Economic Development Authority - Elizabeth Showalter, Community Development Specialist
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Loan Program Modifications
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Executive Summary
Staff is proposing modifications to the home improvement loan program that would index the interest rate for the existing home improvement loan program and create a down payment assistance program, accessibility program, and a rental property loan program.
Background
The EDA has operated a home improvement loan program since 1998 with the goal of encouraging residents to invest in their homes and keep the quality of aging home high. At the August 2nd City Council workshop, Council discussed grant and loan programs that would expand the City’s efforts to improve the quality of housing in the city. This resolution will approve modifications to the EDA loan programs as summarized below and listed in the terms sheet attached to this report.
Home Improvement and Manufactured Home Improvement Loans
These two loan programs are intended to provide low interest loans to homeowners to encourage reinvestment in their homes. Due to historically low interest rates, the current interest rate is higher than almost all borrowers are able to obtain from a traditional bank, which means the program is no longer encouraging reinvestment. To ensure that the interest rate remains competitive, staff recommends indexing it to the ten year Treasury note, which is used to set mortgage rates. The attached term sheet outlines that borrowers with an existing mortgage to which a loan from this program would be subordinate, would have an interest rate calculated as the ten-year Treasury note plus 1.75%, while borrowers that would have the EDA in the first lien position would have a 0.25% lower interest rate (10-year Treasury plus 1.50%). This is a typical practice for lenders, since the first position loans are more likely to recoup their outstanding loan amount in case of foreclosure.
Last Resort Deferred Loan
This loan program provides an option for homeowners to make emergency improvements to their homes when they do not qualify for other loans. It is most commonly used for furnaces, roofs, and other basic necessities. The loan is deferred for 20 years and if the home is not sold in that time period, the loan is forgiven. No changes to this program are proposed.
Accessibility Deferred Loan Program
Most homes in Blaine require some sort of modification to allow people who use a mobility device to comfortably and safely live in them. The proposed loan program would be available to homeowners with an income under 110% of Area Median Income with a member of the household who has a disability that impacts their ability to live in a residential setting. The program will be targeted at aging residents who need to make modifications to their homes such as widening doorways, adding grab bars, and similar improvements, but will be open to any household with a disability. The loan will be deferred with no interest for 30 years, and if the home has not sold during that time period it will be forgiven. The loan program will have a maximum amount of $10,000 which is enough to make several improvements, and it can be combined with other programs offered by other agencies if necessary.
Down Payment Assistance Loan
Down payment assistance makes homeownership available to prospective buyers who are not able to otherwise afford a home. The loan would be structured as a silent second mortgage that is deferred with no interest that is paid back upon sale of property. Many neighboring cities offer similar programs. Staff is proposing offering $10,000 of down payment assistance to buyers who currently live in Blaine or currently work in Blaine and are moving to Blaine. For other buyers, staff recommends offering $5,000 to buyers moving to Blaine. A recent study found that $10,000 was a highly effective level of down payment assistance for making ownership a possibility for renters who otherwise are not able to buy in the Twin Cities market. Buyers will need to be first time homebuyers and have incomes at or below 110% of Area Median Income.
Rental Property Improvement Loan
Currently, all loan programs are limited to homeowners. Many rental properties would also benefit from additional investment, and small landlords often do not put sufficient money away to pay for exterior improvements, which can have a negative impact on the neighborhood. Additionally, owners may have difficulty obtaining funds to make improvements necessary for code compliance. To facilitate improvements, the rental property loan program would offer a below market rate loan (at the same interest rates as the home improvement loan program) but would be limited to exterior improvements, security improvements, fire suppression and fire alarms, accessibility improvement, and rectifying code violations. These categories were selected because they either reduce negative impact on the neighborhood or reduce the burden on police, fire, and EMS.
Strategic Plan Relationship
Not applicable.
Board/Commission Review
Not applicable.
Financial Impact
The loan programs are funded out of the revolving loan fund which currently has a balance of approximately $2.7 million. The fund has a balance that is more than necessary to support the existing programs and can be used to expand the home improvement offerings. The two new deferred loans, down payment assistance, and accessibility are likely to be the most popular, and, since they are deferred loans, the EDA will need to monitor the loan activity to ensure the sustainability of the program. If necessary, a budget can be established in the future to limit the number of deferred loans each year.
The programs are administered by the Center for Energy and Environment which charges the city a $750 fee for each loan origination, which is paid out of the revolving loan fund. A $1,500 setup fee applies to each of the three new loan programs. There is minimal staff time involved on ongoing administration of these programs.
Public Outreach/Input
Not applicable.
Staff Recommendation
Approve the resolution modifying the existing loan programs and adding three additional loan programs.
Attachment List
Body
WHEREAS; the Blaine EDA established a home improvement loan program in 1998; and
WHEREAS; the existing revolving loan fund has sufficient funds to expand the loan programs; and
WHEREAS; expansion of the loan programs will help achieve the goals of the housing chapter of the 2040 Comprehensive Plan
NOW THEREFORE, BE IT RESOLVED, that the Blaine Economic Development Authority hereby approves the modification of the loan program to index the interest rate for interest bearing loans and create an accessibility deferred loan program, a down payment assistance loan, and a rental property improvement loan as described in the terms sheet attached to the staff report.
PASSED by the Blaine Economic Development Authority this 15th day of November, 2021.