Opposition to Proposition 37: Concerns Over Potential Billion Housing Experiment.

Proposition 37, which will appear on the November ballot, seeks to address California’s ongoing challenge of affordable housing by proposing a multi-faceted approach that intertwines philanthropy, tort reform, housing construction, and financial mechanisms. The initiative is framed as a means to stimulate the construction of middle-class housing while enabling families to purchase homes without reliance on taxpayer funding.

Under this proposal, builders who commit to becoming “qualified builders”—accepting responsibility for potential labor violations by their contractors and subcontractors—will benefit from protections against construction defect lawsuits and elevated legal fees. To qualify, these builders must produce “qualified new homes,” which includes either new constructions or conversions priced no higher than 125% of the conforming loan limit for their respective counties, typically ranging from million to .5 million.

For prospective homebuyers, Proposition 37 introduces fixed-rate second mortgages covering 17% of the home’s purchase price, eliminating the need for private mortgage insurance (PMI). Additionally, an alternative “cash-flow underwriting” process aims to assist buyers who might not qualify for traditional second mortgages. To access these financial products, borrowers must first secure a primary mortgage and contribute 3% of the purchase price from their own resources. Eligibility criteria include being a California resident for at least one year and maintaining a household income under 200% of the area median income, adjusted for family size.

The financial architecture of the program is based on a billion issuance of revenue bonds by the state, which borrowers will repay, inclusive of principal, interest, and administrative costs. Notably, taxpayers are not directly liable for these bonds.

However, concerns arise regarding the claimed consumer benefits. Proponents assert that these second mortgages will offer below-market rates; yet, the measure does not guarantee that the associated loan costs will be more favorable than those from private lenders. The expectation that foundations and non-profits will invest in bonds at reduced interest rates remains speculative and contingent on altruistic fiscal behavior.

In the absence of these charitable purchases, the California Housing Finance Agency may opt to sell the bonds in the open market, potentially subjecting borrowers to higher interest rates than those available from commercial lenders, which do not carry the administrative burden of this program.

While any developer can construct homes that meet the price cap to qualify for assistance, only those who comply with specific labor standards can gain the protections associated with the program. Furthermore, should even a single unit in a project exceed the price threshold, the entire development loses its litigation shield.

Homebuyers should be cognizant that properties purchased below market value will still be assessed by county tax officials at fair market rates, not purchase prices.

Ultimately, Proposition 37 attempts to navigate California’s complex landscape of housing regulations and liabilities. Its reliance on philanthropic investment in second mortgages raises questions about sustainability, leading to skepticism regarding its potential effectiveness in truly alleviating the financial burdens of housing costs for income-limited families. As the election approaches, voters may wish to consider the implications of such a measure critically.