Common Pitfalls in HOME ProgramResale and Recapture Provisions

COSCDA Housing Program Managers Training Conference – March 2015

Homebuyer Requirements

• Required by Section 215 of the HOME statute, §92.254 of the HOME rule:

- Be single-family modest housing- Principal residence of owner who qualifies as

low-income at purchase- Meet affordability requirements determined

by the amount of assistance- Subject to resale or recapture provision to

ensure affordabilitySlide 2

Requirements for HUD review and approval

– HUD must determine that the requirements for resale and recapture set forth in the PJ’s Consolidated Plan are appropriate and must specifically approve them in writing before the PJ can use HOME funds for homebuyer assistance.

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Snapshot

• Contents of some resale and recapture provisions do not comply with the basic requirements

• 2010 HUD OIG audit of PJ resale and recapture provisions found– 50% of the 40 PJs sampled failed to have adequate

provisions that complied with §92.254.– Inadequate provisions did not ensure the financial

investment in affordable housing was sufficiently protected

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General Resale & Recapture Elements

• General characteristics of good provisions– Clearly describe the PJ’s homebuyer program and

use of resale & recapture– Include provisions used by all partners • e.g., subrecipients, State recipients, consortium

members, CHDOs

– Correctly explain the circumstances under which different provisions will apply

– State how the provisions will be enforced

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RESALE PROVISIONS

What is Resale?

• Restricts the homebuyer’s ability to resell only to a HOME-eligible buyer and limits the sales price

• Can be used for any HOME-eligible homebuyer project for any type of assistance

• Repayment of HOME funds dependent on PJ’s mortgage financing terms

Affordability Period Under Resale

• Affordability period based on total HOME investment in the property– Must include $$$ of HOME assistance to buyer – PLUS total amount of HOME funds provided to

developer

Affordability Period under Resale

• HOME affordability periods are minimums -- PJs can set longer terms

Total HOME $ Affordability Period

< $15,000 5 yrs.

$15,000 - 40,000 10 yrs.

Over $40,000 15 yrs.

Resale ProvisionsRequired Elements

• §92.254(a)(5)(i): “…The participating jurisdiction must specifically define “fair return on investment” and “affordability to a reasonable range of low-income homebuyers,” and specifically address how it will make the housing affordable to a low-income homebuyer in the event that the resale price necessary to provide fair return is not affordable to the subsequent buyer.”

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Resale ProvisionsRequired Elements

• When a homebuyer unit is sold or transferred, voluntarily or involuntarily, during the HOME Period of Affordability (POA):– Long-term affordability is preserved by selling the unit to

another low-income homebuyer who will use property as principal residence

• At a price that…– Provides the original homebuyer a fair return on

investment,– Is affordable to a reasonable range of low-income buyers

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Fair Return on Investment

• How is Fair Return on Investment Calculated?

Step 1: (Homebuyer’s original investment + value of capital improvements) x objective index = Fair Return on Investment

Step 2: Homebuyer’s original investment + value of capital improvements + Fair Return on Investment = Total Return to Original Homebuyer at Sale

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Fair Return on Investment…What is Homebuyer’s Investment?

• Original homebuyer’s investment must include:– Initial investment (e.g., downpayment, closing costs)– Capital improvements

• What are capital improvements?– Provisions should broadly define what the PJ considers

a capital improvement– PJ’s policies and procedures must provide greater

detail including:• Specific capital improvements included in the calculation of

fair return• How the PJ will value those improvements

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Fair Return on Investment…What is a Clear & Objective Index?• Provisions must identify specific index used to

calculate fair return. • Index or standard must be:– Publically accessible– Easily measured at time of purchase & resale

• Examples include:– Consumer Price Index (CPI)– % change in median sale prices over the period of

ownership

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Affordable to a ReasonableRange of Homebuyers

• “Affordable to a reasonable range of homebuyers” is the PJ-defined target population that should be able to afford a HOME-assisted home at resale.– Often misunderstood to mean how PJ will set sale

price of a HOME-assisted unit at resale.• Typically defined as the percentage of income

families at a specific income range may pay for PITI. (e.g., <30% of income for 65-80% AMI)

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Subsequent Purchase by Low-income Family at Resale

• Provisions must ensure long-term affordability for duration of POA.

