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HomeMy WebLinkAbout1994-02-10; Housing Commission; ; SAN DIEGO COUNTY REGIONAL MORTGAGE CREDIT CERTIFICATE PROGRAM COOPERATIVE AGREEMENTSTAFF REPORT DATE: FEBRUARY 10, 1994 TO: HOUSING COMMISSION STAFF PERSON: CLINT PHILLIPS LEILANI HINES FROM: HOUSING AND REDEVELOPMENT DEPARTMENT SUBJECT: SAN DIEGO COUNTY REGIONAL MORTGAGE CREDIT CERTIFICATE PROGRAM COOPERATIVE AGREEMENT: Request for approval of a recommendation to approve a cooperative agreement between the City of Carlsbad and the County of San Diego for participation in a San Diego County Regional MCC Program. I. RECOMMENDATION ADOPT Housing Commission Resolution No. 94-005 recommending to the City Council APPROVAL of a Cooperative Agreement adopting the San Diego County Regional Mortgage Credit Certificate Program in the City of Carlsbad in cooperation with the County of San Diego. II. BACKGROUND As reported in the City's Comprehensive Housing Affordability Strategy {CHAS), only about 25% of the very low and low income families residing in Carlsbad have been able to attain home ownership in the City. In an effort to provide lower-income as well as moderate-income households with homeownership opportunities, the Housing and Redevelopment Department has been meeting with staff of the County of San Diego and other local cities to discuss and evaluate the effectiveness of operating a regional Mortgage Credit Certificate {MCC) first time home buyer program. As a result of these meetings, it was determined that a regional approach would provide several benefits: 1) centralized administration of the MCC Program would allow the sharing of associated costs; 2) the MCC Program could be standardized on a County-wide basis making it easier to use and understand by lenders, realtors and home buyers; and 3) a regional MCC allocation application to the State will make participating cities within San Diego County more competitive with other individual jurisdictions iri the state for award of future allocations. As designed, the regional program would serve all qualified first time· home buyers within each participating city/jurisdiction. MCC PROGRAM COOPERATIVE AGREEMENT HOUSING COMMISSION -2/10/94 PAGE 2 The MCC Program, authorized in the Tax Reform Act of 1984, is a publicly-sponsored financial assistance program which provides assistance to first time home buyers in the purchase of single-family housing. In accordance with program regulations, a home buyer qualifies if their household income does not exceed $41,300 for a family of one to two persons (100% of the median San Diego County income), or $47,495 for a family of three or more persons (115% of the median San Diego County income). A "qualified" home must have a purchase price at or below $221,850 for a new home, and $148,230 for an existing home (these prices represent 90% of the average area purchase price). An MCC can only be used for new (i.e., never previously occupied) or existing single-family homes including single family detached homes, condominiums, half plexes, or town houses. Duplexes, triplexes, or four-plexes do not quality as eligible structures. The home buyer applies for an MCC through any of the participating lenders at the same time he/she makes a formal application for a· mortgage loan. The MCC operates as an IRS tax credit. With an MCC, the qualified home buyer can take a federal income tax credit of twenty percent (20%) of the annual interest paid on the mortgage. The tax credit reduces the federal income taxes due to the federal government from the home buyer, resulting in an increase in the home buyer's earnings. Increased buyer income enables a home buyer to qualify for a mortgage loan when they otherwise may not have been able to qualify for such a loan. • Ill. ANALYSIS Under a regional approach for the MCC Program, the County would act as the central agency for the purposes of administering the MCC Program. This includes responsibility for submittal of applications to the California Debt Limit Allocation Committee (CDLAC) for MCC allocations, program administration, program compliance with IRS regulations, and distribution of MCC allocations to participating cities. Individual cities will be responsible for marketing their allocations and maintaining compliance with their respective Allocation Agreements. As part of its marketing program, the City will maintain a list of eligible lenders for referral to interested real estate offices and home buyers. The Cooperative Agreement between the County of San Diego and the City will adopt the San Diego County Regional MCC Program in the City Carlsbad and will allow the City to choose to become