ADOPT A RESOLUTION ESTABLISHING A SUBORDINATION POLICY FOR THE BELOW MARKET PRICE (BMP) HOUSING PROGRAM

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1 yaw N MEETING DATE: 1/ 22/ 2013 ITEM NO. t COUNCIL AGENDA REPORT DATE: JANUARY 9, 2013 TO: MAYOR AND TOWN COUNCIL FROM: GREG LARSON, TOWN MANAGER SUBJECT: ADOPT A RESOLUTION ESTABLISHING A SUBORDINATION POLICY FOR THE BELOW MARKET PRICE (BMP) HOUSING PROGRAM RECOMMENDATION: Adopt a resolution establishing a Subordination Policy for the Below Market Price (BMP) Housing Program. BACKGROUND: Pursuant to the Town' s current BMP process, the Deed Restriction for the Town' s BMP for -sale units is recorded on the title records immediately after the Grant Deed, transferring ownership from the developer or owner to an eligible BMP purchaser and ahead of a bank' s loan documents. The majority ofthe First Time Homebuyers who purchased their homes through the Town' s BMP Housing Program have relied exclusively on mortgage lenders to provide the financing for their homes. Prior to Council approving BMP Housing Guideline revisions in September of2012, a BMP purchaser who could not obtain traditional mortgage financing, could purchase a BMP unit with nonconventional financing from private investors. Prior to 2006, most lenders had very lax underwriting requirements ( i.e. no documentation loans) and were not concerned about verification of lien positions relative to local affordability or resale deed restrictions. In most foreclosures that result in a Trustee Sale auction, the other lenders claims are paid off in priority order of lien position if there are sufficient sales proceeds after the primary lien is paid off. As a result of the " Mortgage Lending Crisis" in 2006, most residential lenders currently will not provide loan financing to a borrower if the bank' s Deed of Trust, which is the loan document recorded on title to secure the borrower' s Promissory Note ( i.e. the loan note), is not in the first recorded lien position, or unless other liens on title ahead of the lender' s loan documents agree to subordinate ( i.e. accept a lower lien position) to the bank should a loan default occur. PREPARED BY: Todd Capurso, Acting Director of Community Development, 6 Reviewed by: 5 Assistant Town Manager Town Attorney Finance N:\ DEV\TC REPORTS\2013 \Town BMP Subordination Policy Staff Report Q2-13. doc Revised: 1/ 9/ 13 1: 45 PM

2 PAGE 2 MAYOR AND TOWN COUNCIL SUBJECT: BMP Housing Program Subordination Policy January 9, 2013 This process is usually handled for multiple lenders with an Intercreditor Agreement or for smaller residential transactions through a formal Subordination Agreement that is negotiated between the lender and other parties with liens. The Subordination Agreement specifies the conditions and terms under which a lien holder agrees to accept a lower position (should a default and foreclosure occur with the lender' s loan) in exchange for the bank providing the primary purchase financing for the home. Typically, the lender with the largest risk has a higher lien position ( i.e, the first mortgage lender would be higher in priority than the Town or the Housing Trust' s documents). In the case of affordable housing programs such as the Town' s BMP Housing Program, most local agencies have accepted the current loan underwriting reality and have agreed to accept a lower lien position if the agency is allowed a specified period of time to cure potential defaults to preserve their own rights to enforce their documents. All six of the First Time Homebuyek/ Below Market Rate Programs in Santa Clara County surveyed by the Housing Trust in 2010 currently subordinate to the first mortgage lender in order to ensure that their participants can obtain conventional fixed rate, fixed term financing from commercial mortgage lenders. The lenders contacted by the Housing Trust staff on behalf of the Town have indicated that under the current underwriting environment they would not be able to provide conventional financing for the Town' s BMP program units without some modification to the Town' s standard Deed Restriction or a formal Subordination Agreement. The Town does not provide any direct financial subsidy to BMP buyers with the purchase transactions so the Subordination Agreement only changes the lien position of the Town' s Deed Restriction with the Right of First Refusal and owner occupancy requirements. In order to ensure that the eligible BMP buyers do not have a barrier to obtain the traditional financing to purchase available BMP homes provided by developers and existing owners, staff is recommending that Council adopt the attached resolution ( Attachment 1) establishing a subordination policy for the Town' s BMP Housing Program. DISCUSSION: Subordination Agreements are very common in the lending industry and staff has verified that many local cities have used them to facilitate financing for their affordable housing and first time homebuyer programs. In September and October, staff developed a Subordination Agreement template to facilitate the lender financing of the two BMP units in the Bluebird Lane development. The template was accepted for use by Guild Mortgage and Wells Fargo Bank. Staffproposes using it for future Subordination Agreements if the recommended policy is approved by Council. As proposed in the policy, the Subordination Agreement would only be executed by the Town in exchange for the Town being guaranteed the ability to remedy any potential default and/ or exercise its repurchase option for a BMP unit within the specified " cure" period. The deed restriction would still be recorded ahead of any first mortgage loan; however, the agreement would specify that the Town has agreed to a lower lien position to facilitate the lender' s financing of the unit, and that the Town has a specific period to exercise its deed restriction options in the event of a default by the buyer before the bank will be able to initiate foreclose proceedings. The " cure period" required by

