SUBJECT: POLICY CHANGE TO THE HOUSING REHABILITATION PROGRAM TO RESPOND TO THE STRONG NEIGHBORHOODS INITIATIVE

COUNCIL DISTRICT: Citywide

RECOMMENDATION

It is recommended that, in order to enhance the potential opportunity for private-property improvements in the Strong Neighborhoods Initiative, the City Council adopt a resolution that would:

1) Revise and expand the Housing Rehabilitation Program’s grants for repairs;

2) Jointly implement the Housing Rehabilitation Program and the Airport’s Acoustical Treatment Program in the Guadalupe-Washington neighborhood; and

3) Authorize the City Administration to pursue the possibility of partnering the Housing Rehabilitation Program with historic restoration and other program initiatives that are identified in the Strong Neighborhoods planning process.

BACKGROUND

The Strong Neighborhood Initiative has ambitiously targeted the revitalization of neighborhoods encompassing tens of thousands of homes and apartments. The Initiative focuses the services of several City departments to stabilize and enhance these neighborhoods. Neighborhood plans have been completed in six areas, and in all those plans, rehabilitation of the housing stock is an important long-term strategy. A similar theme is being articulated by City residents participating in the Strong Neighborhoods planning process that is now underway. Clearly, the repair, rehabilitation and upgrading of private residential property will be a key element for improving the targeted neighborhoods.

For this reason, the Housing Department and the Redevelopment Agency initiated discussions in early-2000 to integrate the various rehabilitation programs then being administered by the two agencies. Bringing together the experience of the two staffs that have worked in older neighborhoods – and particularly those in which there is a high proportion of lower-income residents – a new program design emerged. The new program was designed to standardize and simplify program criteria and conditions, and to make the product more attractive to potential customers.

Based on those conclusions jointly reached by the Redevelopment Agency and the Housing Department last year, the Director of Housing instituted the following programmatic changes in January 2001, under the Director of Housing’s Delegation of Authority from the City Council:

• Amortization of loans to rental properties is required if cash flow from the property can support the payments; otherwise, the repayment will be deferred until the cash flow can support payments. No deferral of rental loans was previously allowed.
• For rental properties of 5+ units, the owner is required to contribute 10% of the hard costs of construction; for rental properties of 1-4 units, there will no owner-participation requirement. Previously, there was no exemption from the 10% owner-participation requirement for smaller property.
• For loans to homeowners, loan-to-value ratios will be increased from 80-90% to 80-95%, with the applicable ratio depending on the type of first mortgage.
• Limitations on the amount of assets that a homeowner can have in order to qualify for the program is increased to 100% of area median income (AMI), by household size, for non-senior/non-disabled households and three times AMI, by household size, for households headed by a senior or disabled individual (retirement accounts are not counted as assets for this purpose).
• No amortization of loans to homeowners is required; repayment of principal plus accrued interest is required upon sale or transfer of the property. Previously, amortization was required if to do so would not exceed the housing-cost limitations in State law; if the housing-cost limitation would be exceeded, payments were deferred for three- to five-years for a re-analysis of the borrower’s ability to make payments.
• No homeowner participation is required in the paint grant program – irrespective of income level – and the basic paint grant amount for single-family homes is increased to $5,000. Owner participation for rental paint grants parallels the rehabilitation program (i.e., none required for 1-4 units, and 10% for properties exceeding four units). This system greatly simplifies and reduces owner-participation requirements over the previous system.
• All loans bear an interest rate of 3%. Previously, interest rates varied depending on the income level of a homeowner.

The two remaining changes yet to be implemented are: (1) enabling of the Housing Department to make small-dollar-amount grants to properties occupied by low- and very low-income households (the subject of this report); and (2) additional program funding from the Redevelopment Agency, which is included in the Agency’s 2001-02 Capital/Program Budget and will be made available once the SNI planning process has been concluded in early 2002.

ANALYSIS

The City has a unique opportunity to significantly improve the older housing stock in Strong Neighborhood areas, in a number of ways:

1. The integration of the Agency and City programs presents residents and property owners one program with additional housing rehabilitation resources.