a part of any of the County's applications to CDLAC for MCC allocations. Upon electing to participate in the regional MCC allocation application, each participating city will be asked to enter into an Allocation Agreement with the County. This agreement will specify the number of MCC's to be allocated to each city as well MCC PROGRAM COOPERATIVE AGREEMENT HOUSING COMMISSION -2/10/94 PAGE 3 as the shared administration costs. Application fees and administration costs will be charged to participating cities based on the number of MCC's allocated to each city. The Cooperative Agreement will authorize the Housing and Redevelopment Director to sign Allocation Agreements. on behalf of the City. It is expected that the County will be applying to CDLAC once a year for additional MCC allocations. The City's membership in the regional program is not effected by its election to opt out of an allocation application. IV. FISCAL IMPACT There is no fiscal impact to the General Fund. All program costs will be funded through federal CDBG funds allocated for administration of the CDBG program. The costs associated with participation in the MCC Program are based on the City's share of MCC's, which is estimated to be 3.2% of the total MCC's allocated to the regional program (estimated at 815 MCC's with full participation by all cities in San Diego County). Total program administration costs for the regional program are estimated at $165,000. The City's share of program costs are as follows but may be adjusted depending upon the level of participation of each member city in the regional MCC program: Program Administration Costs: Technical Support IRS Tax Counsel State (i.e., CDLAC) Application Fees Program Marketing Costs: Advertising Referrals Total Annual Cost to City Estimated MCC Allocation to City Approximate Cost to City per MCC $4,800 $500 $1,000 $6,300 25 $252 "Program Marketing Costs" are not shared costs. They are budgeted separately by each participating city. MCC PROGRAM COOPERATIVE AGREEMENT HOUSING COMMISSION -2/10/94 PAGE 4 ATTACHMENTS 1 . Housing Commission Resolution No. 94-005 recommending approval by the City Council of a Cooperative Agreement adopting the San Diego County Regional Mortgage Credit Certificate Program in the City of Carlsbad in cooperation with the County of San Diego. 2. MCC Consumer Information Circular. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 HOUSING COMMISSION RFSOLUTION NO. 94-00S A RESOLUTION OF THE HOUSING COMMISSION OF THE CITY OF CARLSBAD, CALIFORNIA, RECOMMENDING APPROVAL OF A COOPERATIVE AGREEMENT ADOPTING THE SAN DIEGO COUNTY REGIONAL MORTGAGE CREDIT CERTIFICATE PROGRAM IN THE CITY OF CARLSBAD IN COOPERATION WITH THE COUNTY OF SAN DIEGO WHEREAS, there is a continued need for affordable home ownership opportunities within the City of Carlsbad (the "City") and the County of San Diego (the "County") for qualified first time home buyers; and WHEREAS, the Tax Reform Act of 1984 established mortgage credit certificates . ("MCC") as a means of assisting qualified first time home buyers with the acquisition of new and existing single family housing; and WHEREAS, Division 31, Part 1, Chapter 35, Article 4 of the California Health and Safety Code Sections 50197 et seq (the "Act") authorizes counties, cities, and redevelopment agencies to create and participate in MCC Programs; and WHEREAS, the County has heretofore determined to engage in an MCC Program pursuant to the Act in order to assist individual home purchasers in the City and the County to afford both new and existing homes within the statutory limits as provided for in said Act; and WHEREAS, the City requests that mortgage credit certificates be available to eligible first time home buyers within the corporate limits of the City when City participates with the County in receiving an MCC allocation; and WHEREAS, the City and County wish to cooperate with one another pursuant to the Act in the exercise of their powers under the "Act" for the purposes of an MCC Program. ,. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOW, THEREFORE, BE IT HEREBY RESOLVED by the Housing Commission of the City of Carlsbad, California, as follows: 2. 