A communication transmitted from Owen C. O'Riordan, Acting City Manager, relative to Awaiting Report Item Number 21-35 regarding options to update the HomeBridge and Homeownership Programs

C I T Y O F C A M B R I D G E Community Development Department IRAM FAROOQ Assistant City Manager for Community Development SANDRA CLARKE Deputy Director Chief of Administration KHALIL MOGASSABI Deputy Director Chief Planner 344 Broadway Cambridge, MA 02139 Voice: [phone removed] Fax: [phone removed] TTY: [phone removed] www.cambridgema.gov To: Owen O’Riordan, Acting City Manager From: Iram Farooq, Assistant City Manager for Community Development Date: July 28, 2022 Re: Awaiting Report #21-35 dated May 3, 2021, regarding options to update the HomeBridge and Homeownership Programs In response to the above referenced Policy Orders, we submit the following. The Community Development Department (CDD) and the Affordable Housing Trust have begun reviewing the City’s affordable homeownership programs. The goals of the current program are to: • provide housing stability, • enable affordable homeowners to stay in Cambridge, • provide modest asset building and return on investment to homeowners, and • maintain long-term affordability of the housing units. The purpose of the review is to explore options to update the programs to also increase the ability to build intergenerational wealth through ownership of an affordable home. The City holds affordability restrictions on more than 550 homeownership units. These units were created through a variety of programs, including non-profit housing development; market purchase programs such as HomeBridge and its predecessors; and Inclusionary and other zoning-based requirements. The affordable homeownership program has served hundreds of residents over more than thirty years. Over the past few years, we have spoken with many owners informally on the challenges and opportunities they have had with the program. In addition, we continue to collect and analyze the data we have on owner’s equity returns at sale, costs to maintain units, and the affordability of homes over time. Current Program The current form of homeownership affordable housing restriction has been in use since the early 1990’s, with one significant revision in 2010. This revision was in response to changes in Fannie May (FNMA) mortgage policy and did not substantially change any of the program terms that are part of this review. Most current owners have some form of this restriction, although there are about 15 owners with older restrictions that have very different terms, including more significant price increases. This summary does not apply to those earlier restrictions. Key program components that have come up as areas to interrogate are the resale formula and inheritance policy.

Page 2 of 5 Resale formula This is the formula that defines how the unit’s value appreciates over time. The current formula is a “Return on Equity” model. In this model, the affordable unit value increase is based on the amount of equity (i.e., the total of an owner’s downpayment and loan principal payments) multiplied each year by a Treasury Bill rate. This “Return on Equity” is added to the original affordable purchase price to determine the resale price. The rate of appreciation depends on many factors, including the Treasury Bill rates, downpayment amounts, and mortgage interest rate, and can vary greatly between owners. Over the past thirty years, this formula has done an excellent job of preserving and increasing affordability over time, creating housing stability for owners, and in many cases allowing units to be resold to households with lower incomes at resale than at the original purchase. However, the formula can be confusing for homeowners to understand, and the financial return is very modest and does not support wealth-building in keeping with real estate value increases. Our initial analysis of resale prices and affordability indicates that the return to owners can be increased without compromising permanent affordability, and that there are options to make the resale formula more beneficial, transparent, and equitable for owners. Inheritance Policy The City’s current restriction does not allow for any transfer of ownership, including through inheritance, without approval of the City. However, the restriction does have explicit language that allows a surviving spouse or domestic partner to remain living in the unit after the owners’ death for the rest of their life, even if they are not themselves an owner. Other household members may remain for one year after the completion of probate. In cases where an owner passes away with an adult child living with them, it has been our policy to allow the child to purchase the unit if they are an income-eligible buyer and can afford to purchase the home. We have received feedback on several occasions that the lack of inheritance is a deterrent for some residents. Potential Changes Our work is likely to result in recommendations for changes to the existing homeownership program. We may also benefit from considering additional programs that have been successful in other parts of the country, particularly focusing on housing markets similar to Cambridge. Changes to the current programs

