The Perfectly Created Fraudulent Program

We figured something was fishy about the length of time it has taken to secure an audit of the Santa Barbara County Housing and Community Development Department Affordable Housing Program. Guillaume Doane’s report on page 14 should help clarify why the affordable housing program is a fiasco and why the Board of Supervisors needs to examine its usefulness carefully.

We first suspected the reason the audit would be buried was to avoid embarrassment to and possible criminal charges being filed against those that have taken advantage of such housing. We assumed a good percentage of these lucky folks would be County employees, their friends, and relatives. That may yet prove to be so but the real embarrassment is the complete incompetence of county staffers involved in running what is a seriously flawed program. A reading of it has made it clear why the County has put this audit on the back burner for so long.

The following wording comes directly from the audit: “Management [County staff] has failed to develop policies addressing the risk of foreclosure upon affordable units. Once a unit is foreclosed upon, the lender resells the unit at market value to the general public, resulting in the loss of an affordable unit to the Program. The first deed of trust position given to the primary mortgage lender provides an unintended incentive to unscrupulous lenders to extend excessive levels of secured debt to Program participants. High levels of homeowner debt increases the risk of foreclosure and the lender’s ability to obtain a highly valuable asset for a price well below market value. There is effectively no risk to the lender to extend significant amounts of secured debt to under-qualified participants.”

In case you couldn’t follow along, here’s how it works: The lucky lottery winner secures a three-bedroom home on a large lot on the Mesa for $279,000; its market value? $989,000. Mr. Lucky puts 5% down ($13,950), secures a mortgage on the $265,050 balance (30 years at 6.25% = $1,632 a month), and moves in. Local lender sends Mr. Lucky regular mailings, tempting him to re-finance with a $600,000 (Cash out! Take a Vacation! Buy a Porsche!) interest-only mortgage ($2,875 per month @ 5.75%). As other bills pile up, Mr. Lucky finally takes advantage of the lender’s generous offer and deposits the difference ($600,000, less $265,050), nearly $335,000, into his bank account. Mr. Lucky has done nothing illegal, but if he spends that money and is unable to make the higher mortgage payments, the lender forecloses on its $600,000 loan on a $1 million property. It’s a risk-free proposition for both the borrower and the lender. Once the house is foreclosed, it goes off the “Affordable Housing” rolls. It has become a market-rate home!

This Is One For The Circular File

The above paragraph illustrates why the County has had such a tough time figuring how many homes are in its program. Because it doesn’t – and can’t – know. The practical result of its own poorly policed program – based upon just an initial finding that 40% of taxpayer-subsidized homeowners have availed themselves of new loans based upon the market equity of their properties – is that it serves to shrink the supply of affordable housing. Which explains why pressure is constantly exerted to force homebuilders and developers to set aside below-market-rate properties. The county affordable housing program is like a junkie whose need for drugs is not only never satiated, but always grows.

Our advice to the Board of Supervisors is this: read this report. All of it. Don’t be embarrassed. Everyone involved in the creation of this program is responsible. They meant to do something good. They failed. To make it right, however, the Santa Barbara County Housing and Community Development Department Affordable Housing Program should not be fixed. It cannot be fixed. It should instead be crumpled up and thrown in the nearest wastebasket, and those who work in the program should look for productive employment.

This program is not only an insult to poor people and the American taxpayer, it is also an enormous waste of time, effort, and taxpayer money.

Next issue, we’ll tackle some of the finer points of the program, like allowable “partial rentals,” “exchange student” programs, covenant expiration terms, equity share provisions, and more. Much more.