Re: Affordable coho options
From: David L. Mandel (75407.2361compuserve.com)
Date: Sun, 17 Dec 1995 01:03:35 -0600
In reply to my brief description of the second mortgages made available to our
low-income members by the local housing agency, Mac Thompson asked the following
questions. I'm happy to provide answers.

1. Did the second mortgage plus the first mortgage equal the total price of the
home, i.e., no downpayment?  Or was there also a downpayment and if so, what
percent of the price?

Our loan arrangement required a down payment of at least 3 percent of value, and
a few buyers paid that little. That means they had to qualify on the basis of
their income for a conventional first mortgage of at least 48 percent of the
value, since the maximum second mortgage was 49 percent of value. I've heard of
lenders who say, anyway, that they'll lend with an even smaller down payment or
even none, though if you're talking 100 percent from one lender, the effective
interest may go up due to hefty mortgage insurance requirements. In the case of
our low-income buyers, they were not required to have mortgage insurance, since
the lender didn't count the second mortgages when calculating their
loan-to-value ratios. Also, the same local housing agency cooperated in setting
aside and holding mortgage credit certificates for all our buyers who were
getting the second mortgages. These are a very valuable federal tax credit worth
20 percent of interest paid every year ... much better for small mortgages than
the regular mortgage interest deduction (which still applies to the other 80
percent). All 11 of our buyers who got second mortgages and three others
qualified for this program. By the way, we also got a very good mortgage deal
for nine of the remaining 11 buyers. The California Housing Finance Agency
offers bond-financed below-market mortgages through private lenders to first
time buyers with incomes below a fairly generous ceiling -- and in a "target
area" -- which our rather dilapidated neighborhood is, you don't even have to be
a first time buyer. Our loans through this program were 5.75 percent at a time
when the market rate was around 7.75%, though a mortgage insurance requirement
raised the effective rate to about 6.25%. Unfortunately, availability of MCCs,
bond-financed mortgages and other such programs for first-time, moderate-income
buyers is limited and probably shrinking fast with Gingrich slashing and Clinton
meeting him halfway, but inquire in your community. There may be some such
things. 


2. You mention that repayment of seconds "will involve a share of appreciation
as well as principal".  Does that mean that they're interest free?

If the housing market stagnates and there's no appreciation by the time the
units are resold or the loans come due, then yes, the loans will be interest
free. 


3. Were the homes initially sold at market value?  And if so, why is a deed
restriction necessary?  ("the resale of the units in the meantime is
restricted as to price and income of buyer")

We were essentially our own developers, so our prices were determined solely by
our costs of construction. We expected, therefore, to be selling below market
value. Unfortunately, something funny happened along the way. Our costs went way
up for reasons I won't describe here and the housing market was depressed. In
the end, our costs exceeded appraised values by an average of around 5 percent.
Fortunely, the same local housing agency came to our rescue (a fringe benefit of
the good relationship we developed) and offered a whole separate set of loans to
all buyers to make up most of the gap. These are unsecured (otherwise the
regular financing wouldn't have worked), low interest and payable upon resale --
but forgivable in whole or part if there is still insufficient value to assure
that the seller recoups her/his initial investment. 
        To get back to your main question here, however: the resale restrictions
on units bought with the second mortgages are meant to keep these units
affordable at least for a while and to prevent the initial buyer from making a
big windfall if values go way up. It's the price they pay for the favorable loan
they're getting and it serves a social purpose that we all favored. Admittedly
it's a pretty small measure, since it expires after 10 or 30 years. Perhaps some
others among us can find a way to make this affordability permanent in some or
all units. And someday, we'll get speculative profit out of the housing market
altogether (see my harangue against capitalism, also posted today).


All the best; I hope this helps.

David Mandel, Southside Park, Sacramento

















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