BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 984
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          Date of Hearing:   April 3, 2013

               ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
                                 Norma Torres, Chair
                  AB 984 (Chau) - As Introduced:  February 22, 2013
           
          SUBJECT  :   The California Housing Finance Agency 

           SUMMARY  :   Makes changes to the board of directors governing the  
          California Housing Finance Agency (CalHFA).  Specifically,  this  
          bill  :  

          1)Adds the following voting members to the board of directors of  
            CalHFA, increasing the number from eleven to thirteen:

             a)   The Secretary of Veterans Affairs or his or her  
               designee; and 

             b)   A person appointed by the Governor that has specific  
               knowledge of housing finance agencies, single family  
               mortgage lending, bonds and related financial instruments,  
               interest rate swaps, and risk management. 

           EXISTING LAW  

          1)Requires the board of directors of CalHFA to be made up of 11  
            voting members, including the Treasurer, the Secretary of  
            Business, Consumer Services and Housing, and the Director of  
            Housing and Community Development, or their designees, one  
            member appointed by the Speaker of the Assembly, one member  
            appointed by the Senate Committee on Rules, and six members  
            appointed by the Governor, two of whom must be residents of  
            rental or cooperate housing financed by the agency or have  
            experience in counseling, assisting or representing tenants. 

          2)Provides that the Director of Finance, the Director of  
            Planning and Research, and the executive director of CalHFA  
            are nonvoting ex-officio members of the board of directors.

          3)Requires the Governor to select four of his six appointees  
            from among the following categories:

             a)   An elected official of a city or county engaged in the  
               planning or implementation of a housing, housing  
               assistance, or housing rehabilitation program;








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             b)   A person experienced in residential real estate,  
               mortgage banking, or the commercial banking industry;
             c)   A person experienced in building residential housing;
             d)   A person experienced in organized labor in the  
               residential construction industry;
             e)   A person experienced in the management of rental or  
               cooperative housing occupied by lower-income households;
             f)   A person experienced in manufactured housing finance and  
               development; and
             g)   A person representing the public.  

            (Health and Safety Code 50901 et. al.)
           
           FISCAL EFFECT  :  Unknown 

           COMMENTS  :

          Established in 1975, CalHFA was chartered as the state's  
          affordable housing bank to make below market-rate loans for  
          single-family and multi-family housing through the sale of  
          tax-exempt bonds. CalHFA is a self-supporting entity and its  
          debts, including those related to the compensation and  
          retirement costs of its employees, are separate from the State  
          of California. Investor capital, through the sale of bonds,  
          provides the agency's source of revenue, not taxpayers'  
          proceeds. Existing statutes and bond indentures state that the  
          agency's debts are not a debt or liability of the state or any  
          political subdivision thereof and are not backed by the faith  
          and credit of the State of California. 

          In 2010, at the request of the Joint Legislative Audit  
          Committee, the California State Auditor audited CalHFA to  
          determine what decisions and actions of the agency may have  
          contributed to its current fiscal condition and its future  
          financial solvency. According to the State Auditor, beginning in  
          2008, CalHFA experienced losses on its single-family portfolio  
          totaling $146 million and $189 million in fiscal years 2008-09  
          and 2009-10, respectively. These losses were a result of the  
          high delinquency rates on its single-family loans and the amount  
          of variable-rate debt that the agency issued, which led to a  
          downgrade in the credit rating. In an effort to continue to  
          provide loans on single-family homes in a time of low interest  
          rates, CalHFA issued variable- rate bonds because the cost of  
          the debt was less. To mitigate the risks associated with  
          variable- rate bonds, CalHFA entered into interest-rate swaps  








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          with counterparts. According to the Auditor, the decision to  
          enter into variable-rate bonds and interest-rate swaps was a  
          result of CalHFA's desire to pursue ever-increasing goals for  
          loan volume. The board of directors approved these strategies.

