BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 1551
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: Torres
VERSION: 8/22/12
Analysis by: Mark Stivers FISCAL: Yes
Hearing date: August 28, 2012 URGENCY: YES
SUBJECT:
California Housing Finance Agency loan subordinations
DESCRIPTION:
This bill authorizes the California Housing Finance Agency to
subordinate a second mortgage under the Home Purchase Assistance
and Extra Credit Teacher Programs under certain conditions. The
bill also allows the Department of Housing and Community
Development to subordinate a second mortgage under the CalHome
Program under certain conditions.
ANALYSIS:
Established in 1975, the California Housing Finance Agency
(CalHFA) is the state's affordable housing bank. CalHFA's
primary business activity is making mortgage loans to low- and
moderate-income first-time homebuyers in California. CalHFA
makes these first mortgage loans with the proceeds of tax-exempt
revenue bonds.
Where needed to help borrowers achieve homeownership, CalHFA
also makes downpayment assistance loans, sometimes referred to
as silent second mortgages, from the proceeds of general
obligation housing bonds. The largest of these programs is the
California Homeownership Downpayment Assistance Program (CHDAP).
CalHFA also administers two smaller downpayment assistance
programs, known as the Home Purchase Assistance Program and the
Extra Credit Teacher Program. Payments on these loans are
deferred until the homeowner sells or refinances the home.
In light of the historic drop in home values associated with the
Great Recession, the Legislature in 2009 authorized CalHFA to
subordinate a second mortgage under CHDAP to a refinanced first
mortgage under certain conditions. Subordination means allowing
the new first mortgage to take precedence over the existing
CalHFA second mortgage in the event of the borrower's default.
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Without subordination of the much smaller second mortgage, the
lender refinancing the first mortgage will not make the
refinance loan. In order to approve a homeowner's request for
subordination, the law requires CalHFA to determine that the
homeowner has demonstrated hardship, that subordination is
required to avoid foreclosure, and that the new loan meets the
agency's underwriting requirements.
The Home Purchase Assistance and Extra Credit Teacher programs
continue to require homeowners to repay the CalHFA second
mortgage at the time of refinancing, which is generally not
possible if the homeowner has insufficient equity in the home.
Likewise, the Department of Housing and Community Development
(HCD) administers the CalHome Program, which provides grants to
local governments and non-profit organizations to support
existing homeownership programs serving low- and very low-income
households. The program also provides loans to the developers
of homeownership units affordable to low- and very low-income
households. Among other things, awardees use CalHome funds to
provide deferred-payment second mortgages to individual
homebuyers for downpayment assistance. Existing law requires
the homeowner to repay the second mortgage upon sale or transfer
of the home, when the home ceases to be owner-occupied, or upon
the loan maturity date.
This bill allows CalHFA under the Home Purchase Assistance and
Extra Credit Teacher Programs and HCD under the CalHome Program
to subordinate a second mortgage when CalHFA or HCD makes the
following determinations:
The homeowner has demonstrated hardship.
The homeowner has insufficient equity to repay the loan and
subordination is required to avoid foreclosure.
The new loan meets CalHFA's or HCD's underwriting
requirements.
COMMENTS:
1.Purpose of the bill . At the time the Legislature authorized
CalHFA and HCD's awardees to make downpayment assistance
loans, no one contemplated a situation in which so many
California homeowners would owe more on their mortgages than
their homes are worth (i.e., be "under water"). Moreover, at
that time it was generally not possible for a homeowner to
refinance a home when he or she had negative equity. More
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recently, however, the federal government created the Home
Affordable Refinance Program (HARP) specifically to help under
water homeowners that are current on their payments take
advantage of historically low mortgage rates.
CalHFA currently has authority to subordinate its CHDAP second
mortgages to a refinancing of a homeowner's first mortgage,
but the Home Purchase Assistance and the Extra Credit Teacher
Programs continue to require the homeowner to pay off the
CalHFA second mortgage as part of a refinancing. Likewise,
HCD and its awardees are unable to subordinate a downpayment
assistance loan under the CalHome Program. For those
California homeowners currently under water in their
mortgages, it is not possible to repay the second mortgage
when they refinance the first mortgage, effectively
prohibiting these homeowners from participating in HARP. As a
result, these homeowners cannot get the benefit of saving
hundreds of dollars per month through refinancing and, in
worst case scenarios, may lose their homes to foreclosure.
2.Increases security of CalHFA and HCD loans . CalHFA currently
has roughly 2,500 second mortgages outstanding under the Home
Purchase Assistance and the Extra Credit Teacher Programs. It
is unknown how many of these homeowners are interested in
refinancing, but presumably many of them are. The number of
homeowners who may lose their home to foreclosure without the
ability to refinance is undoubtedly much smaller, but
potentially still significant. Allowing subordination of
CalHFA and HCD second mortgages should not affect much the
timing of the loan repayments (without subordination there
would be no refinance loan and therefore no repayment of the
second mortgage anyway), but by reducing the likelihood of the
borrower defaulting on the existing first mortgage with
significantly higher interest rates, subordination may well
decrease future losses to CalHFA and HCD's awardees.
3.Urgency . In order to ensure that homeowners can take
advantage of the current historically low interest rates, this
bill is an urgency measure.
4.Senate Rule 29.10 hearing . The Senate Rules Committee
referred this bill to the committee under Senate Rule 29.10 in
order for the committee to review the new subject matter of
this bill. On a 29.10 hearing such as this, the committee may
only take one of three actions:
1) hold the bill; 2) return the bill to the Senate Floor; or
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3) send the bill to the Appropriations Committee for a review
of the bill's fiscal impacts.
Previous Votes Not Relevant.
POSITIONS: (Communicated to the committee before noon on
Monday, August 27, 2012)
SUPPORT: None received.
OPPOSED: None received.