Boulder seeks voter OK to issue debt for middle-class down payment assistance

home real estate
Photo by Binyamin Mellish on Pexels.com

Friday, July 26, 2019

Boulder voters in November will weigh the virtues of a pilot program to help middle-class residents buy homes here after city council on Tuesday advanced a ballot measure that will authorize the city to issue a $10 million line of credit and fund down payment assistance.

Councilman Sam Weaver and Bob Yates brought forward the idea of a down payment assistance program to help stem the flow of middle-income earners from Boulder due to a lack of affordable home ownership options. The city’s share of middle-class households has fallen 6% since 1989, according to the 2016 Middle-Income Housing Strategy.

The strategy resulted in a goal of building or preserving 3,500 homes accessible to middle-income earners by 2030: 2,500 market-rate and 1,000 deed-restricted permanently affordable. Subsidized units are prohibitively expensive to create, Housing Director Kurt Firnhaber said Tuesday — just 110 such dwellings have been created in the past three years, though 69 more are in the pipeline.

Down payment assistance was proposed as a way for the city to help buyers afford homes at a lower cost than direct government subsidies. The idea is that Boulder will provide funding for the gap between what a buyer can afford, whether a portion of the down payment or the monthly payment. For example, on a $600,000 house, a buyer who qualifies for a $432,000 mortgage would be required to have a 5% down payment ($30,000); the city will provide the “gap” funding of $138,000.

The initial idea discussed in February was that a buyer would get two mortgages from a lender. Boulder would guarantee the “gap” loan. Given the area’s extremely low foreclosure rate — there have been only 10 defaults in the city’s affordable housing program over 15 years, of 1,373 total loans, less than 1% — such an approach would be a relatively low-risk way to provide more housing.

But municipal governments cannot guarantee loans, per the Colorado Constitution. The city will instead pursue a line of credit to produce the cash for home purchases. It’s a cost-effective strategy: Boulder will borrow money as-needed and pay back only the interest each year. Assuming 10 loans per year, averaging $150,000 each, and a 4% interest rate, the city’s annual costs will be $60,000, according to staff notes.

A line of credit will require homeowners to pay off the principal of the loan all at once in a ballon payment, either at the time of sale or 7-10 years after purchase, whichever comes first. (The average length of ownership in the city’s affordable program is seven years.) If the owners wish to stay in the home beyond the time of repayment, they’ll have to refinance or find some other way to pay back the city.

Staff estimates that monthly payments will increase 20% or $400 a month after a refinance — assuming interest rates don’t increase. Council spent several minutes discussing the risk to homeowners if interest rates were to rise or home values decrease.

The success of the program is predicated on the idea that home values will only go up, Mary Young said. “How is that not what happened in 2008” with the national housing crash?

“I think we could potentially force people into foreclosure,” Aaron Brockett said. If home values went down, “refinancing wouldn’t really be an option; they’d be underwater. We need to have a safety valve.”

Brockett requested that funds be set aside for such instances, to keep from forcing participants out of their homes. Staff had recommended reserving $1.2 million in case of foreclosures, but that was for the city’s protection, not homeowners.’

Weaver countered that, although the program is not without its risks, it still represents a leg-up for middle-class buyers.  “What we’ve given them is a time-out” from paying the full cost of the home, he said, a 7- to 10-year period where they are paying down the mortgage, thereby gaining equity at a discounted price.

“There certainly is risk,” Yates added. “That’s true of all home ownership.”

Home values have appreciated, on average, 7% each year for the past decades. Houses in the middle-income program will only be allowed to gain 2% of value each year, around the average annual gains in Area Median Income over the past 10 years.

That will keep them  affordable for subsequent buyers, rather than Boulder having to continually subsidize the unit each time it changed hands. Council left open the possibility that they could tweak the program over time to allow greater appreciation, if 2% proves too low to attract buyers.

The city will use $820,000 left over from an existing but rarely used program, H2O, as seed money. At a pace of 10 loans annually, if interest rates remain low, it will be 5-7 years before those funds run out, according to staff. If interest rates increase, Boulder will simply assist fewer people.

A ballot measure requesting voter OK for the line of credit will return to council for second reading and public hearing on Aug. 20.

To view a Twitter thread of this discussion, click here.

— Shay Castle, boulderbeatnews@gmail.com, @shayshinecastle

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