Travis County Commissioners Court
September 28, 2004
Item 47
47. Consider and take appropriate action on request to reconsider the creation
of the strategic housing finance corporation of Travis County whose purpose
is the implementation of a single-family lease-purchase program and other
related matters. There was a question asked regarding the setting of interest
on this program. Commissioner Davis?
>> yes, judge. And I guess during the deliberation, I guess
-- which I strongly support, the lease purchase type of program, it's not
that I do not support it. However, I was kind of led to believe that it would
be similar to our other single family [indiscernible] program which basically
is set at a fixed rate and it wasn't -- I had consistently I think during
the time of the presentation asked for literature to disclose the outreach
aspect of the lease purchase program whereby it would be something readily
available for me to hand anyone who inquired about this particular program
that we [indiscernible] putting forward with it. On receiving the outreach
literature, on the literature itself, I saw something that said variable rate
revenue bond as far as the program is concerned on this particular lease purchase
options for a person to purchase a home, I saw variable rates there, it kind
of raised the red flag because it was disclosed to us that it was a single
-- it was similar to a single family housing bond type of fixed rate program.
But of course when I saw that that was a variation and kind of raised a red
flag. Of course I guess my position is that -- I don't think that we have
ever, not in my opinion, are aware of -- of any housing initiative since I
have been here judge, it may have happened prior to me getting in here, that
we have dealt with something that dealt with variable rates, also have maybe
[indiscernible] potentials, balloon within a cap, where the rates is just
a moving target, I didn't want that to be imposed on -- on the community as
far as those kinds of situations are concerned. I basically wanted to bring
this back, I don't know how the rest of the daughter feels but I知 -- how
the rest of the daughter feels but I知 -- how the rest of the court feels
but I知 very opposed to any situation where you have a variable rate structure
on mortgage. That was not -- my understanding when we first started going
into this and like I say whenever it was discovered I wanted to bring it back
maybe for reconsideration as far as I知 concerned. I don't know what anybody
else want to do, but you can go from there and of course you brought a lot
of information was brought in just late yesterday afternoon, like about 4:45.
Quite a bit of information. And bond itself, series 2004, from the revenue
bond side of this. And of course that was a lot of information to even try
to digest and of course it wasn't disclosed. So that's my whole concern is
that when the communities ask me about the program, I -- I had no idea that
we were talking about variable rates. And we have [indiscernible] and a whole
-- bonds and a whole lot of other things attached to this, then a cap, 5%
cap, that's why I brought it up judge. If they can explain that --
>> why don't we hear.
>> we need to hear something.
>> let them explain it to us. Why don't we hear basically
what the variable rate is and why it's necessary to be part of this program,
if it is.
>> yes, my name is wylie hopkins, chief operating officers
of the housing finance crption. Cliff blunt our counsel. Cliff you don't mind,
you alluded to and outlined in detail how this was structured. I might say
this to my knowledge we never alluded to this being anything other than a
variable rate transaction. And --
>> how does that work? Help us understand that first.
>> this is a 30-year mortgage. When a borrower or a tenant
comes in and signs a lease purchase with the opportunity to assume the mortgage
at the end of 39 months, they will have a 30-year mortgage on the property.
So I think I heard balloon a minute ago. There is not a balloon. It will be
for that period of time. The rate will be set quarterly during the origination
period, we will set a rate at closing scheduled for next Monday. That rate
will be good through December 31st. So all lease purchase transactions that
are initiate during that quarter will have the same rate and we were estimating
5 and 7/8ths, it has gone down a little bit.
>> looks like 5 and three quarters through the end of this
year. That rate will stay set for 7 years.
>> how many years.
>> seven years.
>> all right. At the end of seven years, it will start adjusting
annually as -- it has a 2% per an mum cap, every year it can adjust as much
as two percent up or down. It can adjust down, also. With a lifetime cap on
the high side of 5 points, so for this first quarter, the highest those mortgages
could ever be, it would be in the 10th year that it could even get this high
would be 10 and three quarters. It can never go -- there is a floor, though,
it can never go below, I believe two and three quarters percent, the lowest
the rate could ever adjust. So that's -- that's how the particular mortgages
work.
>> right. On that point like when -- when I asked the question,
this is from -- from harvey Davis, something called a -- an [indiscernible]
index.
>> the libor index.
>> yeah. Libor index, I知 not a financial person, but at
that date that I asked you, at that time with 5.883%. Of course the point
is that even after it's set for a seven year period, that -- that figure right
there is a moving target. Doesn't stay set. Then again after the seven year
period, there is a possibility regardless of what that is if this -- that
can be seven, eight, nine percent, even as high -- because that's something
that's moving, it's not a set amount. And it can in fact go higher than 10%.
