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High construction costs, skyrocketing insurance rates and the national economic crisis have
prevented families at various income levels from becoming homeowners. Thus, in 2008 the
Jeremiah Group and other advocates lobbied the Louisiana Recovery Authority to redirect $75
million from the stuttering Small Rental Property Program (SRPP) to help renters, a group that
had been woefully underserved in previous recovery efforts, become homeowners. An initial
pool of $27-million had already begun to stimulate the affordable homeownership market.
That first pool allowed 379 families to buy homes for the first time, adding to the citys tax rolls
and reducing blight. In addition, the program referred over 1,000 interested, but not yet
qualified, families to homebuyer counseling. The funding for the first program has now been
exhausted, and without continued funding for the program, these families will not be able to
realize their dream of homeownership.
RECOMMENDATION FOR USE OF FUNDS
GNOHA has combined its understanding of the issues and needs with those expressed by its
partners and recommends that the $62,000,000 originally designated for FANO administration
be used to develop a comprehensive program that includes:
1. Down Payment and Closing Cost Assistance to cover the gap between what the family can
afford and the sales price of the home (average estimated at $150,000). This would include up
to $65,000 in Down Payment Assistance, up to $10,000 in Closing Cost Assistance, and a 10-year
Soft Second Mortgage forgivable over time.
2. Alternative Mortgage Pool to provide loan products designed to meet the unique needs of
families in underserved communities. These loan products include both interim construction
financing and permanent first mortgage loans. A loan loss reserve fund to mitigate risk for local
lenders is established. See model referenced in Appendix B submitted by the Southeast
Louisiana Alliance for Economic Inclusion Housing Committee. The recommended funding level
would allow for a $25 million loan, originating over 400 loans.
3. Developer Subsidy & Homebuyer Counseling. Market conditions in underserved
neighborhoods often mean that total development costs often exceed the sales prices. Though
new housing units and infrastructure can be a catalyst for neighborhood growth and
sustainability, the initial investment required by developers to reach a tipping point
(normalized appraisal values) in sustainable revitalization cannot be reached without investment
from other stakeholders. Developers should be qualified and certified to access funds in the
subsidy pool. This certification should insure a fair distribution of funding that ties into other
city priorities: focusing on place-based initiatives and eradicating blight. Certification should
also provide guarantees that facilitate construction and completion of homes.
Funding for Housing Counseling Agencies: Developers should contract with counseling agencies
approved by the Louisiana Homebuyers Education Collaborative to provide first time
homebuyers training, credit counseling and financial literacy to educate and empower families
about the homeownership process. These agencies provide resources that promote affordable
housing and foster economic well being and ensure that families connect with qualified
7. Eliminate 50% First Mortgage Loan Rule: As designed, first mortgage loan amount must be at
least 50% of sales price; should include cash down; should consider total contribution; if a client
has large down payment from recovery funds, they should not be penalized for using it to buy
down the first mortgage. Also, if the client cannot qualify for a first mortgage equal to 50% of
purchase price when housing ratio is maxed out at 30%, they are simply out of luck. This money
is intended to fill the gap by making homeownership affordable; this program design flow
drastically prohibits usability and accessibility to those who need it most. Many of the families
who need this money to fill the gap between purchase price and affordability are on fixed
incomes. Most mortgage lenders gross up fixed income (social security, and other federal
funds) to account for the standard deductions from the gross amount in an effort to be
consistent with the way income is calculated for wage earners. These families simply can not
meet the 50% rule because 30% of income isnt enough to get to 50% of purchase price. This
program should be consistent with other industry standard rules regarding calculation of
income.
8. Lower front-end ratio: With the vagaries of insurance rates and property taxes, many lowmoderate buyers find themselves straining with mortgage payments calculated with at 30%
front-end ratio. Allowing lenders to adjust the ratio between 25-30%, based upon the families
income level will allow for a first mortgage that is truly affordable.
9. Integrate the Own the Crescent Campaign into the Service Delivery System: GNOHA has
launched a campaign to promote homeownership in the city called Own the Crescent to
stimulate more interest in homeownership and educate families about their options.
Prospective buyers will call into a centralized hot line and be referred to local resources
according to their neighborhood and lifestyle preferences. Use this existing campaign as the
outreach mechanism rather than directing the traffic directly to the City or entity selected to
administer funds. NeighborWorks America, Capital One, AARP and a dozen developers are
providing funding to finance this campaign. See overview in Appendix C.