3 PAGE 3 MAYOR AND TOWN COUNCIL SUBJECT: BMP Housing Program Subordination Policy January 9, 2013 the Subordination Agreement would also formalize the Town' s right to remedy any potential foreclosure situation and exercise its repurchase rights during a set six month period after it receives a copy of the formal Notice of Default from the homeowner' s lender. Additionally, the Subordination Agreement would require a lender to provide the Town copies of all delinquency and late notice correspondences that it sends the homeowner. This would greatly improve the notification to the Town early in the lender delinquency process that a homeowner may have problems making their mortgage payments. Currently, the Town only receives a copy of a Notice of Default approximately 90 days after a homeowner is late with a loan payment. This additional time will enhance staffs ability to preserve BMP units so they remain in the Town' s inventory rather than potentially being lost to foreclosures. As part of the September 2012 BMP Housing Program Guideline revisions, Council adopted amendments which only allow fixed -rate, fixed -term conventional mortgages without balloon payments for BMP units in order to decrease the potential risk of foreclosures due to buyers financially stretching" themselves via non - conventional loans. Without the ability for BMP buyers to obtain traditional mortgages to purchase the available units in the BMP inventory, the Town may have to consider allowing buyers the ability to turn to less secure loan types which could increase defaults, or accept an increase in the number of unsold BMP units due to the decreased number of financially qualified buyers. ENVIRONMENTAL ANALYSIS: Action on the proposed resolution does not constitute a " project" as defined by section of the CEQA Guidelines because the negotiated agreement between two parties to determine lien position for recorded loan documents is not an action which has a potential for resulting in either a direct or reasonably foreseeable indirect physical change in the environment. FISCAL IMPACT: In addition to requiring an application for requested Subordination Agreements, staff will propose as part of the upcoming budget process, an application fee to recoup the cost of staff processing time reviewing and routing each request (approximately $500 based on what is typically charged in other jurisdictions). The fee is proposed to be reviewed as part of Council' s annual review of the fee schedule. No fiscal impact is anticipated with the implementation of the proposed Subordination Policy if the associated processing fee is approved to cover actual costs. CONCLUSION: Staff recommends that the Council adopt the resolution ( Attachment 1).

4 PAGE 4 MAYOR AND TOWN COUNCIL SUBJECT: BMP Housing Program Subordination Policy January A 2013 Attachments: 1, Draft Resolution (including Exhibit A - Subordination Policy) 2. Sample Subordination Agreement Template TC:EO: ct

5 RESOLUTION NO. RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS ESTABLISHING A SUBORDINATION POLICY FOR THE BELOW MARKET PRICE HOUSING PROGRAM WHEREAS, the Town of Los Gatos Zoning Ordinance Sections through establishes a Below Market Price (BMP) Housing Program to assist low and moderate income Los Gatos citizens to purchase homes at prices below market value; and WHEREAS, the program requires construction of dwellings that persons and families of low and moderate income can afford to rent or buy, and assures to the extent possible that the resale prices of those dwelling units and rents, if they are rented, will be within the means of persons and families of low and moderate income; and WHEREAS, the Program helps the Town meet State mandated housing goals; and WHEREAS, systemic changes in the broader housing and finance markets due to the Great Recession" have caused lenders to tighten their loan underwriting requirements and require higher recorded lien positions for their loans in the event of foreclosures; and WHEREAS, the Town has identified the need to establish a Subordination Policy for the BMP Housing Program to reflect the changes that have occurred in the housing and finance markets; and WHEREAS, this resolution establishes a Subordination Policy for the Town of Los Gatos BMP Housing Program in order to ensure that BMP buyers are able to obtain necessary lender financing to purchase available units and maintain the Town' s ability to retain units for the longest feasible time possible. ATTACHMENT 1