According to the example that you gave and according to -- to the movement
of this -- of this particular index. It does vary, it does move. It can go
up or down. But point is, I知 looking at the upside of the worst case scenario
and right now, it appears that there may be some instability as far as some
of the freddie mac situation right now. So I知 hearing some deep -- I知 having
some deep concerns because that was not -- if anybody else can recall what
we're talking about here today, during the discussion of this particular lease
purchase program, I would like you to say it, because this was not brought
up, during the discussion of this particular program. You know, I was a strong
advocate of -- strong supporter of good housing, sound programs with Travis
County. I have always been a proponent of it. What you have discussed today
was not discussed. It's -- but go ahead and finish going. But I知 just saying
my assessment of it, what i've been looking at as far as investigating as
far as what I have here now.
>> well, I mean --
>> what is there about the program that makes the variable
rate -- acceptable I guess.
>> well, number one, I think when you step back and look
at the big picture, we are talking about providing a program to service potential
homeowners that are Travis County residents that right now cannot qualify
for a mortgage. Or at least a market mortgage. If theycal phi, they are going
to -- goodwill going to to -- they are going to qualify what's called the
subprime market, their rates are going to be at least three points higher,
probably even higher than that if theyket good a -- if they can get a loan
at all. 30 years at the mortgage, if it stays out that long, if you look at
break even, it may not even hit break even for what they could get otherwise.
I this the other thing to -- the other thing to consider is that these are
folks that have a credit challenge and credit history they can't qualify for
it. This program is going to provide credit counting, enable them to raise
their credit score up high enough that they can qualify for a mortgage on
a more current market condition. At the time that they do that, there is no
penalty built in, these people they come in, and sign these leases and then
assume these mortgages, can -- can refinance that mortgage at any time. So
the minute that they have purchased the property and assumed the loan, their
credit score is high enough to do that, they can, if they elect to, refinance
this forge and get -- this mortgage and get whatever mortgage product they
want that's on the market at that time. If they -- the idea of this program
is to provide some opportunities to some residents in Travis County that don't
have that opportunity right now.
>> but even if you refinance, they look at your credit. In
order to refinance. And if it doesn't meet it, you don't get refinanced. And
so -- so but I think the thing that I found good about this, it gives people
an opportunity to work -- I wish that I could work with -- someone would work
with me on my credit. That -- because we all need it at some point. But it
gives you an opportunity to work with the families to -- on the credit to
clean it up, to strengthen it and then be ready for the time when the rate
is low so you can refinance. I don't think we want to refinance with the same
rate or the higher rate. We want to make sure that we're ready for -- for
the time when that tax rate -- I mean when that rate lowers, right?
>> okay.
>> can you tell me --
>> I知 sorry.
>> can you tell me a program in the country right now that's
using this structure as you presented to the Travis County that is successful
using this concept with the same freddie mac support as far as bonds, somewhere
in the country right now, that has a successful track record.
>> I think there's several. I personally --
>> not having any structural problems. I've heard some things
that there are some definite concerns of real problems with some of these
programs that are in other places that using freed demac bonding issue, freddie
mac bonding issue, using this particular concept. Even our staff person when
we first started looking at this really wasn't, I知 saying harvey Davis, looked
at this and wouldn't really recommend it to us. Of course let me let you answer
that question, though.
>> sorry. Remind me, which question did you want me to answer?
>> the one I just asked. In other words there are serious
problems according to sources about this particular program in other parts
of the country.
>> yes, sir.
>> under this. So can you tell me the success --
>> absolutely.
>> or am I just hear the wrong information.
>> I知 -- I can't speak to that question because it's been
a while since i've been here to remind, my name is guy [indiscernible] I am
familiar with several programs throughout the country that have been successful,
from the origination perspective if that's what you're asking. Yes, that's
the case.
