San Jose gives more equity to first-time homebuyers

Hundreds of first-time San Jose homeowners who took out loans with the city to make down payments are set to get back tens of thousands of dollars in home equity.

The San Jose City Council voted unanimously April 8 to restore home equity shares for residents who bought homes under the city’s defunct First-Time Homebuyer Loan Program. The 1990s-era program saw low-income homeowners make deals with the city to trade down payment assistance funds for a cut of the future home sale profits. As a result of Tuesday’s vote, more than 400 first-time homebuyers who participated in the program will go from owning 70% of their home’s equity to 85%. This will translate into an unexpected profit boost for homeowners if they decide to sell.

According to more than one dozen loans due to the city this year, San Jose homeowners can regain an average of $48,600 in home equity.

Mayor Matt Mahan described the equity increase as an opportunity for longtime homeowners in the program to have a bigger nest egg for retirement funds. He said the homes must be preserved as affordable, also known as deed restricted, for at least 30 years — even if a homebuyer sells before the 30-year period ends. About 93% of loan borrowers won’t reach the 30-year period until after 2030.

“When somebody living in this home decides they want to leave for something else. They’re ready to sell, they have this asset and we are significantly capping their upside — their equity,” Mahan said at the meeting. “Are we better off just keeping these units deed restricted and capping how much they can sell them for? Or uncapping them and giving families a nice retirement nest egg?”

Erik Soliván, director of the city housing department, said they recommended increasing the equity share for homeowners to make up for the loss in potential profits from having to sell their home at a fixed affordable housing rate.

“At the end of the 30-year period, the affordability restriction (ends),” he said at the meeting. “If a homeowner chooses to sell during the 30-year period, they have to sell at the affordable rate.”

Mahan said the city stands to earn tens of millions of dollars in home equity shares if the affordability restrictions were eliminated, as homeowners would be able to sell at more profitable market-rate prices.

“We could use (that) to build what we really need, which is more supply of affordable housing,” he said.

Soliván said most low-income program participants aren’t likely to sell because they may be priced out of San Jose. If city leaders wanted to eliminate the affordability restriction for the homes, he said they would have to vote on that separately.

“Even if they were to max out their total values, given how small the units are, given how old the units are, you’re looking at maybe $700,000 or $800,000. Does that buy you back into San Jose? Maybe,” Soliván said. “If we were to design a homebuyer program today, would we design it this way where we’re taking equity share? Absolutely not.”

Vice Mayor Pam Foley said she remembered in the 1990s when equity loan share programs like the city’s were the latest way for residents who could afford a mortgage but not a down payment to achieve homeownership. She supported returning equity to the homeowners.

“It might be worth taking a look at removing that deed restriction now to enable those homeowners to potentially refinance at a lower rate than the loan that they got with the property,” Foley said at the meeting. “There are a lot of components worth looking at to see if there’s ways that we can assist these homeowners — because this is their No. 1  source of generational wealth.”