BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair


          AB 984 (Chau) - California Housing Finance Agency.
          
          Amended: June 18, 2013          Policy Vote: T&H 10-0
          Urgency: Yes                    Mandate: No
          Hearing Date: June 24, 2013                             
          Consultant: Mark McKenzie       
          
          This bill does not meet the criteria for referral to the  
          Suspense File. 

          
          Bill Summary: AB 984 would add two members to the California  
          Housing Finance Agency (CHFA) board of directors, authorize CHFA  
          to offer energy efficiency grants in conjunction with specified  
          mortgage products, and revise the repayment requirements for  
          certain downpayment assistance loans.

          Fiscal Impact: 
              Initial expenditures from CHFA operating funds (non-state  
              revenue bond funds) of up to $3 million for short-term  
              interim funding to finance initial allocations related to  
              the new energy efficiency grant program (California Housing  
              Finance Fund).  The program must ultimately be funded  
              through a grantee's CHFA mortgage loan, or securities backed  
              by those loans, but CHFA is authorized to finance startup  
              costs on a short-term basis.  

              Potential delays in downpayment assistance loan repayments  
              in future years to the extent those loans are assumed by  
              persons purchasing homes partially financed through a CHFA  
              downpayment assistance loan.  Currently, these loans must be  
              repaid when a home is refinanced or sold, but this bill  
              would allow downpayment assistance loans to be assumed by a  
              new owner or repaid as part of the home purchase.

          Background: CHFA was statutorily chartered in 1975 to be the  
          state's affordable housing bank.  The agency is financially  
          self-supporting; funding for its programs and operations comes  
          from the sales of tax-exempt and taxable revenue bonds, and it  
          sets its loan interest rates slightly higher than debt service  
          costs and charges fees for specific services to cover its  
          lending costs and risks.  CHFA's funding is not subject to  








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          Budget Act appropriation, nor is it supported by the full faith,  
          credit, or taxing power of the State of California.

          In addition to its primary function of making direct mortgage  
          loans to low- and moderate-income first-time homebuyers in  
          California, CHFA 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 CHFA 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 allows CHFA to permit the  
          subordination of downpayment assistance loans 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.  If the home has sufficient  
          equity, subordination is prohibited and the loan must be paid  
          off at the time of refinancing.  Approximately 95% of CHDAP  
          loans are made to persons whose primary mortgage is a Federal  
          Housing Administration (FHA) loan.

          The FHA recently informed CHFA that California's statutory  
          requirement that CHDAP loans must be repaid upon the sale of the  
          home is prohibited when the primary mortgage is an FHA loan.  In  
          addition, a recent interpretation of FHA and federal Housing and  
          Urban Development Department (HUD) regulations that prohibit  
          certain types of downpayment assistance associated with FHA loan  
          indicate that if state assistance is involved in the purchase,  
          that assistance must be provided directly.  Currently, CHFA does  
          not lend the CHDAP loan funds directly to a borrower, but works  
          with lenders who provide that loan and CHFA purchases the loans  
          from those private lenders.  As a result of the recent  
          interpretation of regulations, CHFA will not be able to provide  
          CHDAP loans to FHA borrowers as of July 1, 2013 without changing  
          its legal authority and practice.

          CalHFA currently participates in FHA's Energy Efficient Mortgage  
          (EEM) Program, which helps homebuyers save money on utility  
          bills by financing the cost of adding energy efficiency features  
          to new or existing housing as part of an FHA mortgage.  The  
          total cost of the financed energy improvements may not exceed  
          the total dollar value of the energy that will be saved during  








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          the improvement's useful life as determined by a Home Energy  
          Rating Systems report.  The maximum amount of the improvements  
          that may be financed is limited to 5% of the property's value  
          (not to exceed $8,000) or $4,000, whichever is greater.

          Proposed Law: AB 984 would add the Secretary of Veterans Affairs  
          and a new gubernatorial appointee who has specific knowledge of  
          bonds and related financial instruments, interest rate swaps,  
          and risk management to the CHFA board of directors.  The bill  
          would also do the following:
                 Specify that a CHDAP loan shall not be due and payable  
               upon sale of the home if the FHA owns or insures the first  
               mortgage loan or if repayment requirement is otherwise  
               contrary to specified HUD regulations.
                 Authorize CHFA to fund any second mortgage loan  
               directly.
                 Authorize CHFA to make grants to CHFA mortgage borrowers  
               whose loan is used in conjunction with FHA's EEM Program  
               for the purpose of making repairs or improvements to  
               increase energy efficiency in the home.
                 Require CHFA to fund the cost of the energy efficiency  
               grant program through revenues realized from the grantee's  
               first mortgage loan, or securities backed by it, except  
               that CHFA may provide short term interim funding to  
               facilitate the transaction.

          Staff Comments: This bill is intended to add financial expertise  
          to CHFA's board, as suggested in a recent California State  
          Auditor recommendation, and add the Secretary of Veterans  
          Affairs to the board in an effort to increase coordination  
          efforts among the agencies.  The bill would also bring CHFA's  
          statutes regarding downpayment assistance loans into conformance  
          with federal regulations and allow CHFA to provide an additional  
          product to its borrowers who are not able to fully finance  
          energy efficiency improvements due to limits in the federal EEM  
          program.

          CHFA indicates that it will finance the initial capitalization  
          of the energy efficiency grant program from $3 million of its  
          operating funds, which are derived from non-state funds that are  
          the proceeds of revenue bonds, loan repayments, and fees it  
          charges for services.  All startup costs, as well as ongoing  
          program costs, will be covered by an incremental increase in  
          interest that it charges to its borrowers who are awarded  








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          grants.

          The provisions of the bill that eliminate the requirement to  
          repay a CHDAP loan upon sale of the home may result in delays in  
          loan repayments if those loans are assumed by a purchaser of a  
          home initially supported by a CHDAP loan.  The option to assume  
          the loan would lie with that purchaser, and it is not clear how  
          many would choose to assume the loan, rather than simply have it  
          paid off as part of the home purchase.  To the extent that new  
          buyers do assume CHDAP loans, it will result in a slower  
          repayment, which may affect CHFA's ability to make new CHDAP  
          loans.  Absent this legal change, however, CHFA would be  
          prohibited from making downpayment assistance loans to FHA  
          borrowers.