6 NOW, THEREFORE, BE IT RESOLVED, AND IT IS HEREBY RESOLVED, that Town Council of the Town of Los Gatos adopts the Town of Los Gatos Below Market Price Housing Program Subordination Policy attached as Exhibit A. PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of Los Gatos, California, held on the _ day of 2013, by the following vote: COUNCIL MEMBERS: AYES: NAYS: ABSENT: ABSTAIN: ATTEST: SIGNED: MAYOR OF THE TOWN OF LOS GATOS LOS GATOS, CALIFORNIA CLERK ADMINISTRATOR OF THE TOWN OF LOS GATOS LOS GATOS, CALIFORNIA NADEV\RESOS\ 2013\ RESO- BMP. Prog. Subordination, Policy docx

7 TOWN OF LOS GATOS BELOW MARKET PRICE HOUSING PROGRAM SUBORDINATION POLICY In order to facilitate the on - going purchase of Below Market Price ( BMP) for -sale units by eligible Lower and Moderate Income households and to allow for the preservation of the BMP units in Town' s affordable housing stock for the longest feasible time, the Town Council of the Town of Los Gatos establishes this Subordination Policy for the BMP Housing Program, 1. The Town Manager or designee is authorized by the Town Council to execute a Subordination Agreement with a lender providing financing for a BMP for -sale property subject to the following requirements; A. The Town' s Deed Restriction shall be recorded immediately after the Grant Deed transferring ownership to the BMP buyer. B. The lender must be a bona fide financial institution subject to the banking laws and regulations of the United States government. C. The lenders loan shall be for a fixed term and fixed rate with no balloon payments. D. The amount of the lender' s purchase loan cannot exceed the designated BMP sales price. E. The Subordination Agreement shall require the lender to promptly notify the Town upon the occurrence of a default event for the lender' s loan. F. The Subordination Agreement shall require the lender to timely provide the Town copies of all delinquency notices, late payment, and courtesy correspondences that are sent to the homeowner /borrower. G. The Subordination Agreement shall provide the Town a minimum 180 -day period to be able to cure a default of the lender' s loan, and if necessary pay off the lender' s loan and purchase the property from the buyer prior to foreclosure. H. The Subordination Agreement shall note that the 180 -day cure period shall commence upon receipt of the Town' s receipt of a Notice of Default on the lenders loan. I. The Borrower shall pay any applicable application or processing charges established by the Town to offset its costs related to the provision of the requested Subordination Agreement ( e. g. staff time, materials, etc.) J. The Subordination Agreement shall be for the specific purchase loan being provided by the lender and only for the loan documents recorded at the time of initial purchase. EXHIBIT A Of Attachment 1

8 2. The Town Council may consider approval of a Subordination Agreement for a lender refinance loan for an existing BMP unit provided that all the following requirements are satisfied: A. The proposed refinance loan is consistent with the BMP Housing Program Guidelines. B. The proposed refinance loan is only for a lower rate or term and will result in lower monthly payments to benefit the homeowner. C. The proposed refinance loan amount is equal to or less than the amount of the outstanding loan balance of the existing loan (i.e. no cash out to homeowner). D. The homeowner has attempted to obtain a refinance loan from other lenders and has provided the Town documented evidence that a refinance loan cannot be obtained from any lender without the Town' s approval of a Subordination Agreement. E. Satisfaction of Policy Items Section IA through 1I. N:\ DEV \TC REPORTS\ 2013\ BMP Ho us ingprograms ubordinationpol icy [ Ex. A],docx

