Council Committee Recommends Revising Terms of Some City-Funded Home Loans

Responding to a recommendation from the Pasadena Department of Housing, the City Council’s Economic Development and Technology Committee on Tuesday voted unanimously to send to the full council a plan that would reduce monthly mortgage-loan payments for 61 homeowners whose city-sponsored Homeownership Opportunities Program (HOP) loans fall under older, costlier guidelines.

The EDTech Committee’s recommendation is expected to be on the full council’s agenda next Monday, and if passed would cut the monthly payments of the homeowners by bringing terms of their loans into alignment with current HOP repayment provisions and Fannie Mae underwriting guidelines. It would involve waiving some interest fees on those older loans.

“I’m very glad that they (the Housing Department) were able to look at it and figure out what’s in the best interests of our low-income property owners,’’ said Vice Mayor Tyron Hampton, who had first recommended the Housing Department look into modifying the HOP program guidelines.

“Overall, I’m grateful, and I think the residents will be grateful too, those 60 property owners that kind’ve fell within these old guidelines.’’

Hampton sits on the EDTech Committee with Council Members Steve Madison, Andy Wilson and Chairman Victor Gordo.

Pasadena’s HOP program was begun in 1982 to assist low- and moderate-income people become first-time home owners in the city. Funding comes from the city’s redevelopment and inclusionary housing dollars, plus federal HOME entitlement allocations and state BEGIN and CalHOME grants.

The HOP program assists home buyers by providing a trust deed loan, which is recorded in a junior lien position to the conventional first mortgage. 

According to a report by city Housing Director William K. Huang, the city’s current HOP inventory consists of 199 outstanding loans, with a principal balance of about $12.2 million.

The report said that, of those 199 HOP loans, 138 comply with current Fannie Mae guidelines while 61 loans – underwritten prior to 2010 – do not.

If the full council next Monday approves the EDTech Committee’s recommendation, those older 61 loans would be modified to post-2010 Fannie Mae rules, like the majority of the city’s HOP inventory – easing the financial burden on the homeowners and giving them more flexible refinancing options.

For instance, borrowers whose HOP loans would be modified could have the opportunity to consider Fannie Mae mortgages, which may have more advantageous terms than non-Fannie Mae financing, including broader debt-to-income ratios and lower credit requirements. 

Fannie Mae mortgages offer a number of advantages for borrowers who seek to purchase a home or to refinance, including lower down payment and equity requirements and expanded borrower eligibility provisions.

In addition, Fannie Mae loans can be paired with other federal and state down-payment and closing cost grants and loans, which help enable borrowers without large amounts of cash or savings to purchase homes. 

How these recommended modifications play out is an exercise in the sometimes-complex science of mortgages.

Depending on when the HOP loan originated, the term is either 30 years or 45 years. Loans carry either a fixed interest cost (a promissory note rate between 1.5 percent to 4 percent), a contingent interest cost (also known as shared appreciation), or both. 

In 2009, Fannie Mae adopted new underwriting policies that affected the type of subordinate financing that local governments can provide home buyers. Specifically, conventional mortgages underwritten to Fannie Mae guidelines could not be used in home purchase or refinance transactions if the local agency’s subordinate home buyer assistance loan — such as Pasadena’s HOP — were to impose both a fixed interest cost and a shared appreciation cost, such as the city’s contingent interest cost.

Under the newer Fannie Mae rules, a local agency loan, such as HOP, may require either fixed interest or shared equity, but not both.

According to the Housing Department’s presentation to the EDTech Committee, the specific modifications that will be on the table at Monday’s council meeting would:

• Modify the older 61 HOP loans to eliminate the fixed interest cost, but retain the contingent interest – aligning with the newer Fannie Mae guidelines.
• Allow borrowers to see a reduction in their HOP loan’s monthly installment payment.
• Provide borrowers a greater financial cushion, making home ownership more affordable and accelerating equity building.
• Enable borrowers who seek to refinance a better rate and terms with the now-available Fannie Mae option, which may be more financially advantageous.

The Housing Department presentation cited a “typical” 45-year, $60,000 city HOP loan that, pre-modification, carried a 4 percent fixed-interest rate. Currently, the monthly installment is $250.76, including $82.06 in principal and $168.70 in interest. By waiving the fixed interest, the borrower would pay just the $82.06 in principal on a monthly basis.

In total, the report said, the revisions, if approved, would result in the estimated reduction of approximately $87,372 in annual interest revenue from scheduled HOP loan monthly payments.

— Andy Vitalicio contributed to this report.