Subsidized home loans déjà vu

JUNE 18, 2010


While listening to a housing and community development committee hearing this week,  a strange sense of déjà vu came over me.

Sen. Alan Lowenthal, D-Long Beach, presented SB 958, a bill designed to acquire the maximum federal funds available for low-income, first-time home buyer mortgage assistance subsidies. The déjà vu is in the obvious questions: Didn’t the state and country just experience a housing meltdown because of government subsidized, low-income mortgages? And isn’t the state still suffering from record foreclosures, short sales and tens of thousands of homeowners walking away from their houses because they are upside down and drowning in bad mortgages?

Lowenthal’s bill is titled the “Federal Housing Trust Fund” for a reason. Existing law already established the multi-family housing program under the Department of Housing and Community Development, as well as the CalHome Program, to provide grants and loans to enable low and very low-income households to become or remain homeowners. The bill would require the department to administer the federal funds. Up to 10 percent of the funds may be appropriated by the Legislature to CalHome “to assist very low-income, first-time homebuyers through the production, preservation, and rehabilitation of affordable homes or through down payment, closing cost, and mortgage assistance.” Or sometimes, all of the above.

During the committee hearing Wednesday, Lowenthal explained that the federal funds were available for low and extremely low-income households, first-time home buyers and for mortgage assistance. Lowenthal described the relationship between the agency and awards of trust funds as a “perfect fit.”

The bill language states that “at least 90% of the funds must be used for the production, preservation, rehabilitation, or operation of rental housing affordable to very low-income households (those earning 50% of area median income or less), and at least 75% of these funds must benefit extremely low-income households (those earning 30% of area median income or less) or households with incomes below the federal poverty line.”

SB 958 is rooted in HR 3221, the Housing and Economic Recovery Act of 2008,  signed into law in 2008 by President George W. Bush, which established the National Housing Trust Fund. This major housing legislation was enacted to reform and improve the regulation of Fannie Mae and Freddie Mac (government-sponsored enterprises), provide grants to states for use to increase and preserve the supply of rental housing, and increase homeownership for extremely low and very low income families — including homeless families — as well as to “strengthen neighborhoods hardest hit by the foreclosure crisis, enhance mortgage protection and disclosures, and maintain the availability of affordable home loans” (Department of Housing and Urban Development). HR 3221 is where the state funding comes from.

The language in every housing subsidy loan and grant program is the same. And Cal Home is no different: CalHome  enables low and very-low income households to “become or remain homeowners” through government subsidies referred to as “grants, loans and assistance.” The loans are used to help low-income, “first time” homeowners, defined by the state as someone who has not owned a home for three or more years. That’s like being a born-again virgin.

It’s difficult not to ask how those who qualify as low, and extremely-low income households, can even afford a house payment. But wait – there’s more.

The CalHome Program program has loan terms unheard of in the free market, and is perhaps demonstrative of why the government should never be in the business of business:

1) principal and interest payments shall be deferred for the term of the CalHome Program loan;

2) loans shall be repayable upon sale or transfer of the property, when the property ceases to be owner-occupied, or upon the CalHome Program loan maturity date.

CalHome has an interesting clause as well for applicants that cannot afford the payments: If it’s determined by the recipient that repayment of the CalHome Program loan at the maturity date, causes a hardship to the borrower, the recipient has two other options:

A) Amending the note and deed of trust to defer repayment of the amount due at loan maturity, that is the original principal and the accrued interest, for up to an additional 30 years (at 0 percent additional interest), this may be offered one time, or;

B) Converting the debt at loan maturity, that is the original principal balance and any accrued interest, to an amortized loan, repayable in 15 years at 0 percent additional interest. (terms of the loan here).

The housing development department plans on grabbing all of the federal money available, which is the primary purpose of Lowenthal’s bill. This is not unexpected, since state agencies count on receiving a large amount of annual funding from the federal government. What’s more, written into the funding availability notice, the housing department states that the intent of the CalHome program is to “increase homeownership, encourage neighborhood revitalization and sustainable development, and maximize the use of existing homes.” The CalHome program even offers grants and loans to non-profit developers.

The “revitalization” of neighborhoods through government subsidies has already proven to be a financially dangerous and unstable approach. Peter Wallison and Charles Calomiris, both scholars at The American Enterprise Institute, wrote in The Wall Street Journal in September 2008, “Fannie Mae and Freddie Mac had committed to increased financing of “affordable housing” in order to curry support with congress. They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total government sponsored enterprise exposure, eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.”

Russell Roberts, a scholar with the Mercatus Center and Professor of Economics at George Mason University, gave perspective in another Journal column: “While Fannie and Freddie and the Community Reinvestment Act were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.”

The State Income Limits are based on median income by county, and appear to loosely accept from 30 percent to 50 percent of the median income as qualification for a grant and/or loan. The median income for Los Angeles County is $63,000, Sacramento County is $73,100 and Imperial County is $56,300, based on a June 17, 2010 report from the housing department. The number of persons in the household lowers the required percentage of median income, and in most cases, actually increases the allowable income to well above median, based on the HUD section 8 housing choice voucher program.

The March 2010 Contra Costa Times story “Program helps first-time homebuyers” promotes the CalHome program, advertising that there was still $480,000 available to help other first-time home buyers in the county. An annual income of $66,250 was used as the example in the story for loan qualification for a family of four. The story stressed that the program loan does not require any payments until the home is sold or refinanced, or after 30 years from the purchase.

The CalHome communications director did not return two calls for comment for this story.

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