>> let me ask you -- I知 asking as far as other problems,
structural integrity of the owe over the programs itself and things of that
nature. There have been a lot of -- have mentioned significant problems with
it. And really the -- the -- the thing is that they need to be really looked
at and -- wait and see attitude I think we need to maybe do on some of this
stuff, real serious flaws, and of course if that's the case, then -- then
beginning to really have some real bad vibes and especially when none of this
information was disclosed when we came before the housing finance corporation
for us to -- to support you and move forward. It's not that you are not doing
a credible job. I知 not saying those kind of things. I知 saying that there
is a need for a lease purchase program. But I would dare not allow this to
-- to a person who is on a fixed income in the next year they have to make
adjustment on that fixed income when they get a 2.5% increase of the mortgage
they are paying and they are struggling at that time to make those necessary
needs. That's moving -- targets. We are talking about folks that aren't in
a position where they are comfortable, as far as acquiring a traditional mortgage
as we know, even if it's fixed mortgage and we see -- when you say variable
I think that's the first thing that ought to be right popping in somebody's
face, hey, these are variable rates this is what can happen to you under a
variable rate scenario. It can get as high as an additional 5% cap on top
of what you are dealing with right now. I don't think that the persons in
Travis County, in my opinion, should be hog tied to something like that. Especially
when they are struggling to make ends meet as they are now.
>> well, is it true that if you -- if you get into this program,
at a pretty low interest rate and 5.75 is pretty low, it's fixed there for
a -- seven years?
>> yes, sir.
>> you spend your seven ebb years working on your credit.
If we try to increase that to 7.75, you come to us and say, Travis County,
thank you, my credit is a whole lot better, I can beat your interest rate
at xyz mortgage company and we have been successful.
>> also, you don't have to wait until that seven year period.
You can do it at any time after you assume that mortgage on the house, you
can go refinance that mortgage. So starting -- most people will do that at
39 months as they owe after they enter into a lease, any time after 39 months
they can go in and do that.
>> if you don't need this program in the beginning there's
no reason to go through it. You need to go and access one of the other Travis
County programs, down home payment, the rest of that. When we put this in
this place my understanding was that we were trying to help people who really
as a last resort had to depend on a program like this because they could not
get in a home ownership position otherwise. So rather than be renters forever,
this program gives them an opportunity to rent for a short period and then
get a mortgage. My understanding is that this is not available anywhere else
in Travis County, is it?
>> that's right.
>> so the other thing, my caution was that, you know, we
try to get the best ones possible and we really sort of arrived that every
time we do 25, we kind of take a look at this situation. If we can improve
it, we do that, but keep on moving it, I mean, and where there are deficiencies
then we try to address those. But my thinking, too, was that if you got to
the point where you did not need this program, then I had no problem with
your moving on. At a lower interest rate. And us basically being able to claim
this is one of our success stories right here. I don't know that we highlighted
the variable interest rate.
>> we didn't.
>> but I did know that this is not as good as xyz with sterling
credit going to a mortgage company and getting into that situation, otherwise
you wouldn't have to be leasing up front.
>> that's where I got my comfort level on this. Harvey came
to see me, there you are, over the lunch period where I could sign-off on
a check because we had yet one more of our folks that came through on down
payment assistance. Not this program, but another helping out kind of program
saying don't need my five years, I知 ready to move on, they are going on.
I think in the old days, when we signed a mortgage, you know, people really
did stay in a house for 30 years and there was a value to locking into a super,
super low rate because it was assumable. That was always what everybody looked
for. Well, I actually have been in my home for 22 years, looking forward to
having it actually paid off in a couple more years. I知 on my third mortgage
staying put because I have been able to take advantage throughout the years
as the interest rates dropped and I got in at 12%, at the time that was a
bargain because the market was 18. I mean there really was a time in the early
'80s that even somebody with a great credit rating had an 18% note.
>> [indiscernible]
>> it was 18%. Sometimes we get lull into thinking this thing
is what it isn't. To me, I知 fine with me, to be able to lock in for seven
years at 5.8 or 5.75 is amazing. The chances that somebody finally is going
to stay in his house forever I think there's either the chance of refiling,
they will have been given the opportunity that no one else is going to give
them to repair their credit, really be out there on their own and prove their
worth to somebody or they might find another house. In which case like the
check I signed off on today at lunch, they are already moving on. They didn't
even stay there the five years and we have seep that over and over and over
again on the housing finance corporation. People saying, appreciate it, I知
moving on. And the secondary or -- I call the secondary market, submarket,
there are a lot of folks literally being shut out, forced into these eight,
nine, 10% notes or what you cautioned against, a good caution, balloon mortgage
is horrible because it literally has a humongous amount that you barely see,
made any kind of dent in the principle that's due and you are really stuck
with whatever market commissions are out there on the day that it's due. Just
one of the things, there actually is a moving target for all of us. Even those
of us that have a mixed principle and interest payment because there's a ti
that's part of the pi, taxes and insurance. We just adopted a budget today
and everybody that is a -- that is a home owner is going to be seeing their
mortgage go up just a tad. Because taxes went up, not only for Travis County
but the city of Austin and our school districts and a.c.c. Then there's this
thing called insurance. Insurance is also a moving target. There's a lot of
responsibility that goes into being a home owner, I知 looking at this as a
great opportunity for somebody who would be thrown into the subor secondary
market at a very, very high price that for seven years you get to lock down
an unbelievable -- this is an unbelievable rate that would be offered only
to those that have a good credit rating and a great personality. [laughter]
in allows -- this allows them to improve themselves, to another house, another
mortgage. We are giving them the chance to open the door. This doesn't lock
them in for a 30 year note. They are not stuck with anything. I was aware
that it was adjustable and thrilled that it's seven years because a lot of
those adjustable notes you only get a five year lock in period. And then that
period starts where you can get it jacked up on an annual basis depending
on what's going on with the economy. So my comfort level is here, but you
asked very good questions. People need to be very educated about what they
are signing because it's serious grown-up stuff. The questions are very good,
but I felt comfortable that this was a very good program and we wouldn't be
throwing somebody into a path that really isn't appropriate.