9 d RECORDING REQUESTED BY: TITLE COMPANY AND WHEN RECORDED MAIL TO: TOWN OF LOS GATOS 110 E. MAIN STREET LOS GATOS, CA ORDER NO.: APN: XXX- XX -XXX SPACE ABOVE THIS LINE FOR RECORDER' S USE ONLY SUBORDINATION AGREEMENT NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR SECURITY INTEREST IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITYN: \DEV \TC REPORTS \2013 \Subordination Agreement Form - TOWN to Guild Mortgage. doc THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT. This Subordination Agreement ( " Agreement ") is made as of the A, by and between the TOWN OF LOS GATOS, a California municipal corporation, corporate and politic organized and existing in the County of Santa Clara, under and by virtue of the laws of the State of California California Health and Safety Code section 33000, et seq.) ( " Town"), and W.,` 4, a corporation organized and existing under the laws of the State of California, with its principal place of business at _ ( " Lender "). RECITALS A. As part of its affordable housing program to assist low and moderate income households, Town has heretofore recorded a NOTICE OF RECORDED DEED RESTRICT_I-_ ONS AND FIRST RIGHT OF REFUSAL OF THE TOWN OF LOS GATOS ( " Deed Restriction ") executed by M, (` Borrower ") as consideration for being provided the opportunity to purchase the residential real property in the Town of Los Gatos (the " Property "), which is legally described in Exhibit "A" attached hereto and made part of this Agreement. B. Concurrently with the execution of this Agreement, Lender is making a loan to Borrower in y the principal amount of $ yh ( the " Lender Loan"), to refinance the first mortgage loan on the Property. The Lender Loan is evidenced by a Promissory Note dated and secured by a Deed of Trust dated 99949, executed by Borrower in favor of Lender the " Lender Deed of Trust "). The Lender Deed of Trust and all other documents to be executed by Borrower in connection with the Lender Loan may be referred to collectively in this Agreement as the " Lender Documents." ATTACHMENT 2

10 of; C Lendee ucr' es; as- a -canzdit onprecerlent-of making- its -L- ender -L- oan that- the - Lender -Deed - oftrust and Promissory Note be senior in priority to the Town' s Deed Restriction. D. It is to the mutual benefit of the Town and Lender that Lender make such Lender Loan to Borrower. No economically feasible method of refinancing Borrower' s first mortgage loan is reasonably available on substantially comparable terms and conditions but without subordination; Lender would not make the Lender Loan to Borrower but for the Town entering into this Agreement; and the Town is willing to specifically and unconditionally subordinate the City Documents to achieve and maintain the order of priority listed in Recital D. NOW, THEREFORE, in consideration of the mutual benefits accruing to the Town and Lender and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Town and Lender hereby agree as follows: The Lender Loan, the Lender Deed of Trust and Promissory Note, together with any advances by Lender pursuant to the Lender Loan, shall at all times be prior and superior to the Town' s Deed Restriction. 2. This Agreement shall be the whole and only agreement with regard to the priority and subordination of the Lender Loan, the Lender Deed of Trust, Promissory Note, and the Town Deed Restriction. This Agreement shall supersede and cancel, but only insofar as would affect the priority among. the loans and documents referred to in this Agreement, any prior agreements as to such subordination including, but not limited to, those provisions, if any, contained in any of such loans and documents which provide for the subordination of the lien or charge thereof to another loan or loans, document or documents, deed or deeds of trust or to a mortgage or mortgages of the Property. Town and Lender declare, agree, and acknowledge that: a) Town consents to and approves ( i) all provisions of the Lender Deed of Trust; (ii) all Lender Documeits including but riot `limited to ' any promissory notes, loan agreements, and development or escrow agreements between Borrower 'and Lender for the disbursement of the proceeds of the Lender Loan for the Property, to the extent such documents were delivered to Town fonreview; and b) Lender consents to and approves all provisions of the Town Deed Restriction; and c) Town intentionally and unconditionally subordinates the lien or charge of the Town Deed Restriction, in favor of the lien or charges of the Lender Deed of Trust and Promissory rorder Note_ in, the priority - specified in this Agreement, and understands that in reliance upon and in consideration of subordination, specific loans and advances are being and will be made, and specific monetary and other obligations are being and will be entered into, which would not be made or entered into but for said reliance upon this subordination. Town of Los Gatos Initials: N:\ DEV\TC REPORTSMIMSubordination Agreement Form - TOWN 9 - I1-12 to Guild Mortgage.doc Page 2 of 7