          Ultimately the auditor determined that despite its losses,  
          CalHFA's "major housing programs and the fund it uses to pay its  
          operating expenses should remain solvent under most foreseeable  
          circumstances." The auditor identified several actions that  
          CalHFA's board could take to shore up the financial viability of  
          the agency going forward. First, the auditor determined that the  
          annual delegations of duties to staff were overly permissive.  
          The decision to enter into interest-rate swaps was not a planned  
          business strategy and was entered into before the board was  
          briefed on the risks. CalHFA amended the wording of its annual  
          delegations in January 2011 to respond to this concern. Second,  
          the auditor recommend that the Legislature amend CalHFA's  
          statute to require that the board include appointees with  
          knowledge "of housing finance agencies, single-family mortgage  
          lending, bonds and related financial instruments, interest-rate  
          swaps and risk management."

          The board of directors of CalHFA is composed of 11 voting  
          members, including the Treasurer, the Secretary of Business,  
          Consumer Services and Housing, and the Director of Housing and  
          Community Development, or their designees, one member appointed  
          by the Speaker of the Assembly, one member appointed by the  
          Senate Committee on Rules, and six members appointed by the  
          Governor, of which two must be residents of rental or cooperate  
          housing financed by the Agency or have experience in counseling,  
          assisting, or representing tenants. The Director of Planning and  
          Research, the Director of Finance, and the Executive Director of  
          CalHFA are non-voting members.



          In 2011, AB 1222 (Gatto) Chapter 408, responded to the Bureau of  
          State Audits (BSA) audit by amending CalHFA's conflict of  
          interest statutes to give the agency more flexibility to include  
          board members who are single-family lenders. CalHFA does  
          business with many different lenders through its single-family  
          mortgage program. Prior to AB 1222, the conflict of interest  
          statute prohibited CalHFA board members from having any  
          financial interest in any contract made by the agency. This  
          prohibition significantly narrowed the pool of financial  








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          institutions from which CalHFA could recruit board member. The  
          existing conflict of interest laws still require board members  
          to recuse themselves from decisions in which their institutions  
          have a financial interest.


          In 2012, the BSA restated its recommendation to require more  
          sophisticated expertise on the CalHFA board to assist the agency  
          in avoiding financial difficulties. The BSA continued in its  
          recommendation that the board make-up include appointees with  
          knowledge "of housing finance agencies, single-family mortgage  
          lending, bonds and related financial instruments, interest-rate  
          swaps and risk management."

           Purpose of this bill:  AB 984 increases the total number of  
          members of the CalHFA board of directors to thirteen. It  
          increases the number of members appointed by the Governor from  
          six to seven and requires that at least one of the Governor's  
          appointees have the knowledge that the auditor believes may have  
          assisted CalHFA in avoiding the financial challenges associated  
          with variable-rate bond and interest-rate swaps. In addition,  
          the bill would add the Secretary of Veterans Affairs to the  
          board of directors.
           
           The committee may wish to consider that the current statue  
          already includes a person with "experience in residential real  
          estate in the savings and loan, mortgage banking, or commercial  
          banking industry" as one of seven categories that the Governor  
          can choose from in appointing four of his six members to the  
          board. AB 984 may be redundant in including "single-family  
          mortgage lending" as an additional position to be appointed by  
          the Governor. In theory, AB 1222 (Gatto) would have made it  
          easier for the Governor to appoint a member to the board by  
          clarifying the conflict of interest standards applied to board  
          members. 
           
           This bill requires the Governor to appoint one person with a  
          variety of expertise. The committee may wish to consider if one  
          person would have all of the expertise that the BSA identifies  
          as lacking in the CalHFA Board of Directors or if it would be  
          better to amend the existing list of possible types of knowledge  
          that the Governor must select from when appointing his members  
          to the board. 
           
          REGISTERED SUPPORT / OPPOSITION  :   








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           Support 
           
          None on file. 

           Opposition 

           None on file.

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