California Proposed Funding for Homeownership

Billing Dollars of Taxpayer Funds to be Invested in Down Payments

Under a proposal circulating in Sacramento, homebuyers will no longer need to rely on “mom and dad” nor borrow from their 401(k) Plan!  California Legislators are proposing to let taxpayers undertake the role of generous parents and wealthy relatives.  Under a recent proposal, a multi-billion-dollar fund would be created and launched within the latest state budget.  The funding would provide first-time buyers either all of the money they need for a down payment or very close to it, depending upon qualifications, and in exchange, the new homebuyers would make California their partner by giving up partial ownership stakes in their properties.

The proposal is being put forward by state Senate President Pro Tem, Toni Atkins, to encourage homeownership despite California’s ever-increasing property values, and to broaden and extend home ownership to those who rent in California and could not otherwise afford to buy a property without assistance.

According to a recent the American Community Survey, California’s rate of home ownership is at just 56%, and is second lowest in the U.S. behind New York.  The proposed fund could possibly extend the American Dream to more Californians, while at the same time placing the state at risk of loss of the equity invested by taxpayers.

To fund the scheme, California would issue revenue bonds in the amount of $1 billion each year for 10 years to create the fund, and California’s taxpayers will “foot” the bill!  The proposal also includes $50 million in the budget for the current year, and $150 million per year thereafter to pay for the administrative costs of the program and the interest costs of the revenue bonds.  The plan targets assisting about 7,700 homebuyers each year. 

The details of the program, including start dates, are still being negotiated.  However, if ultimately approved, the plan would be to issue interest-free, second mortgage loans covering up to 30% of a home’s purchase price, though lawmakers expect many of the loans would cover 27% and borrowers would be required to put up 3% of their own money or pair the loan with other first-time buyer programs.  The interest-free loans would be paid back into a state fund whenever the home was sold, or at such time a bigger mortgage was acquired in a cash-out refinancing.

So long as home prices continue to rise in California, the scheme could eventually pay-off for the state, and hopefully the proposal would generate sufficient returns for the state to help future homebuyers.  If prices fall, homeowners might still gain some equity and the fund would absorb the losses.  As with most programs like this, taxpayers need to beware of the unintended consequences.