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CalHFA Foreclosing on Rentals

LOS ANGELES — Afraid of jeopardizing its tax-exempt bond status, the California Housing Finance Agency has been foreclosing on homeowners who are renting out homes financed by the agency — even if they are current on their mortgages, according to a report by the state Senate Office of Oversight and Outcomes.

Senate President pro tempore Darrell Steinberg, D-Sacramento, and Sen. Mark DeSaulnier, D-Concord, sent a letter to CalHFA director Claudia Cappio on Monday asking that the agency stop forcing foreclosure on borrowers that remain current on their mortgage payments, even though they may technically be violating the agency’s strict owner-occupancy policy.

“At a time when we’re urging banks and other corporate lenders to work out compromises with homeowners struggling to stay in their homes, it seems absurd that CalHFA is taking such a hard line on borrowers who stay current on their loans,” Steinberg said in a statement.

Founded in 1975, CalHFA offers low-interest loans to first-time homebuyers and encourages the development of affordable rental housing.

“CalHFA’s mission is to provide affordable housing,” Steinberg said. “By not being flexible in its owner-occupancy policy, CalHFA is hurting its own clients while putting unnecessary strain on its own reserves.”

Under an Internal Revenue Service policy, people who finance their homes through CalHFA are not allowed to rent them out without receiving a waiver from the agency.

Prior to the current severe housing downturn, when people who had purchased homes with agency mortgages needed to move, they were able to sell their houses and pay off their mortgages as their families grew.

But now, homeowners, either unable to sell because of a stagnant market or because they are underwater on their loan, have been renting out the homes, sometimes without receiving approval from the agency.

CalHFA has been cracking down on such people, the Senate report said, creating hardships for those people while hurting the agency’s own bottom line. According to the report, 189 homeowners are renting out their CalHFA-financed homes without permission.

Of that number, the agency has foreclosed on at least 21 borrowers who were violating the requirement that a borrower occupy the home for the life of the mortgage, the report states.

Another 49 borrowers who rented out their residences are delinquent, and likely headed for foreclosure.

CalHFA grants waivers for homeowners to rent their homes if they have experienced a hardship such as loss of a job, medical problem, aging parents, job relocation or military service transfer, according to Bruce Gilbertson, the agency’s director of financing.

“We have reviewed the policy twice over the past two years and made changes,” he said.

John Hill, the Senate report’s author, provided several vignettes in his report describing the life changes that led to homeowner decisions to rent out their homes. Most involved people whose families had grown, making their current home a tight fit. In a normal housing market, such people might not engender sympathy or need a waiver.

In the report, Marcia Wold, a Mountain View school teacher, describes buying a 724-square-foot Sunnyvale condo with a CalHFA loan. The home was large enough until she married. But it was a tight squeeze for Wold, her husband and his five-year-old child.

Unable to sell, the couple made the decision to rent the condo out. Even with a renter, she was still losing $1,000 a month, but she was determined to keep paying.

CalHFA found out she was renting and foreclosed.

“They took away a part of me, because I worked so hard for it,” Wold was quoted as saying in the report. “This represented that I had made it. And they took that away from me.”

The agency also denied Wold’s request to forego reporting the technical default to credit reporting agencies, and her credit rating dropped from 802 to 679.

In addition to creating a bad situation for the people the agency was designed to help, its actions are also a money-losing proposition, Hill said.

Each foreclosure translates into $38,000 in uninsured losses for the agency, according to the report. Now that two CalHFA insurance funds have been wiped out by foreclosures, each new default costs more than $50,000 in uninsured losses, the report states.

“If housing agencies in other states can find a way to allow these home loans to continue, CalHFA should as well,” DeSaulnier said in a statement. “For a California state agency to force these homeowners into foreclosure is especially troubling.”

The agency’s policy, crafted on the advice of bond counsel, was designed to insure that CalHFA complied with IRS guidelines on how the bond proceeds were to be used, to not endanger its bonds’ tax-exempt status, Hill said.

The guidelines were intended to prevent speculators from using money aimed at providing people with affordable homes to set themselves up as landlords, he said.

The IRS dictates that “a residence must be one that may be reasonably expected to become the principal residence of the mortgagor within a reasonable time after the financing is provided,” the Senate report states. A residence may not be used as “an investment property.”

Of the 20 states surveyed in the report, only California, Nevada and Georgia housing finance agencies have taken a hard line regarding the issue of homeowners renting out agency-financed homes. Those three states only give borrowers the option of moving back in, repaying the loan in full, or facing foreclosure.

Two of those states, California and Nevada, share the same bond counsel, Orrick, Herrington & Sutcliffe LLP, Hill noted.

Justin Cooper, co-chair of Orrick’s housing finance group, refused to comment on what guidance his law firm has given the state agency.

Hawkins, Delafield & Wood LLP, another CalHFA bond counsel, interprets the IRS code to mean that the homeowner demonstrated good faith by occupying the home for a reasonable amount of time, Hill said.

Dan Fuss, a partner at Hawkins Delafield’s New York office who represents CalHFA for his firm, could not be reached for comment.

With even its own bond counsel having offered differing opinions, CalHFA has asked the IRS for further clarification, but has not received a response, according to Gilbertson.

Bond counsel in other states have interpreted the law as saying that the homeowners must make the home his or her primary residence by moving in within a reasonable amount of time, as opposed to requiring the homeowner to stay in the home for the life of the mortgage, Hill said.

Most of the 20 states that Hill contacted for his report had much more lenient policies, he said.

“Florida, which like California has been hit hard by the housing downturn, allows renting on a case-by-case basis if an appraisal shows that the mortgage is underwater,” his report states. “Washington does not foreclose on any borrowers who rent. New York allows renting if the mortgage is underwater regardless of the reason the borrower is moving out. It could be something as simple as the homeowners having a child.”

CalHFA officials have decided to take another look at the policy, Gilbertson said. The board has been asked to review the issues at its regular meeting in January to decide if a different policy should be adopted.

“I think it’s worth it for them to at least revisit the policy, based on what is in the report,” said Mark Hedlund, the Senate president’s communications director. “They could do what other states are doing and be more flexible. We think they have more flexibility than what they are showing now.”

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