BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 447|
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THIRD READING
Bill No: SB 447
Author: DeSaulnier (D)
Amended: 1/11/12
Vote: 21
SENATE TRANSPORTATION & HOUSING COMMITTEE : 9-0, 1/10/12
AYES: DeSaulnier, Gaines, Harman, Huff, Kehoe, Lowenthal,
Pavley, Rubio, Simitian
SENATE APPROPRIATIONS COMMITTEE : 7-0, 1/17/12
AYES: Kehoe, Alquist, Emmerson, Lieu, Pavley, Price,
Steinberg
NO VOTE RECORDED: Walters, Runner
SUBJECT : California Housing Finance Agency
SOURCE : Author
DIGEST : 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
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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:
1.Reduction in income because of reduced hours, pay cuts,
or a new job.
2.An involuntary increase in living expenses or medical
costs.
3.An involuntary job transfer, including a military
posting, with a possible return in one year.
4.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
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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:
1.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.
2.The borrower lived in the home for at least one year
after obtaining the mortgage.
3.No more than four percent of the proceeds of the relevant
bond issuance are associated with rented properties.
4.The value of the residence securing the mortgage is less
than the aggregate amount of debt on the residence.
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.
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.
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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.
Comments
According to the author's office, 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 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2012-13 2013-14
2014-15 Fund
Foreclosure prohibition
Avoidance of up to $10,000 in aggregate
Special*
losses
Tax exempt status Potential risk of state exposure if
tax-exempt General
status is jeopardized
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* California Housing Finance Fund
JJA:nl 1/18/12 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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