California treasurer's office tasked with new homebuyer support plan

California lawmakers have tasked the State Treasurer’s Office and housing finance agencies under its umbrella with making a dent in the state's housing crisis.

Assembly Bill 140, an urgency bill signed by Gov. Gavin Newsom that took effect on July 19, asks the office and other state agencies to create a first-time homebuyer’s program that provides part of the cost of the home.

The treasurer’s office has until April 1, 2022 to submit its proposal to the Legislature.

“We have been working on the idea of a G.I. bill for home ownership,” state Sen. Robert Hertzberg, D-Van Nuys, said Monday during an online panel at The Bond Buyer California Public Finance conference. “It would be a simple liquidity bond fund to offer people a silent second mortgage.”

The aim, he said, is “to create a society of homeowners.”

The original G.I. Bill, officially called the Servicemen's Readjustment Act of 1944, is best remembered for making college education available to returning veterans. But it also made low-interest mortgages available, for white veterans anyway.

The housing crisis and homelessness have been center stage in California politics and policy in recent years. The state and major cities and counties have approved and sold billions of dollars of bonds to fund housing. The California Housing Finance Agency, like its counterparts around the country, has long facilitated mortgages for low- to moderate-income borrowers.

But despite all these efforts, the number of homeless people is highly visible and studies say high housing costs are a significant driver in out-of-state migration, particularly among lower- and middle-income people.

“Younger Californians are priced out of housing,” State Treasurer Fiona Ma said in her keynote speech to the conference.

The average California home costs more than seven times the median income for 25 to 30-year-olds, she said.

The median income for all ages in California in 2020 was $87,100, according to the state’s Department of Housing and Community Development. California’s median home price of $808,890 in September represented a 13.5% increase from the $712,430 recorded in September 2020, according to the California Association of Realtors.

CAR’s 2022 forecast also predicted that housing affordability, or the percentage of people in the state who can afford to buy a home, will drop to 23% next year from a projected 26% in 2021.

“Assuming the pandemic situation can be kept under control next year, the cyclical effects from the latest economic downturn will wane, and a strong recovery will follow,” CAR Vice President and Chief Economist Jordan Levine said in a statement.

“However, structural challenges will reassert themselves as the normalization of the market continues. Demand for homes will continue to outstrip available supply as the economy improves, resulting in higher home prices and slightly lower sales in 2022,” Levine continued.

California saw a 6.8% increase in homelessness between 2019 and 2020, and a 16.2% increase between 2007 and 2020, according to a U.S. Department of Housing and Urban Development report. California, with about one-eighth of the U.S. population, accounted for more than half of all the unsheltered people in the country, according to the 2020 Annual Homelessness Assessment Report.

“Too many Californians find themselves overburdened with high housing costs, unemployment and limited pay,” Ma said. “We need to produce and develop housing that meets the needs of all Californians. Home ownership is still out of reach for many Californians.”

AB140 has provided the funding authority for the treasurer’s office to develop a financing program, Ma said. “It’s called the California Dream For All project. This is already underway and we plan to develop a report for the Legislature.

“The program would create a sponsor that would cover a significant portion of the cost for homebuyers in exchange for a partial ownership stake in the home,” Ma said. “This entity will hold a majority ownership in the home. This will be based on the homebuyer’s income level.”

The specific sources of funding for the California dream housing program have not been determined, and the legislation is vague, but Ma said it would not expose the state’s general fund to a loss.

The proposal calls for a financing mechanism where investors would team with homebuyers to purchase a home. The investor would share appreciation in the mortgage, pay a share to the lender, and then return the share price to the party making the investment.

The traditional 20% down payment is unrealistic “when home prices are increasing faster than the median income,” Ma said.

The concept would act like a silent second mortgage on the home, Ma said. When a homebuyer sells the home, the investor would not only get back what they invested, but a percentage of the appreciation in the home. The second mortgage is “silent,” because the homeowner would make no payments on the second mortgage; it would be repaid when the home is sold or refinanced.

It would combine patient capital with low-income homebuyer programs, Ma said. “It is intended to provide potential homebuyers, a maximum degree of choice.”

It’s a G.I. Bill for the middle class, Hertzberg said.

“One of the big issues we are facing in California is the housing issue,” Hertzberg said. “We are so focused on trying to solve every problem at once. We have a gigantic host of issues."

“The tightening of lending standards after the 2008 crash has created problems for would-be homebuyers, but the problem is particularly acute in California,” Ma said. “California needs a solution that accounts for the state’s unique problem set. We need a program that makes homeownership more affordable.”

The new homebuyer's program is one-part of a number of bills California lawmakers passed this year in response to the state's housing crisis.

Gov. Gavin Newsom signed 31 affordable housing bills in September to boost housing production across California, complementing a $22 billion housing affordability and homelessness package designed to spur more housing production, tackle barriers to construction and hold local governments accountable. They include bills designed to increase the number of housing units by limiting single-family zoning.

“The acute affordability crisis we are experiencing in California was decades in the making, and now we’re taking the necessary steps to fix it,” said Newsom at the bill signing in September held at an affordable housing development in Oakland.

The governor's office claims the $22 billion in funding will lead to the creation of over 84,000 new affordable homes for Californians, including over 44,000 new housing units and treatment beds for people exiting homelessness.

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