BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 447 (DeSaulnier)
Hearing Date: 01/17/2012 Amended: 01/11/2012
Consultant: Mark McKenzie Policy Vote: T&H 9-0
_________________________________________________________________
____
BILL SUMMARY: SB 447 would prohibit the California Housing
Finance Agency (CalHFA) from foreclosing on a mortgage
administered by the agency for the sole reason that the
homeowner is renting out the residence if all of the following
conditions are met:
The borrower is current on mortgage payments and has not
breached any other term of the mortgage except the renting of
the residence, as specified.
The borrower lived in the residence for at least one year
after the mortgage was executed.
No more than 4 percent of the total proceeds of the relevant
bond issuance are used to finance mortgages that are currently
used as rental properties.
The value of the residence securing the mortgage is less than
the debt on the residence.
_________________________________________________________________
____
Fiscal Impact (in thousands)
Major Provisions 2012-13 2013-14 2014-15 Fund
Foreclosure prohibitionAvoidance of up to $10,000 in
aggregateSpecial*
losses
Tax exempt status Potential risk of state exposure if
tax-exempt General
status is jeopardized (see staff
comments)
____________
* California Housing Finance Fund
_________________________________________________________________
____
STAFF COMMENTS:
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
SB 447 (DeSaulnier)
Page 1
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. The agency's
funding is not subject to Budget Act appropriation. Currently,
the agency has roughly 23,000 loans in its single-family housing
portfolio. Federal law relating to CalHFA's tax-exempt bonds
requires that bond proceeds be used for the purchase of
owner-occupied homes, although Internal Revenue Code rules allow
for a diminimus exception. 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, and there have been
varying opinions from bond counsel on this point.
As a result of increasing requests to rent out property due to
the drop in home values, CalHFA has established policies to
allow the rental of agency-financed homes in certain hardship
circumstances. The revised policy prohibits rentals unless the
borrower can document certain involuntary financial hardships,
such as reductions in income or increases in expenses,
involuntary job transfer or military posting, or increased
mortgage payments associated with loan products that allow for
limited-term interest only payments. CalHFA allows borrowers
who meet specified criteria to rent out a home 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 outstanding loans issued
under the relevant bond indenture, which ensures the retention
of the tax-exempt status of the revenue bonds used to finance
the mortgages.
According to an October 2011 report by the Senate Office of
Oversight and Outcomes (SOOO) that highlights CalHFA foreclosure
activity (Good Deeds Punished: State-Run Mortgage Lender
Forecloses on Californians Current on Their Loans), the agency
has foreclosed on 21 of its 23,000 loans for violations of the
owner-occupancy clause. The report also notes that there are
currently 147 loans that have been issued waivers, another 49
borrowers who rented out residences and face foreclosure because
they are currently delinquent on their mortgages, and an
additional 186 borrowers who are renting their homes without
permission from the agency. CalHFA has recently suspended any
new foreclosure actions related to non-monetary default (e.g.
unauthorized renting) until its board can discuss the matter at
SB 447 (DeSaulnier)
Page 2
its January meeting.
SB 447 would prohibit 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.
The value of the residence securing the mortgage is less than
the debt on the residence.
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. Staff notes that by
prohibiting the foreclosure on 186 properties currently being
rented in violation of owner-occupancy rules, this bill could
avoid aggregate losses to CalHFA of approximately $10 million.
CalHFA staff note a concern that the provisions of the bill may
increase risk of jeopardizing the tax-exempt status of bond
issuances. There is currently no known instance in which the
Internal Revenue Service has determined that a state entity that
authorized the renting of properties purchased with tax-exempt
bonds is in violation of IRC requirements requiring
owner-occupancy. If this were to happen, however, the state
could be exposed to liability if it is determined that the
Legislature limited or altered agreements with bondholders.
Staff notes that the CalHFA Board of Directors will discuss a
change to their current policy allowing homeowners to rent out
their homes at their meeting scheduled for January 19, 2012.
The proposed changes to the policy are consistent with the
intent of SB 447, and approval of the changes may obviate the
need for this bill. Specifically, the proposed rental policy
SB 447 (DeSaulnier)
Page 3
for CalHFA loans would allow for rental of a property if the
borrower meets the following conditions:
As required by Internal Revenue Code section 143, the borrower
had a reasonable expectation that the home would be his or her
principal residence at loan origination.
CalHFA will permit borrowers to rent their property financed
with a CalHFA mortgage for a period of no more than 12 months,
with the potential for renewal on a case by case basis.
The borrower's loan balance must be greater than the fair
market value of the property as a predicate to consideration
for rental permission.
The borrower is current on his or her mortgage payments.
The borrower lived in the home for at least one year after
obtaining the mortgage.
The borrower demonstrates, through a standard set of income
and expense questions supported by documentation, that he/she
is capable of meeting the obligations of both his/her new
housing expenses and the pre-existing CalHFA mortgage payment.
The borrower shall submit a list with complete addresses of
all real property the borrower owns.
The borrower shall execute an affidavit stating that, when
feasible, the borrower will reoccupy the CalHFA-financed
property as his/her primary residence. The borrower shall also
declare that he/she did not obtain the CalHFA-financed
property for investment purposes.