BILL ANALYSIS
SB 813
Page 1
SENATE THIRD READING
SB 813 (Kehoe)
As Amended September 4, 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), for four years, 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 future equity of the home.
Specifically, this bill :
1)Allows HCD to offer a 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)Applies the provisions of the bill to contracts between HCD and
a grantee made on or before July 1, 2009.
3)Makes a special deferred payment loan repayable only from the
increase in equity derived from the 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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4)Provides that the amount of the special deferred payment loan
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.
5)Provides that the amount of the special deferred payment loan
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.
6)States that 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 under the existing programs in addition to the deferred
payment loan.
7)Provides that any additional loans required to achieve the
housing cost in excess of the special deferred payment loan
required by the program shall be secured by the appraised value
of the home and not only by any future increase in equity.
8)Allows HCD to implement the provisions of the bill through
guidelines not subject to review by the Office of Administrative
Law after having at least one consultation with the program
grantees and housing sponsors.
9)Allows HCD to require concessions from a developer or a local
government in order to permit future value securitization.
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
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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% 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 maximum assistance for
example, CalHOME is capped at $60,000 and BEGIN is $30,000 or 20%
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
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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 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
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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 give HCD authority to approve deferred
payment loans for self-help housing programs that will be repaid
by the future appreciation of the home 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.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0002929