BILL ANALYSIS
AB 2043
Page 1
Date of Hearing: May 19, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2043 (Torrico) - As Amended: April 29, 2010
Policy Committee: Housing and
Community Development Vote: 7 - 2
Local Government 6 - 3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill expands the eligible uses of redevelopment funding to
include mortgage assistance to homeowners. Specifically, this
bill:
1)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.
2)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.
d) Limits the subordinate loan to low- and moderate-income
borrowers and to owner-occupied homes.
1)Prohibits the use of the L&M Fund for the use of subordinate
loans (second mortgages).
2)States it is the Legislature's intent that the subordinate
AB 2043
Page 2
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.
3)Provides a sunset of January 1, 2016.
FISCAL EFFECT
1)Because this legislation places these mortgage loans in the
subordinate position, it essentially allows redevelopment
agencies to use public funds to reimburse mortgage lenders for
the riskiest portion of a mortgage loan, the portion of the
loan that exceeds the actual value of the property.
As an illustration of potential losses, if these loans are
provided to 1,000 homeowners throughout the state with an
average first mortgage of $200,000, and 25% of those homes end
up in foreclosure, local governments would lose over $7.5
million in public funds that have been diverted from local
agencies, including school districts.
2)Potential long term effects on property tax revenue growth to
the extent that non-traditional uses of tax increment funds -
such as home mortgage assistance --result in less brick and
mortar investment, and hence less property tax growth in RDAs
over time.
Such impacts could affect other local agencies - such as
counties and schools -- once redevelopment areas expire and
the increment property taxes are allocated back to the
underlying local jurisdictions.
3)Redevelopment has traditionally focused on long-lasting
"bricks and mortar" investments in public improvements,
commercial and industrial projects, and affordable housing.
This is partly because the funding sources for these
investments are bonds repaid by added property values, and
taxes, created by the investments. This bill raises the
question of whether tax increment funds - which represent
property taxes diverted from other local governmental agencies
such as schools - are the appropriate source for home mortgage
assistance.
COMMENTS
AB 2043
Page 3
1)Rationale . 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%
of the 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.
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.
2)Appropriate Use of Public Funds ? By replacing the riskiest
portion of a mortgage loan - the portion that exceeds more
than 110% of the value of the property - with public funds,
the bill provides benefits not only to struggling homeowners,
but also private banks and other lenders that had made bad
loans during the real estate boom. The considerable risks
associated with the loans would be transferred from the
private lenders - many of which are out-of-state - to
California taxpayers. The Legislature may wish to consider
whether providing bailout funds to private lenders is an
appropriate use of tax increment revenues that have been
diverted from counties, special districts, and schools. It
should also be noted that the repayment of the subordinate
loans to the redevelopment agency will only occur if the
home's value rises substantially before the homeowner sells
the property - a risky proposition at best.
3)California Redevelopment Law . The Community Redevelopment Law
allows local officials to set-up redevelopment agencies,
prepare and adopt redevelopment plans, and finance
redevelopment activities. The Law repeatedly underscores the
AB 2043
Page 4
need for the public sector's intervention when private
enterprise cannot accomplish the redevelopment of blighted
areas. Before redevelopment officials can wield their
extraordinary powers of property tax increment funding and
property management (including eminent domain), they must
determine if an area is blighted.
A blighted area must be predominantly urbanized with a
combination of conditions that are so prevalent and
substantial that they can cause a serious physical and
economic burden that can not be helped without redevelopment.
In addition, a blighted area must have at least one of four
conditions of physical blight and at least one of seven
conditions of economic blight.
Predominantly urbanized means that at least 80% of the land in
the project area:
a) has been or is developed for urban uses (consistent with
zoning), or
b) is an integral part of an urban area, surrounded by
developed parcels.
The four conditions of physical blight are:
a) unsafe or unhealthy buildings;
b) conditions that prevent or hinder the viable use of
buildings or lots;
c) incompatible land uses that prevent development of
parcels;
d) irregular and inadequately sized lots in multiple
ownerships.
The seven conditions of economic blight are:
a) depreciated or stagnant property values;
b) impaired property values because of hazardous wastes;
c) abnormally high business vacancies, low lease rates, or
a high number of abandoned buildings;
d) serious lack of necessary neighborhood commercial
facilities;
e) serious residential overcrowding;
f) an excess of adult-oriented businesses that result in
problems;
g) a high crime rate that is a serious threat to public
AB 2043
Page 5
safety and welfare.
In order to fund redevelopment, a redevelopment agency keeps
the property tax increment revenues generated from increases
in property values within a redevelopment project area. When
it adopts a redevelopment plan for a project area and selects
a base year, the agency "freezes" the amount of property tax
revenues that other local governments receive from the
property in that area. In future years, as the project area's
assessed valuation grows above the frozen base, the resulting
property tax revenues --- the property tax increment --- go to
the redevelopment agency instead of going to the underlying
local governments.
To get the capital they need to carry out their activities,
redevelopment officials issue property tax allocation bonds.
Redevelopment officials also create long-term debt by signing
development contracts with property owners and builders, and
they take out loans from the underlying city or county.
Redevelopment agencies repay these debts by pledging the
property tax increment revenues that come from the project
area. By capturing property tax increment revenues over the
decades, redevelopment agencies gain access to a generally
steady, long-term revenue stream. Once the tax increment
revenues pay off these debts, the agency ceases to receive its
share of tax revenues. The other local governments ---
cities, counties, special districts, school districts --- then
enjoy their earlier shares of the now-expanded property tax
base.
The diversion of property tax increment financing does not
normally harm schools because the State General Fund makes up
the missing revenues. The State General Fund automatically
backfills the difference between what a school district
receives in property tax revenues and what the district needs
to meet its revenue allocation limit. When a redevelopment
agency diverts property tax increment revenues from a school
district, the State General Fund pays the difference.
4)Related Legislation . AB 2065 (Calderon) allows the City of
Downey to expand their redevelopment area and use additional
tax increment financing to recoup rent and improvements it is
making related to the Tesla Motors project. That bill is
currently pending in this committee.
AB 2043
Page 6
AB 2531 (Fuentes) gives redevelopment agencies additional
authority to provide loans, loan guarantees and other
financial assistance to businesses, assists nonprofits and
public agencies in establishing small business incubators, and
clarifies the City of Los Angeles' authority to apply for and
administer federal funding for economic development. That bill
is currently pending in this committee.
In 2008, 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 that bill. In his veto
message he noted that "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."
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081