11 4. Notwithstanding anything to the contrary contained in this Agreement, Lender hereby acknowledges that the Town would not otherwise subordinate it' s interest to the Property which is included in the Town' s affordable housing inventory unless the Town obtains written commitments from Lender, designed to protect the Town' s investment of resources in the event of default, as hereinafter set forth. Therefore, Lender hereby covenants, represents, and warrants as follows: a) Upon the occurrence of an event of default under the Lender Documents, Lender shall promptly notify the Town of the occurrence of such event of default, which notification shall be provided to the Town contemporaneously with the delivery to Borrower of any notice of default under the Lender Documents at the following location: Town of Los Gatos Attention: Community Development Director /Housing Division 110 E. Main Street Los Gatos, CA b) In addition to Notices of Default, the Lender agrees to provide the Town concurrent copies of any notices late payment, delinquency notices, or courtesy reminders that it sends to the Borrower. c) The Town shall have the right, during a minimum 180 -day period commencing upon receipt of the required notice to Borrower and pursuant to the Lender Documents, to negotiate with Lender and to cure Borrower' s default relative to the Lender Loan; d) After a default on any of the Lender Documents but prior to a foreclosure sale or deed in lieu assignment of the Property, the Town shall have the right to take title to the Property pursuant to the Lender Documents and cure the default within the 180 -day period, without Lender exercising any right it might otherwise have to accelerate the Lender Loan by reason of such title transfer; and e) After a default on any of the Lender Documents within the T8-0 -day cure period but prior to a foreclosure sale or deed in lieu assignment of the Property, the Town shall have the right to purchase the Property from Borrower and pay all amounts due and owing under the Lender Loan. Town of Los Gatos N:\DEV\ TC REPORTS\ 2013 \Subordination Agreement Form - TOWN to Guild Mortgage.doe Initials: Page 3 of 7

12 NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A. PROVISION, WHICH ALLOWS THE- PERSON OBLIGATED ON THE-REAL TROPERTY-SECURITY TO OBTAIN A LOANSSPORTIOI - OF -WHICH M'A -Y- -BE EMENDED -F PURPOSES OTHER THAN IMPROVEMENT. OF THE LAND. IN WITNESS WHEREOF, the Town and Lender have executed this Agreement TOWN OF LOS GATOS, CALIFORNIA, a municipal corporation APPROVED AS TO FORM: TOWN: JUDITH PROPP Town Attorney ATTEST: GREG LARSON Town Manager 110 E. Main Street Los Gatos, CA Town Clerk Clerk Administrator LENDER" Lender Dated Lender" Town of Los Gatos Initials: N:\ DEV\TC REPORTS\ 2013 \Subordination Agreement Form.- TOWN to Guild Mortgage.doe Page 4 of 7

13 STATE OF CALIFORNIA } COUNTY OF ss: On me, Public, personally appeared before a Notary who proved to me on the basis of satisfactory evidence to be the person( s) whose name( s) is /are subscribed to the within instrument and acknowledged to me that he /she /they executed the same in his /her /their authorized capacity( ies) and that by his /her /their signature( s) on the instrument the person( s), or the FOR NOTARY SEAL OR STAMP entity upon behalf of which the person( s) acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. Signature STATE OF CALIFORNIA } COUNTY OF ss: Town of Los Gatos N:\DEV\TC REPORTS OMSubordination Agreement Form - TOWN to Guild Mortgage.doe Initials: Page 5 of 7

14 On before FOR NOTARY SEAL OR STAMP me,, a Notary Pubiic, personally appeared who proved to me on the basis of satisfactory evidence to be the person( s) whose name( s) is /are subscribed to the within instrument and acknowledged to me that he /she /they executed the same in his /her /their authorized capacity( ies) and that by his /her /their signature( s) on the instrument the person( s), or the entity upon behalf of which the person( s) acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. Signature Town of Los Gatos Initials: N:tDEV\TC REPORTSWIMSubordination Agreement Form - TOWN to Guild Mortgage.doc Page 6 of

15 ImoA : X7.1 DESCRIPTION OF THE PROPERTY Escrow No.: Locate No.: Title No.: APN: XXX XXX XXX XXX Xxxx Xxxxx XXXX XXXXX Escrow XXX -XX -XXX Town of Los Gatos N:\DEV\TC REPORTS\ 2013 \Subordination Agreement Form - TOWN to Guild Mortgage.doc Initials: Page 7 of 7

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