3. The above recitations are true and correct. The Housing Commission hereby recommends adoption of the San Diego County Regional Mortgage Credit Certificate Program (the "Program") for the purpose of increasing home ownership opportunities for first time home buyers, and consents to the operation of said Program within the geographical boundaries of the City. That the Cooperative Agreement, dated as of __________ , 1994, between the County and the City (the "Agreement"), a copy of which is attached as EXHIBIT "A" and incorporated herein by reference, is hereby recommended for approval by the Housing Commission to the City Council, and that the Housing and Redevelopment Director is hereby recommended to be authorized and directed to execute and deliver the Agreement, for and in the name and on behalf of the City. It is furthermore recommended that the Housing and Redevelopment Director, with the advice and consent of the City Attorney, be authorized to approve any additions to or changes in the form of the Agreement deemed necessary or advisable, approval of such additions or changes to be conclusively evidenced by the execution by the Housing and Redevelopment Director of the Agreement as so added to or changed. It is recommended that the Housing and Redevelopment Director, with the advice and consent of the City Attorney, be further authorized to enter in such additional agreements with the County, execute such other documents, or take such other actions as may be necessary or appropriate to carry out the purposes and intent of the Agreement or to cooperate in the implementation of the Program. HC RESO NO. 005 -2- ,. l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PASSED, APPROVED, AND ADOPTED at a regular meeting of the Housing Commission of the City of Carlsbad, California held on the 10th day of February, 1994, by the following vote, to wit: AYES: Scarpelli, Avis, Escobedo, Sato, Noble NOES: None ABSENT: Calverley, Wellman, Rombotis, Peterson ABSTAIN: ATIEST: EVAN E. BECKER HOUSING AND REDEVELOPMENT DIRECTOR HC RESO NO. 005 -3-• COOPERATIVE AGREEMENT BETWEEN EXHIBIT "A" THE COUNTY OF SAN DIEGO AND THE CITY OF CARLSBAD THIS COOPERATIVE AGREEMENT (the "Agreement") is hereby made and entered into as of ______ , 1994 by and between the County of' San Diego, a legal subdivision and body corporate and politic of the State of California (the "County"), and the City of Carlsbad, a political subdivision of the State of California (the "City"). WITNESS ETH WHEREAS, the County has determined to provide assistance in the financing of homes for qualified first-time homebuyers in the County and the City with a program to issue mortgage credit certificates pursuant to Part 1 and Part 5 of Division 31 of the Health and Safety Code of the State of California (the "Act"); and WHEREAS, the County, pursuant to the Act, has established the San Diego County Regional Mortgage Credit Certificate Program (the "Program"), and has determined to cooperate with the City pursuant to the Act and in the exercise of its powers under the Act for purposes of the Program; and WHEREAS, the City has adopted the Program and determined to cooperate with the County pursuant to the Act in the exercise of their powers under the Act for the purposes of the Program; NOW, THEREFORE, in consideration of the mutual covenants hereinafter provided, the parties hereto agree as follows: SECTION 1. The words and phrases of this Cooperative Agreement shall, for all purposes hereof unless otherwise defined herein, have the same meanings aligned to such words and phrases in the Act. SECTION 2. The County and the City agree to use their best efforts to undertake the Program and to issue mortgage credit certificates therefore pursuant to the Act to the extent that the County receives allocations from the California Debt Limit Allocation Committee ("CDLAC"). SECTION 3. The City hereby agrees to cooperate with the County and other participating cities in the joint exercise of their powers for the purpose of issuing mortgage credit certificates pursuant to the Act by agreeing that the County shall exercise its powers to issue mortgage credit certificates under the Program, a more specifically set forth in the Act, with respect to property located within the geographic boundaries of the City. _ SECTION 4. The City agrees to undertake such further proceeding or actions as may be necessary in order to carry out the terms and the intent of this Agreement. The County has entered into cooperative agreements with other cities within the County, and nothing in this Agreement shall prevent the County from entering into one or more additional agreements with other cities within the County. SECTION 5. This Agreement shall expire and be of no further force and effect upon termination of the Program. Furthermore, either the City or the County may terminate this Agreement by giving a 30 day written notice to the other party. The City, however, may elect, without terminating this Agreement, not to participate in any application by the County for an allocation from CDLAC. The City election to participate or not in an application shall be made to the County upon receipt