10. Require Curative Counseling as Integral Step in the Process: Clients referred, via the Own the
Crescent website or hotline, to partner developer must be connected to HUD-certified
counseling agency. Financial obstacles are cured; prospective buyer demonstrates responsible
financial behavior. Once clients are deemed mortgage ready by assigned Housing Counselor,
they are referred to participating lender.
11. Implement a Developer Subsidy: The program design should acknowledge the gaps between
development costs and appraised values and/or sales price. The program should fund
reasonable gaps in an effort to facilitate development in targeted under-served areas of the city.
Developers who access these funds must also contract with a counseling agency to assess clients
and funding will be provided to facilitate this relationship and insure that the counseling
agencies are compensated and monitored.
12. Develop a Set-Aside for Facilitating the Development of Innovative Loan Products:
Prospective homebuyers and builders need interim/construction financing and permanent
mortgages. Assist local and regional lenders in creating loan products that address the need by
mitigating their risk via a Loan Loss Reserve Fund.
13. Create a Streamlined Service Delivery System: Once a Program Description is defined, create a
comprehensive list of Frequently Asked Questions for specific audiences (lenders, realtors,
developers, homebuyers) so the local stakeholders and industry players can execute their roles
and responsibilities for transparent and efficient service delivery. Define the process flow from
outreach through closing (including every decision point and compliance function) and develop
standard operating procedures for each function on the map. Train the team (both internal staff
and external partners) and implement a quality control program based on performance. Define
measures that will be used to monitor quality and performance at each functional point in the
service delivery system; use this data to make adjustments to improve outcomes as needed and
to measure and document success.
14. Streamline the Required Documentation: It has been reported that it is very burdensome for
some families (especially the elderly) to complete/obtain all of the required affidavits and get
them notarized. Verification is necessary to maintain compliance with regulations but systems
can be implemented that meet compliance requirements and that reduce redundancy without
overly burdening the customers.
15. Execute Effective Protocols to Ensure CDBG Program Compliance: Income verification and
eligibility should be checked at various intervals throughout the service delivery system.
Ultimate responsibility for income eligibility should rest with the administrator of the program
funds though housing counselors and lenders should be trained accordingly.
APPENDIX A
Current Pipeline Summary (As reported by the Greater New Orleans Housing Alliance)
Organization
Make It Right
Jericho Road
Neighborhood Housing Services
New Orleans Neighborhood
Development Collaborative
Neighborhood Development
Foundation
Community of Faith for Economic
Empowerment
Preservation Resource Center
Builders of Hope
Providence
St. Bernard
Jerusalem Economic Development
Corp.
Tulane Canal Neighborhood
Development Corporation
Habitat New Orleans
EnviRenew (Salvation Army)
TOTAL FOR SALE HOMES
Low
High
Area
30
10
10
75
15
20
12
20
25
40
15
12
20
94
60
15
12
20
235
100
10
20
2
34
5
55
100
424
100
732
St. Roch
Holy Cross
Mid City, Central City
Trem, Seventh Ward, Mid-City
Ninth Ward
St. Roch, New Orleans East, Lower
9th Ward
Tulane-Gravier
City wide
Broadmoor, Algiers, St. Bernard,
Ponchatrain Park
OVERVIEW
The return of pre-Katrina homeowners to their homes and neighborhoods, and the
creation of new homeowners are essential to the growth and redevelopment of New
Orleans- a city still reeling from the ravages of Hurricane Katrina. Having access to
adequate rehab and new purchase financing and technical assistance with construction
management services are two key components to help in the rehab and revitalization of
New Orleans neighborhoods. The purpose of providing this proposed non-traditional
alternative mortgage financing program, contractor selection support and construction
management oversight services is to help bridge the financing gap and contractor
selection anxiety that exists for many worthy pre-Katrina homeowners and new potential
homeowners.
With the escalation of centralized credit underwriting over the past decade and rapid
credit decision procedures being implemented, more emphasis has been placed on credit
score and speed rather than on true repayment and cash flow ability in the consumer and
mortgage loans industries. As a result, a significant number of potential homeowners fall
through this financing gap and are unable to experience their dream of becoming a
homeowner.
