BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 813 (Kehoe)
          As Amended  August 31, 2009
          Majority vote 

           SENATE VOTE  :Vote not relevant  
           
           HOUSING             4-2         APPROPRIATIONS      12-5        
           
           ----------------------------------------------------------------- 
          |Ayes:|Torres, Eng, Ma, Saldana  |Ayes:|De Leon, Ammiano,         |
          |     |                          |     |Charles Calderon, Coto,   |
          |     |                          |     |Davis, Fuentes, Hall,     |
          |     |                          |     |John A. Perez, Skinner,   |
          |     |                          |     |Solorio, Torlakson, Hill  |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Harkey, Knight            |Nays:|Conway, Harkey, Miller,   |
          |     |                          |     |Nielsen, Audra Strickland |
           ----------------------------------------------------------------- 

           SUMMARY  :  Allows the Department of Housing & Community  
          Development (HCD) to implement a special loan securitization  
          program to make financial assistance provided for self-help  
          housing through the CalHOME program, Building Equity and Growth  
          in Neighborhoods (BEGIN), Home Investment Partnership Program  
          (HOME), and the Joe Serna Jr. Farmworker Housing Grant (Joe  
          Serna Grant) program as a deferred payment loan to be paid  
          through an increase in the equity of the home.  Specifically,  
           this bill  :   

          1)Allows HCD to offer a new special deferred payment loan to  
            assist a homeowner in a mutual self-help housing program  
            funded by one of the programs listed above that is due when  
            the home is sold or transferred or is no longer owner  
            occupied.

          2)Makes a special deferred payment loan or Joe Serna grant  
            repayable only from the increase in equity derived from  
            difference between the appraised value at the time the  
            deferred payment loan or grant is recorded against the  
            property at the completion of construction and the appraised  
            value at the time repayment is due.  









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          3)Provides that the amount of the special deferred payment loan  
            or Joe Serna grant shall not affect the loan-to-value ratio of  
            the first mortgage financing of the property at the time the  
            HCD program loan and/or grant is made. 

          4)Provides that the amount of the special deferred payment loan  
            or Joe Serna grant must not exceed the difference between the  
            loan secured by the first deed of trust and the total  
            development cost plus the amount of sweat equity of the  
            self-help homeowner as approved by HCD.

          5)If necessary to achieve the affordable housing cost to the  
            homeowner required by the programs listed above and to qualify  
            the homeowner for a first mortgage, HCD may approve loans or  
            Joe Serna grants under the existing programs in addition to  
            the deferred payment loan or Joe Serna grant. 

          6)Provides that any additional loans or Joe Serna grants  
            required to achieve the housing cost in excess of the special  
            deferred payment loan or Joe Serna grant required by the  
            program shall be secured by the appraised value of the home  
            and not only by any future increase in equity.

          7)Allows HCD to implement the special grant and loan  
            securitization programs through regulation not subject to  
            review by the Office of Administrative Law after having at  
            least one consultation with the program sponsors who receive  
            and represent homeowners who benefit from the mutual self-help  
            housing programs. 

          8)Applies the provisions of this bill to any unspent funds in an  
            existing self-help housing contract providing funds from the  
            programs listed above to a local government or nonprofit  
            entity and any mortgage, grant or take out financing provided  
            by one of the programs listed above. 

          9)Allows HCD to limit the use of the special loan securitization  
            program in housing developments were the department has  
            already made a financial commitment and to require concessions  
            from a developer or a local government in order to permit  
            future value securitization.  

          10)  Gives HCD discretion in use of the special loan  
            securitization program including establishing any necessary  








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            guidelines. 

          11)  Provides a sunset of January 1, 2013. 

           FISCAL EFFECT  :  Unknown, potentially significant loss in state  
          housing bond funds, to the extent that the appreciation in home  
          prices needed to ensure repayment of  deferred payment loans  
          does not materialize.  One-time costs of about $120,000 to HCD  
          to develop regulations and guidelines for the program. Ongoing  
          costs of about $150,000 annually to monitor new loan and grant  
          programs.

           COMMENTS  : Over the last 40 years, mutual self-help housing has  
          provided homeownership opportunities to low-income families.  In  
          the self-help housing model, individual families or in some  
          cases groups of families, contribute 30-40 hours per week of  
          sweat equity to the construction of their homes.  The sweat  
          equity serves as their down payment for the home.  Typically,  
          the mortgage or take-out financing is provided through a  
          combination of a USDA or CalHFA loan and HCD deferred payment  
          loan and grant programs -- CalHOME, BEGIN, HOME and the Joe  
          Serna Grant Program -- with below market interest rates.

          Through the CalHOME, BEGIN, HOME and Joe Serna Program, the  
          state provides soft secondary financing which does not require a  
          monthly or regular mortgage payment.  All are due-on -sale  
          deferred payments loans or grants that are forgiven over time.   
          In the case of CalHOME, BEGIN and HOME, HCD distributes the  
          funds to local governments or non-profits which provide the  
          loans and receive repayment once the home is sold.  Under the  
          Joe Serna Jr. Grant Program HCD receives repayments directly.   
          Serna grants are forgiven by ten percent each year after the  
          recipient has maintained residency for 10 years, with full  
          forgiveness in 20 years.   On average, families that use the  
          self-help programs maintain ownership of their homes for 10 to  
          20 years.   