of notice from the County of its intention to apply for allocation from CDLAC. SECTION 6. If the City elects to participate in an application by the County for a mortgage credit certificate allocation from CDLAC, then the City shall agree to share proportionately with the other participants any deposit required by CDLAC for the application. The City further agrees to pay the County, upon participation, its proportionate share (based upon the number of participants in the program) of administration costs applicable to each allocation received from CDLAC. SECTION 7. This Agreement may be amended only by a supplemental agreement executed by the City and the County at any time, except that no such amendment or supplement shall be made which shall adversely affect the rights of the owners of any mortgage credit certificates issued by the County in connection with the Program. SECTION 8. By entering into this Agreement, the City does not abrogate any of its legal duties imposed by State law or its Charter or Municipal Code. Any provisions of this Agreement, the terms of which provide for the payment of funds or provide for the services to be furnished by the parties hereto, shall be subject to the availability of funds for such purposes. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and attested by the proper officers thereunto duly authorized and their official seals to be hereto affixed, all as of the day and year first above written. COUNTY OF SAN DIEGO CITY OF CARLSBAD By:---------By:---------- (SEAL) (SEAL) ATTEST: ATTEST: By:---------By:---------- APPROVED AS TO FORM: APPROVED AS TO FORM: By:---------By:---------- A. l\1CC CONSlJ1,,fER ll\1FOR1\1A TION C1RCULAR PROVIDED BY TIIE SAN DIEGO I-IOUSING COl\Il\1:ISSION (R~visc!d 10/20/93) GENERAL OVERVIE\V The Mortgage Credit Certificate Program, authorized by Congress in the Deficit Reduction Act of 1984, is an alternative to mortgage revenue bond-backed financing as a means of providing financial assistance for the purchase of single-fami1y housing. In 1985, the State adopted legislation authorizing local bond issuing agencies to make Mortgage Credit Certificates (MCCs) available in California. This program is designed primarily to benefit first-time home buyers of new or existing housing units throughout the City of San Diego. WHAT IS AN MCC? The MCC operates as an IRS tax credit. With an MCC, the qualified home buyer becomes eligible to take a federal income tax credit of twenty percent (20%) of the annual interest paid on the mortgage. This credit reduces the federal income taxes of the buyer, resulting in an increase in the buyer's net earnings. Increased buyer income results in increased buyer capacity to qualify for the mortgage loan. WHAT JS THE DIFFERENCE BETWEEN A "TAX CREDIT" AND A "TAX DEDUCTION'?" A "tax credit" entitles taxpayers to subtract the amount of the credit from their total federal income tax liability, receiving a dollar for dollar savings. A tax deduction is subtracted from the adjusted gross income before federal income taxes are computed. Therefore, with a deduction, only a· percentage of the amount deducted is realized in savings. The following example illustrates how a credit is considerably more valuable than a deduction. • TABLE 1-1 VALUE OF A TAX CREDIT VS. TAX DEDUCTION Total Income Deductions TOTAL TAXABLE INCOME Federal Income Tax Liability Credit TAXES PAID TAX CREDIT $35,000 -0 - $35,000 5,776 -2,000 S 'J,776 TAX DEDUCTION $35,000 -2,000 $33,000 5,216 -0 - $ 5.216 Table 1-1 shows that for the same dollar value, a $2,000 credit reduces federal income taxes paid by $1,440 more than the.$2,000 deduction. ($5,216 minus $3,776 equals $1,440.) WHAT HAPPENS 10 THE STANDARD MORTGAGE INTEREST TAX DEDUCTION WHEN THE HOME BUYER USES AN MCC? A taxpayer receiving an MCC credit loses 20% of his or her normal interest paid deduction with respect to interest paid on the mortgage loan. However, the home buyer may continue to deduct the remaining 80% of the annual mortgage interest payment not claimed as a credit. A It hough the interest deduction is reduced from 100 % to 80%, the holder of the MCC still pays considerably less in taxes. See Table 1-2. Assume a taxpayer with a $30,000 annual income buys a home for $100,000 at an 8% interest rate. Interest paid the first year is approximately $8,000. An MCC tax credit of 20% interest paid would equal $1,600 (20% x $8,000 = $1,600). TABLE 1-2 With MCC Without MCC Annual Income $30,000 $30,000 Personal Exemption -2,350 -2,350 Interest Deduction -6 400 8,000 Taxable Earnings $21,250 $19,650 Tax from Table $ 3,184 $ 2,944 MCC Credit -1,600 -0 - $ 1,584 $ 2,944 The same taxpayer owes $1,360 less with