Darlene,
Since no one's responded to you who actually purchased a house in the Tustin lottery, I thought I'd add my two cents (I'm new to the forum also). My younger brother was in the original lottery, had his number picked fairly early, selected a Clarendon townhome and closed escrow on it in spring 2007. I'm a CPA, so I spent a lot of time reviewing the documents, crunching the numbers, etc. for him.
We never saw any evidence of fraud in the proceedings. There seemed to be a lot of confusion, since it was the first time the city had run a program like this. The biggest problem, as mentioned above, is that the city didn't finally crunch the down payment numbers until well after the original "winners" had selected their homes. The state required that the winner's housing payment, including mortgage, property taxes, Mello Roos and association fees, not be more than 33% (per above, I don't remember exactly) of their monthly gross income. This was a reasonable requirement to ensure that the new homeowners could make their payments, but it seemed unreasonable to many purchasers used to the crazy loans given at the time.
When the city calculated the down payment requirements, they had fixed costs of high association fees, property taxes (at the fair market rate, NOT the discounted affordable purchase rate) and Mello Roos (I remember they got a discount on the Mello Roos, but it was still about $1k a year). The "plug" was then the mortage payment. Since the other costs were so high, they ended up having to require enormous down payments to get the monthly mortage payment low enough to qualify. My brother had to put down around $80k and he was definitely at the low end. The only way he made the down payment was because he had a generous father-in-law. Otherwise, he would have dropped out. The city required full documentation of where the down payment came from; his father-in-law had to show he had the money and sign a letter stating it was a gift and he had no expectation of being reimbursed. The city was trying to keep people from getting loans for the down payment and pretending they were gifts.
I remember the builder reps telling my brother that they had tons of people dropping out of the program because they couldn't meet the down payment requirements. If a lot of the houses ended up going to relatives of rich real estate agents, it may be because they were the only ones who could get the down payments.
You say the program was a joke and you had saved a down payment to purchase. How much was the down payment you saved? Unless it was close to $100k, as quoted to you by the sales rep, then I don't think you would have qualified based on the monthly housing payment to gross income ratio set by the STATE, not the city. For example, if you made $45k a year, that gives you $3750 a month and, at 33%, $1238 a month for housing. I don't recall the exact numbers, but assuming the association fees are $350/month, property taxes are $4k/year and Mello Roos is $1k/year, then you have $471 left to pay the mortage. At the 6.5% rate, 30-year-fixed that the program was offering (you had to use their mortgage program), you could have a mortage of $75k. The difference between that and your affordable purchase price was your down payment. The purchase price was set based on your income level and family size.
I know it's a long post, but it sounded like you didn't fully understand the program requirements. The real joke was not how the program was run, but in thinking that you could have affordable housing in a new condo complex with massive homeowners' dues, property taxes and Mello Roos. It just isn't possible. I think the City of Tustin meant well in creating the program, but they should have estimated the down payment numbers BEFORE the lottery, instead of hitting people with them afterwards. If you have a down payment saved and are looking to purchase, you'd probably find it much more affordable in an older complex with low HOA and no mello roos after prices come down a bit more in the next year or two. Good luck.
