BILL ANALYSIS
SB 813
Page 1
SENATE THIRD READING
SB 813 (Kehoe)
As Amended August 31, 2009
Majority vote
SENATE VOTE :Vote not relevant
HOUSING 4-2 APPROPRIATIONS 12-5
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|Ayes:|Torres, Eng, Ma, Saldana |Ayes:|De Leon, Ammiano, |
| | | |Charles Calderon, Coto, |
| | | |Davis, Fuentes, Hall, |
| | | |John A. Perez, Skinner, |
| | | |Solorio, Torlakson, Hill |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Knight |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Audra Strickland |
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SUMMARY : Allows the Department of Housing & Community
Development (HCD) to implement a special 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 loan to be paid
through an increase in the equity of the home. Specifically,
this bill :
1)Allows HCD to offer a new special deferred payment loan to
assist a homeowner in a mutual self-help housing program
funded by one of the programs listed above that 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.
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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.
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 may 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)Allows 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)Allows HCD to limit the use of the special loan securitization
program in housing developments were the department has
already made a financial commitment and to require concessions
from a developer or a local government in order to permit
future value securitization.
10) Gives HCD discretion in use of the special loan
securitization program including establishing any necessary
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guidelines.
11) Provides a sunset of January 1, 2013.
FISCAL EFFECT : Unknown, potentially significant loss in state
housing bond funds, to the extent that the appreciation in home
prices needed to ensure repayment of deferred payment loans
does not materialize. One-time costs of about $120,000 to HCD
to develop regulations and guidelines for the program. Ongoing
costs of about $150,000 annually to monitor new loan and grant
programs.
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 ten 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% and 35%. 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
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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 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 down payment. 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
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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
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.
SB 813
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Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0002656