• Sales price at resale must:– Ensure fair return to seller– Be affordable to PJ’s identified range of low-

income homebuyers• Subsequent purchaser must:– Meet HOME income eligibility requirements– Use unit as principal residence

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Presumption of Affordability under Resale

• Certain housing may be presumed to meet the resale restrictions during the period of affordability without the imposition of enforcement mechanisms by the participating jurisdiction.

• The presumption must be based on a market analysis of the neighborhood subject to HUD review and approval.

• §92.254(a)(5)(i)(B) specifies the requirements• Underutilized option, administrative ease

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RECAPTURE PROVISIONS

What is Recapture?

• Homebuyer may sell home:– To any willing buyer– At any price– At any time

• PJ must collect part or all of HOME assistance from the net sale proceeds (if sufficient)

Use of Recapture

• Recapture can only be used when:– Provide direct subsidy to homebuyer– Must have an amount that can be recaptured

• Resale can be used for any HOME-assisted homebuyer

Recapture ProvisionsRequired Elements

• Recapture provisions must ensure when homebuyer unit is sold or transferred, voluntarily or involuntarily, during the HOME POA:– Subject to available net proceeds, PJ recovers all

or a portion of the direct HOME subsidy provided to the homebuyer.

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Direct HOME Subsidy

• Recapture provisions must specifically state that the PJ will recapture the direct subsidy provided to the homebuyer.

• Direct subsidy is the amount of HOME assistance, including PI, that enabled the homebuyer to buy the unit.– e.g., downpayment, closing cost assistance, direct

subsidies the reduced the purchase price from market value to an affordable price.

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Amount Subject to Recapture, cont.

Market value of home (if development HOME assisted)

- Sales price of home = Discount benefiting homebuyer + HOME funds provided directly to homebuyer = Amount subject to recapture

Affordability Period Under Recapture

• Affordability period based on total direct subsidy benefiting homebuyer– Known as “amount subject to recapture”

• Does not include HOME amounts to subsidize development when that cost exceeds market– Known as development subsidy

Affordability Period under Recapture

• HOME affordability periods are minimums -- PJs can set longer terms

Direct HOME subsidy to HB

Affordability Period

< $15,000 5 yrs.

$15,000 - 40,000 10 yrs.

Over $40,000 15 yrs.

Development SubsidyExample

• Subdivision of 15 town homes• Total development costs of $2,400,000 or $160,000

per home• Development subsidy:

Cost per home: $ 160,000Market value: $ 130,000Development subsidy: $ 30,000 per home

• Under recapture, this subsidy not included when determining affordability period

Recapture Affordability Period Example

• $50,000 HOME development assistance to CHDO– Of this, $10,000 left in deal to write sale price

below market• $6,000 HOME downpayment assistance to

homebuyer• Total direct subsidy:• Affordability period:

$16,00010 years

Net Proceeds

• Recapture provisions must specifically state that the PJ will recapture the direct HOME subsidy from available net proceeds.

• Net proceeds are calculated as follows:Sales price – Superior Loan Repayment(s) –

Closing Costs = Net Proceeds

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Acceptable Recapture Models

• Four acceptable models are defined in the HOME regulations:– PJ recaptures entire direct HOME subsidy– Reduction during POA– Owner investment returned first– Shared net proceeds

• PJ may develop and use own model subject to HUD approval.

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PJ Recaptures Entire Direct HOME Subsidy

• PJ recaptures the entire direct HOME subsidy from available net proceeds.

• Insufficient net proceeds may prevent PJ from recapturing entire direct HOME subsidy.– PJ is NOT required to repay the difference

between total direct subsidy and amount PJ is able to recapture from available net proceeds.

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Reduction During POA

• Subject to available net proceeds, PJ pro rates amount recaptured based on # of years homeowner occupied the unit measured against POA.