Page 3 of 5 As we consider changes to the homeownership program, we expect to consider modifications both to the resale formula and the inheritance policies. Such changes are likely to also prompt changes in other areas, such as how capital improvements are included in the value and the process for selling an affordable unit. Additional Programs The current affordable homeownership stock is approximately 1% of the total housing units in Cambridge. In addition to looking at ways to increase the asset building potential in these 550 units, the City could develop additional programs with an emphasis on connecting underserved groups historically excluded from market homeownership. For example, one potential model to consider could be a “shared equity” program, similar to San Francisco’s Downpayment Assistance Loan Program (DALP). This program provides funding for participants to purchase a home on the open market, like the HomeBridge program. The City funds act as a second loan. At the time of a sale or transfer (such as inheritance), the full principal amount of the loan is repaid, plus a portion of the appreciation based on the original percentage of the purchase paid by the DALP loan. Once the home is sold and the DALP loan repaid, there are no ongoing restrictions on the unit. The City might also hold a purchase right to give the option to re-subsidize the unit at resale with the seller’s loan payoff. Using HomeBridge subsidy numbers, a shared-equity program capitalized with $5.5MM could provide funding for 12 to 18 purchases, depending on the unit sizes and prices. Process and Equitable Outreach We have begun a process to review and develop options for potential changes to the affordable homeownership program and are using multiple strategies to engage people and gather input. While homeowners who are in the program are likely to have the most detailed insights, our goal is to engage with multiple groups: • current owners, • Cambridge residents who are waiting for affordable homeownership opportunities, both through the Resale Pool and HomeBridge programs, and • those who may be interested in homeownership but not the current terms of the City program. We are working with our newly-formed Community Engagement Team to design equitable outreach strategies and encourages a wide range of owners and those interested in the program to participate. We are also considering meeting formats that support an open exchange of viewpoints and information.

Page 4 of 5 Initial Invitation for Input and Affordable Housing Trust Discussion We sent a letter to all current owners with an overview of the process and an invitation to participate. The letter included an invitation to submit written comments and attend the meeting of the Affordable Housing Trust held earlier this year focused on the topic of changes to the homeownership program. More than 80 homeowners attended the Trust meeting, and many provided written input for the Trust to consider. Trust members identified the following additional research and analysis that would be helpful for the discussion. Staff will be working on these items in upcoming months: • analysis of the impact of potential changes on the supply of available ownership units over time; • possible financial impacts including the potential need for new funding to keep units affordable; and • an overview of how other affordable homeownership programs approach the balance of building assets and maintaining affordability. Survey We sent a survey to current homeowners in the program to gather preliminary feedback on questions about priorities for a resale formula, inheritance policy, and how the current program impacts owners’ housing choices. More than one- third of current owners completed the survey in July. We are now reviewing responses and compiling data and expect to have data to share with the Trust and community in late summer. Listening Sessions We are also preparing for listening sessions with owners to gather more qualitative feedback and begin discussing the range of potential changes. We anticipate that these meetings will begin in September. All owners will be provided with materials relating to these conversations, whether they choose to participate in a meeting or not. City Council Housing Committee Discussions at the City Council’s Housing Committee could provide additional opportunities for broader public comment, particularly engaging with those who are not currently involved with the homeownership programs, but might be interested. Written Comments

Page 5 of 5 Owners are also able to submit written comments at any time throughout the process. Legal Considerations The affordable ownership stock was created through a range of programs and funding sources. In addition to engaging with a range of stakeholders, we are working with the Law Department to review underlying requirements of funding sources, zoning ordinances, permitting agreements, and any other conditions that may impact potential changes or potential new programs. Completing a thorough review is necessary to ascertain what change(s) the Trust or City can consider while maintaining compliance with underlying legal requirements. Timeline We have begun community engagement concurrently with Affordable Housing Trust discussions and internal research. Our aim is to have a set of program changes for considerations late this year, with the expectation that decisions on these changes can be made by early 2023. We recognize that it is important for this review process to be responsive to feedback as we receive it, so the timeline may evolve, if needed.