Lawmakers and advocates have made many attempts recently to address the affordability crisis that pervades the housing market—some more impactful than others. Legislative bodies have enacted laws addressing private listings, while President Donald Trump recently signed an executive order aimed at cutting costs for title and mortgage insurance and manufactured housing.
In tomorrow’s general election, California voters will vote on a meaningful and unique new measure that essentially allows first-time buyers to borrow the bulk of their down payment, theoretically removing a big barrier to homeownership (with several caveats).
California Proposition 37—or the Second Mortgage Homebuyer Program and Revenue Bond Initiative—would create an assistance program for first-time homebuyers, offering them loans that could cover up to 17% of a home’s purchase price, meaning a buyer only needs to put 3% down to reach the 20% threshold needed to avoid mortgage insurance.
One of the primary sponsors of the initiative, former California Senate Majority Leader and Assembly Speaker Bob Hertzberg spoke with RISMedia and desired for more California residents to achieve homeownership.
“We’re really underhoused in California, so much of the focus has been on subsidized tax supported rental housing. I don’t take that away for a second, but we haven’t done a really good job at making sure that middle-class folks—the missing middle—are able to buy a house,” he says.
Propping up homebuyers
The initiative would authorize the California Housing Finance Agency (CalHFA) to issue up to $25 billion in bonds to offer secondary mortgage loans for down payments, to eligible buyers.
To qualify for the program, applicants must have been residents of California for at least one year, agree to occupy the home as a primary residence within 60 days of closing, fall under the middle-income buyer threshold and provide a down payment of no less than 3% of the purchase price of the qualified homes.
The proposition is aimed at “middle-income buyers,” or buyers who have an income at or below 200% of the area median income.
A qualified home includes any “newly constructed homes, townhouses, row houses, condominiums, or manufactured homes, or a condominium or other residence in a nonresidential building repurposed for residential use, where the borrower is the first purchaser,” according to the proposition.
Within these limitations, the program theoretically allows buyers to put down much less while still getting the keys (the 3% down payment still comes out to around $17,000 for a median-priced new home in the state).
As for the $25 billion in bonds, Hertzberg emphasizes that funding does not rely on taxpayer wallets, but rather investors. What’s more, the bonds will be recycled continuously.
“The bottom line is, it’s evergreen. Evergreen means that it’s not over. When you pay off the loan, it’s evergreen and the money goes back out to somebody else,” Hertzberg notes. “Thirty years from now when all these initial loans are paid off, there’ll be brand new loans. We hired a professor from UCLA who analyzed it and said that it’ll raise $150 billion in new construction and 190,000 new homes.”
Michael Lane—state policy director at the San Francisco Bay Area Planning and Urban Research Association (SPUR)—approves the initiative because it focuses on new homes.
“There are some programs the state has implemented which are just down payment assistance programs without creating new housing,” he asserts. “You’re actually just creating—with those programs—more demand for the existing housing stock, which means more competition which will also boost prices. We think it’s important for this to focus on new construction as well as the down payment assistance.”
Within the proposition, a “secondary mortgage” is a somewhat unique concept. In this case, a secondary mortgage refers to the loan offered to qualified homebuyers, of which goes toward a home’s down payment.
“This is different from a second mortgage,” David Garcia, deputy director of Policy at the Terner Center for Housing Innovation UC Berkeley, stated.
A website made by supporters of the proposition contains a tool that allows voters to view median home price by each county in California, and uses data provided by the California Association of Realtors®.
The Golden State
As with many coastal states, California has a divided housing market. According to the latest data, California metros were not immune to the effects of elevated mortgage rates, as pending home sales fell even in high activity cities such as San Francisco and San Jose.
Construction has fared no better, as the latest report from The Department of Housing and Urban Development (HUD) and the Census Bureau shows that housing starts in the West are down over 23% monthly, and down 25% from the previous year.
In that context, Proposition 37 is particularly relevant as the state seeks to sustainably increase housing that is affordable in a market that is both land constrained and highly regulated.