Thus, in an effort to combat this problem, many cities across the U.S. have decided to
address this financing gap by creating their own alternative mortgage products pool that
places more emphasis on character, current credit situation, existing debt to income,
underlying factors affecting ones credit score, rent/utilities payment history, and
potential rather than strictly credit scores.
Presently, the City of New Orleans and neighboring LA Gulf Coast communities do not
have an alternative mortgage program that encompasses the no minimum credit score
feature. Implementing an alternative mortgage products program in New Orleans and the
Gulf Coast Region is especially needed in view of the impact Hurricanes Katrina and
Rita have had on the credit scores of its residents- many of whom were unemployed or
underemployed for several months after the storms. Additionally, the current nationwide
foreclosure crisis has led to a greater tightening of credit underwriting standards and in
many cases a higher minimum credit score requirement for mortgage loans.
These market trends have made it very difficult for many potentially qualified
homeowners to obtain affordable mortgages to rehab their hurricane damaged homes or
purchase new homes. The end result has been a drag on the rebound of the New Orleans
and LA Gulf Coast housing recovery, although the City, overall, is now beginning to
show signs of economic life after five years of staggering from Katrina. In order for the
city of New Orleans and Gulf Coast to continue to move positively towards achieving a
full and strong recovery, a special mortgage program such as proposed herein will be an
important tool to rebuilding the citys neighborhoods.
In an effort to address the affordable housing crisis and other recovery issues in the Gulf
Coast hurricane zone, in October 2007 the Southeast LA Alliance for Economic Inclusion
(AEI) was formed by the FDIC. The AEI is a coalition of financial institutions, federal
bank regulators, state and local government agencies, faith-based groups, communitybased organizations, academia and other partners in the region who are working together
on strategies to bring more of the unbanked and underbanked into the financial
mainstream.
The AEI, which has over 150 members, formed an Affordable Housing Sub-committee,
which began to research some of the housing issues affecting the New Orleans recovery.
The issue of credit scores and the difficulty experienced by homeowners in obtaining
mortgage rehab financing surfaced as major recovery issues. The AEI also learned that
the local federal bank regulatory officials, City officials and Finance Authority of New
Orleans all had similar concerns about the issue of impaired credit scores as a hindrance
to homeownership development and recovery. Thus, in November 2008 all of these
concerned parties came together to form the AEI Alternative Mortgage Pool
Development Committee to research best practices in the alternative mortgage finance
industry and to work in partnership in resolving this issue.
After extension research was conducted on similar alternative mortgage models around
the U.S, the NHS Chicago Neighborhood Lending Program model was chosen as the
most comprehensive model to replicate for the New Orleans and LA Gulf Coast area.
The NHS Chicago Program has a wide variety of products to meet various
homeownership needs, has a strong history of production and a low loan-default history.
The NHS Chicago board chairman and banking executive, Mr. Tommy Fitzgibbons, has
been volunteering much of his time in advising the AEI committee on how to structure a
similar program for New Orleans. NeighborWorks America, a national nonprofit created
by Congress that works to revitalize communities through affordable housing initiatives,
has been helpful in covering Mr. Fitzgibbons travel costs to assist us in New Orleans.
While the task forces plan is to initially start the program in the New Orleans area, the
long-term plan is to implement the programs products throughout the entire Hurricanes
Katrina and Rita LA Gulf Coast disaster areas.
In an effort to commence the program to meet the current high demand for the proposed
financial products more quickly, we are proposing to implement the program in two
phases (i.e. the multi-bank investor pool takes 6 months to 1 year to develop vs. starting
immediately with one U.S. Treasury-certified Community Development Financial
Institution (CDFI) in the short-term and expanding to a multi-bank pool long-term).
In Phase I, ECD-Hope Credit Union, a CDFI, is proposing to provide $5 million in
mortgage capital to start the program. ECD-Hope has been an active member of the
planning committee since the inception.
Once the City of New Orleans, or Louisiana Housing Finance Agency (LHFA) in the
event that a LHFA-supported Statewide program is developed, are pleased with the
results of the Phase I Pilot, the AEI Affordable Housing Development Committee and
GNOHA will work, collectively, to develop the Phase II $20 million multi-bank pool and
expand the products to be offered.