2. The Airport Department is offering acoustical treatment to more residents in the Washington/Guadalupe Strong Neighborhood area affected by aircraft noise. The Airport’s program and the Housing Rehabilitation Program will be administered as a single program in this neighborhood, with the latter addressing non-acoustical, health and safety issues.

3. The Strong Neighborhoods Initiative Steering Committee endorsed a Housing Department recommendation to make the City’s Enterprise Zone a target neighborhood for housing rehabilitation funds. This action provides Enterprise Zone residents and businesses the opportunity for creating improved neighborhoods along with job creation, job training and job placement benefits being offered by the Office of Economic Development.

4. As the Strong Neighborhoods planning process moves forward and new program initiatives are identified, public/private partnerships will be formed with the Housing Rehabilitation program so that the integrated investment of resources will have a positive impact on these neighborhoods.

5. The City may also be able to incorporate an historic-houses restoration program into the overall housing rehabilitation efforts.

By packaging all of these rehabilitation opportunities into a coordinated, focused program, the City can offer property owners a customized yet comprehensive housing rehabilitation solution.

The Strong Neighborhoods Steering Committee recommends giving the Housing Department the authority to offer rehabilitation grants as well as loans to enhance the flexibility of this comprehensive program and meet the specific needs of individual property owners regardless of income. Eligibility for these grants would require that a property be occupied by low- or very low-income households, including owner-occupied and rental properties.

Additional Benefits

Other benefits to implementing this coordinated, comprehensive program offering both loans and grants from the Housing Rehabilitation Program include:

• Facilitating the coordination between Code Enforcement and the Housing Department by providing a vehicle to swiftly provide the resources necessary to address code violations, rather than waiting for the loan underwriting process to be concluded.
• Improving code compliance by providing resources to lower-income homeowners who want to rectify code violations but lack the means to do so, and providing those resources without penalizing those homeowners.
• Providing resources to homeowners to convert unpermitted garage conversions back to the original garage use. With the adoption of the new Zoning Code, it is no longer possible to legalize illegal garage conversions (of which there about 3,000 in the Strong Neighborhoods, according to the Code Enforcement Division’s blight survey).
• Counters pressures for gentrification by enabling lower-income homeowners to stay in their homes.
• When Redevelopment Agency resources are put into the Housing Rehabilitation Program in the future, those funds can only be grants – not loaned – because of IRS rules governing tax-exempt bond proceeds.
• Offering grants provides the opportunity to make other housing rehabilitation programs more attractive. For instance, the City Administration is studying the possibility of offering a combination loan/grant to encourage residential property owners to make a larger investment in rehabilitation.

Finally, grants will support the public outreach efforts of the Environmental Services Department and the Housing Rehabilitation Program encouraging property owners to install weatherization and other energy-efficiency improvements to reduce energy consumption in an increasingly expensive utility market.

The current City policy provides for loans only for housing rehabilitation. Changing the policy to enable grants as well as loans provides the flexibility to seize these opportunities.

Level of Grant Assistance

Should the Housing Department be authorized to offer grants as well as loans for rehabilitation and repair, it intends to set $15,000 per property as the typical maximum for home repair grants. This amount is based on the experience of the Housing Department and Redevelopment Agency staffs in addressing both rising costs of labor and materials as well as the repair needs of older homes. In this context, it should be noted that an increase from the $7,500 limit was recommended by the U.S. Department of Housing and Urban Development (in a letter dated July 11, 2000) after its completion of a CDBG-program monitoring visit to San Jose.

While $15,000 would normally be the maximum amount of grant assistance, occasional exceptions to this general rule may need to be made in unusual circumstances.

Conclusion

The Housing Department and the Strong Neighborhoods Steering Committee believe that the proposed comprehensive Housing Rehabilitation Program will maximize the number of housing units assisted and will help Strong Neighborhood residents meet their goals for a quality neighborhood.

