John Seymour’s New Job: Southern California Housing Development Corp.

What is the precise mission of the Southern California Housing Development Corporation (SCHDC)? Is it at all similar to that of the BRIDGE Corporation in Northern California? 

The comparison to the BRIDGE Corporation is very accurate; however, there are differences in approach. BRIDGE primarily does new construction, while SCHDC in our current stage of development is focusing more specifically on rehabilitation housing. In my opinion, it is much more complicated to rehabilitate a building, and bring in the necessary social programs to rehabilitate a neighborhood, than develop a vacant piece of land. Further, current economic conditions make it less expensive to create affordable housing out of existing properties, as op­posed to new construction. 

We're based in the Inland Empire, but my task at SCHDC is to expand the organization throughout the nine counties of Southern California. We are looking to move into Los Angeles, Orange and San Diego counties.

What are some of the obstacles SCHDC faces trying to move into the more urbanized areas of Southern California?

It's not so much that there are obstacles, as there are greater opportunities with the older, more urbanized areas, compared to other locations here in the Inland Empire. From my perspective, although there is a larger geographic area to cover, there is more opportunity.

As the former director of the California Housing Finance Agency (CHFA), what is the outlook for state assistance in the financing of affordable housing in California? 

Well, perhaps I should start with what CHFA does not do. It does not offer housing subsidies. Instead CHFA offers below-market interest rates as a result of selling tax exempt bonds, thereby passing on the lower interest rate to the developer or owner of multi-family projects, in exchange for setting aside a percentage of the units in the affordable category for 30 years.

In these changing political times, specifically, a more conservative approach in Washington - the programs sponsored by CHFA will be enhanced by this philosophy. It is not a subsidy program, although I guess one could argue that since it is financed with tax exempt bonds, it is a type of subsidy. However, this is the private sector approach as opposed to the old HUD Section 8 approach-  cutting a check for a housing subsidy and either paying it to the owner or providing it to the tenant.

In the October issue of TPR, Sen. David Roberti was quoted as saying, "The prognosis for affordable housing is very difficult. The cost of land is very high and it appears that no matter how low interest rates fall it isn't enough of an incentive to build affordable housing." He also said, "CHFA only really works well where the land costs an very low...  it's just not a statewide program." Your reactions, please.

I consider David Roberti to be a friend, though politically, a member of the loyal opposition. I respect what he says, and his statement had been accurate until two years ago. When I became director of CHFA, I was well aware that during its previous sixteen years CHFA had been effective primarily in the Central Valley and the Sacramento valleys; the reason, as David Roberti mentioned in his quote, was inexpensive land, which makes it easier to do affordable housing.

Having been a State Legislator representing Orange County — an urban, high-cost area — I was very sensitive to the historical performance of CHFA and was determined to change the agency. In fact, I believe that I was successful in transforming CHFA.

For example, in the home ownership area, CHFA put together what we called our High-Cost Area Program, a special area of finance available to first-time homebuyers in high-cost areas such as Los Angeles and Orange counties, and all of the high-cost areas of California. Specifically, we offered down payment assistance — 3 percent of the purchase price would move the buyer into a home. CHFA was financing the closing costs on a silence second. In addition, we were offering avery favorable interest rate, 150 basis points under Fannie Mae's 60-dayrate, on 30-year fixed-rate loans. We also developed a variable rate mortgage specifically for high-cost areas. At the same time, we doubled CHFA's lending network in high-cost areas. Historically, CHFA bas used mortgage bankers to market our loan products.

The results were very dramatic. Prior to the implementation of these programs, which occurred in late summer of last year, 65 percent of CHFA's loan production was in the Central and Sacramento valleys. Within 60 days of launching the program, 65 percent of CHFA's loans were in high-cost areas, and 35 percent in the Central and Sacramento valleys. Do not conclude, however, that because we went from 65 percent in the low-cost Valleys down to 35 percent, that we were making fewer loans in those areas. What we did do is dramatically increase loan production overall. 

In the multi-family housing area, Sen. Roberti' s remark is also accurate. It is exactly as be said - land is cheaper, the land-use politics are easier, and so financing multi-family projects is following the path of least resistance. Recognizing this fact, I knew that we needed to make a change — we needed to be very competitive. We needed to offer some kind of savings or incentives to those multi-family developers who arc acquiring and rehabilitating property.

First of all, we came up with a very attractive loan rate. I don't know what the rate is today for multi-family, but I will bet that CHFA's multi-family rate is 50 basis points underneath a conventional loan. We were able to offer that rate by examining our loan portfolio over our sixteen year history, and we realized we had some floating rate assets, and therefore, we could take on some floating rate debt. Thus, we were able to come up with a bond package which was 75 percent fixed-rate and 25 percent floating rate, for a combined lower rate. Hence, we offered the lower, combined rate to the non-profits and for-profits developers. Not only did we have the best interest rate in California, I was told it was the best rate in the country. 

