BILL ANALYSIS
AB 2043
Page 1
Date of Hearing: April 28, 2010
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Norma Torres, Chair
AB 2043 (Torrico) - As Amended: April 19, 2010
SUBJECT : Redevelopment funds: mortgage assistance
SUMMARY : Allows redevelopment agencies to issue subordinate
loans using the non-Low- & Moderate-Income Housing (L&M) Funds
for qualified homeowners to prevent foreclosure inside or
outside a project area. Specifically, this bill :
1)Permits redevelopment agencies to issue subordinate loans to
qualified homeowners of no more than 15% to reduce the
principal balance of a primary loan if all of the following
requirements are met:
a)The lender agrees to modify an existing home mortgage to
reduce the principal balance of the primary loan so that the
loan-to-value is equal to or less than 110%;
b)Applies to qualified homeowners who live inside or outside the
project area;
c)Requires the redevelopment agency to adopt a resolution
establishing that the use of the funds outside the project
area will benefit the project area; and
d)Limits the subordinate loan to low- and moderate-income
borrowers and to owner-occupied homes.
2)Prohibits the use of the L&M Fund for the use of subordinate
loans.
3)States it is the Legislature's intent that the subordinate
loan provide leverage to secure greater principal reduction
and that the subordinate loan have a rational relationship to
the amount needed to prevent foreclosure and to the present
value of the forgiven principal.
4)Provides a sunset of January 1, 2016.
EXISTING LAW
AB 2043
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1)Finds and declares that the fundamental purpose of
redevelopment is to expand the supply of low- and
moderate-income housing, expand employment opportunities for
jobless, underemployed low-income persons, and to provide an
environment for the social economic and psychological growth
and well-being of all citizens (Health & Safety Code Section
33071).
2)Requires 20% of all tax increment funds allocated to a
redevelopment agency must be used for the purpose of
increasing, improving and preserving the community's supply of
extremely low-, very low-, low- and moderate-income housing
unless the agency makes findings that the housing is not
needed (Health & Safety Code Section 33334.2).
3)Allows agencies to exercise any or all of its powers to
construct, rehabilitate or preserve affordable housing for
low- and moderate-income persons including: donate real
property, finance insurance premiums, construct buildings or
structures, acquire buildings or structures, rehabilitate
buildings or structures, provide subsidies to low- and
moderate-income persons, and maintain the communities supply
of mobilehomes (Health & Safety Code Section 33334.2).
4)Declares that "blighted areas" are physical and economic
liabilities that require redevelopment in the interest of the
health, safety, and general welfare of the community and state
residents (Health & Safety Code Section 33030).
FISCAL EFFECT : Unknown
COMMENTS :
Background : Community Redevelopment Law allows local
redevelopment agencies to establish project areas and capture
all of the increases in property taxes generated by the
redevelopment activity. Increases in property taxes are called
"tax increment". Redevelopment agencies are required to
set-aside 20% of the tax increment funds collected from a
project area to increase, improve and preserve the community's
supply of extremely low-, very low-, low- and moderate-income
housing. Redevelopment agencies use the remaining 80% to
eradicate blight.
AB 2043
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Legislative findings declare that the fundamental purpose of
redevelopment is to "expand the supply of low- and
moderate-income housing, employment opportunities and provide an
environment for social, economic and psychological growth and
well-being for all citizens."
This bill would allow redevelopment agencies to issue
subordinate loans to homeowners that the agency determines are
at risk of foreclosure because the principal balance on their
home exceeds the assessed value. In order to qualify, a
homeowner would be required to secure a commitment from the
lender to reduce the principal balance on their primary mortgage
by 110%. The redevelopment agency could then provide a
subordinate loan to the homeowner of up to 15% of the principal
value which would further reduce the loan to 95% of the value.
Federal Programs to Available to Troubled Borrowers : In Mach of
2009, the federal government created the Home Affordable
Mortgage Program (HAMP) to assist homeowners who are at risk of
foreclosure. The program had limited success and was recently
overhauled. In addition to providing unemployment relief for up
to 6 months, the program has been revamped in attempt to assist
homeowners who have negative equity. Under the new approach,
lenders assess the net present value (NPV) of a modification
that starts by forbearing principal balance as needed over 115%
loan-to-value (LTV) to bring borrower payments to 31% of income.
If a 31% monthly payment is not reached by forbearing principal
to 115% LTV, the lender will then use standard steps of lowering
rate, extending term, and forbearing additional principal.
Additionally, the federal government recently announced a new
program, Hardest Hit Housing Markets (HFA Hardest Hit Fund).
California was one of five states that received a conditional
award of $700 million to assist homeowners who are at risk of
foreclosure. The program guidelines allow the funds to be use to
pay down all or a portion of an overleveraged loan and to
provide incentives for financial institutions to write down a
portion of unpaid principal
balance for homeowners with severe negative equity. The
California Housing Finance Agency (CalHFA) has submitted a
proposal for the funding and will be hearing back on their
application in the next four to six weeks.
Purpose of this bill : According to the author, a recent study
showed that last year, 70% of modifications involving interest
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rate cuts only, and not principal reduction, failed. Even with
a modified interest rate, the principal of the loan in
comparison to its true market value could be so high that the
home may never be an asset to the homeowner, as a result; the
homeowner may just walk away. This has been commonly referred to
as "strategic defaults." According to the author, while the
federal government recently revised the HAMP to include
principal reductions, it is still important that local
communities are armed with the financial tools necessary to
combat this foreclosure. AB 2043 would allow general purpose
redevelopment funds to be used as subordinate home loans as part
of a plan to encourage lenders to reduce the principal owed on
the original home loan. The loan provided by the redevelopment
agency would be in the form of a subordinate loan of up to 15%
principal owed and could be used in or outside of the project
area. The homeowner would not be required to make monthly
payments on the subordinate loan but could pay it off upon sale
or refinance of their home. However, these subordinate loans
would only be authorized if a lender agrees to reduce the
principal of the first loan so that its loan to value ratio is
equal to or below 110%. Additionally, the subordinate loans
would be limited only to low to moderate income borrowers of
owner occupied homes.
Related legislation : In 2009, AB 2594 (Mullin) would have
allowed a redevelopment agency, until January 1, 2013, to use
non-L&M Funds to acquire, assume, or refinance loans to eligible
homeowners with sub-prime or nontraditional mortgages in default
or at risk of default. The Governor vetoed the bill for the
reason given below:
"If this bill was signed into law, it would be in conflict
with the recently enacted budget trailer legislation. By
allowing redevelopment agencies to use tax increment
revenue to purchase, assume, or refinance nontraditional
and sub-prime mortgages, the bill would reduce the tax
increment available for transfer to the Educational Revenue
Augmentation Funds, as the budget trailer legislation
requires."
Staff Comments :
The committee may wish to consider, that the bill does not
address how the subordinate loan issued by the redevelopment
agency would be repaid if the equity in the home drops further
AB 2043
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and the homeowner defaults on their mortgage.
The committee may wish to clarify that the bill is restricted to
homeowners who have only one primary loan on their home and do
not have a second loan.
The committee may wish to consider the likelihood that lenders
will agree to reduce the principal balance of a homeowner's
mortgage to 110%.
Possible amendments :
Define a "qualified homeowner" as low- and moderate- income
homeowners who own and reside in their homes.
Triple referred : The Assembly Committee on Rules referred AB
2043 to the Committee on Housing and Community Development,
Local Government and Appropriations. If AB 2043 passes this
committee, the bill must be referred to the Committee on Local
Government.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085