>> yeah.
>> but those are good questions, very good questions.
>> I need to ask harvey Davis some questions.
>> harvey you have heard the comments that have been made
here today. Of course as you know, when this first came to us it was something
that you basically would not also support or recommend it. However, I still
haven't gotten an adequate answer I guess of what this particular kind of
program is doing in other parts of the country. I would like to hear if you
have anything on that.
>> well, as you know, when the Commissioners court considered
this program or was considering establishing the -- the new housing finance
corporation, and I believe this was in March or April of this year, I contacted
several programs that were -- that were these freddie mac programs around
the country and I believe it was maybe six or seven programs, I received negative
information, one I received positive information. And I think that I -- at
that time related to the board some of the concerns -- difficulties that these
other programs around the country were having, issues like unrealized expectations,
a lot of interest and then there would -- they were being overwhelmed with
the programs, people -- some issues with -- with valuation of homes going
down during the lease period or people leaving the -- their houses during
-- during the lease period. And some programs they were not able to -- to
put people in the homes. So they -- they would issue $40 million in bonds,
for example, and maybe only have less than 10 people that -- that actually
purchased a home through the program. So they used only a small fraction of
the amount of bonds that were issued. So again those were issues that -- that
I think that I communicated to the Commissioners court at that time.
>>
>> [one moment please for change in captioners]
>>
>> you've heard a couple of folks say that for so many years
you can do the refinancing and leave the program after -- and the lease scenario,
lease to purchase.
>> I think one of the concerns that I -- at that time I think
one of the concerns that I raised was that during the lease period, the 37
months, that if somebody was wanting to get into a mortgage early, I mean,
they were ready after a year, for example, and they wanted to get into a mortgage,
there was a penalty that they had to pay. And depending on the time period
in the 37 months, that penalty could be substantial. So there was some hindrance
of somebody that was qualified and not being able to go ahead and get their
mortgage and become a real homeowner instead of a lease person. As far as
the arm rate I think that really our focus was kind of on these issues of
how the programs were doing in other parts of the country. I don't think that
I focused so much on that these mortgages were going to be an arm mortgage.
>> what about the ability to refinance if you can get a better
deal? Depending on how good your credit is, you can beat the interest rate.
I don't think there's anything in the program to stop you from doing that.
It ought to be like any other mortgage.
>> only in the 37 month period.
>> while you're leasing.
>> while you're leasing. You are tied to the lease for the
37 months. And that is a long lease period. As far as after that, I certainly
had no issue with -- it's good that you can refinance and there's no penalty.
>> as you know, the interest rate was 5.75% the other day
when we looked at this index. When we looked at it, it was a 5.83. Does that
mean that -- here a person gets ready to go in and purchase an interim lease,
and whatever that is on that day when we close, that is what they're locked
into. That's just like anything else. And right now it is today, as of today,
but tomorrow the thing that may change, as anything else on a daily basis
if we look at this stuff.
>> I think we said that each quarter.
>> for three months, okay.
>> is that the rate that's locked in for three months is
the mortgage rate that's offered but the program, it doesn't affect any subsequent
changes in mortgage rate don't affect the initial borrowers. That is to say
we're going to potentially issue 35 million dollars' worth of debt, but more
than dollars'worth of mortgages wille originated. Those mortgages that are
originated from October fourth through December 31st will be originated at
5.75%, and that will be rate that stays in place for the next seven years
for that particular borrower or those borrowers. Then beginning January 1
through the following March 31st a new rate based upon an index similar to
the one that you're referring to will be used to -- will be established for
those borrowers who will originate mortgage bonds during that quarter.
