BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 984 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: chau VERSION: 5/28/13 Analysis by: Mark Stivers FISCAL: yes Hearing date: June 4, 2013 URGENCY: YES SUBJECT: California Housing Finance Agency DESCRIPTION: This bill makes a number of changes to the California Housing Finance Agency's statutes. ANALYSIS: Established in 1975, the California Housing Finance Agency (CalHFA) is the state's affordable housing bank. CalHFA issues tax-exempt revenue bonds and uses the proceeds to make below market-rate loans to income-eligible first-time homebuyers and the developers of affordable rental housing. CalHFA is a self-supporting entity. It does receive money from the state's general fund, and its debts obligate only CalHFA itself, not the State of California. An 11-member board of directors, each of whom serves a six-year term, governs CalHFA. The board members include the Treasurer; the Secretary of Business, Consumer Services, and Housing; and the Director of Housing and Community Development, or their designees, as ex-officio members. In addition, the governor appoints six members, and the Speaker of the Assembly and the Senate Committee on Rules each appoint one member. The Director of Finance, the Director of Planning and Research, and the Executive Director of CalHFA serve as non-voting ex-officio members of the board. Current law requires the governor to select four of his appointees from among the following categories: An elected official of a city or county engaged in the planning or implementation of a housing, housing assistance, or housing rehabilitation program; A person experienced in residential real estate, mortgage AB 984 (CHAU) Page 2 banking, or the commercial banking industry; A person experienced in building residential housing; A person experienced in organized labor in the residential construction industry; A person experienced in the management of rental or cooperative housing occupied by lower-income households; A person experienced in manufactured housing finance and development; and A person representing the public. CalHFA's California Homebuyer's Downpayment Assistance Program (CHDAP) offers to income-qualified first-time homebuyers a deferred-payment subordinate loan (also known as a "silent second mortgage") in the amount of three percent of the purchase price or appraised value, whichever is less, for the buyer to apply towards a downpayment or closing costs. Payments on this loan are deferred, meaning that the homebuyer does not have to make a payment on this second mortgage until the home is sold, refinanced, or paid in full. This program allows a homebuyer to afford a more expensive home than he or she would otherwise qualify for. The Federal Housing Administration (FHA) recently informed CalHFA that California's statutory requirement for a CHDAP borrower to repay the loan upon sale is prohibited for FHA loans by FHA regulations. CalHFA does not lend money directly to consumers. Instead, CalHFA works through and uses approved private lenders to qualify consumers and to make all mortgage loans, including CHDAP loans. CalHFA then purchases closed loans that meet CalHFA's requirements from these private lenders. In late 2012 the Federal Housing Administration (FHA) issued an interpretive rule defining "prohibited sources" of downpayment assistance under the federal Housing and Economic Recovery Act of 2008. The new ruling states that "state and local government agencies and instrumentalities can contribute funds, if they do so directly, towards the minimum cash investment even if they are otherwise involved in the transaction." FHA will apply this rule to all loans closed after July 1, 2013. CalHFA currently contributes CHDAP funds indirectly through the purchase of the loans, not directly at the loan closing, and will not be able to provide CHDAP loans to FHA borrowers after this date without changing its legal authority and practice. CalHFA currently participates in FHA's Energy Efficient Mortgage AB 984 (CHAU) Page 3 (EEM) Program, which helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to new or existing housing as part of their FHA insured mortgage. The program recognizes that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements. The total cost of the financed energy improvements may not exceed the total dollar value of the energy that will be saved during the improvement's useful life as determined by a Home Energy Rating Systems report. In addition, the cost of the improvements that may be financed may not exceed 5% of the property's value (not to exceed $8,000) or $4,000, whichever is greater. This bill makes a number of changes to the California Housing Finance Agency's statutes. Specifically, it: Adds the Secretary of Veterans Affairs and an additional gubernatorial appointment to the CalHFA board. Requires that one of the Governor's appointments have specific knowledge of bonds and related financial instruments, interest rate swaps, and risk management. Provides that a CHDAP loan shall not be due and payable upon sale of the home if FHA owns or insures the first mortgage loan or if a repayment requirement is otherwise contrary to HUD regulations governing FHA insured first mortgage loans. Allows CalHFA to fund any second mortgage loan directly. Allows CalHFA to make a grant to a homebuyer who is seeking a CalHFA first mortgage under the FHA's EEM Program for the purpose of making repairs or improvements to increase energy efficiency in the home. CalHFA must fund the cost of the program through revenues realized from the grantee's first mortgage loan, or securities backed by it, except that CalHFA may provide short term interim funding of the grant to facilitate the transaction. Contains an urgency clause that applies to all provisions of the bill except for the provisions relating to CalHFA board membership and board member qualifications. COMMENTS: AB 984 (CHAU) Page 4 1.Purpose of the bill . According to the author, this bill will implement the California State Auditor's recommendation to add to the financial expertise to the CalHFA board. In addition, the bill adds the Secretary of Veteran Affairs to the board to increase coordination between CalHFA and the Department of Veterans Affairs, which provides mortgage loans to veterans through the CalVet Home Loan Program. The bill also seeks to bring CalHFA's statutes regarding CHDAP into conformance with recent federal policy changes and allow CalHFA to provide grants for energy efficiency improvements over and above what the EEM program currently provides. 