BILL ANALYSIS
SB 813
Page 1
Date of Hearing: July 8, 2009
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Norma Torres, Chair
SB 813 (Kehoe) - As Amended: July 1, 2009
SENATE VOTE : Not relevant
SUBJECT : Community development: grant and loan securitization
program
SUMMARY : Directs Department of Housing & Community Development
(HCD) to implement a special grant and loan securitization
program to make financial assistance provided for self-help
housing through the CalHOME program, Building Equity and Growth
in Neighborhoods (BEGIN), Home Investment Partnership Program
(HOME), and the Joe Serna Jr. Farmworker Housing Grant (Joe
Serna Grant) program as a deferred payment grant or loan to be
paid through an increase in the equity of the home.
Specifically, this bill :
1)Requires a new special deferred payment loan or Joe Serna
grant to assist a homeowner in a nonprofit mutual self-help
housing program funded by one of the programs listed above is
due when the home is sold or transferred or is no longer owner
occupied.
2)Makes a special deferred payment loan or Joe Serna grant
repayable only from the increase in equity derived from
difference between the appraised value at the time the
deferred payment loan or grant is recorded against the
property at the completion of construction and the appraised
value at the time repayment is due.
3)Provides that the amount of the special deferred payment loan
or Joe Serna grant shall not affect the loan-to-value ratio of
the first mortgage financing of the property at the time the
HCD program loan and/or grant is made.
4)Provides that the amount of the special deferred payment loan
or Joe Serna grant must not exceed the difference between the
loan secured by the first deed of trust and the total
development cost plus the amount of sweat equity of the
self-help homeowner as approved by HCD.
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5)If necessary to achieve the affordable housing cost to the
homeowner required by the programs listed above and to qualify
the homeowner for a first mortgage, HCD must approve loans or
Joe Serna grants under the existing programs in addition to
the deferred payment loan or Joe Serna grant.
6)Provides that any additional loans or Joe Serna grants
required to achieve the housing cost in excess of the special
deferred payment loan or Joe Serna grant required by the
program shall be secured by the appraised value of the home
and not only by any future increase in equity.
7)Requires HCD to implement the special grant and loan
securitization programs through regulation not subject to
review by the Office of Administrative Law after having at
least one consultation with the program sponsors who receive
and represent homeowners who benefit from the mutual self-help
housing programs.
8)Applies the provisions of this bill to any unspent funds in an
existing self-help housing contract providing funds from the
programs listed above to a local government or nonprofit
entity and any mortgage, grant or take out financing provided
by one of the programs listed above.
9)Provides a sunset of January 1, 2014.
EXISTING LAW
1)Establishes the CalHOME program within HCD to provide grants
and loans to local public agencies and nonprofit corporations
for projects or programs that enable low- and very low-income
people to become or remain homeowners, including self-help
housing (Health and Safety Code Section 50650.3).
2)Establishes the BEGIN program within HCD to provide grants and
loans to assist development or rehabilitation of various types
of housing projects for agricultural worker households (Health
& Safety Code Section 5057125.5).
3)Establishes the HOME program within HCD to provide grants to
cities and counties for housing rehabilitation, new
construction, and acquisition and rehabilitation, for both
single-family and multifamily projects, and predevelopment
loans by the Community Housing Development Organization
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(Health & Safety Code Section 50896).
FISCAL EFFECT : Unknown
COMMENTS :
Over the last 40 years, mutual self-help housing has provided
homeownership opportunities to low-income families. In the
self-help housing model, individual families or in some cases
groups of families, contribute 30-40 hours per week of sweat
equity to the construction of their homes. The sweat equity
serves as their down payment for the home. Typically, the
mortgage or take-out financing is provided through a combination
of a USDA or CalHFA loan and HCD deferred payment loan and grant
programs -- CalHOME, BEGIN, HOME and the Joe Serna Grant Program
-- with below market interest rates.
Through the CalHOME, BEGIN, HOME and Joe Serna Program, the
state provides soft secondary financing which does not require a
monthly or regular mortgage payment. All are due-on -sale
deferred payments loans or grants that are forgiven over time.
In the case of CalHOME, BEGIN and HOME, HCD distributes the
funds to local governments or non-profits which provide the
loans and receive repayment once the home is sold. Under the
Joe Serna Jr. Grant Program HCD receives repayments directly.
Serna grants are forgiven by 10 percent each year after the
recipient has maintained residency for 10 years, with full
forgiveness in 20 years. On average, families that use the
self-help programs maintain ownership of their homes for 10 to
20 years.
State funds can be provided as either upfront construction or
land purchase financing or take-out long-term mortgage financing
for a self-help housing project. All the state programs provide
less than half of the financing for a home and on average
between 20 percent and 35 percent. The loans and grants
provided by the state are secondary financing sources which are
subordinate to the first mortgage on the property. Most
programs are capped on maximum assistance for example, CalHOME
is capped at $60,000 and BEGIN is $30,000 or 20 percent of the
value of the home whichever is less. All of these programs
provide gap financing which means that there is a means test on
each borrower to ensure they are getting the maximum primary
mortgage financing they can afford but no more than they need.