The NHS NLP has a solid history of performance and a variety of special mortgage
products with no minimum credit score requirements to meet the affordable housing
needs of Chicagoans (see product matrix details- attachment C). Brief descriptions of
these products are as follows:
FINANCING TOOLS
There will be two principal financial tools- interim construction financing and permanent
mortgage financing. Unlike the Chicago model wherein all loans (interim construction
and permanent) are originated by NHS-Chicago, which has a mortgage license, there will
not be a need to create a licensed mortgage division under NHS New Orleans since at
least three local lenders have expressed strong interest to underwrite the loans exclusive
of a minimum credit score requirement as per the Chicago products matrix model.
This scenario will allow for the implementation of the New Orleans program much faster
since creating a new vehicle and applying for a mortgage license is time consuming.
These lenders will use their own bank capital to make the construction loans thus
eliminating the need to establish a Warehouse Line of Credit Purchase Sale and Servicing
Agreements (PSSA) as was needed in Chicago. More lenders are invited to become
originators; however, the underwriting matrix criteria that have been established based
on the Chicago matrix must be followed.
Interim Construction Lines of Credit
a. ECD- Hope Credit Union during the Phase I Pilot and possibly others for the
Phase II Multi-bank Pool will participate in the development of the loan
origination program
i. Loan origination
1. Construction loan disbursements
a. Oversight of lien waiver process
ii. Loan Servicing and Collections
iii. Investor Reporting
iv. Investor Accounting
COMMUNITY BENEFITS
The subordinated gap financing product reduces the financial institutions loan
to value senior mortgage thus, allowing the financial institution to generate more
first mortgage loans.
Lenders involved in the underwriting and interim construction loan phases can
generate additional interest income and fee income.
Lenders participating in the proposed Phase II $20 million Permanent Take-Out
Purchase Sale and Servicing Agreement (PSSA) Pool will generate additional
market-rate interest income on loans otherwise not available in the marketplace.
Loans and/or Investments made into the PSSA by banks can qualify for CRA
credit under the Lending Test, Investment Test or both depending on the structure
of the loan to the PSSA Pool.
Bank officers who provide service on this programs development committee or
the Investor Oversight Committee can receive CRA credit under the Service Test.
New potential consumers loans and deposit relationships established with
customers whom would have been declined initially for a conventional loan.
The originators are currently reviewing the RESPA regulations to determine the
potential for paying a referral fee arrangement to lenders who refer customers to
them. If RESPA regulations will allow for such an arrangement, there could
potentially be fee income for lenders who refer borrowers to the originators.
INVESTOR OVERSIGHT
An Investor Oversight Committee will be formed from the Phase II PSSA Pool
investor group to monitor the pools performance and to provide policy direction.
Meets Quarterly & Oversees performance
Modifies/changes underwriting criteria
Directs concentration decisions
Negotiates government support/program modifications
Ensures coordinated legal review of investor documents
Negotiates with secondary market for loan sales from the pool
The program replicates a proven model that has had a significant positive economic and
human development impact for the city of Chicago, its citizens and neighborhoods.
Homeownership promotes stable communities and contributes to the accumulation of
household wealth. However, borrowers opportunities for homeownership have
diminished as the availability of mortgage credit has contracted. The market disruptions
have touched all economic demographics but have been particularly difficult for lowerto-moderate income borrowers, who have been disproportionately affected. The
implementation of the NRLP for New Orleans will play a key role in the sustainable
rebuilding of New Orleans, the LA Gulf Coast Hurricane Recovery Region and our
devastated neighborhoods.
NEXT STEPS
Phase I: $5 Million Pilot Initiative
a. ECD-Hope and the AEI Affordable Housing Development Committee meets with
City officials (for New Orleans Program) and/or LHFA officials (for LA Gulf
Region or Statewide Program) to agree on financial products to be offered.
b. Upon agreement with ECD-Hope the final underwriting Term Sheet is developed
and Loan-Loss Reserve Agreement accepted by the respective legal departments.
c. Marketing materials and marketing strategies finalized.
d. Program commences via a strong networking alliance with first-time homebuyer
training programs, financial institutions, realtors and community-based
organizations.
Phase II: $20 Million Multi-Bank/Corporate Investor Pool
a.
b.
c.
d.
e.
f.
g.
