Affordable Housing Programs Place Longtime Costs at Feet of Lenders - Topouzis & Associates Affordable Housing Programs Place Longtime Costs at Feet of Lenders - Topouzis & Associates

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May 28, 2019

Affordable Housing Programs Place Longtime Costs at Feet of Lenders

Affordable Housing Programs Place Longtime Costs at Feet of Lenders

As more affordable housing is built in any given area, there will naturally be more mortgages to originate and service on the part of lenders. This has been the effect, for example, in California, where a bill was passed in early 2018, known as the Building Homes and Jobs Act, which raised recording fees on documents in real estate transactions in order to place an increased stream of revenue into a fund earmarked for creating more low-cost housing with the goal of easing the squeeze on renters and the attendant homelessness that has occurred there (California has the highest rate of homelessness in the nation).

California’s 2018-2019 budget shows this tactic has worked—it has put forward $5 billion to contend with the affordable housing and homelessness dilemmas, of which $255 million is composed of funds from the Building Homes and Jobs Act.

But this isn’t good news for everyone (no matter how positive it in fact is for lower-income renters and local governments). Lenders and servicers whose bread and butter comes from funding and servicing loans on affordable and low-income housing units have to deal with a number of unique issues, particularly in California. When new affordable housing is put into the market via new construction or the rehabilitation and reclassification of existing housing units, they are then offered for sale via a number of programs that are administered by city governments. Generally the units are sold at rates below market-rate to people who qualify for such lending. In order to achieve this, the units must meet use and value restrictions, such as the use of the property being limited to exclusive use as a principal residence, and there being limitations on the borrower’s right to sell or refinance the property, providing the city or local government with a right of first refusal in the case of default or condemnation, and so forth —which are in place over the course of decades (ranging from 30-45 years in most cases). These restrictions are just as enforceable against lenders as they are against those borrowing the money, and in fact are considered “senior” to mortgage liens. If these restrictions are violated, lenders and servicers become subject to a source of liability that is generally not seen in traditional mortgages for residential properties, including the potential for claims of damages by the city or local government. Any lender or servicer becoming involved in properties of this sort must do their due diligence on the restrictions put in place in order to avoid bearing such long-term costs.

Topouzis & Associates, P.C. is here to act as a bulwark against title problems initiated in the past, including the restrictions placed on low-income housing. We do title searches and ensure a buyer—or a lender—is gaining clear title to their new property—and we back our services with offerings of title insurance (click here), in case someone along the line of ownership did something that will weaken title at some point in the future.