BILL ANALYSIS                                                                                                                                                                                                    






           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  




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            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  




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          (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:





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           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  




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            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  




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            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.