ATTACHMENT A
James Ross
NeighborWorks America
Nancy Montoya
Federal Reserve Bank of Atlanta
Gary Williams
Enterprise Corp. of the Delta/Hope Community
Credit Union
Brenda Richard-Montgomery, Co-Chair
Providence Housing Corporation/Greater New Orleans
Housing Alliance
Patrick Guillion
Liberty Bank
Kevin Williams
FDIC
Note: To avoid duplication, the Southeast LA AEI links its housing development
strategies with the Greater New Orleans Housing Alliance on urban
affordable housing issues.
ATTACHMENT B
Is the investment into the pool in the form of a loan or quasi-equity or equity instrument?
There is no legal entity. It is a Purchase sale and Servicing Agreement (PSSA) instrument
similar to a private placement security, serviced by one entity.
3.
Market rate (FNMA 60 day pricing at the time of origination of the individual loans)
4.
The anticipated term is driven by the underlying mortgages at 30 years. The Weighted Average
Life of the loans is expected to be 12 years or less.
5.
6.
Is the agreed upon loan or investment amount by an investor made as a one-time lump sum
investment commitment or is it draw down as needed?
Draw down as loans are aggregated in minimum $2.5 million capital calls. The originators of the
loans will warehouse them until the critical mass reaches the capital call requirements.
7.
What is the loan loss reserve and is the loss reserve guarantee provided by the City/LHFA
on a loan by loan basis or based on a certain percentage of the pools outstanding loans?
Although this has not been agreed upon, the request is for a first loss coverage of up to 10% of
the pool of loans, or the outstanding balance at the time that the loss occurs. This is still under
negotiation at this time.
What are the Citys or LHFAs designated targeted neighborhoods for this special
program?
8.
10. Who would be the borrowers from the investor pool (i.e. the originator/underwriters
or the homeowner borrowers)?
The borrowers would be the individual owner-occupied residential property owners
through a Purchase Sale and Servicing Agreement serviced by one of the participating lenders
or servicing companies.
11. What are the loan to value risk standards?
The underwriting loans will meet FNMA/FHLBC standards for loan-to-value and other credit
criteria.
12. Is my companys investment into the pool limited to its percentage of participation
in the pool?
Yes. If your companys initial investment represents 10% of the fund and an individual loan
defaults, then your potential loss is limited to your 10% participation in the pool. However, as
new investors enter the pool after your initial investment, then this will have the positive
impact of diluting your potential loss downward since your % in the pool becomes less. Also
bear in mind that the Citys loan loss reserve will be used for loan losses.
13. Will all of the originators/underwriters be experienced and have construction
management experience?
Yes. The loans will be originated by regulated banks or credit unions with solid financial
histories and which already have in place the underwriting processes necessary to meet
competency requirements. Neighborhood Housing Services of New Orleans (NHS), a local
nonprofit which has an excellent construction management division, will help supervise
construction for some properties where major rehab is involved. The Investor Oversight
Committee must approve all originators/underwriters.
14. Will the mortgages loans be held to maturity or sold in the secondary market
periodically?
We anticipate that once a portfolio of the mortgage loans have been seasoned (2 to 3 years),
they will be sold in the secondary market to either Freddie-Mac or Fannie-Mae. This is what
has occurred historically with the Chicago model we are following.
15. What are the alternative credit standards and how will the originators/underwriters
evaluate borrower qualifications and mitigate risks to ensure their ability to sell the
mortgages on the secondary market?
The participating originators/underwriters are assuming the construction risk using their own
funds. Only loans that have completed their construction will be in the pool. Each loan will
meet FNMA/FHLMC requirements at the time that they are sold into the pool.
16. Will any and all investors be able to be part of the Investor Oversight Committee even
if that investor does not originate loans?
Yes, all investors will have membership on the Investor Oversight Committee.
17. Who will be the Loan Servicer and in charge of Investor Reporting?
A final decision has not been reached at this time but a neutral, experienced non-investor
servicer such as Standard Mortgage Corporation for example could be used.
Advance the belief that homeownership is an accessible, beneficial and desirable opportunity;
Increase the overall applicant pool by reaching untapped target populations; and
Create a process that ensures that every interested and qualified applicant becomes a homeowner.
All GNOHA member organizations are encouraged to join the campaign and each participating
organization will be asked to make a one-time donation of at least $1000 to cover marketing costs and
members will also be able to access various marketing materials through packages.
The Own the Crescent Campaign will consist of the following initiatives:
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