# of Years Homebuyer Occupied Home ×Total Direct HOME Subsidy Period of Affordability

• Provisions must include or describe pro rata formula and limit to available net proceeds.

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Owner Investment Returned First

• PJ permits homebuyer to recover entire investment before recapturing direct HOME subsidy.– Homebuyer’s investment includes downpayment,

capital improvements• Subject to available net proceeds– PJ is NOT required to repay the difference

between total direct subsidy and amount PJ is able to recapture from available net proceeds.

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Shared Net Proceeds

• Most commonly used recapture model, often in combination with pro rata reduction.

• Proceeds to Homebuyer =Homebuyer investment

X Net ProceedsDirect HOME Subsidy + Homebuyer Investment

• Recaptured amount =Direct Home Subsidy X

Net ProceedsDirect HOME Subsidy + Homebuyer Investment

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Recapture Requirements

• Regardless of model used, provisions must:– Clearly describe each recapture model used and

circumstances under which each model will apply– Address circumstances that trigger recapture• Voluntary or involuntary sale of transfer

– Specifically state that recapture amount is based on direct HOME subsidy to homebuyer

– Limit recapture to available net proceeds– New Rule: subsequent buyer may assume recapture

obligations Slide 34

New Flexibility under Recapture

• §92.254(a)(5)(ii): “…Recapture provisions may permit the subsequent homebuyer to assume the HOME assistance (subject to the HOME requirements for the remainder of the period of affordability) if the subsequent homebuyer is low-income, and no additional HOME assistance is provided.”

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Common Pitfalls in Resale and Recapture Provisions

Common Errors

• Failing to describe circumstances under which different provisions or models will be used

• Failing to describe either resale or recapture but merely refer to §92.254

• Using recapture provisions when no direct subsidy is provided to homebuyer

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Common Errors

• Hybrid provisions mixing resale and recapture• Not limiting recapture to net proceeds• Failing to clearly define “fair return on

investment”• Failing to clearly define “affordable to a

reasonable range of homebuyers”• Failing to include the principal residency

requirement

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Common Errors

• Conflating events that trigger the resale or recapture requirements (voluntary or involuntary transfer of the unit) with noncompliance (e.g. vacating or renting the unit).

• Failing to state how determination of HOME POA differs in resale vs. recapture

• Failing to state that the PJ will monitor

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Enforcement Mechanisms

• PJs must legally enforce the HOME affordability requirements

• Acceptable resale mechanisms include:– Recorded deed restrictions– Covenants running with the land

• Acceptable recapture mechanisms include:– Lien– Deed restrictions

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Noncompliance

• Noncompliance requires repayment of full HOME investment– Repayment amount dependent on PJ’s program

design• Noncompliance with resale or recapture

requirements means:– Violation of principal residency requirement

(owner vacated or rented out the unit)– Applicable resale or recapture provisions were not

enforced.Slide 41

Monitoring the Resale or Recapture Agreement

• Monitor ownership– Review tax records – Request copy of insurance bill– Establish system for flagging pending sales

• Recommend monitoring principal residency:– Request copy of insurance and/or utility bill– Send out letter and certification form with “Do

Not Forward”• PJs typically monitor annually

Program Design Considerations (cont)

• Strategies for identifying pending sales and foreclosures– Periodic communication with real estate

agents, lenders, and title companies– Provide list of assisted addresses to taxing

entity and request notification–Others?

Enforcing the Written Agreement in case of Noncompliance

• If owner doesn’t sell but fails to occupy unit as principal residence for duration of POA or meet another PJ condition:– Project is in noncompliance– PJ must take legal action to restore principal residency or

collect funds– Total outstanding HOME investment must be repaid to PJ’s

HOME account• Minus HOME $ paid back, if applicable

– Funds collected are “repayment funds” (returned funds in IDIS) NOT program income or recaptured funds

– Activity must be canceled in IDIS

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For detailed guidance…

• Notice CPD-12-003: Guidance on Resale and Recapture Provision Requirements under the HOME Program

• www.hudexchange.info/HOME• Ask your CPD Representative

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