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 AB 984 (Chau) Page 1 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 AB 984 (Chau) Page 2 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 AB 984 (Chau) Page 3 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.