BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair AB 697 (V. M. Perez) Hearing Date: 7/11/2011 Amended: 5/4/2011 Consultant: Maureen Ortiz Policy Vote: VA: 7-0 _________________________________________________________________ ____ BILL SUMMARY: AB 697 authorizes the Department of Veterans Affairs to refinance a mortgage loan that is not an existing loan acquired under the Cal Vet Home Loan Program. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Expansion of home loan program ---unknown, potentially significant--- Special* Regulations ----------------minor, absorbable---------------- General *Cal Vet Home Loan Fund _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. The Department of Veterans Affairs indicates the costs of implementing regulations will be absorbable within existing resources. The Cal-Vet Home Loan Program is funded from general obligation bonds that are repaid through monthly mortgage payments. The program has no General Fund costs. While AB 697 will expand the use of the funds which will likely deplete the account sooner and potentially require future bond sales, there is currently about $1 billion available in the home loan fund. Current law authorizes California veterans to purchase homes through the use of the Cal-Vet Home Loan Program. AB 697 will expand the program to authorize veterans who have existing mortgage loans to refinance those loans with the Cal-Vet Home Loan Program. The veteran must have a stable loan and will have to meet all existing qualifications in order to participate such as obtaining an appraisal showing a market value above the AB 697 (V. M. Perez) Page 1 amount of the loan. This bill will not allow for loan modifications. Voters have passed 23 veterans bonds since 1943, the last of which was passed in 2008 as Proposition 12 and authorized $900 million in bonds for the Cal-Vet Home Loan program. The revenue from these bond sales is used by the Department of Veterans Affairs to purchase farms, homes and mobile homes which are then resold to California veterans. Each participating veteran makes monthly payments to the Department. These payments are set in an amount sufficient to do all of the following: 1) reimburse the department for its costs in purchasing the farm, home, or mobile home, 2) cover all costs resulting from the sale of the bonds, including interest on the bonds, and 3) cover the costs of operating the program. The Cal-Vet home loan is advantageous to veterans since it requires little down payment and offers competitive market rates. The Cal-Vet Program has historically been fully supported by participating veterans. If, however, payments made by program participants do not fully cover principal and interest payments on the bonds, because general obligation bonds are backed by the State, the difference would come from the General Fund. This, however, has not been necessary since the inception of this program. The default rate on the Cal-Vet home loans is very little as compared to conventional home loans. These loans are not sold on the secondary market, and because the DVA holds the papers on the homes, if there is a foreclosure, they then sell the home to recoup the loan proceeds. In the rare event that there is a short sale, the DVA has a mechanism in place referred to as "loan loss reserves" which is a set-aside that is required by their independent auditors and can be used to further prevent any costs to the General Fund.