Foreclosures May Become Redevelopment Agencies' Concern

Redevelopment agencies may soon have authority to assist homeowners with subprime loans who are facing foreclosure, and to acquire foreclosed housing.

Under a measure likely to pass the Legislature, redevelopment agencies could aid homeowners, lenders and developers whether or not the subject property is within a redevelopment project area. However, a late amendment to the bill would prevent agencies from using their 20% housing set-aside fund for the activities.

Assembly Bill 2594 by Assemblyman Gene Mullin (D-South San Francisco) would permit redevelopment agencies to enter the foreclosure and subprime mortgage mess. The measure passed the Assembly in May and survived the state Senate Transportation and Housing Committee in late June before heading to the Senate floor. But the only way that Mullin and the California Redevelopment Association (CRA), the bill's sponsor, could get the bill out of that committee was to a delete a provision allowing redevelopment agencies to spend their 20% housing set-aside funds for foreclosure-related activities. Instead, the bill permits redevelopment agencies to use only the "other" 80% of funds that are normally dedicated to infrastructure, economic development and activities that generate tax increment.

"It's not a minor amendment," said John Shirey, executive director of the CRA. He predicted that preventing redevelopment agencies from using housing funds for foreclosure-related activities would "greatly reduce the likelihood" that local government will get involved directly.

Still, the bill does authorize redevelopment agencies to make new loans, buy out subprime mortgages and acquire foreclosed units anywhere within the local jurisdiction. Approval in the state Senate appears likely, with a vote coming in August. The governor's position on AB 2594 is unknown.

With the subprime mortgage mess reaching new heights, state lawmakers introduced a number of bills in January and February to address the issue through direct government intervention or regulation of the mortgage industry. With hundreds of thousands of California homeowners facing foreclosure, many people assumed at least some pieces of legislation would pass easily. But that has not happened. For example, a five-bill package that sought to tighten lending practices died in the Senate Banking, Finance and Insurance Committee, where members said federal regulators and the private market could take care of the situation.

The Mullin bill was another one that appeared on the surface as if it would sail through the Legislature. Foreclosures have hit both Democratic and Republican districts. Plus the bill is permissive — it does not mandate that local government officials do anything. The measure passed the Assembly in May on a 49-23 vote, with all but one of the opposing votes cast by Republicans.

The bill then went to the Senate, where it faced more Republican resistance — the caucus has recommended a "no" vote, saying that government intervention is not necessary — as well as opposition from affordable housing advocates, who argued against spending low/mod housing funds on foreclosures.

The CRA's Shirey was among the people surprised at the level of opposition. "I have to admit to some frustration over this issue because we initiated this bill at the request of the Democratic leadership," Shirey said. "This crisis is not over by a long shot. I just don't sense any urgency to do something about the problem."

For cities and counties, the problem is this: Foreclosed houses are accumulating and becoming blighting influences. Oftentimes, the houses sit vacant. They quickly deteriorate and attract "broken window" problems that can drag down a neighborhood — the sort of problems that redevelopment agencies are often charged with solving after the fact. A number of cities have increased their code enforcement efforts to force the property owner, usually a bank or investor, to maintain a house and its landscaping. But a better solution may be to have people living in the house. That's where the Mullin bill comes in.

The measure includes a number of provisions:

• The bill authorizes redevelopment agencies to use non-housing funds to provide pre-foreclosure assistance to homeowners by acquiring, assuming or refinancing mortgages or making new loans to homeowners.
• Assistance would be limited to homeowners with subprime and non-traditional mortgages, terms which the bill defines.
• Because only non-housing funds may be used, homeowners with incomes of up to 150% (rather than the low/mod limit of 120%) of median income are eligible for assistance.
• No affordability covenants are required to be placed on assisted properties.
• Agencies may help lenders or developers purchase for-sale vacant homes that have been foreclosed so that the units may be rented or sold.
• Agencies may acquire and manage foreclosed units themselves.
• Agencies may provide counseling to homeowners in financial difficulty.
• The bill contains a January 1, 2013, sunset date.

Mullin and the CRA argued that agencies should be able to use a portion of the 20% of revenues required by law to be spent on housing for low- and moderate-income families.

 "We are clearly in a mortgage crisis," Mullin told the Senate Transportation and Housing Committee. "This is a pro-active measure to attempt to head off blight."

 But Committee Chairman Alan Lowenthal (D-Long Beach) said he would oppose the bill unless provisions for use of low/mod housing funds were deleted. State law requires redevelopment agencies to devote 20% of revenues to increase and improve affordable housing because redevelopment activities often shrink the affordable housing stock, he said. The bill would not increase the housing stock, rather it tackles blight, Lowenthal said, adding, "Activities to address blight are appropriately addressed by the other 80%."

Lowenthal echoed the concerns of affordable housing advocates, who lobbied hard against AB 2594 as originally written.

"We are fully aware of the growing foreclosure problem and its effect on our communities, particularly where our clients live, but the Low and Moderate Income Housing Fund (LMIHF) is not the appropriate source to mitigate the problem," Christine Minnehan, a lobbyist for the Western Center on Law & Poverty, and Brian Augusta, an attorney with the California Rural Legal Assistance Foundation, wrote in a letter to lawmakers. "The LMIHF must be used to ‘increase and preserve' the community's supply of affordable housing."

Minnehan said she could accept a bill that permitted agencies to use their non-housing funds on the foreclosure problem inside and outside of project areas.

Steve Lantsberger, who manages the Hesperia Redevelopment Agency, said removing housing funds from the equation will reduce agencies' interest in helping resolve foreclosure issues.

"You're talking housing. It only makes sense to use housing funds," Lantsberger said. "Most of our non-housing funds are committed to capital projects and making debt payments."

Located in the San Bernardino County high desert, Hesperia experienced a housing construction boom from 2003 through 2006, when as many as 1,800 units a year were built. Now, there are "several hundred" units in some stage of foreclosure, and developers are walking away from half-built subdivisions and incomplete infrastructure projects, Lantsberger said. In addition, vacant foreclosed houses are being used for parties, drug activity and by squatters, he said. "It just invites problems that we are having to deal with as municipalities," he said.

 The extraordinary circumstances of the day justify the spending of redevelopment funds outside of designated project areas, Shirey said.

"It's a good investment for redevelopment agencies to deal with those properties now, before those neighborhoods become candidates for redevelopment," Shirey said.

Contacts:
John Shirey, California Redevelopment Association, (916) 448-8760.
Office of Assemblyman Gene Mullin, (916) 319-2019.
Christine Minnehan, Western Center on Law  & Poverty, (916) 442-0753.
Steve Lantsberger, Hesperia Redevelopment Agency, (760) 947-1906.