an MCC than without one ($2,944 -$1,584 = $1,360). The MCC will reduce the amount of federal income taxes otherwise due to the federal government from the home buyer; however, the IRS will not pay out more than should have been paid in. Therefore, the benefit to the home owner in any one year cannot exceed the amount of federal taxes owed for that year, after other credits and deductions have been taken into account. HOW DOES THE HOME BUYER REALIZE THE INCREASE IN HOME BUYING POWER? The home buyer should consider adjusting his or her federal income tax withholding to . receive the benefit from the credit on a monthly basis. The home buyer may file a new W-4 form with his or her employer reflecting the MCC credit savings. By talcing this action, the number of exemptions will increase, reducing the amount of taxes withheld and increasing the buyer's disposable income. The home buyer also has the option to wait until the end of the year and realize the tax credit savings in one lump sum when filing the federal income tax return. 2 Regardless of whether the home buyer adjusts the W-4 form or not, the tax credit must be listed by the home buyer when filing federal income tax return, in order to receive the tax credit savings. WHAT HAPPENS IF A QUALIFIED HOME BUYER CANNOT USE THE ENTIRE AMOUNT OF THE MCC CREDIT FOR A PARTICULAR YEAR? If the amount of MCC exceeds the home buyer's tax liability reduced by any other personal credits for the tax year, the unused portion of the credit can be carried forward to the next three tax years or until used, whichever comes first. The home buyer will have to keep track of the unused credit each year. The current year credit is applied first and then the oldest amount of unused credit applied next. • WHAT KIND OF PROPERTIES ARE ELIGIBLE? An MCC can only be used for new or resale single-family homes including single family detached homes, condominiums, half plexes, or townhouses in the City of San Diego. Duplexes, triplexes, or four-plexes do not qualify as eligible structures. Two-on-one units are not eligible. WHAT LOANS CAN BE USED WITH THE MCC? MCCs can be used with conventional, fixed-rate or adjustable rate loans, FHA and VA loans, and privately insured loans. MCCs are not available with bond-backed loans such as California Housing Finance Agency (CHFA) and Cal Vet loans. MCCs can only be used with original first mortgage financing. The San Diego Housing Commission does not underwrite the loans. Lenders will process the underlying mortgages using standard procedures, with adjustments to those procedures as needed in order to utilize the tax credit in qualifying home buyers. WHAT ARE THE PURCHASE PRICE AND INCOME LIMITATIONS ·FOR MCC HOLDERS? Mortgage Credit Certificates will generally be made available to first-time home buyers in the City of San Diego. Table 1-3 shows the current purchase price and income limitations for MCC Program participants as of September 1, 1993. The execution of required State and Federal documentation for the MCC Program will be performed under agency agreement by lenders participating in the program. The San Diego Housing Commission (SDHC) will review the documentation from the lender in order to determine qualification and eligibility. 3 TABLE 1-3 MORTGAGE CREDIT CERTIFICATE PROGRAM PURCHASE PRICE AND INCOME LIMITATIONS· MAXIMUM BUYER INCOME (Revi11ed 6/J/92) Non-Targeted Areas (Figures represent 100% & 115 % median area income respectively) 1-2 person household 3 + person household $ 41.300 $ 47.495 Targeted Census Tracts 20% set-aside • (Figures represent 120% & 140% median area income respectively) 1-2 person household 3 + person household $ 49.560 $ 57.800 MAXIMUM PURCHASE PRICE Non-Targeted Areas (Figures represent 90% average area purchase price) Resale: $ 148,230 New: $ 221.850 Targeted Census Tracts (Figures represent 110% average area purchase price) Resale: $ 18 l. 170 New: $ 271. 150 WHAT ARE THE OTHER PROGRAM REQUIREMENTS? Qualified applicants must be first-time home buyers. The home buyer cannot have had an ownership interest in a principal residence in the Jast three years preceding the date of application. Also, the home buyer must occupy the home as a principal residence. In designated targeted areas, applicants do not have to be first time home buyers. 