          State funds can be provided as either upfront construction or  
          land purchase financing or take-out long-term mortgage financing  
          for a self-help housing project.  All the state programs provide  
          less than half of the financing for a home and on average  
          between 20% and 35%.  The loans and grants provided by the state  
          are secondary financing sources which are subordinate to the  
          first mortgage on the property.  Most programs are capped on  








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          maximum assistance for example, CalHOME is capped at $60,000 and  
          BEGIN is $30,000 or 20 percent of the value of the home  
          whichever is less. All of these programs provide gap financing  
          which means that there is a means test on each borrower to  
          ensure they are getting the maximum primary mortgage financing  
          they can afford but no more than they need.   One of the  
          purposes of the state's funding is to help lower the amortized  
          loan on the property to reduce the monthly payment to an  
          affordable level for the homeowner.  This also improves the  
          security of the first mortgage lender because there is a lower  
          loan to value ratio and a better ability for the borrower to  
          meet payment obligations. 

          Purpose of the bill:  Self-help housing programs have been  
          successful, in part, due to the labor contributed by the  
          homebuyers which allows their "sweat equity" to replace some  
          labor costs which otherwise must be repaid in the mortgage loan  
          or come from a down payment.  Until the recent precipitous drop  
          in home prices, families could count on some amount of sweat  
          equity upon completion of the building process which equated to  
          the difference between the appraised value of the new home minus  
          the development cost and lenders could rely on the property  
          value being high enough to more than cover the take out  
          financing.  However, the downturn in the real estate market has  
          resulted in low appraised values, so that the actual costs of  
          the home including land, public fees and construction, exceed  
          the current appraised value in many areas; thus, the mortgage  
          loan to take out construction costs must be higher than the  
          appraised value.  In some communities, foreclosed properties are  
          used as comparable properties in the appraisal which further  
          reduces the final appraised value of a self-help home. 

          This bill would permit, for four years, the special loans and  
          grants from certain state programs (CalHOME, BEGIN, HOME and Joe  
          Serna Grant) to be secured against future increase in value so  
          that the special loan or grant would make no claim on the  
          current value of the home.  Loans or grants would be repaid only  
          from any increases in valuation that might occur when the home  
          is sold in the future.   These programs currently provide  
          deferred payment subordinate loans and grants to first-time home  
          buyers which are due when the home is sold or is no longer owner  
          occupied, and this form of lending would continue under the  
          current proposal if necessary to achieve affordable monthly  
          payments.  The repayment obligation of the loans or grants would  








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          not have to be revised since they currently defer repayment  
          obligations until a time when values increase.  This provision  
          would apply only to that portion of lending required to reduce  
          all loans and grants not to exceed appraised value amounts.  Any  
          additional loan or grant required to reduce the overall monthly  
          housing costs would be secured in the present manner against the  
          existing appraised value.

          Shared equity proposal:  Once a self-help house is completed the  
          home must be permanently financed with a mortgage.  Generally  
          this permanent financing is provided by USDA which can loan up  
          to $100,000 with a low interest rate.  In a healthy real estate  
          market, the home would appraise for the cost of the land, fees,  
          and the cost of construction of the structure and for enough to  
          cover the sweat equity the homeowner invested in the  
          construction of the home which is on average between $10,000 and  
          $20,000.  There would also be enough value to secure the  
          additional state loan or grant against the appraised value while  
          still maintaining a low enough first mortgage to keep the  
          monthly payment affordable for the homeowner.  However, in the  
          current real estate market, self-homes are not appraising for  
          the cost of the land, construction, the homeowners sweat equity  
          as well as the state's loans.  As a result many of these  
          projects have come to a standstill even though the nonprofits  
          have purchased land for construction and households are waiting  
          for the opportunity to build their homes.  Since it is uncertain  
          when the real estate market will rebound the author and the  
          sponsors of mutual- self help housing programs, which utilize  
          state funding for their programs, have proposed a shared-equity  
          repayment formula which would allow the projects to continue. 

          This bill proposes to allow HCD to provide special deferred the  
          loan or grant that is currently allowed for state programs that  
          provide financing to mutual self-help programs, but require that  
          it be repaid only by the appreciation of the home between the  
          time the loan is recorded and the time it is sold.   The amount  
          of the deferred payment loan would be the amount of the loan for  
          the first deed of trust minus the total development cost  
          including and the owners sweat equity as determined by HCD.   If  
          there is enough equity in the home after the first mortgage and  
          the sweat equity have been financed then a portion of the  
          deferred payment loan can be secured against the equity and the  
          remaining amount would be payable out of any increase in equity  
          in the future. 








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           Analysis Prepared by  :    Lisa Engel / H. & C.D. / (916) 319-2085  



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