2yaw N
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DATE:
TO:
FROM:
SUBJECT:
MEETING DATE: 1/22/2013
ITEM NO.
COUNCIL AGENDA REPORT
JANUARY 9, 2013
MAYOR AND TOWN COUNCIL
GREG LARSON, TOWN MANAGER
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 of the 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 of 2012, 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
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. Staff proposes 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
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 staff s 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 15378 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).
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
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 29.10.3000 through
29.10.2040 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
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:
SIGNED:
ATTEST:
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 2013.docx
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
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
RECORDING REQUESTED BY:
TITLE COMPANY
AND WHEN RECORDED MAIL TO:
TOWN OF LOS GATOS
110 E. MAIN STREET
LOS GATOS, CA 95030
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 9 -11 -12 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.,`d „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
the principal amount of $y 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
- - -- -- -C - --- Lendee ucr' es; as- a -canzdit on precerlent-of making- its -L- ender -L- oan— that- the - Lender -Deed -
of Trust 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 Note_ in, the rorder of; 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:
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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 95030
(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 9 -11.12 to Guild Mortgage.doe
Initials:
Page 3 of 7
NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A. PROVISION, WHICH
ALLOWS THE- PERSON OBLIGATED ON THE-REAL TROPERTY-SECURITY
TO OBTAIN A LOANSS PORTIOI -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:
JUDITH PROPP
Town Attorney
ATTEST:
Town Clerk Clerk Administrator
TOWN:
GREG LARSON
Town Manager
110 E. Main Street
Los Gatos, CA 95030
"LENDER"
Lender
Dated
"Lender"
Town of Los Gatos Initials:
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STATE OF CALIFORNIA } ss:
COUNTY OF
On before
me, a Notary
Public, 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
STATE OF CALIFORNIA }
COUNTY OF
Town of Los Gatos
ss:
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FOR NOTARY SEAL OR STAMP
Initials:
Page 5 of 7
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 9-11-12 to Guild Mortgage.doc Page 6 of
Escrow No.:
Locate No.:
Title No.:
APN:
Town of Los Gatos
ImoA :X7.1
DESCRIPTION OF THE PROPERTY
XXX XXX XXX XXX
Xxxx Xxxxx XXXX
XXXXX Escrow
XXX -XX -XXX
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