2.Facilitating coordination of homeownership efforts . Like CalHFA, the Department of Veterans Affairs (DVA) is a mortgage lender through its Cal-Vet Farm and Home Loan Program. Adding the Secretary of Veterans Affairs to the CalHFA board may increase coordination of the state's two mortgage lending entities. The secretary's presence may help each of the entities educate the other about its products and practices and reveal opportunities to coordinate on mortgage lending. The secretary's presence is less likely, however, to promote the development of supportive rental housing for homeless veterans, which is arguably the largest service gap facing veterans. Neither DVA nor CalHFA is in a good position to serve homeless veterans. CalHFA's multifamily lending requires debt service payments in order for CalHFA to repay bondholders. Likewise, Cal-Vet's funding comes from bonds that also must be repaid by program beneficiaries. Because supportive housing rents do not even cover a development's operating costs, supportive housing developments cannot pay debt service. 3.Following up in part on auditor's report . CalHFA experienced losses 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 had issued. In 2010, the California State Auditor audited CalHFA to determine the decisions and actions that contributed to these losses and to examine CalHFA's future financial solvency. The audit, among other things, recommended 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." Presumably, the auditor made this recommendation to reflect AB 984 (CHAU) Page 5 the complexity of the financial markets from which CalHFA obtains funding and the significant impact that its financing decisions can have on the agency's survival. 4.Directly funding CHDAP loans . The bill allows CalHFA to fund second mortgages directly. While CalHFA needs this authority to provide downpayment assistance associated with FHA loans, the language is broader than that and allows CalHFA to fund any second mortgage directly. Currently, 95% of CalHFA's CHDAP loans go to FHA borrowers. CalHFA, however, has not decided whether to directly fund all its CHDAP loans or just the ones associated with FHA loans. The broader language gives CalHFA the flexibility to make this decision in a manner that is administratively simplest and least costly. 5.Allowing new buyers to assume CHDAP loans . This bill provides that a CHDAP loan associated with an FHA first mortgage shall be not due and payable upon sale of the home. In other words, a new buyer may assume the CHDAP loan when the CHDAP borrower sells the home. It is not clear how many new buyers may choose to assume these loans. It would only make sense for the new buyer if the interest rate on a new loan were higher than the rate on the existing loan and the seller had equity in the property. To the extent that new buyers do assume CHDAP loans, it will result in a slower repayment, which may affect CalHFA's ability to make new CHDAP loans. Absent this legal change, however, CalHFA will be able to make very few CHDAP loans because so many of their potential CHDAP borrowers have FHA loans. 6.Energy Efficiency Mortgage Program . As CalHFA seeks to rebuild its mortgage lending business, it looks to offer products that are more attractive than those otherwise available to homebuyers. Like other lenders, CalHFA currently participates in FHA's EEM program to increase loan amounts to pay for a limited amount of qualified energy efficiency improvements. CalHFA would like to do its competitors one better by offering grants to pay for energy efficiency improvements over and above the amount the homebuyer may finance through the EEM program. CalHFA intends to provide grants to fund any remaining improvements recommended in the property's Home Energy Rating Systems report. CalHFA further intends to pay for the grants and program costs by increasing interest rates on the first mortgages of program participants. While CalHFA will have to front the grant money, ultimately the borrowers will fully fund the program. Reflecting these AB 984 (CHAU) Page 6 intentions, the bill prohibits CalHFA from using bond proceeds for this program and requires CalHFA to fund the cost of the program through revenues realized from the grantee's first mortgage loan, or securities backed by it, except that CalHFA may provide short term interim funding of the grant to facilitate the transaction. 7.Urgency clause . In order to allow CalHFA to continue offering CHDAP loans to FHA borrowers after the FHA's policy on the source of downpayment funds takes effect on July 1, and in order to get the EEM grant program up and running, the bill contains an urgency clause that applies to everything in the bill except the CalHFA board provisions. Assembly Votes: Floor: 76-0 Appr: 17-0 H&CD: 7-0 POSITIONS: (Communicated to the committee before noon on Wednesday, May 29, 2013.) SUPPORT: None received. OPPOSED: None received.