BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: sb 447
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: desaulnier
VERSION: 1/4/12
Analysis by: Mark Stivers FISCAL: YES
Hearing date: January 10, 2012
SUBJECT:
California Housing Finance Agency
DESCRIPTION:
This bill prohibits the California Housing Finance Agency
(CalHFA), under specified circumstances, from foreclosing upon a
single-family mortgagee for renting out the property.
ANALYSIS:
Established in 1975, CalHFA is the state's affordable housing
bank. CalHFA issues tax-exempt bonds and uses the proceeds to
make below market-rate loans to income-eligible first-time
homebuyers and the developers of affordable rental housing.
CalHFA is a self-supporting entity. It does not receive money
from the state's general fund, and its debts obligate only
CalHFA itself, not the State of California.
CalHFA's primary business activity has been making mortgage
loans to low- and moderate-income first-time homebuyers in
California. Currently, the agency has roughly 23,000 loans in
its single-family housing portfolio. Federal law relating to
tax-exempt bonds requires that 95 percent of borrowers occupy
the homes that the bonds financed. The law is not clear whether
this rule applies only to the intentions of the borrower at the
time of purchase or over the life of the loan.
As a result of increasing requests to rent out property due to
the drop in home values, in August 2010 CalHFA revised its
policy on renting out agency-financed homes to expand the
definition of "hardship" and to allow for extensions of CalHFA
approvals. The revised policy prohibits rentals unless the
borrower can document one of the following involuntary financial
hardships:
Reduction in income because of reduced hours, pay cuts, or a
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new job.
An involuntary increase in living expenses or medical costs.
An involuntary job transfer, including a military posting,
with a possible return in one year.
Being forced to look for a job outside the area with the
possibility of return, or selling or refinancing the home,
within a year.
Several months later, CalHFA added another economic hardship
exemption: increased mortgage payments associated with a
35-year-loan product in which the borrower pays interest only
for the first five years and sees increased payments in year
six. In all cases, CalHFA allows borrowers who met the criteria
to rent out their homes for one year, with the possibility of
month-to-month extensions. The policy also stipulates that under
no circumstances shall rental exceptions exceed five percent of
the loans issue outstanding under the relevant bond indenture.
In response to a report by the Senate Office of Oversight and
Outcomes (SOOO) on this issue and a follow-up letter from
Senators Steinberg and DeSaulnier, CalHFA recently suspended
foreclosures for non-monetary default (e.g. unauthorized
renting) until its board can discuss the matter at its January
meeting.
This bill prohibits CalHFA from foreclosing upon a borrower for
renting out the property if all of the following conditions are
met:
The borrower is current in making his or her mortgage payments
and has not breached any term of the mortgage but for the
rental provision.
The borrower lived in the home for at least one year after
obtaining the mortgage.
No more than 4% of the proceeds of the relevant bond issuance
are associated with rented properties.
COMMENTS:
1.Purpose of the bill . According to the author, California
should take all reasonable measures to reduce the staggering
impacts of foreclosures on families and neighborhoods. The
recent SOOO report points out that California has a small but
important opportunity to do just that by more closely
following other states in how it responds to CalHFA borrowers
who move out of a home due to changing circumstances and, in
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these times of depressed market values, rent it out to avoid a
massive financial loss to themselves and CalHFA. By
prohibiting foreclosures in such situations, this bill helps
struggling homeowners, keeps CalHFA in compliance with federal
tax law, and reduces losses to CalHFA itself.
2.Experiences from report . CalHFA has foreclosed on 21 of its
23,000 loans for violation of the owner-occupancy clause. In
one example, a teacher living in Sunnyvale lost a condo to
foreclosure after marrying a man with a young son and deciding
that they could not live in her 724-square-feet home. She was
current on her payments to CalHFA in spite of losing each
month the $1000 difference between her mortgage payment and
her rental income. Determined to meet her obligation, she
intended to keep paying her note until she could sell or
refinance the home. According to the SOOO report, 186 more
known borrowers are renting out their CalHFA-financed homes
without permission and at risk of foreclosure due to
non-occupancy.
3.Limiting CalHFA losses . In addition to inflicting financial
losses on homeowners and potentially displacing tenants,
CalHFA's policy increases losses to CalHFA itself. According
to the SOOO report, CalHFA loses an average of $37,839 per
foreclosed property. Because CalHFA's mortgage insurance fund
has now run out of reserves, the average loss has recently
increased to $56,000 per foreclosure. As long as the
tax-exempt status of CalHFA's bonds are not jeopardized, this
bill will help reduce losses to CalHFA by reducing the number
of foreclosures on performing loans.
4.Policies in other states . According to the SOOO report, only
two states, Georgia and Nevada, of the twenty that the office
surveyed have policies as strict as CalHFA's, and Georgia has
not foreclosed on anyone for renting out a home for a few
years. Most states surveyed have more forgiving policies.
For example, Washington does not foreclose on any borrowers
who rent. New York allows renting if the mortgage is
underwater regardless of the reason the borrower is moving
out. Florida allows renting on a case-by-case basis if an
appraisal shows that the mortgage is underwater.
5.Differing legal opinions . CalHFA has received two differing
legal opinions on this matter. As bond counsel to the agency
prior to 2005, Orrick, Herrington & Sutcliffe opined that one
section of the Internal Revenue Code prohibited commercial
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uses of properties funded by tax-exempt bonds, a definition
that included rentals. In 2005, CalHFA's new bond counsel,
Hawkins, Delafield & Wood, advised the agency that the
Internal Revenue Code required only that the borrower intended
to live in the house at the time of origination, not stay
there for the life of the mortgage. According to CalHFA, the
opinion associated with a particular bond issuance controls
the policies on loans originated from that bond. In the
interest of maintaining uniform rules for all borrowers,
however, CalHFA's policy has conformed to the more
conservative Orrick opinion for loans made with both older and
newer bonds funds.
6.Suggested amendment . This bill prohibits CalHFA from
foreclosing upon a homeowner for renting out the home if three
conditions are met. The committee may wish to consider adding
a fourth criterion: that the value of the home be less than
the debt on the property (i.e. the home is "underwater").
This will ensure that the bill's protections only apply to
those who cannot refinance or sell without loss.
POSITIONS: (Communicated to the committee before noon on
Wednesday, January
4, 2012)
SUPPORT: None received.
OPPOSED: None received.