California, one of the states hardest hit by the housing crisis, still is working its way through “underwater” mortgages and trying to find ways to jump-start new housing production that is affordable to Californians of all incomes.
The state’s aim should be twofold: to get people out of homes they can’t afford and into homes they can afford, and to reverse the massive shrinkage in the construction industry from 2005 to 2009 to produce affordable housing.
Two bills working their way through the Legislature would go a long way to accomplish this – Senate Bill 30, on tax relief for struggling homeowners, and Senate Bill 391, creating a new housing trust fund. Both deserve passage.
Senate Bill 30
Under the national mortgage settlement last year, the nation’s largest lenders – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial (formerly GMAC) – agreed to do more “loan modifications” to keep some people in their homes and “short sales” to sell homes for less than the balance due on the mortgage. Both involve some measure of “forgiveness” from the original loan balance.
The California Legislature applied the new rules to all lenders in the state to get the housing market moving.
But there’s a glitch. If a lender reduces the loan principal to avoid foreclosure, then that would ordinarily be considered taxable income for the homeowner. So Congress in 2007 passed the Mortgage Debt Relief Act to ensure that loan forgiveness would not count as taxable income. It extended that tax relief through the 2013 tax year (for April 2014 tax returns).
California’s state tax system paralleled the federal tax relief from 2007 through 2012 – and SB30 would extend it through 2013, just like the federal government.
SB30 should pass easily with support from Democrats and Republicans. The catch is that leaders in the Senate have made SB30 contingent upon passage of SB391.
Senate Bill 391
Despite the economic crash in 2007, home prices in California still are expensive relative to incomes – and state funds to build affordable housing have run out. Voter-approved bonds in 2002 and 2006 that provided $500 million a year for construction of affordable homes have been spent. And with the Legislature’s elimination of redevelopment agencies in 2012, $1 billion a year in tax-increment monies that went to affordable housing also has disappeared.
SB 391 attempts to replace a small portion of that $1.5 billion a year the way that other states do – by establishing a housing trust fund with a designated revenue source that has some nexus to housing. Like many states, the California bill would rely on a document recording fee on real estate transactions. The proposed $75 fee, for example, would add a one-time $150 fee to a traditional refinancing with two documents (deed of trust and reconveyance) over the 30-year life of the new loan.
Last year, the authors negotiated with the California Association of Realtors to exempt documents related to home and commercial property sales and the group signed on in support. This year, however, the group inexplicably has changed its position and now opposes the bill – jeopardizing SB391. This modest fee is well worth it to add an average of 10,500 new affordable apartments and single-family homes annually.
While we don’t like linking bills, both have merit and both should pass.
Californians who have received a principal reduction through a loan modification or negotiated a short sale this year should not be hit with a significant tax bill come April 2014. The state should be finding a new way to fund affordable home construction without creating new debt with new bonds or reviving redevelopment agencies.
The Senate has passed both SB 30 and SB 391. The Assembly should, too.