraised or equalized assessed value of the property, whichever is
greater.
Formatted: Bullets and Numbering
3. For clients 60 years of age or older, disabled, or handicapped, new or additional debt may
be approved provided that the total debt ratio on the property does not exceed 50% of the
appraised or equalized assessed value of the property, whichever is greater.
4. Decisions of the Neighborhood Services Director may be appealed to the Community
Development Authority (CDA). All such appeals must made in writing and received within
fourteen (14) days of the date the client was notified of the decision of the Housing
Director.
Analysis/Recommendation:
The proposed changes are being made in order to update the DPCC & HIP Program manuals to
bring this criteria more in line with current market conditions. It will also alleviate some
administrative burden in the reduction of requests that are brought before the CDA. There is also a
benefit to the Program participant in that they will be able to take advantage of mortgage rate and
monthly payment savings in a more timely manner. Staff further believes adding a level of review of
the recoup period of the closing costs will attempt to ensure that homeownership remains affordable
to its participants. It is not the desire of staff to eliminate the CDA’s guidance, this change leaves in
place the requirement of CDA review for requests where additional debt is being proposed.
Staff is recommending the proposed changes to the DPCC & HIP manual be approved. A motion to
approve the changes would be in order.
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