BILL ANALYSIS
AB 1422
Page 1
ASSEMBLY THIRD READING
AB 1422 (Bass)
As Amended May 21, 2009
Majority vote
HOUSING 4-1
-----------------------------------------------------------------
|Ayes:|Torres, Eng, Ma, Saldana | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey | | |
| | | | |
-----------------------------------------------------------------
SUMMARY : Allows a redevelopment agency (agency) to use tax
increment funds, not held in the Low & Moderate (L&M) Income
Housing Fund, to acquire, assume or refinance loans to eligible
homeowners with subprime or nontraditional mortgages in default
or at risk of default. Specifically, this bill :
1)Makes legislative findings regarding the decline in housing
prices, increase in delinquencies and foreclosures, and the
negative impacts of both on local governments and
neighborhoods.
2)Provides the following definitions:
a) "Eligible homeowner" as a homeowner with a subprime or
nontraditional loan that is 30 days or more past due or is
scheduled for an interest rate increase that will likely
lead to default on a home that is his/her principal
residence or who has a mortgage on which a notice of
default has been recorded;
b) "Fund" as the Low and Moderate Income Housing (L&M)
Fund;
c) "Nontraditional mortgage" as a consumer loan that allows
the borrower to defer payment on the principal and in
certain circumstance the interest on the loan; and,
d) "Subprime mortgage" as a loan originated on or after
January 1, 2002 for a single-family home, condominium or
townhome, but not a mobilehome, that meets any of the
following conditions:
AB 1422
Page 2
i) Has an annual percentage rate that is more than
three percent for senior loans and five percent for
subordinate loans plus the yield on United States
Treasury notes;
ii) Has interest-only payments or adjustable rate that
may lead to negative amortization; and,
iii) Does not include subordinate home equity lines of
credit or reverse mortgages.
3)Allows an agency to use tax increment funds, excluding funds
that are held in the 20% L&M Fund, to do any of the following
within its jurisdiction:
a) Purchase, assume or refinance existing subprime or
nontraditional mortgages on homes owned by eligible
homeowners;
b) Assist lenders or nonprofit or for-profit developers in
purchasing, assuming or refinancing subprime or
nontraditional mortgages owned by eligible homeowners;
c) Make loans to eligible homeowners with subprime or
nontraditional mortgages if the combined annual income of
the members of the household does not exceed 150% of area
median income;
d) Purchase or assist lenders in purchasing homes that have
been foreclosed and are vacant and sell those homes to a
buyer regardless of income; and,
e) Provide mortgage or credit counseling services to
existing or prospective eligible homeowners.
4)Allows an agency to manage, maintain and rent foreclosed homes
prior to sale.
5)Provides the amount of assistance a single eligible homeowner
can receive must not exceed an amount equal to the loan to
value ratio applied by the Federal Housing Administration for
an insured loan for the applicable geographic area multiplied
by the current value of the home.
AB 1422
Page 3
6)Requires funds to be expended for the purposes outlined above,
in a manner that preserves the exemption from federal and
state income taxes of interest on the bonds or notes issued by
the agency.
7)Allows an agency to adopt local criteria governing the use of
funds to address the finance of subprime or nontraditional
mortgages or purchase of foreclosed properties including but
not limited to assistance to defined neighborhoods, geographic
areas or targeting specific income categories.
8)Includes a sunset date of January 1, 2013.
FISCAL EFFECT : None
COMMENTS : The Community Redevelopment Law allows local
governments to establish redevelopment areas and capture all of
the increase in property taxes that is generated within the area
(referred to as "tax increment"). The law requires redevelopment
agencies to deposit 20% of tax increment funds into the L&M Fund
to be used to increase, improve, and preserve the community's
supply of low and moderate income housing at affordable housing
cost. The other 80% of tax increment funds are to be used to
eradicate blight.
Once an agency is established via an ordinance and its
organizational structure is formed it may function as a legal
entity within its jurisdiction. The jurisdiction of an agency
is the jurisdiction of the community. Agencies' power and
authority to redevelop a community is derived from the
California Constitution (Section 16 of Article XVI) and the
public purpose established by the Legislature, to eliminate
blight which constitutes physical and economic liabilities
requiring redevelopment in the interest of the health, safety
and general welfare of the people of the communities and the
state.
The method of financing used by redevelopment agencies, tax
increment financing, is authorized by the California
Constitution (Section 16 of Article XVI) Tax increment
financing authorizes an agency to use tax revenues from
increases in the assessed value of a property within a
redevelopment area. This method of financing allows agencies
to carry out redevelopment activities without drawing funds down
from a local government's general fund or by increases in
AB 1422
Page 4
property tax rates.
Impact of Foreclosures on California: According to Moody's
Economy nearly nine million homeowners nationwide have mortgages
equal to or greater than their homes' value. In February of
2008, the total foreclosure filings in California accounted for
24% of the 223,651 foreclosure filings reported nationwide. In
March 2009, UC Santa Barbara Forecast Project issued a report
indicating, California has lost 236,572 homes to foreclosure
which represents 2% of homes in the state.
Subprime mortgages represent a significant proportion of the
foreclosures. According to the mortgage banking industry, while
subprime loans represent 15% of outstanding mortgages in
California, they accounted for 68% of recent foreclosures in the
second quarter of 2007. According to research conducted by the
US Santa Barbara Forecast project, approximately 31% of all home
loans in California are Alt-A, which are considered riskier
loans, because they require limited documentation, have a
high-loan-to value ratio and may have a non-traditional
amortization schedule. Additionally, of the Alt-A loans in
California, 70% are Adjustable Rate Mortgages (ARM) and over
half of the Alt-A loans have not reset. The UC Santa Barbara
Forecast Project predicts that 4.3% will reset in 2009, 6.1%
will reset in 2010 and 38.3% will reset in 2011 and beyond.
Home foreclosure affects an owner's circumstances with the
threat of bankruptcy, poor credit ratings and tax liabilities.
However, foreclosures reach even further to have negative
impacts on neighboring homeowners, local governments and
California's greater economy. These damaging effects include
increases in abandonment and vandalism, an estimated $100
billion loss in property value, and an estimated $4 billion loss
of property and sales tax revenues for local governments.
In order to stabilize the market, preserve homeownership and
prevent neighborhoods from becoming blighted with vacant
abandoned bank owned homes, California needs innovative programs
to assist credit worthy homeowners with refinancing their
existing sub-prime and nontraditional loans and assist in
eradicating blight through the purchase of bank owned homes.
Purpose of this bill: This bill seeks to allow redevelopment
agencies to use tax increment funds that are not held in the 20%
L&M fund set aside, to acquire, assume or refinance mortgages or
AB 1422
Page 5
make loans to income-eligible homeowners faced with foreclosure
of existing units. Agencies can also assist lenders or
for-profit or non-profit developers in purchasing, assuming or
refinancing subprime or nontraditional mortgages. This bill
additionally, allows agencies to purchase vacant and foreclosed
homes and sell them to any purchaser regardless of income and if
necessary, manage, maintain and rent the home prior to sale.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0000908