HOMEfires - Vol. 5 No. 2, June, 2003

Q: Does the termination of the affordability restrictions on a HOME-assisted project due to foreclosure or transfer in lieu of foreclosure relieve the Participating Jurisdiction (PJ) of the requirement to repay the HOME investment in projects in which the affordability requirements are not met for the full affordability period?

A: No. Notwithstanding the termination of affordability restrictions on a HOME project conveyed to a lender due to foreclosure or transfer in lieu of foreclosure, the PJ must repay the HOME account because the project has not met the affordability requirements for the full affordability period. Consequently, if a HOME-assisted rental project or homebuyer project with a resale agreement no longer meets applicable affordability requirements, the PJ must repay the HOME investment.

• Revised explanation of HUD's waiver policy

Affordability Requirements

The HOME Rule imposes affordability requirements for rental and homebuyer housing that must be met for an established affordability period. In the case of foreclosure or transfer in lieu of foreclosure, the HOME Rule allows the lender to take the property without the affordability restrictions. This permits primary lenders to maximize the amount of investment recouped in the event of a default, and thereby encourages private lenders to participate in the HOME program. The affordability restrictions must be revived according to the original terms if, during the original affordability period, the owner of record before foreclosure or transfer of the deed in lieu of foreclosure, or any entity that includes the former owner or those with whom the former owner has or had family or business ties, obtains an ownership interest in the project or property.

The PJ must repay the HOME account if the HOME-assisted housing fails to meet the affordability requirements for the full affordability period without regard to the term of any loan or mortgage or the transfer of ownership, even in the event of foreclosure, transfer in lieu of foreclosure or assignment to HUD.

Preserving Affordability

To preserve affordability, PJs should negotiate as part of the original financing agreement, purchase options, rights of first refusal or other preemptive rights to purchase the housing before foreclosure or transfer in lieu of foreclosure. PJs should regularly review the management and financial condition of projects so that they can intervene before projects reach the point of default. If a project goes into default, the PJ must work with the project owner and primary lenders to maintain the project as affordable housing for the remaining affordability period or the PJ must repay the HOME account.

Repayment of HOME Investment

When the affordability requirements are not met for the full affordability period, Section 219(b) of the HOME statute and § 92.503(b)(1) of the HOME Rule require the PJ to repay HOME funds invested in the housing to the HOME Investment Trust Fund. The PJ is responsible for repaying the funds, whether or not it is able to recover any portion of the HOME investment from the owner, project developer, state recipient, subrecipient or CHDO.

HUD may waive the repayment requirement for good cause when the PJ can demonstrate that it made good faith efforts to salvage the project and preserve it for affordable housing, or where foreclosure was due to some extreme circumstance, such as a building being destroyed by fire and the insurance proceeds are insufficient to repay the HOME funds. This waiver authority has been used infrequently.

If the HOME funds were provided as an amortizing loan, the amount of the repayment is the outstanding principal balance of the loan. If the HOME funds were provided as a grant, the amount of the repayment is the full grant amount. For deferred loans provided to rental housing and homeownership housing under a resale agreement undergoing foreclosure, the pro rata reduction of the HOME loan over time under the terms of the loan agreement with the owner does not reduce the amount of HOME funds that must be repaid by the PJ to the HOME account. Homebuyer projects under recapture provisions are treated differently when the noncompliance is due to foreclosure.

Rental Housing

Section 92.252(e) of the HOME Rule provides that the affordability restrictions may terminate upon foreclosure or transfer in lieu of foreclosure. However, this does not terminate the long-term affordability requirements. The affordability requirements would be met if the new owner agrees to enter into a written agreement subjecting the project to the HOME affordability requirements for the remainder of the affordability period.

Homebuyer Housing with a Resale Agreement

Section 92.254(a)(5)(i)(A) of the HOME Rule provides that the affordability restrictions for homebuyer housing subject to a resale agreement may terminate upon foreclosure, transfer in lieu of foreclosure or assignment of an FHA insured mortgage to HUD. However, this does not terminate the long-term affordability requirements. The affordability requirements would be met if the housing is sold to another HOME-eligible low-income family and the new homebuyer agrees to enter into a resale agreement for the remaining affordability period. Homebuyer housing with a resale agreement that is presumed to meet the affordability requirements pursuant to § 92.254(a)(5)(i)(B) continues to meet the affordability requirements even after a foreclosure.

If the PJ provides additional HOME funds to the new homebuyer or invests additional HOME funds in a property, the original affordability period is terminated and a new affordability period starts. The length of the new affordability period is determined by the amount of HOME funds invested.

Homebuyer Housing with a Recapture Agreement

Homebuyer housing with a recapture agreement is not subject to the affordability requirements after the PJ has recaptured the HOME funds in accordance with its written agreement. If the ownership of the housing is conveyed pursuant to a foreclosure sale, the family may or may not have a recapture obligation, depending upon the option the PJ has chosen in accordance with §92.254(a)(5)(ii)(A). Unlike rental housing and homeownership housing under resale restrictions, the amount of HOME funds required to be repaid in the event of foreclosure is the amount that would be subject to recapture under the terms of the written agreement with the homebuyer. If the recapture agreement provides for shared net proceeds, the amount subject to recapture is based on the amount of net proceeds (if any) from the foreclosure sale. If the recapture agreement requires the entire amount of the HOME investment from the homebuyer or an amount reduced prorata based on the time the homebuyer has owned and occupied the housing measured against the affordability period, the amount required by the agreement is the amount that must be recaptured by the PJ for the HOME program. If the PJ is unable to recapture the funds from the family, the PJ must repay the HOME account in the amount due pursuant to the recapture agreement. [Please note that in the case of noncompliance other than foreclosure (e.g., homebuyer is no longer using the property as a principal residence), the amount the PJ must repay is the entire HOME investment rather than the amount due under the written agreement.] Regardless of the terms of its written agreements, it is important that the PJ establish mechanisms that ensure that it will be notified of pending foreclosures so that it can attempt to recoup some or all of the HOME subsidy.

PJs concerned about the possibility of repaying funds in case of foreclosure may wish to consider adopting recapture provisions that base the recapture amount on the net proceeds available from the sale rather the entire amount of the HOME investment. If the written agreement bases the recapture amount on net proceeds and there are no net proceeds from the foreclosure, repayment is not required and HOME requirements are considered to be satisfied. A PJ that was unaware that its homebuyer program design obligated it, in the event of foreclosure, to repay funds in excess of what would be available through the foreclosure and has changed the design to base recapture amounts on net proceeds may want to pursue a waiver of the repayment requirement at § 92.503(b)(1) for homebuyers assisted under its original program design. HUD may grant a waiver on a program basis that, in the event or foreclosure involving homebuyers assisted under its previous program design, would limit the PJ's repayment obligation to the amount that it is able to obtain through the foreclosure.

You may obtain additional information about the HOME program from the HOME program web page.