BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 813|
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UNFINISHED BUSINESS
Bill No: SB 813
Author: Kehoe (D)
Amended: 9/4/09
Vote: 21
PRIOR VOTES NOT RELEVANT
ASSEMBLY FLOOR : Not available
SUBJECT : Community development
SOURCE : Author
DIGEST : This bill 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.
Assembly Amendments delete the Senate version dealing with
redevelopment agencies annual report. This bill now deals
with loan programs.
ANALYSIS : Existing law:
1.Establishes the CalHOME program within HCD to provide
grants and loans to local public agencies and nonprofit
CONTINUED
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corporations for projects or programs that enable low-
and very low-income people to become or remain
homeowners, including self-help housing.
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.
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.
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.
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.
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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.
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
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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.
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.
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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 construction and
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
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.
SUPPORT : (Verified 9/11/09)
Burbank Housing Development Corporation
California Coalition for Rural Housing
Coachella Valley Housing Coalition
Community Housing Improvement Program
Mercy Housing California
Peoples' Self-Help Housing Corporation
Rural Communities Housing Development Corp
Rural Community Assistance Corporation
AGB:nl 9/11/09 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
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