One of the purposes of the state's funding is to help lower the
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amortized loan on the property to reduce the monthly payment to
an affordable level for the homeowner. This also improves the
security of the first mortgage lender because there is a lower
loan to value ratio and a better ability for the borrower to
meet payment obligations.
Purpose of the bill :
Self-help housing programs have been successful, in part, due to
the labor contributed by the homebuyers which allows their
"sweat equity" to replace some labor costs which otherwise must
be repaid in the mortgage loan or come from a downpayment.
Until the recent precipitous drop in home prices, families could
count on some amount of sweat equity upon completion of the
building process which equated to the difference between the
appraised value of the new home minus the development cost and
lenders could rely on the property value being high enough to
more than cover the take out financing. However, the downturn
in the real estate market has resulted in low appraised values,
so that the actual costs of the home including land, public fees
and construction, exceed the current appraised value in many
areas; thus, the mortgage loan to take out construction costs
must be higher than the appraised value. In some communities,
foreclosed properties are used as comparable properties in the
appraisal which further reduces the final appraised value of a
self-help home.
This bill would permit, for four years, the special loans and
grants from certain state programs (CalHOME, BEGIN, HOME and Joe
Serna Grant) to be secured against future increase in value so
that the special loan or grant would make no claim on the
current value of the home. Loans or grants would be repaid only
from any increases in valuation that might occur when the home
is sold in the future. These programs currently provide
deferred payment subordinate loans and grants to first-time home
buyers which are due when the home is sold or is no longer owner
occupied, and this form of lending would continue under the
current proposal if necessary to achieve affordable monthly
payments. The repayment obligation of the loans or grants would
not have to be revised since they currently defer repayment
obligations until a time when values increase. This provision
would apply only to that portion of lending required to reduce
all loans and grants not to exceed appraised value amounts. Any
additional loan or grant required to reduce the overall monthly
housing costs would be secured in the present manner against the
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existing appraised value.
Shared equity proposal :
Once a self-help house is completed the home must be permanently
financed with a mortgage. Generally this permanent financing is
provided by USDA which can loan up to $100,000 with a low
interest rate. In a healthy real estate market, the home would
appraise for the cost of the land, fees, and the cost of
construction of the structure and for enough to cover the sweat
equity the homeowner invested in the construction of the home
which is on average between $10,000 and $20,000. There would
also be enough value to secure the additional state loan or
grant against the appraised value while still maintaining a low
enough first mortgage to keep the monthly payment affordable for
the homeowner. However, in the current real estate market,
self-homes are not appraising for the cost of the land,
construction, the homeowners sweat equity as well as the state's
loans. As a result many of these projects have come to a
standstill even though the nonprofits have purchased land for
construction and households are waiting for the opportunity to
build their homes. Since it is uncertain when the real estate
market will rebound the author and the sponsors of mutual- self
help housing programs, which utilize state funding for their
programs, have proposed a shared-equity repayment formula which
would allow the projects to continue.
This bill proposes to allow HCD to provide special deferred the
loan or grant that is currently allowed for state programs that
provide financing to mutual self-help programs, but require that
it be repaid only by the appreciation of the home between the
time the loan is recorded and the time it is sold. The amount
of the deferred payment loan would be the amount of the loan for
the first deed of trust minus the total development cost
including and the owners sweat equity as determined by HCD. If
there is enough equity in the home after the first mortgage and
the sweat equity have been financed then a portion of the
deferred payment loan can be secured against the equity and the
remaining amount would be payable out of any increase in equity
in the future.
Staff comments :
The shared equity formula proposed recognizes that property
(house and land) values currently are artificially low-often
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less than the actual cost of land, fees, and construction-and
that first mortgage lenders cannot make loans that are
traditionally secured, affordable, and adequate to refinance
development costs. By securing additional financing from HCD
against only future increases in value, the program and formula
will encourage lenders to make affordable first mortgage loans
as they did previously because the balance of the development
cost will be taken-out by the HCD deferred loans or grants and
not impact loan-to-value ratios because the HCD loans and grants
are repayable only from future equity increase. This also will
allow the homeowner to receive some equity for the labor it
contributed for construction and allow projects that are
currently stymied to be permanently financed. This also will
allow nonprofits to use land they currently are making payments
on, thus reducing costs for future homebuilders. This proposal
is not that different then the state's current programs which
provide loans and grants due at the time the home is sold.
If a self-help homeowner remains in the home the value may
rebound to the level needed to provide enough equity to pay off
the deferred payment loan created by this bill. However, it is
possible that the state may lose some funding for these programs
as a result of this proposal if the homeowner sells before the
home has time to appreciate enough to cover the special deferred
loan or grant.
Committee amendment :
The committee may wish to consider an amendment to limit the
special grant and loan securitization program to counties with
the most severe challenges in building self-help mutual housing
by making it a pilot project in the 5-6 counties in the state
with the greatest gap between self-help development costs and
finished appraised values.
REGISTERED SUPPORT / OPPOSITION :
Support
California Coalition for Rural Housing (sponsor)
Opposition
SB 813
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None on file.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085