BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 1551 (Torres) - Housing loans: subordination to refinancing.
Amended: August 22, 2012 Policy Vote: T&H 7-0
Urgency: Yes Mandate: No
Hearing Date: August 29, 2012
Consultant: Mark McKenzie
This bill does not meet the criteria for referral to the
Suspense File.
Bill Summary: AB 1551, an urgency measure, would authorize the
California Housing Finance Agency (CalHFA) and the Department of
Housing and Community Development (HCD) to permit the
subordination of certain loans to refinancing under specified
circumstances.
Fiscal Impact:
Potential delays in loan repayments in future years, the
impacts of which would likely be offset by reduced risk that
state-financed loans would be extinguished during a
foreclosure (various funds).
Minor administrative costs to CalHFA and HCD (various
funds).
Background: The CalHome program provides grants and loans to low
income and very-low income individuals to become or remain
homeowners. HCD administers the program and distributes the
funds to local public agencies and private nonprofit
corporations that then make loans and grants directly to
low-income households. The grants can be used for homebuyer
downpayment assistance, rehabilitation, homebuyer counseling,
self-help mortgage assistance programs, or shared housing
homeownership. Loans may be used for the purchase of real
property, site development, predevelopment, construction and
other expenses incurred to develop homeownership development
projects including single family subdivisions. Existing law
requires homeowners to repay CalHome downpayment assistance
loans upon the sale or transfer of the home, when the home
ceases to be owner-occupied, or upon the loan maturity date.
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In addition to its primary function of making direct mortgage
loans to low- and moderate-income first-time homebuyers in
California, CalHFA also provides downpayment assistance loans,
sometimes referred to as silent second mortgages, from the
proceeds of general obligation housing bonds. The largest of
these programs is the California Homeownership Downpayment
Assistance Program (CHDAP), but CalHFA also administers the Home
Purchase Assistance Program and the Extra Credit Teacher Home
Purchase Program. Payments on these downpayment assistance
loans are generally deferred until the homeowner sells or
refinances the home.
Existing law, as enacted by SB 224 (Correa), Chap 172/2009,
allows CalHFA to permit the subordination of downpayment
assistance loans under the CHDAP program to refinancing if a
homeowner has a demonstrated hardship, if subordination is
required to avoid foreclosure, and if the new loan meets the
agency's underwriting standards. Subordination is not
authorized for loans issued under the Home Purchase Assistance
Program or the Extra Credit Teacher Home Purchase Program.
Proposed Law: AB 1551 would allow CalHFA, for loans issued under
the Home Purchase Assistance and Extra Credit Teacher programs,
and HCD, for loans issued under the CalHome Program, to permit
downpayment assistance loans to be subordinated to refinancing
if a homeowner has a demonstrated hardship, subordination is
required to avoid foreclosure, and the new loan meets
underwriting requirements. Subordination would be prohibited if
the borrower has sufficient equity to repay the loan.
Related Legislation: SB 224 (Correa), Chap 172/2009, authorized
CalHFA to permit the subordination of downpayment assistance
loans issued pursuant to the California Homeownership
Downpayment Assistance Program to refinancing under the same
conditions specified in this bill.
Staff Comments: This bill would expand the authority to
subordinate a downpayment assistance loan to refinancing in
limited circumstances in which the loan may be at risk due to
foreclosure. Under current law a downpayment assistance loan
must be repaid when the homeowner refinances a first mortgage.
In most cases, a homeowner whose mortgage loan exceeds the
current market value of the home is precluded from refinancing
the mortgage. In response to the prevalence of homes with
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negative equity due to the dramatic downturn in the housing
market, the federal government created the Home Affordable
Refinance Program (HARP), which specifically allows homeowners
who are current on mortgage payments to refinance their first
mortgage, even if the mortgage exceeds the value of the home.
The HARP program is intended to stem the tide of foreclosures by
making it more affordable for homeowners to stay in their homes
by taking advantage of historically low interest rates and
lowering mortgage payments.
Prior to the downturn in the housing market, homeowners could
refinance their mortgages and take out equity to pay for home
improvements, or to make other purchases. With sufficient
equity, state downpayment assistance loans could be repaid at
the time of refinancing. Under current conditions, however,
homeowners with negative equity are precluded from refinancing
at current low rates if they have an outstanding state
downpayment assistance loan because the loan must be paid off
and HARP does not allow the amount of a refinanced loan to be
higher than the current mortgage value (the downpayment
assistance loan may not be rolled into the refinanced mortgage).
In addition, lenders generally refuse to refinance a mortgage
unless any existing second mortgages, including downpayment
assistance loans, are subordinated to the new first mortgage.
AB 1551 would allow CalHFA and HCD to permit an existing
downpayment assistance loan to be subordinated to refinancing if
the homeowner has experienced a demonstrated hardship and the
home is in danger of foreclosure without the subordination. If
the home has sufficient equity, subordination would be
prohibited and the loan must be paid off at the time of
refinancing, consistent with current law.
CalHFA has been authorized to allow subordination of downpayment
assistance loans provided under the CHDAP Program since 2009.
During that time, the agency has received 583 subordination
requests, of which 394 have been approved. CalHFA currently has
approximately 2,500 outstanding downpayment assistance loans
under the Home Purchase Assistance and Extra Credit Teacher Home
Purchase programs. It is unclear how many of the homeowners
with outstanding loans have homes that are underwater and are in
danger of foreclosure. Absent the authority provided in this
bill to allow subordination of downpayment assistance loans, it
is likely that some small percentage of these homeowners would
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undergo foreclosure, which would put the downpayment assistance
loan at risk. This bill could result in deferral of repayment
of some downpayment assistance loans, but any impacts would
likely be offset by the reduction of cases in which these loans
would be extinguished in a foreclosure.
Staff notes that the previous version of AB 1551, related to
auto insurance premiums for public safety employees, was
approved by this Committee on August 16, 2012 on a vote of 7-0.
The bill was amended recently on the Senate Floor to delete the
previous contents and add the current provisions that allow
subordination of downpayment assistance loans. Pursuant to
Senate Rule 29.10 (c), the bill was re-referred to the Senate
Transportation and Housing Committee, where it was approved 7-0
on August 28, 2012 and subsequently re-referred to this
Committee.