4 HOW DOES A HOJ\·1E BUYER APPLY FOR AN MCC? The home buyer may obtain an MCC through any of the participating lenders. A list of the lenders can be obtained from the San Diego Housing Commission (SDHC). The home buyer should apply for the MCC at the same time he/she makes a formal application for a mortgage loan. The buyer should have a purchase offer in hand and should be ready to supply credit information, employment data and other information to the lender for both the mortgage and the MCC applications. Lenders will work with borrowers on a first-come, first-served basis. There is no allocation of MCCs by lender. During the processing of the mortgage application the lender will submit an MCC application package to the SDHC on behalf of the buyer. Provided the buyer and property are eligible, the Housing Commission will provide a Commi1111enr to the lender which reserves an MCC for that purchase transaction. The MCC is issued to the buyer after the close of escrow. Since the MCC processing is concurrent with the loan processing, it should not extend the length of escrow. WHAT IS AN MCC RECAPTURE TAX? Buyers who receive loans closed with an MCC after January 1, 1991, may be subject to a recapture tax if they sell their residence within nine years. The tax, if any, will always be the lesser of: half the gain from the sale of the home, or a tax based on a somewhat complicated formula which takes into consideration: (I) the original principal amount of the home mortgage; (2) the number of complete years that pass before the home is sold; (3) the median family income for the buyer's area at the time he/she bought the home, and (4) the buyer's modified adjusted gross income at the time the home is sold. There are several conditions which can exempt the seller from the recapture tax. These include: (I) a cause-of-sale due to death or divorce; and (2). insufficient increase in the income of the seller (certificate holder) between the time of purchase and the time of • sale. The home buyer will receive detailed information on the recapture tax from the lender and will be asked to sign a statement at time of application that he/she is aware of the tax. WHAT IS A TARGETED CENSUS TRACT? There are 31 census tracts throughout San Diego which have been designated by the Census Bureau as "low Income." Applicants purchasing homes in these census tracts do not have to meet the first time home buyer requirement. Also, the income and purchase price maximums in targeted census tracts are higher, as the federal government wishes to encourage revitalization in those areas. Of each MCC allocation received, 20% is set aside for use in targeted areas. See page 6 for the targeted census tracts. 5 TARGETED CENSUS TRACTS The following is a complete listing of the census tracts within the City of San Diego, as of October 1993, which are federally targeted for special treatment under the MCC program. Buyers purchasing homes in these census tracts can be, but do not have to be, first time homebuyers. The income and purchase price maximums are also higher in these census tracts (see page 4). For buyers who must purchase in a targeted census tract because of their income or because they are not first time buyers, a census tract map package is available through calling the Housing Commission Info Request line at 235-9673. See the Thomas Guide "Census Tract Edition" for a census tract street directory of the entire San Diego County region. Twenty percent (20%) of the Housing Commission's MCC allocation is set aside for purchase in targeted census tracts. These tracts are: 12 34.02 50 16 51 18 35 36 52 22 23 39 55 · 24 40 56 WHAT ARE THE FIRST STEPS? 25.01 41 66 26 45 83.05 27.01 46 47 100.08 27.04 48 100.09 33 49 The prospective home buyer who wants to apply for an MCC must take the following steps. First, the buyer begins looking for a house or condo to purchase (the Housing Commission has no properties for sale). The buyer makes an offer to the seller. When the offer is accepted, escrow is opened and the buyer applies to a mortgage lender for the first mortgage. During escrow the lender applies to the Housing Commission for the MCC on behalf of the buyer. The buyer pays a $200 non-refundable application fee to the lender, of which $150 is forwarded to the Housing Commission. The buyer is given consumer information on the MCC and the recapture tax. The Housing Commission will answer any questions the buyer might have on the MCC during the application process. After the close of escrow, the Housing Commission sends the MCC to the buyer. The Housing Commission has no control over whether the lender approves the buyer's loan application. Various home buyer counseling agencies in San Diego offer free or low cost counseling to buyers with loan qualification issues. Call 235-9673 for information on these agencies. It is best to work with lenders and real estate professionals who are familiar with the MCC program. Call 235-9673 for a list of participating lenders. New lenders are joining all the time. (_k\fomis_93\consinfo.new) 6