>> but within that seven-year time frame -- in other words,
year after year after year.
>> we'll have a two-year origination period to use the entirety
of the $35 million -- 32 and a half million dollars, excuse me. But what we've
tried to do about using variable rate debt is to create an environment where
the mortgage rate for the program is always competitive with competing programs.
And so this allows us to offer a new mortgage interest rate. I can't imagine
rates getting much lower in the next 90 days, but if that should happen, we'll
be able to reprice the mortgages available through this program and any mortgage
originated subsequent 90 days would be at that new lower rate. The thing to
note, that mortgage will stay at that new lower rate for the entirety of that
seven years. The question you asked about assumption, it stays in place throughout
the entirety of the 39 month please agreement, that's the rate that that money
will assume at and then continue to make no mortgage payments for the next
four years based upon that initial rate before they're subject to any kind
of adjustment, that 200 basis rate adjustment at the end of seven years, again
keeping in mind that our goal would be to stay in touch with those folks.
>> the worst case scenario, even if it's locked in at 5.75,
the worst case scenario, even with a five percent cap, that could end up being
10.75 if that increment period of looking at the adjustment period for the
two and a half percent is adjusted. So there is still a possibility of 10.75
percent interest on that particular mortgage.
>> indeed there is. And what I would note --
>> and that was my whole point. It's a good idea -- listen.
I知 not knocking what you're doing.
>> thank you.
>> I知 not knocking what you're doing. Believe may, I知 not.
But it's just that I just wish that this was something that we are going through
it as we're doing now and then all of this could have been flushed out at
this time -- at that time for me. If I had known it was a variable, I could
have said a five and a half percent cap, all this stuff could have been disclosed.
Folks have asked me about this and stuff like that, and I kept pushing for
the little handout that's going to be given out to the community. Of course,
at the very top of it it does say variable rate. I think people need to be
very mindful, but I知 not going to be able to support this as such because
it wasn't disclosed to me until after the fact on this particular concept
and scenario. Not that you're not doing good work. I appreciate what you're
doing. And those that can benefit from it, you know, they should, but accept
my position that I have to take because of the fact that it does say -- it's
the deal that you gave me the other day, it does say variable rate right at
the top.
>> what's the 39-month lease requirement?
>> it's the amount of time taken --
>> who mandates that?
>> it's a combination of freddie mac and the investors, the
provider on this transaction. I'll be happy to explain that is a 39 month
lease period to enable the family to repay the down payment and closing cost
assistance that the hs -- the housing finance corporation, generated by issuing
this debt. It thanks for making daybreak a part of your day that long to service
the payment and make it a reasonable payment to the family in order for the
bonds to be paid off.
>> this has been determined to be a due diligence period
by freddie mac and the bond hold ohers, I take it.
>> I think it's a period of if it's necessary to repair the
credit and to kind of -- I don't know how to word it, but to cover the cost
involved in doing the program.
>> they are non-asset bonds. In addition to the 32 and a
half million dollars, both the acquisition accounts and the payment system,
there are non-asset bonds that are issued. Those have to be repaid. The housing
finance corporation is financing the entirety of this project. Consequently
those lease payments that will be garnered over the 39 month lease period
will be used to repay the debt service associated with the bonds, non-asset
and asset bonds alike. The whole portion of that is attributed to down payment
assistance. So again it takes the 39 months.
>> it's structured around making lease payments for 39 months?
This is for the home ownership basically?
>> yes, sir.
>> there's no way for us to wake up one morning and say these
100 applicants look very good, let's put them on the 29 month program. That
won't work. [ laughter ]
>> actually, the underlying guidelines are written such that
any family can assume early, beyond the first 12 months, if they in most cases
experience a windfall. I believe mr. Davis referred to a prepayment penalty.
It's actually an early assumption fee.
>> that sound a wohl lot better -- (indiscernible). [ laughter
]
>> thank you.
>> again.
The Closed Caption log for this Commissioners Court agenda item is provided by Travis County Internet Services. Since this file is derived from the Closed Captions created during live cablecasts, there are occasional spelling and grammatical errors. This Closed Caption log is not an official record the Commissioners Court Meeting and cannot be relied on for official purposes. For official records please contact the County Clerk at (512) 854-4722.
Last Modified: Thursday, October 27, 2005 9:22 AM