Affordable Homes Tug-of-War

The county is engaged in a struggle to hold onto its affordable housing stock, specifically the owner-occupied condos that are initially offered, by lottery, at below-market prices to lower-income buyers. It is a program that has been plagued for decades by record-keeping and enforcement problems. A county audit a few years ago found, for example, that a number of people were renting out their units at market rates while using the proceeds to buy additional property.

A new problem now surfacing is that some owners are borrowing against their properties for amounts far beyond the price they could legitimately sell them for, since the properties come with covenants severely restricting their resale value as a means of keeping the housing affordable. And if the owners default on such loans, the property automatically reverts to the lender, forcing the homes out of the affordable program and allowing them to be sold at market rate.

Jil and Andy Gilbert-she’s a teacher at Open Alternative School, he’s an insurance salesman for Fidelity-are in escrow on a four-bedroom house that was part of the affordable program until it was recently foreclosed upon. But now, they said, the County of Santa Barbara won’t let them close escrow.

Andy Gilbert said he heard of the foreclosure on the Chananga Court house by word-of-mouth, so he contacted the owner and asked if he was interested in a short sale, which means selling it for less than the owner owes the bank. But the owner wasn’t interested. Although the house was not supposed to be sold for more than $257,000 under the county’s affordable formula (which generally restricts appreciation to about 5 percent a year), the owner had borrowed $575,000 against it. If he sold it for less than that, he would owe his lender, MorEquity Inc., the balance.

According to the Gilberts, the county was extremely unhelpful in the negotiations that they and MorEquity entered into last spring in an effort to solve everybody’s problem. The lender even agreed to sell to the Gilberts for the restricted amount of $257,000, while letting the previous owner walk away clean; but the county objected that the Gilberts made too much money to qualify as buyers. Nor would the county accept a higher amount from the Gilberts, who argued that they would qualify under the affordability program guidelines for a house costing $400,000. Ultimately, the owner ceased his mortgage payments, MorEquity foreclosed, and with that, the affordable restrictions were rendered null and void. The lender promptly agreed to sell the property to the Gilberts for $400,000.

The county cried foul. In a letter dated January 9 to MorEquity Inc., Senior Deputy County Counsel Mary McMaster said, “As we stated in our April 22, 2008 letter to you, the Subject Property : can only be sold for a price that is affordable to Upper-Moderate Income households.” The January letter goes on to say that MorEquity Inc. and the homeowner breached the covenant “when the MorEquity Inc. loan, well in excess of the recorded price restricted value of the Subject Property, was made and recorded.”

Andy Gilbert accused the county of being unreasonable from the outset. He argued that he and his family-especially his wife, because she is a teacher, one of the professions frequently cited along with emergency response personnel as critical workers in danger of leaving the area because of high housing prices-are precisely the people that these affordable units should go to. The parents at his wife’s school are upset and angry, he added, at the prospect of losing her. Meanwhile, the Gilberts have already given notice on the house they are renting and must be out by February 28. They also stand to lose the escrow deposit. Gilbert said they are aware of other would-be buyers of foreclosed affordable units in similar situations.

Santa Barbara County Housing and Community Development Director John Torell, of department would not comment on any particular cases, but he did say, “I think the goals of the program are laudable, but we have to be very careful in administering it, and make sure all our i’s are dotted and t’s crossed. There are a lot of smart people trying to get around the rules and regulations and in effect subvert the program.”

And until the county hashes out the details, more prospective homeowners will be scrambling to buy in a gray market and may, like the Gilberts, be left holding the bag.