“We’re also focused on construction defect liability reform and liquidated damages for condominiums in California,” Lane notes. “We’re at a disadvantage compared to other states; it makes it more risky to build condominiums here. That’s why we don’t produce very many—about 3,000 developments of five units or more—compared to other states and nations which do 10 times that amount with lesser populations.”
Homebuilders cite global tensions and labor shortages for faltering construction rates. Although the conclusion of each year typically ushers in a slowdown in housing activity, the latest data for new-home sales showcases further deceleration, likely caused by high mortgage rates and economic unease.
The Terner Center for Housing Innovation at UC Berkeley does not take positions on bills or legislation. But Garcia does note that the initiative may encourage more than buyers.
“By limiting the use of funds to newly built housing, it also may act as an incentive for builders to build more homes that are for sale,” he says.
Although his focus is on housing in Sacramento, Lane points out that California’s homeownership rates leave much to be desired.
“We have one of the lowest homeownership rates in the nation here in California because of our high housing costs and the median home price of over $800,000; it makes it very difficult for working families to scrape together the 20% down payment,” he notes.
Notably, California is one of only a few states where new homes are cheaper than existing homes, making Proposition 37 potentially more powerful at addressing affordability.
Lane also believes that more changes to California’s housing market will come, specifically by drawing investors and builders to the state.
“We’ve been working on this issue for decades and will continue to do so; there’s always more to do,” Lane says. “In California, the cost of construction and the rules for project approvals can make it very difficult and time-consuming. That’s why investors oftentimes look for other opportunities rather than investing in housing in California. We’ll continue to make it more business-friendly and friendly for housing construction.”
With five years’ worth of work nearing its climax, Hertzberg states that his goal with Prop 37 is to encourage the supply of affordable homes, in the hopes of addressing California’s low homeownership rates.
“It’s the simplest rule in economics, supply and demand,” he adds. “You get more supply, it works better. People can say all the arguments they want to make, but we don’t have enough middle-class housing.”
Battle of the ballot
Despite his retirement, Hertzberg noted that he’s met with a handful of opposing groups, but states that many arguments against the initiative have not “done their homework.”
The League of Women Voters in California (LWV) declined to speak with RISMedia on the proposition, but they are opposed to it. The group’s argument is that the proposition essentially adds a second mortgage for buyers to repay, alongside their primary mortgage, each month.
“The program could reinforce racial and economic gaps instead of targeting families facing the greatest barriers,” the LWV’s voting recommendations state. “Generations of housing discrimination have left many Black and Latino families with less wealth to draw on, but Prop 37 gives no priority to first-time or first-generation buyers and does not exclude current or former homeowners. Households earning up to twice the area median income could qualify, including some earning more than $300,000 a year, while buyers would still have to provide at least 3% of the home price.”
The LWV also stated that voters would not know the interest rate, loan term or monthly payment amount prior to the program’s approval. Essentially, the LWV argues that the program would put homeowners in more debt.
Hertzberg rejected these notions, responding that the group’s arguments are “ridiculous” and that with purchase money security interest (PMSI), the only players to take a loss should there be a significant downturn in home prices are the banks and bondholders.
“PMSI means that there is no liability,” Hertzberg claims. “Assume we had a downturn, where a home’s value drops significantly. The bank and the bondholders take the loss. The only thing that the buyer loses if they buy a house for $900,000, is $30,000. There’s no downside risk beyond losing your down payment.”
He also emphasizes the safeguards the initiative includes, in reference to the 2008 financial crisis that rocked the world.
“People in 2008 had variable-rate mortgages. Their mortgage went from $1,200 to $2,400, and they couldn’t afford it. These down payment loans are fixed-rate mortgages. For renters, I promise you this much: In 10 years your rent’s going up. That doesn’t happen in a fixed-rate mortgage,” Hertzberg stresses.
While it may not be the optimal option for all first-time homebuyers, Garcia does acknowledge that some buyers in California may find use out of the program.
“I think it’s useful in a circumstance where a homebuyer or family has the income to cover the payments for both a first and second mortgage, but don’t have the liquidity,” he says. “It’s just an alternative pathway for individuals who just don’t have a lot of cash on hand to afford homeownership.”
