Approval of Program modifications on April 4th is necessary in order to implement program outreach activities during peak home buying season, teacher recruitment period and before the summer break.

Adoption of a resolution modifying the Teacher Homebuyer Program adopted by the City Council on June 29, 1999, as follows:

• Increasing the City loan from 3% of the home purchase price, not to exceed $7,200, to a maximum of $40,000.
• Increasing the maximum household income limit from 80% to 120% of Area Median Income.
• Eliminating the requirement that City loan funds be limited to down payment assistance.
• Eliminating the requirement that the borrower cannot have owned a home in the three years prior to the closing of the City’s loan.
• Eliminating the requirement that the City loan be prepaid if the borrower is no longer a qualified teacher after the home is purchased.
• Permitting teachers in any school with at least 50% of its students residing in San Jose to be eligible for the City loan.
• Authorizing changes to City loan documents to assure consistency with outside funding agency requirements, as specified in Analysis, III. C. Technical Changes.
• Authorizing the Director of Housing to negotiate and execute all necessary documents evidencing the revised program on behalf of the City.

On June 29, 1999, the City Council approved a $2,000,000 program to provide down-payment assistance loans to income-qualified public school teachers for the purchase of homes in San Jose. After an evaluation of the Program and the current real estate market, the Department is proposing several changes that will increase the Program’s chances to achieve its primary objective--attracting and retaining the public school teachers that are needed to provide quality education for San Jose youth.

• Current Environment
  The last year has seen a major drop in teacher home purchasing power. The price of home ownership in San Jose, already at an all-time high, continues to escalate. Further, higher interest rates have reduced the size of a home loan that a teacher can afford. This gap between teacher purchasing power and home prices is likely to widen. The proposed changes are designed to increase the pool of teachers who could both qualify for the Program and afford to buy a home in San Jose. Attachment 1 compares the existing and proposed program and outlines the benefits of the proposed changes.



• Experience to-Date
  Despite an aggressive marketing campaign and a significant staff effort over the past eight months, five loans have closed to date.



• Program Modifications
  Housing Department staff completed an analysis of other home buyer loan programs in other high-cost Bay Area localities. (See Attachment 2) In every instance, both the income and local subsidy limits currently exceed San Jose’s Teacher Homebuyer Program limits.
  
  In addition, on February 24, 2000, the Department conducted a focus group with realtors, lenders and educators to ask for input on the proposed modifications to the Program. The group unanimously supported the changes to the Program as proposed and agreed with the Department’s assessment that additional increases in home prices and interest rates will further erode teacher home buying power. The modifications also take into account the testimony from teachers at the numerous presentations conducted at local schools and union halls.



• Increase in City Loan Amount
  The Department proposes increasing the City loan from 3% of the home purchase price, not to exceed $7,200, to a maximum of $40,000. The main purpose of the proposed City loan amount is to enhance teacher home purchasing power in this extremely high cost market.
  
  Our analysis indicates that the homes most teachers can afford are priced much lower than the median home prices, if such units are on the market at all. This affordability gap has noticeably worsened during the past year. Between June 1999 and March 2000, the median sales price for San Jose homes on the Santa Clara County Association of Realtors MLS listings increased from $219,000 to $240,000 for condos/townhouses and from $359,000 to $410,000 for single-family detached homes. In addition, increases in interest rates have adversely affected teachers’ buying power, thus further widening this gap.



• Increase in Maximum Qualifying Income
  The Department proposes increasing the maximum household income limit from 80% to 120% of Area Median Income. This change would enhance teacher recruitment and retention by increasing the pool of teachers who could both qualify for the Program and afford to buy a home in San Jose.



• Technical Changes
  The Housing Department identified several changes that would expand the pool of teachers who would be eligible, while achieving the Program’s intent:
  • Use of City Funds--Eliminate the requirement that the City loan funds be limited to down payment assistance. This change would allow the Department to tailor the most-cost effective home financing package for the teacher. Additionally, it increases opportunities for the Department to leverage funds.
  • Previous Home Ownership--Eliminate the requirement that a teacher household cannot have owned a home in the three years prior to City loan closing. This change would enhance efforts to recruit teachers who own homes in low-cost areas. The Program would continue to require that the teacher not own another home at time of loan closing.
  • City Loan Pre-payment --Eliminate the requirement that the loan be repaid if the borrower is no longer a qualified teacher after the home is purchased. Currently, the teacher must prepay the City loan prepayment if he (she) is no longer a teacher in a San Jose public school during the City loan’s 30-year term. Outside lenders are reluctant to allow this provision to be included in a City loan that is secured by the property because they do not want a change in occupation to create a default on the property securing their loan.
  • Border Schools--Permit those who are teaching in any school with at least 50% of its students residing in San Jose to be eligible for the City loan. Several schools are not currently eligible because they are outside the San Jose City Limits, even though they have student bodies that mainly consist of San Jose residents. The proposed change would allow teachers at these schools to participate.
  • Subordination of Affordability Restriction--Permit the City to remove the Affordability Restriction for the Program if a deed in lieu of foreclosure is used. State law permits the affordability restriction assisted housing assisted with 20% Housing Funds to be subordinated to other lenders which would result in removal of the City’s Affordability Restriction in the event an outside lender forecloses on the property. The Federal National Mortgage Association, which will purchase home loans from private lenders participating in the Program requires the City’s affordability restriction to be removed if the deed in lieu of foreclosure approach is used. The City has previously approved this approach, provided it is guaranteed a reasonable opportunity to cure the default or purchase the property. The City would agree to this provision if similar guarantees are provided.
• Next Steps
  The Department intends to immediately take several steps to implement the modified program:
  • Send pre-qualification letters to 50 over-income teachers from the Program’s current database. Send letters to eight teachers which the database indicates are from boarder schools.
  • Provide schools with updated marketing materials.
  • Conduct, in cooperation with the San Jose Real Estate Board, a forum with realtors.
  • Conduct a program modifications workshop for lenders.
  • Continue presentations at schools and teacher union halls.

The Housing Department conducted a focus group on February 24, 2000 with realtors, lenders and educators to ask for input on the proposed changes to the Program.

Program funds in the amount of $2,000,000 were approved by the City Council on June 3, 1999. Should demands for loans exceed the current appropriation, the department can fund the loans by using monies in the FY2000-01 Housing Loan, Grants and acquisition appropriation.

In accordance with State law, 30-year affordability restrictions will be recorded on the title to properties purchased by teachers using the program to maintain the affordability of these properties at re-sale or upon pre-payment of the City loan. These restrictions may be subordinated to senior loans, as permitted by State law. The restrictions will include an equity-share, buy-out provision, as permitted by State law. As a result, if the owner wants to transfer the property to a non-eligible buyer or prepay the City loan, the City will be paid a proportional share of the net increase in property value. In certain cases where federal government lenders require certain modifications, the City may agree to modify the affordability restriction as set forth in this memo.

This memorandum was coordinated with the Office of the City Attorney.

Alex Sanchez
Director of Housing