With mortgage defaults on the rise, creating a sound and flexible home improvement loan program has become increasingly important around the country. This challenge is especially important in Pennsylvania, a state that also has an aging housing stock.1
In response to these challenges, the Pennsylvania Housing Finance Agency (PHFA) created the Keystone Renovate and Repair Program (R&R Program) in 2006. This loan program is intended to help borrowers avoid loans with unfavorable terms and rates and also improve Pennsylvania’s aging housing. In addition, the R&R program assists homeowners in prioritizing their home repair spending and also provides access to reputable contractors.
R&R loans are secured loans for home repairs and improvements, such as increasing energy efficiency, making homes more accessible to elderly or disabled residents, repairing roofs, upgrading bathrooms and kitchens, abating code violations, upgrading septic or well systems, or converting multi-unit dwellings back into single-family residences.
The program works as a partnership between local program administrators (LPAs), who are typically local governments or nonprofits, and financial institutions. The LPA is the primary contact for the borrower and helps him or her determine the types of repairs needed, ensures the costs are reasonable, and recommends approved contractors. The LPA also works with the borrower to complete an initial home evaluation and makes sure the work is completed to the borrower’s satisfaction.
To become an LPA, an organization must complete an application and be approved by the PHFA. There are 27 LPAs throughout the state. In certain instances, the LPA also assumes the role of the financial institution.
Roberta Schwalm, senior special programs officer at the PHFA, noted: “The LPAs that have been the most successful are the ones that have internalized the R&R program they have taken it and adapted it to meet their local needs. The program is one tool in their toolbox.”
The financial institution is responsible for underwriting the loan and ensuring that the borrower has the ability to repay it. The financial institution can originate the loan and then sell it to the PHFA or the PHFA will fund the loan directly.
The program is funded by the PHFA reserves and PHFA services all loans. The LPA receives an administrative fee from the PHFA for each loan closed or a small fee along with reimbursement of loan processing expenses for loans that don’t close.
Using an R&R loan, borrowers from the city of Allentown, Pa., repaired the outside of their home. The negotiated fee for this work was much lower than the borrowers had budgeted, enabling them to also upgrade the bathroom and kitchen. Photos by Scotty Smith, City of Allentown.
Homeowners can borrow up to $35,000 or 120 percent of the home’s value. (The minimum loan amount is $2,500.) The PHFA will take up to a third lien position. The interest rate is fixed and currently ranges between 6.375 and 8.875 percent, based on the loan term and combined loanto- value ratio. The loan term can be for 10, 15, or 20 years.
There are a few restrictions, including:
The first R&R loan closed in April 2007. As of the end of July 2008, the PHFA had closed 134 loans totaling nearly $2.3 million. The average loan amount was $17,000, and the average income of borrowers was $64,755.
We have included information on three organizations that administer the R&R program.
Prior to the creation of the R&R program, AFC First, a consumer lender based in Allentown, and the Pennsylvania Treasury Department developed the Keystone Home Energy Loan Program (HELP) to assist homeowners wishing to make energy improvements. Through this program, launched statewide in 2006, AFC First provides Pennsylvania homeowners with unsecured Keystone HELP loans of up to $10,000. Once these loans are originated, AFC First sells them to the Pennsylvania Treasury Department.
Peter Krajsa, President, AFC First
Photo by Hub Willson
Recognizing that $10,000 was often not enough to complete the energy improvements that a borrower needed, AFC First and the Pennsylvania Treasury Department worked with the PHFA to expand Keystone HELP to include energy loans of up to $35,000. The PHFA uses the R&R program to purchase the energy loans of up to $35,000. These larger loans are known as “Secured Keystone HELP” loans. AFC First assumes the role of both LPA and lender in this arrangement.5
The terms and conditions of the unsecured and secured Keystone HELP loans vary slightly. Borrowers taking out either type of loan must have the energy improvements completed by a member of AFC First’s network of nearly 700 approved contractors and dealers.
As of mid-July 2008, AFC First had closed 63 secured Keystone HELP loans for energy improvements totaling nearly $1.1 million. (AFC First has closed 2,652 unsecured Keystone HELP loans totaling over $15.6 million.) While the program is available throughout the state, loans have been primarily concentrated in the Philadelphia and Pittsburgh metropolitan areas, the Lehigh Valley, York, and Lancaster.6
The city of Allentown has partnered with KNBT, a division of National Penn Bank, to provide R&R loans to homeowners residing in the city.7
Allentown has a proactive approach to finding potential borrowers. The city targets Weed and Seed8 neighborhoods, and city officials often go door to door to identify potential borrowers. If a homeowner is cited for a code violation during a city inspection, the R&R program is recommended to them. The program is also advertised through the media and neighborhood groups.
The city has two staff members who oversee different aspects of this program, and this arrangement has worked well. A financial specialist discusses the loan qualifications with the borrowers, completes the prescreening process, and works with the borrower to provide necessary information to KNBT to complete the full financial evaluation. A rehabilitation inspector does the initial home evaluation and works with the borrower and contractor to make sure the work is completed to the borrower’s satisfaction.
The inspector is also involved in finding a reliable contractor for each job. The city has a network of 15 approved contractors. Once a borrower receives approval for the loan, the inspector sends the project out to bid to three or four of the contractors who have expertise in that area.
Dave Paulus, housing rehabilitation supervisor for the city of Allentown, highlights a positive aspect of the program: “Traditionally, federal and state funds are designed to help people below 80 percent of area median income. This program enables us to help people with slightly higher incomes improve their homes.”
As of the end of July 2008, five loans had closed totaling nearly $110,000. One challenge has been that many applicants do not meet the program requirements. Of the 36 residents prescreened, only eight qualified for an R&R loan through KNBT. Several applicants were not eligible, according to KNBT, because they had highinterest adjustable-rate mortgages (ARMs) with high loan-to-value ratios and were therefore unable to take on additional debt. Several of these applicants faced the additional problem that the ARMs were about to reset, making their monthly mortgage payments even less affordable, and they did not realize they were in trouble until they went through the process of applying for an R&R loan.
The Cumberland County Redevelopment Authority (CCRA) partners with Members 1st Federal Credit Union, based in Mechanicsburg, to provide R&R loans in Cumberland and Perry counties. As of the end of July 2008, 11 loans had closed totaling nearly $140,000.
Chris Gulotta, Executive Director, CCRA
Chris Gulotta, executive director of CCRA, said: “The R&R program complements the other programs in our portfolio, and we have been able to promote this program at the same time as we promote our other housing programs. It has been successful because we have integrated it into what we already offer the community.”
Members 1st Federal Credit Union entered into a partnership with CCRA, although the credit union does not have CRA obligations. Debra Brennan, assistant vice president of real estate lending at the credit union, said Members 1st Federal partnered with the Redevelopment Authority because the R&R program “aligns with our mission to serve the community, and it also provides us with access to new members.” All borrowers must be members of the credit union in order to receive an R&R loan. A $5 deposit to a savings account is required to join, which CCRA will donate on behalf of the borrower when the R&R loan closes.
For information, contact Roberta Schwalm of the PHFA at (717) 780- 3838 or firstname.lastname@example.org; Peter Krajsa of AFC First at (610) 433-7486 or email@example.com; David Paulus of the city of Allentown at (610) 437-7696 or firstname.lastname@example.org; Patricia Mrkobrad of the Redevelopment Authority of Cumberland County at (717) 249-0789, ext. 136, or email@example.com.
For information, go to www.phfa.org; select Homebuyer, Homeowner, and Renters; and Renovate and Repair Loan Program.