Proposition 37: Socializing the Risk, Privatizing the Profit!

Proposition 37: Socializing the Risk, Privatizing the Profit!

California's landscape is changing fast. For the past 6 years, Sacramento has been passing laws designed to encourage more construction, override local control, streamline approvals, and push cities toward aggressive housing targets. Developers have reaped the rewards, posting record construction activity while remaining among the many special interests that routinely spend millions influencing elections and public policy.

Now comes Proposition 37, another measure being promoted as a solution to California's housing crisis. Supporters describe it as a pathway to homeownership for middle-income families struggling to afford a down payment. Proposition 37 authorizes up to $25 billion in bonds to create a new homeownership assistance program administered by the California Housing Finance Agency.

Eligible buyers could receive a state-backed second mortgage covering up to 17 percent of the purchase price of a newly constructed home. Buyers would only be required to provide a 3% down payment, and the assistance would be available to households earning up to twice the median income in their area. This means that people making over 300k a year could qualify for this financing.

At first glance, the measure sounds appealing. With home prices out of reach for many Californians, any proposal that promises to make homeownership more attainable is bound to attract attention.

But there's a catch.

The program is limited to newly constructed homes. Existing homes do not qualify. If the purpose is to help buyers, why exclude the millions of homes already on the market? Why should a family purchasing a twenty-year-old home receive no assistance while a buyer purchasing a brand-new home qualifies for government-backed financing?

The answer may explain who stands to gain the most. Every state-backed loan created under this program increases the pool of potential buyers for newly built homes. More buyers mean more demand. More demand means developers can sell more homes. In effect, Proposition 37 acts not only as a subsidy for homebuyers but also as a government-assisted marketing program for the new-home construction industry.

That concern becomes even more relevant when voters consider the measure's financing structure. Proposition 37 would allow up to $25 billion in revenue bonds to be issued to support these loans. Supporters emphasize that the bonds would be repaid through homeowner payments rather than direct taxpayer funding. Nevertheless, the program depends upon a continued, healthy housing market and the willingness of buyers to take on additional debt through second mortgages.

For many Californians, that brings back uncomfortable memories. During the 2008 housing collapse, homeowners across the country discovered that home values do not always rise. When prices fell, second mortgages were the first loans to default. While Proposition 37 is not identical to the lending practices that contributed to the financial crisis, it still relies on a financing tool that increases leverage and assumes housing values will remain strong when many are pushing for housing prices to come down, which would erase equity. Borrowers could end up owing more on their home than the property is worth, which is what caused the housing crash of 2008. California is a non judicial foreclosure state which means that borrowers can walk away from their homes, never having to repay a defaulted loan, with no personal responsibility. When that happens, taxpayers will get stuck with the bill.

Campaign finance records also show substantial support for Proposition 37 from organizations with a direct stake in housing transactions, including realtor groups and construction-related interests.

Building a Better California: $6 million

California Association of Realtors Issues Mobilization PAC: multiple contributions totaling millions

National Association of Realtors: millions in contributions

Carpenter unions and related organizations

These are the same groups that have been donating to our local assembly and senate reps that keep passing more and more one size fits all housing mandates to benefit developers. That does not automatically make the measure bad policy, but it should encourage voters to look beyond the marketing slogans and examine whose economic interests are being served.

Before approving a $25 billion program that revolves around risky second mortgages and new construction, and makes California one of the biggest second mortgage banks in the nation, voters should ask whether Proposition 37 is truly about helping families achieve homeownership or whether it is simply the latest chapter in

California's ongoing effort to subsidize the development industry.

I am voting NO on this one.