Shutterstock

This November, California voters will decide whether to establish a second-mortgage program to help eligible middle-income homebuyers purchase qualifying homes.

Proposition (Prop 37), the Second Mortgage Homebuyer Program and Revenue Bond Initiative, would create the program to expand homeownership opportunities for middle-income Californians. It would be financed through $25 million in bonds issued by the California Housing Finance Agency. (CalHFA).

Prop 37 would require qualified buyers to meet specific conditions outlined in the measure.

Buyers would be required to have been California residents for at least one year, agree to occupy and state the home as their primary residence within 60 days of closing, hold an income that is at or below 200% of the area’s median income for a similar-sized family in the city or county where the qualified home is located and provide a down payment that is at least 3% of the total purchase price of the qualified home.

Under the initiative, a “qualified home” could be a newly built single-family home, townhome, row house or condominium. It could also be a residence in a former nonresidential building converted for residential use.

In each case, the borrower must be the property’s first purchaser.

Supporters say Prop 37, also known as the Middle-Class Homeownership and Family Home Construction Act, would make homeownership more attainable for middle-income families while encouraging the construction of new housing.

“I wanted to create something that would support the building of, and therefore supply, more middle-class housing. We need to increase supply. Because these subsidy programs, most of them, just end up increasing the cost of housing,” former Senate Majority Leader and Assembly Speaker Robert Hertzberg said.

“You wind up buying your grandma’s house with bad pipes and a leaky roof, and then you’re stuck with all those expenses. The subsidies raise prices, but they don’t add supply,” Hertzberg added. “And lately, everything has been focused on affordable rental housing. This is about ownership. Because, as I always say, home is where the wealth is.”

Pete Rodriguez, second general vice president of the United Brotherhood of Carpenters and Joiners of America, made a similar argument.

“The home affordability crisis has put homeownership out of reach for too many working families. That’s why Union Carpenters strongly support the California Middle-Class Homeownership and Family Home Construction Act,” said Rodriguez. “The ballot measure makes home ownership more affordable with low-interest down payment assistance loans and encourages new home construction, creating good-paying jobs and homeownership opportunities for California’s working families.”

Prop 37 would cap second-mortgage loans at 17% of a home’s purchase price. Buyers would be required to finance the remaining cost from a first mortgage.

CalHFA would oversee the repayment of the bonds used to fund the second mortgages. The agency would set loan interest rates and terms sufficient to cover bond interest and the program’s administrative costs. It would also contract with one or more lenders to operate and support the program.

CalHFA would establish lending standards, including loan limits, minimum credit scores or other methods of verifying creditworthiness, and debt-to-income requirements.

Prop 37 qualified for the ballot as a voter-initiated state statute, meaning supporters drafted the proposal and collected enough voter signatures to place it before voters. On June 29, Secretary of State Shirley N. Weber assigned the proposition number and announced that it had qualified for the November ballot.

Supporters include state Controller Malia Cohen, Treasurer Fiona Ma and Democratic gubernatorial nominee Xavier Becerra. Former gubernatorial candidates Matt Mahan, Katie Porter, Tony Thurmond and Antonio Villaraigosa also back the measure.

Hertzberg and former Senate President pro Tempore and Sacramento Mayor Darrell Steinberg, both Democrats, have also advocated for the measure.

Other supporters include the California Democratic Party, Northern California Carpenters Regional Council, United Brotherhood of Carpenters and Joiners of America, Western States Regional Council of Carpenters and California Association of Realtors.

Reform California opposes Prop 37, citing concerns about taxpayer risk, government subsidies, housing costs, expensive developments and potential political favoritism.

“Prop 37 makes the State of California one of the biggest mortgage lenders in America overnight and taxpayers are left holding the bag for any losses. Many of the boondoggle projects supported by this bond will cost more than $1M per unit. Campaign contributors to politicians also get special contracts under Prop 37,” the organization said.

The California Budget & Policy Center, a nonpartisan research organization that does not endorse or oppose ballot measures, has raised concerns about the proposal.

One concern is the second mortgage itself. Unlike some existing CalHFA programs that use deferred loans, Proposition 37 assistance would likely require homeowners to make monthly payments. The Budget Center says those payments could reduce the benefit of reaching a 20% down payment and avoiding private mortgage insurance. It also notes that the second mortgage could carry a higher interest rate because it would represent greater risk to investors.

The Budget Center questions the program’s broad income eligibility. Households earning up to 200% of area median income could qualify, while buyers would still need to provide at least 3% of the purchase price. On a $500,000 home, that would mean $15,000 upfront.

The organization also notes that Proposition 37 does not require recipients to be first-time or first-generation homebuyers, raising questions about whether the program would reach Californians facing the greatest barriers to homeownership.

A “yes” vote would establish the second-mortgage homebuyer program for homes that meet CalHFA’s eligibility standards and authorize the agency to issue up to $25 million in bonds to finance it.

A “no” vote would reject the proposed second-mortgage homebuyer program.

Article Written By: Austin Gage

Note:  Edward Henderson contributed research used in this article.