Prop. 37 would let the state borrow $25 billion for second mortgages on new homes; Bay Area price cap near $1.5 million

One of the less familiar measures on California's Nov. 3 ballot is a $25 billion bond that its author says would never touch taxpayer money. CalMatters published a guide to Proposition 37 on Tuesday, laying out how the down payment program would work and where analysts see risk.

How it would work

The California Housing Finance Agency would sell bonds to private investors and lend the proceeds to homebuyers as second mortgages. Buyers would still need a regular first mortgage, but the second loan could cover up to 17% of a home's value. CalMatters' example: on an $800,000 house, a 20% down payment of $160,000 would shrink to $24,000.

Repayments would flow back to the bondholders. Under the measure's text, investors rather than the state would absorb losses if borrowers default, though some analysts doubt lawmakers could resist pressure to step in during a wave of defaults.

Who could qualify

Households earning up to twice their county's typical income would be eligible, a range from about $116,000 in Imperial County to just over $410,000 in San Mateo County for a family of three. A Public Policy Institute of California analysis estimates that covers about 90% of renters.

The loans would apply only to newly built or newly converted homes bought by their first occupant, from builders who agree to the program's rules. The price cap is about $1 million in inland areas and up to about $1.5 million in Los Angeles, Orange County and the Bay Area.

Builders who sign on would also gain some protection from construction defect lawsuits if they fix problems to an owner's satisfaction.

The debate

Former Senate Majority Leader Bob Hertzberg, the measure's author, calls it an "elegant" fix for middle-income renters who cannot save a down payment. He says charitable foundations might buy the bonds at below-market rates, possibly as low as 3%, but he has not named any.

A study paid for by the Yes on 37 campaign estimated up to 190,000 homes could be built, a figure its author called the high end.

Opponents, including the League of Women Voters of California, worry the loans would mostly reach buyers who need help least. The Legislative Analyst's Office says it is unknown whether investors would buy the bonds, at what rate, or how many buyers would apply. Edward Pinto of the American Enterprise Institute said investors would likely want rates well above the 7% now charged on regular mortgages.

That matters for affordability. Even at 7%, the second loan could add about $1,000 a month, and PPIC found fewer than 40% of eligible renters could manage the payments on an entry-level home. At the top of the price range, fewer than half of 1% could.

Chris Hoene of the California Budget & Policy Center said he doubts the program would work as promised but sees limited downside: "It could still work, and if it doesn't work, the state's not really on the hook."

Sources

pleasantonweekly.com