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Redevelopment Agencies May Step Into Subprime Mortgage Mess

Mar 31, 2008
Do ya think that the California redevelopment crowd might be a little nervous?

It sure seems that way, and here's why:

Under a state law passed in 1993, some of the oldest redevelopment project areas will have to start going out of business next year.

The state has a $16 billion budget deficit and the state's finance wonks are eyeing redevelopment's tax increment money the property tax revenues generated inside redevelopment project areas.

Proposition 98, which would put the brakes on eminent domain, is on the June ballot. The redevelopment folks are spending a lot of time campaigning against the measure.

On top of everything else, redevelopment agencies have to solve the subprime mortgage crisis too?

That last one is a maybe. But redevelopment officials are working with legislative leaders on an approach that might help homeowners at risk, and also convert some of the housing units caught up in the subprime crisis into affordable housing.

That was the word last week from the California Redevelopment Association conference in Anaheim.

A quarter of all troubled subprime loans are in California, as CP&DR Senior Editor Morris Newman pointed out during a panel discussion on the housing crisis. And redevelopment agencies are government organizations that are in the real estate business and understand housing finance. They have a bunch of money to throw at the problem almost $2 billion in unspent housing set-aside money, according to the latest estimates. ("Housing set-aside" money is the 20% of all tax increment funds that redevelopment agencies must typically set aside for affordable housing.)

And redevelopment agencies maybe actually have skin in the game, because the subprime crisis is hollowing out many poor and working-class neighborhoods where redevelopment agencies operate.

So the redevelopment establishment has been working with Speaker Fabian Nunez and others in the Legislature to craft a bill that would give redevelopment agencies a role in the subprime bailout. The ideas being kicked around would actually allow redevelopment agencies to do what other real estate investors do pick up mortgages and property cheap in a crisis and then place affordability covenants on the properties involved.

At the CRA conference panel, Jim Kennedy, director of the Contra Costa County Redevelopment Agency, and John Shirey, head of the California Redevelopment Association, outlined AB 2594, sponsored by Nunez and Gene Mullin, D-South San Francisco. They said redevelopment agencies are likely to focus on two things:

Pre-foreclosure assistance, where agencies might acquire mortgages or make low-interest loans to homeowners at risk in exchange for long-term affordability covenants

Post-foreclosure acquisition, where agencies might purchase bank repos and convert them into affordable units.

One big question is whether agencies might be able to use money other than the 20% housing set-aside money funds that must by law be used inside project areas to purchase foreclosed homes outside project areas. Lisa Stipkovich, executive director of the Anaheim Redevelopment Agency, said this is an issue because the subprime crisis affects not only poor neighborhoods inside project areas, but many brand-new subdivisions.

A lot of redevelopment folks seemed nervous that if the bill passes, it will mandate that redevelopment agencies assist in the subprime bailout. Shirley insisted that the CRA's position is that the bill will create a voluntary role with maximum local flexibility. But the bill may also be insurance against a state raid on redevelopment money. After all, how can the state balance its budget on the backs of the redevelopment agencies when the redevelopment agencies are bailing out homeowners?

Bill Fulton
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