BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 984
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: chau
VERSION: 5/28/13
Analysis by: Mark Stivers FISCAL: yes
Hearing date: June 4, 2013 URGENCY: YES
SUBJECT:
California Housing Finance Agency
DESCRIPTION:
This bill makes a number of changes to the California Housing
Finance Agency's statutes.
ANALYSIS:
Established in 1975, the California Housing Finance Agency
(CalHFA) is the state's affordable housing bank. CalHFA issues
tax-exempt revenue 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 receive money from the state's
general fund, and its debts obligate only CalHFA itself, not the
State of California.
An 11-member board of directors, each of whom serves a six-year
term, governs CalHFA. The board members include the Treasurer;
the Secretary of Business, Consumer Services, and Housing; and
the Director of Housing and Community Development, or their
designees, as ex-officio members. In addition, the governor
appoints six members, and the Speaker of the Assembly and the
Senate Committee on Rules each appoint one member. The Director
of Finance, the Director of Planning and Research, and the
Executive Director of CalHFA serve as non-voting ex-officio
members of the board.
Current law requires the governor to select four of his
appointees from among the following categories:
An elected official of a city or county engaged in the
planning or implementation of a housing, housing assistance,
or housing rehabilitation program;
A person experienced in residential real estate, mortgage
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banking, or the commercial banking industry;
A person experienced in building residential housing;
A person experienced in organized labor in the residential
construction industry;
A person experienced in the management of rental or
cooperative housing occupied by lower-income households;
A person experienced in manufactured housing finance and
development; and
A person representing the public.
CalHFA's California Homebuyer's Downpayment Assistance Program
(CHDAP) offers to income-qualified first-time homebuyers a
deferred-payment subordinate loan (also known as a "silent
second mortgage") in the amount of three percent of the purchase
price or appraised value, whichever is less, for the buyer to
apply towards a downpayment or closing costs. Payments on this
loan are deferred, meaning that the homebuyer does not have to
make a payment on this second mortgage until the home is sold,
refinanced, or paid in full. This program allows a homebuyer to
afford a more expensive home than he or she would otherwise
qualify for.
The Federal Housing Administration (FHA) recently informed
CalHFA that California's statutory requirement for a CHDAP
borrower to repay the loan upon sale is prohibited for FHA loans
by FHA regulations.
CalHFA does not lend money directly to consumers. Instead,
CalHFA works through and uses approved private lenders to
qualify consumers and to make all mortgage loans, including
CHDAP loans. CalHFA then purchases closed loans that meet
CalHFA's requirements from these private lenders. In late 2012
the Federal Housing Administration (FHA) issued an interpretive
rule defining "prohibited sources" of downpayment assistance
under the federal Housing and Economic Recovery Act of 2008.
The new ruling states that "state and local government agencies
and instrumentalities can contribute funds, if they do so
directly, towards the minimum cash investment even if they are
otherwise involved in the transaction." FHA will apply this
rule to all loans closed after July 1, 2013. CalHFA currently
contributes CHDAP funds indirectly through the purchase of the
loans, not directly at the loan closing, and will not be able to
provide CHDAP loans to FHA borrowers after this date without
changing its legal authority and practice.
CalHFA currently participates in FHA's Energy Efficient Mortgage
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(EEM) Program, which helps homebuyers save money on utility
bills by enabling them to finance the cost of adding energy
efficiency features to new or existing housing as part of their
FHA insured mortgage. The program recognizes that reduced
utility expenses can permit a homeowner to pay a higher mortgage
to cover the cost of the energy improvements. The total cost of
the financed energy improvements may not exceed the total dollar
value of the energy that will be saved during the improvement's
useful life as determined by a Home Energy Rating Systems
report. In addition, the cost of the improvements that may be
financed may not exceed 5% of the property's value (not to
exceed $8,000) or $4,000, whichever is greater.
This bill makes a number of changes to the California Housing
Finance Agency's statutes. Specifically, it:
Adds the Secretary of Veterans Affairs and an additional
gubernatorial appointment to the CalHFA board.
Requires that one of the Governor's appointments have specific
knowledge of bonds and related financial instruments, interest
rate swaps, and risk management.
Provides that a CHDAP loan shall not be due and payable upon
sale of the home if FHA owns or insures the first mortgage
loan or if a repayment requirement is otherwise contrary to
HUD regulations governing FHA insured first mortgage loans.
Allows CalHFA to fund any second mortgage loan directly.
Allows CalHFA to make a grant to a homebuyer who is seeking a
CalHFA first mortgage under the FHA's EEM Program for the
purpose of making repairs or improvements to increase energy
efficiency in the home. CalHFA must fund the cost of the
program through revenues realized from the grantee's first
mortgage loan, or securities backed by it, except that CalHFA
may provide short term interim funding of the grant to
facilitate the transaction.
Contains an urgency clause that applies to all provisions of
the bill except for the provisions relating to CalHFA board
membership and board member qualifications.