PUBLIC OUTREACH

In the preparation of plans for the Washington-Guadalupe, University, Rock Springs, Edenvale-Great Oaks, Santee and Mayfair neighborhoods in the past few years and in the ongoing planning efforts underway in other Strong Neighborhoods, rehabilitation of the stock of affordable housing has been identified as a revitalization need.

COORDINATION

Preparation of this report was coordinated with the Department of Parks, Recreation and Neighborhood Services, the Department of Planning, Building and Code Enforcement, the Public Works Department, the Department of Transportation, the Office of Economic Development, the Airport Department, the Redevelopment Agency, and the Offices of the City Attorney and the City Auditor.

LESLYE CORSIGLIA MARK LINDER RALPH TONSETH

Acting Director of Housing Chair, SNI Steering Director of Aviation

Committee

Attachments

Attachment 1

Current Restriction on Making Grants

In the Housing Rehabilitation Program

On April 27, 1999, the City Council approved the recommendation of the Finance Committee that the Housing Department undertake a one-year pilot program of offering Interest-Free Conditional Loans for repairs under $7,500 to conventional single-family homes instead of granting funds up to that amount. The Finance Committee’s recommendation was based on a recommendation from the City Auditor’s April 1997 report entitled, “An Audit of the Housing Rehabilitation Program.”

The pilot program covered the general housing rehabilitation program. Assistance for exterior repainting and mobilehome repairs was still offered in the form of grants. The Council directed staff to report back at the end of one year on the results of the pilot program. The pilot program was implemented at the beginning of the 1999-00 Fiscal Year.

Results of the Interest-Free Conditional Loan Pilot Program

Before the City Council’s action in April 1999, the Housing Department offered grants up to $7,500 for home repairs to low-, very low- and extremely low-income (LI, VLI and ELI, respectively) homeowners. Under the Interest-Free Conditional Loan program, grants are no longer available but secured loans bearing a 0% interest rate and requiring repayment only upon sale or transfer of the property are available to LI, VLI and ELI homeowners for repair needs up to $7,500. Assistance to LI, VLI and ELI homeowners above the $7,500 threshold – as well as assistance to moderate-income homeowners and rental property owners – has always been in the form of secured, interest-bearing loans with an amortization requirement (with payments deferred for three to five years in cases where making payments would cause a homeowner’s housing costs to exceed limits established by State law).

The following table reports approvals in the Housing Rehabilitation Program for the two fiscal years before and after implementation of the pilot program:

Type of Transaction	1998-99	1999-00
Regular, Interest-Bearing Loans (all property types)	41	32
Grants for Single-Family Homes	227	22*
Interest-Free Conditional Loans for Single-Family Homes	n/a	33
Grants for Mobilehome Repairs	148	144
TOTALS	416	231

* Grant applications on file (and “grandfathered”) as of June 30, 1999

The data show that the level of activity in regular, interest-bearing loans and in mobilehome-repair grants did not change appreciably from one year to the next. However, there was a substantial decline in the number of homeowners assisted at the under-$7,500 level, based entirely on the number of applications received (a similar level of activity was recorded in the first nine months of Fiscal Year 2000-01). The lower production figures were a result of reduced demand, not a lack of program resources or staff capacity to process applications.

Beginning in Fiscal Year 1999-00, the Housing Department has deployed additional staff resources to marketing the Housing Rehabilitation Program in target neighborhoods (first under the pre-existing Neighborhood Revitalization Strategy, and then under the Strong Neighborhoods Initiative). Since January 2000, Housing Department staff has been an active participant in 26 community meetings, and two neighborhood resource fairs. Additionally, marketing materials have been supplied to community coordinators. Despite bilingual presentations and materials and the fact that the Interest-Free Conditional Loan is the most attractive program the Department currently offers (with the exception of Paint Grants), little interest in the Interest-Free Conditional Loan program could be generated among potential clients.

