Foreclosure Aid Hits a Snag

Monday, May 18, 2009 | A plan to spend more than $17 million to stabilize San Diego County neighborhoods ravaged by foreclosure has been so far hamstrung by restrictions forcing homebuyers to negotiate deep discounts.

The Neighborhood Stabilization Program intends to help low- and middle-income first-time homebuyers purchase foreclosed homes, and to enable agencies to buy foreclosed homes to rent out to low-income families.

But a provision requiring buyers to get up to a 15 percent discount is causing trouble. In order for a buyer to use the federal aid to purchase a home that is valued at $200,000, current rules dictate that buyer must negotiate a discount of between $10,000 and $30,000. And if the buyer can only secure that lower discount, then other buyers using the funding will have to obtain an even bigger markdown so that the program’s total discount is 15 percent across the board.

That’s a tall order these days. Discounted low-end foreclosures are attracting multiple offers and all-cash investors who want to rent out the homes for a profit. It’s quite tough already for regular first-time homebuyers to beat out the heap of offers and be selected, let alone to then ask for a discount.

“That’s been a huge stumbling block for the program,” said Mike Dececchi, chief of the county’s community development division, who’s administering the county government’s $5.1 million allocation. “That might work in Kansas, but that doesn’t work so well in Southern California.”

This trouble illustrates some of the difficulty of fighting the foreclosure epidemic through bureaucracy, which moves at a snail’s pace compared to local market trends.

The amount of money available for spending in the program is already dwarfed by San Diego County’s foreclosure problem. Now it faces hurdles to get the money on the ground as the local foreclosure rate continues to climb. More than 7,000 foreclosure filings were recorded last month, up 30 percent from April 2008.

In addition to the county, the city of San Diego got $9.4 million and Chula Vista has $2.8 million, for a regional total of more than $17 million. The three agencies submitted very similar plans for distributing the money — 25 percent for acquiring foreclosures to rent to low-income families, and 75 percent to help homebuyers purchase houses. The agencies are entitled to 10 percent of the grants to administer the program.

Chula Vista has pre-approved six buyers for the homebuyer help and has six more in the pipeline for the homebuyer assistance, said Amanda Mills, redevelopment and housing manager for the city of Chula Vista. The county has also been telling homebuyers about its program for a couple of months. San Diego announced its program on Friday.

This pot of money — called the Neighborhood Stabilization Program — came out of July’s federal Housing and Economy Recovery Act. The cities and the county announced their allocations in September, submitted plans for the funding late last year, the money was approved in January and it was finally rolled out to the agencies this spring.

In the past year, buyers have reentered the market in sizable numbers. Last month, 20 percent more homes were sold in San Diego County than in April 2008, according to numbers released Monday by MDA DataQuick. When the legislation was drafted, home-buying activity was slumping and prices hadn’t fallen as far. And bidding wars were certainly not the common occurrence they now are.

Mandating the discounts may have sounded like a good idea last fall as bank bailouts were a testy political issue, said Rick Gentry, president and CEO of the San Diego Housing Commission, the agency managing the city of San Diego’s allotment.

But the market is different now. The federal government has changed its rules for an upcoming second phase of the funding to lower the combined discount required to 5 percent — a much easier prospect.

Gentry said he’s confident the federal government will adapt the rules for the first phase of funding, meaning buyers can approach a deal asking for only a 1-to-5 percent discount, instead of the prohibitive up-to-15 percent off. The Housing Commission waited to announce it was collecting homebuyer applications until Friday, because it didn’t want to get buyers’ hopes up only to send them into a marketplace where the requests for discounts would likely be scoffed at, Gentry said.

“This restriction, if not a program-killer, would be a difficult hindrance to get past,” Gentry said. “The rules that were devised six months ago for [this first phase of the funding] have been kind of superseded by reality.”

The three government entities have announced to nonprofits and developers that they’re accepting applications for the other part of the program — the purchase and rehabilitation of houses to rent out to lower-income people. The county has moved more of its funding into that side of the program to ensure the money gets spent sooner.

“We want the money to get into the community,” Dececchi said. “We don’t want to give it back to HUD.”

Each agency is administering the homebuyer assistance funds slightly differently, but all involve what’s called a “silent second” loan — a mortgage that does not require repayment for a number of years. That allows the homeowner, after making a down payment usually lower than 5 percent, to get a conventional loan with substantially lower monthly payments.

All require the first-time homebuyer (someone who has not owned a home in the past three years) to attend an eight-hour home-buying class. In the city of San Diego’s program, the buyer then takes a letter stating she has completed the class to include in her offer to buy a property. This part of the program is available to households at or below 120 percent of the area median income — or $89,900 for a family of four.

A first-time homebuyer would find a foreclosed house to purchase in one of the target neighborhoods, including Golden Hill, North Park, City Heights, Barrio Logan, Encanto and Nestor. Here’s where the discount comes in: the lender must be willing to sell the house for a discount of 5 to 15 percent from the market value according to a recent appraisal.

The homebuyer would obtain a mortgage privately for 80 percent of the purchase price. Then the homebuyer would approach the agency to pitch in 17 percent of the price, plus 3 percent for closing costs. That 17 percent loan would not incur any monthly payments for 30 years unless the house is sold, refinanced or rented out, at which time the loan has to be repaid. The buyers may also be eligible for an extra loan for rehabilitating the house.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.