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CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION

93

Introduced by Senator Cortese

(Coauthors: Senators Arreguín, Becker, Cabaldon, Durazo, Umberg, and Wiener)

February 21, 2025

An act to add Section 51071 to the Health and Safety Code, relating to housing.

Vote: majority   Appropriation: no   Fiscal committee: yes   Local program: no

LEGISLATIVE COUNSEL’S DIGEST

Existing law establishes the California Housing Finance Agency for the primary purpose of meeting the housing needs of persons and families of low or moderate income, and sets forth various programs administered by the agency to fulfill that purpose.

This bill would require the agency to conduct a comprehensive assessment of potential credit enhancement mechanisms designed to reduce borrowing costs for housing projects receiving state financial assistance that includes specified evaluations. The bill would require the agency to submit an interim report by January 1, 2028, and a final report by July 1, 2028, as specified. Upon appropriation, and within 6 months of that appropriation, the bill would authorize the agency to establish a limited-scale pilot credit enhancement product and program to run concurrently with the assessment and a fund for the purpose of deploying that product, as specified.

The people of the State of California do enact as follows:

SECTION 1.

Section 51071 is added to the Health and Safety Code, to read:

51071.

(a) It is the intent of the Legislature to evaluate strategies to reduce borrowing costs and improve capital efficiency for housing developments receiving state financial assistance by assessing potential state-administered lending and credit enhancement tools applicable to both construction phase and permanent financing, with a specific focus and priority on reducing construction financing costs.

(b) The agency shall conduct a comprehensive assessment of potential credit enhancement mechanisms designed to reduce borrowing costs for housing projects receiving state financial assistance that includes, but is not limited to, an evaluation of all of the following:

(1) Credit enhancement structures applicable to both construction phase and permanent financing, with a primary emphasis on construction phase risk and strategies to reduce construction loan interest rates and financing volatility.

(2) Mechanisms that could do any of the following:

(A) Reduce construction and permanent loan interest rates.

(B) Mitigate lender risk and volatility during the construction period.

(C) Improve capital efficiency and pricing for permanent financing, where feasible.

(D) Support projects that are funded by a combination of state, local, federal, or private financing, including, but not limited to, projects administered by the Department of Housing and Community Development, the agency, and the Housing Development and Finance Committee.

(E) Provide credit enhancement options for state-funded projects that do not utilize available federal mortgage insurance or risk-sharing programs, including, but not limited to, the FHA-HFA Risk-Sharing Program.

(F) Encourage housing trusts and pension funds to invest in housing development.

(G) Boost the creation of midsize housing developments.

(H) Provide credit enhancement to complement local and regional bond projects.

(3) Construction phase risk and market conditions, including, but not limited to, all of the following:

(A) Short-term loan pricing dynamics for constructions loans with typical terms of 12 to 36 months.

(B) Allocation of risk among lenders, developers, and the state during the construction period.

(C) Claims timing, loss severity, and administrative considerations under existing insurance or guarantee programs.

(D) Market demand for state-backed credit enhancement products targeting construction financing.

(4) Permanent financing considerations, including, but not limited to, all of the following:

(A) Interaction between construction phase credit enhancement and permanent loan pricing.

(B) Opportunities to transition from construction phase enhancement to permanent phase risk-sharing or insurance programs.

(C) Market gaps in permanent financing for state-assisted projects.

(5) Credit enhancement structures, including, but not limited to, all of the following:

(A) Portfolio-based loan loss reserve structures providing first-loss coverage.

(B) Partial state guarantees covering a defined percentage of principal loss.

(C) Construction phase insurance or backstop products.

(D) Hybrid models transitioning from construction enhancement to permanent phase federal insurance or risk-sharing programs.

(E) State-administered credit enhancement products for projects ineligible for federal insurance programs.

(6) Financial modeling and fiscal analysis, including, but not limited to, all of the following:

(A) Initial capitalization scenarios.

(B) Expected leverage ratios under varying program structures.

(C) Estimated reductions in borrowing costs, expressed in basis points, for both construction and permanent financing.

(D) Portfolio-level savings projections under varying construction and permanent lending pipeline sizes.

(E) Sensitivity analysis under adverse market conditions.

(F) Projected claims frequency and severity.

(G) Net present value analysis comparing projected borrower savings to required state capitalization.

(7) Governance and administrative structure, including, but not limited to, all of the following:

(A) Program governance and oversight.

(B) Underwriting standards and eligibility criteria.

(C) Rating agency considerations and potential impacts on state credit ratings.

(D) Claims administration and reserve management.

(E) Premium pricing structures and cost recovery models.

(F) Integration with existing agency programs.

(c) In conducting the assessment required by subdivision (b), the agency shall consult with, and may contract with, any of the following:

(1) Construction lenders.

(2) Permanent lenders.

(3) Community development financial institutions.

(4) Bond underwriters.

(5) Bond counsel.

(6) Actuaries.

(7) Credit risk modelers.

(8) Insurance and reinsurance advisors.

(9) Rating agency consultants.

(10) Affordable housing developers.

(11) Representatives of other housing finance agencies.

(d) (1) The agency shall submit an interim report by January 1, 2028, to the Legislature and the Department of Finance that includes all of the following:

(A) Preliminary findings.

(B) Capitalization scenarios.

(C) Financial modeling results.

(D) Stakeholder feedback.

(2) The agency shall submit a final report by July 1, 2028, to the Legislature and the Department of Finance that includes, but is not limited to, all of the following:

(A) Recommended program design.

(B) Fiscal impact analysis.

(C) Risk modeling results.

(D) An implementation roadmap, including, but not limited to, specific recommendations for reducing construction financing costs.

(3) The reports required by this subdivision shall be submitted in accordance with Section 9795 of the Government Code.