BILL ANALYSIS
AB 2043
Page 1
Date of Hearing: May 5, 2010
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 2043 (Torrico) - As Amended: April 29, 2010
SUBJECT : Redevelopment funds: mortgage assistance.
SUMMARY : Creates a five-year program to allow a redevelopment
agency (RDA) 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 an RDA 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) The RDA would be subordinating the loan of a qualified
homeowners who live inside or outside the project area;
c) The RDA adopts a resolution establishing that the use of
the funds outside the project area will benefit the project
area; and,
d) The subordination is limited to 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 that the subordinate loan, plus any fees or interest
charges as determined by the RDA, may be repaid to the agency
upon sale or refinance of the home.
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5)States that prior to the sale or refinance no monthly payments
shall be owed to the RDA.
6)Expands the definition of redevelopment to include providing
assistance to qualified homeowners.
7)Defines "qualified homeowner" as a low- or moderate-income
homeowner who resides in his or her home.
8)Provides a sunset of January 1, 2016.
EXISTING LAW :
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.
2)Defines "redevelopment" as the planning, development,
replanning, redesign, clearance, reconstruction, or
rehabilitation, or any combination of these, of all or part of
a survey area, and the provision of those residential,
commercial, industrial, public, or other structures or spaces
as may be appropriate or necessary in the interest of the
general welfare, including recreational and other facilities
incidental or appurtenant to them.
3)Redevelopment includes the alteration, improvement,
modernization, reconstructure or rehabilitation of existing
structures in a project area.
4)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.
5)Allows agencies to exercise any or all of its powers to
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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.
6)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.
7)Establishes income limits for persons and families (adjusted
for family size) of low- and moderate-income based on
countrywide median incomes:
Moderate income < 120%
Low income < 80%
Very low income < 50%
Extremely low income< 30%
FISCAL EFFECT : Unknown
COMMENTS :
1)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.
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."
2)AB 2043 would allow redevelopment agencies to issue
subordinate loans to homeowners that the agency determines are
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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. AB 2043 provides that the subordinate loan, plus
any fees or interest charges as determined by the RDA, may be
repaid to the agency upon sale or refinance of the home. The
Committee may wish to consider if it might be more financially
responsible to require that the loans be paid back and not
just permissively allow them to be paid back. The Committee
may wish to also consider that without the repayment of a loan
the RDA will not be able go forward with other redevelopment
efforts as prescribed in its redevelopment plan.
Under existing law if an RDA is going to build housing outside
of a project area it must build those units at a 2:1 ratio and
declare that it is necessary to build outside the project
area. AB 2043 allows an RDA to subordinate a loan on a home
that is either inside or outside of the project area. The
Committee may wish to consider how spending tax increment
financing (TIF) outside of a redevelopment project area
provides any benefit to the actually project area that is
providing the TIF.
3)According to the Assembly Housing and Community Development
Committee in March 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
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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.
According to the author, a recent study showed that last year
70% of modifications involving interest 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." The author states that 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
4)Legislative History : AB 2594 (Mullin, 2008) 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. In Governor
Schwarzenegger's veto message he stated: "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." The Committee may wish to consider
that the Governor's remarks in his veto of AB 2594 might still
hold true for AB 2043 give the fact that the state transferred
$1.7 billion from RDAs to the Supplemental Educational Revenue
Augmentation Fund in the 2009-10 State Budget.
5)Support Arguments : Supports could argue that this measure
will both help and encourage homeowners to keep their homes,
as well as protect communities from the economic and social
impacts that occur with foreclosures. Supporters state that
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the subordinate loans would be limited only to low to moderate
income borrowers of owner occupied homes.
Opposition Arguments : Opposition could argue that the crux of
this bill relies upon the fact that 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%. The Committee may wish to consider
what the likelihood is of a lender reducing the principal
amount of the loan.
6)This bill was heard by the Housing and Community Development
Committee on April 28, 2010, where it passed with a 7-2 vote.
This bill has also been referred to the Appropriations
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Katie Kolitsos / L. GOV. / (916)
319-3958