This chart above only addresses those who applied and were approved for rehabilitation assistance. What it does not include are potential applicants who were interested in grant assistance only. When in July 1999, over 400 prospective Program applicants were informed that grants were no longer going to be available, about three-quarters responded that they were no longer interested in receiving assistance.

In sum, the Housing Rehabilitation Program staff has encountered significant market resistance from LI, VLI and ELI homeowners to loans to repair their homes. This market resistance exists irrespective of interest-rates and repayment requirements, even though the City’s loan programs are substantially more attractive than the commercial second-mortgage lending market. The resistance primarily reflects a reluctance to have a deed of trust recorded on one’s home. While the home may be the major asset possessed by most homeowners, it is an incalculably larger portion of the assets of LI, VLI and ELI families, and it represents virtually all the wealth that these families have accumulated. Additionally, there is an irrational (but very real) fear that a City lien on one’s home will result in the City ultimately taking the property. The foregoing is the experience of not only the Housing Department, but also Neighborhood Services, Code Enforcement and Redevelopment Agency staffs active at the neighborhood level.

Policy Conflict in Loans-vs.-Grants Question

The underlying rationale for the adoption of the Interest-Free Conditional Loans pilot program was that affordable housing funds should be loaned – not granted – so that loan repayments and interest earnings will provide revenue for future program needs. In that light, the City Auditor’s 1997 recommendation is a rational outcome of an auditing process designed to find ways and means of saving money and maximizing return on investment in City operations.

In that context, it should be noted that although the number of rehabilitation/repair grants substantially exceeded the number of rehabilitation/repair loans prior to the adoption of the pilot program, the dollar amount disbursed for loans was approximately the same as the dollar amount disbursed for these grants (excluding paint grants).

Looking at the bigger picture, the vast majority of affordable housing funds are disbursed in the form of loans. The largest portion of the affordable housing program is loans to developers of affordable housing projects, and homebuyer assistance and more expensive housing rehabilitation assistance is also made in the form of loans. As shown in Attachment 2, it is projected that 70% of all funding resources available to the Housing Department next fiscal year will be disbursed in the form of loans. As also shown in Attachment 2, retaining the Interest-Free Conditional Loan program will make only a marginal change in the proportion of funds loaned versus funds granted since about two-and-a-half percent of the affordable housing resources are at issue in this policy question.

LOANS TO:
Developers -- New Construction		$77,500,000
Developers -- Acquisition/Rehabilitation		$2,000,000
Teachers -- Homebuyer Loans		$4,000,000
Rental Property Owners -- Rehabilitation		$1,000,000
Homeowners/Mobilehome Owners -- Rehabilitation		$2,100,000
	TOTAL LOANS	$86,600,000	69%
GRANTS TO:
Developers -- Construction of ELI Units**		$27,300,000
Developers -- Construction of HUD-Assisted Units		$1,500,000
Mobilehome Owners -- Rehabilitation		$1,600,000
Mobilehome Owners -- Exterior Repainting		$300,000
Homeowners -- Rehabilitation		$2,000,000	1.6%
Rental Property Owners -- Rehabilitation		$1,000,000	0.8%
Homeowners -- Exterior Repainting		$1,500,000
Rental Property Owners -- Exterior Repainting		$500,000
Property Owners -- Lead-Based Paint Remediation		$1,500,000
Shelter/Service Providers (ESG and HOPWA Programs)		$1,147,000
Shelter/Service Providers (Housing and Homeless Fund)		$850,000
	TOTAL GRANTS	$39,197,000	31%
FOOTNOTES
*	SOURCE: Draft "Sources and Uses of Funds, Fiscal Year 2001-02 Budget" plus actions
	taken by the City Council at its May 8, 2001 Consolidated Plan hearing. The Division between
	loans and grants for Housing Rehabilitation repair assistance based on the approximate
	50-50 split (including mobilehome repair grants) experienced in Fiscal Year 1998-99.
**	Tax-exempt bond proceeds from the Redevelopment Agency cannot be loaned, only granted.
	Includes 20% Supplement, Replacement Housing, and ELI Housing Reserve funds.