COMMENTS:
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1.Purpose of the bill . According to the author, this bill will
implement the California State Auditor's recommendation to add
to the financial expertise to the CalHFA board. In addition,
the bill adds the Secretary of Veteran Affairs to the board to
increase coordination between CalHFA and the Department of
Veterans Affairs, which provides mortgage loans to veterans
through the CalVet Home Loan Program. The bill also seeks to
bring CalHFA's statutes regarding CHDAP into conformance with
recent federal policy changes and allow CalHFA to provide
grants for energy efficiency improvements over and above what
the EEM program currently provides.
2.Facilitating coordination of homeownership efforts . Like
CalHFA, the Department of Veterans Affairs (DVA) is a mortgage
lender through its Cal-Vet Farm and Home Loan Program. Adding
the Secretary of Veterans Affairs to the CalHFA board may
increase coordination of the state's two mortgage lending
entities. The secretary's presence may help each of the
entities educate the other about its products and practices
and reveal opportunities to coordinate on mortgage lending.
The secretary's presence is less likely, however, to promote
the development of supportive rental housing for homeless
veterans, which is arguably the largest service gap facing
veterans. Neither DVA nor CalHFA is in a good position to
serve homeless veterans. CalHFA's multifamily lending
requires debt service payments in order for CalHFA to repay
bondholders. Likewise, Cal-Vet's funding comes from bonds
that also must be repaid by program beneficiaries. Because
supportive housing rents do not even cover a development's
operating costs, supportive housing developments cannot pay
debt service.
3.Following up in part on auditor's report . CalHFA experienced
losses totaling $146 million and $189 million in fiscal years
2008-09 and 2009-10, respectively. These losses were a result
of the high delinquency rates on its single-family loans and
the amount of variable-rate debt that the agency had issued.
In 2010, the California State Auditor audited CalHFA to
determine the decisions and actions that contributed to these
losses and to examine CalHFA's future financial solvency. The
audit, among other things, recommended that the Legislature
amend CalHFA's statute to require that the board include
appointees with knowledge "of housing finance agencies,
single-family mortgage lending, bonds and related financial
instruments, interest-rate swaps and risk management."
Presumably, the auditor made this recommendation to reflect
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the complexity of the financial markets from which CalHFA
obtains funding and the significant impact that its financing
decisions can have on the agency's survival.
4.Directly funding CHDAP loans . The bill allows CalHFA to fund
second mortgages directly. While CalHFA needs this authority
to provide downpayment assistance associated with FHA loans,
the language is broader than that and allows CalHFA to fund
any second mortgage directly. Currently, 95% of CalHFA's
CHDAP loans go to FHA borrowers. CalHFA, however, has not
decided whether to directly fund all its CHDAP loans or just
the ones associated with FHA loans. The broader language
gives CalHFA the flexibility to make this decision in a manner
that is administratively simplest and least costly.
5.Allowing new buyers to assume CHDAP loans . This bill provides
that a CHDAP loan associated with an FHA first mortgage shall
be not due and payable upon sale of the home. In other words,
a new buyer may assume the CHDAP loan when the CHDAP borrower
sells the home. It is not clear how many new buyers may
choose to assume these loans. It would only make sense for
the new buyer if the interest rate on a new loan were higher
than the rate on the existing loan and the seller had equity
in the property. To the extent that new buyers do assume
CHDAP loans, it will result in a slower repayment, which may
affect CalHFA's ability to make new CHDAP loans. Absent this
legal change, however, CalHFA will be able to make very few
CHDAP loans because so many of their potential CHDAP borrowers
have FHA loans.
6.Energy Efficiency Mortgage Program . As CalHFA seeks to
rebuild its mortgage lending business, it looks to offer
products that are more attractive than those otherwise
available to homebuyers. Like other lenders, CalHFA currently
participates in FHA's EEM program to increase loan amounts to
pay for a limited amount of qualified energy efficiency
improvements. CalHFA would like to do its competitors one
better by offering grants to pay for energy efficiency
improvements over and above the amount the homebuyer may
finance through the EEM program. CalHFA intends to provide
grants to fund any remaining improvements recommended in the
property's Home Energy Rating Systems report. CalHFA further
intends to pay for the grants and program costs by increasing
interest rates on the first mortgages of program participants.
While CalHFA will have to front the grant money, ultimately
the borrowers will fully fund the program. Reflecting these
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intentions, the bill prohibits CalHFA from using bond proceeds
for this program and requires CalHFA to fund the cost of the
program through revenues realized from the grantee's first
mortgage loan, or securities backed by it, except that CalHFA
may provide short term interim funding of the grant to
facilitate the transaction.
7.Urgency clause . In order to allow CalHFA to continue offering
CHDAP loans to FHA borrowers after the FHA's policy on the
source of downpayment funds takes effect on July 1, and in
order to get the EEM grant program up and running, the bill
contains an urgency clause that applies to everything in the
bill except the CalHFA board provisions.
Assembly Votes:
Floor: 76-0
Appr: 17-0
H&CD: 7-0
POSITIONS: (Communicated to the committee before noon on
Wednesday, May 29,
2013.)
SUPPORT: None received.
OPPOSED: None received.