Secondly, we recognized that one of the reasons it was difficult for people to use CHFA's multi-family loans was too much red tape. It was taking us six months to process a loan. We changed our policies, and today at CHFA, when someone walks through the door, they will have a firm and final loan commitment within 90 days. Within 30 days, after reviewing the project, we can tell the developer with 90 percent certainty whether or not we can do the deal. 

So, while David Roberti's historical appraisal of CHFA is correct, if you were to talk with current borrowers, both non-profit and for-profit, they would tell you that today's CHFA is nothing like yesterday's. 

What are your thoughts on the implications for California housing production during a Republican Congress? What impact will the change in party have on HUD's mandate and operations? 

I think it will mean a number of things; most positive, but some negative, depending on how you look at affordable housing. If you look at affordable housing as the old Section 8 subsidy housing program, with the federal government reducing rents by cutting checks, you are not going to see much of that in the future. In my opinion, that kind of thing is going to be phased out. That's the bad news for some. 

On the other hand, the good news is that there will be an improved and enlarged, low-income housing tax credit program which is really a stimulus for raising inexpensive capital for the development of affordable multi­family housing. We'll also see an expansion of the mortgage revenue bond program that permits tax exempt financing to reduce interest rates for first-time homebuyers. The amount of bonding a state can do is dependent upon a formula devised by the federal government, so each state is limited in its bonding capacity. For example, in the single-family mortgage program, CHFA is limited to issuing $500 million in tax exempt bonds per year. I predict that Congress will take funds from states that choose not to participate in this program and put those funds in a national pool for the states that have reached their limit. If that happens, it would dramatically increase the capacity of states such as California to deliver low-interest rate loans for first-time homebuyers in the affordable category. 

For multi-family affordable housing, there are also some things that Congress can do to expand the use of tax credits; and as a matter of fact, Newt Gingrich has publicly stated his support for financing affordable housing through the utilization of low-income housing tax credits. 

What is likely to be the financial model for financing affordable housing in the future?

The other two funding sources available are HOME funds and CDBG funds. Today, HOME and CDBG funds are allocated to states, counties and cities, but they have many restrictions. I suspect their amounts might be reduced; however, the restrictions governing those funds will be eliminated. They will now be a type of block grant. 

The future will look like block grant housing funds in the form of HOME and CDBG funds — you can use the money wherever you want as long as you are using it for affordable housing. We are also likely to see an expansion of the low-income housing tax credit program and the mortgage revenue bond program, as I mentioned a moment ago. That is how affordable housing will be financed in the future. 

Sen. Seymour, having begun your political career in Anaheim as a planning commissioner, you're very familiar with local land use politics. Won't devolving discretion to the local level result in money being spent on more politically acceptable projects? 

That is the easy way out, and dollars will not change the "NIMBY" attitude. What I'm excited about is the opportunities I see in SCHDC's approach to affordable housing. We are looking at neighborhoods which need rehabilitation, and I'm not talking about just the building, I'm talking about neighborhoods with drug addicts, gangs, overcrowding -areas that have a real need for social programs as well as affordable housing. Affordable housing developers who are focusing on helping cities to clean up the worst part of their cities - that is where there are opportunities. I recognize that it takes tremendous political will for a local planning body to come to grips with these issues. 

But on the other hand, if I were to take you to some of the projects that SCHDC manages, I defy anybody to say, "That's low-income housing." It  is impossible to see. We have gone to every possible length to rehabilitate these projects — not just a coat of paint and new carpet, but architectural changes, landscapes, day care centers, etc. Secondly, before we undertake a project, we want a commitment from the local community as to what they will provide, from neighborhood clean-up programs all the way to neighborhood child care programs or youth programs. 

You can see that if a city has the flexibility to use the funds for what is needed in a particular neighborhood or project, then we at SCHDC can make some great things happen. 

What is SCHDC's role as technical advisor to the Resolution Trust Corporation (RTC) Affordable Housing Disposition Program? There has been some criticism that the RTC has not promoted the preservation of affordable housing. 

You are correct. In fact, last week I testified before the regional board of directors of the RTC. I told them that same as their advisor has failed, and that they have failed also. What we are supposed to be doing is advising the RTC as to how to save as many multi­family affordable units as possible. In that regard, we have not been successful. The reason is that the system for disposition of assets doesn't work. It doesn't provide an opportunity to preserve affordable housing. 

Let me tell you why. In California, the RTC started with about $26 billion worth of real estate for disposition, 90 percent of which was in multi-family housing. I can't tell you how much of that 90 percent was considered affordable, but my judgment would be about 30 percent of the entire $26 billion is in that category. So, we are talking about $7 billion worth of affordable housing, and I would guess less than $200 million has been preserved as affordable. 

Why has this happened? 

The process which the RTC has used doesn't work to preserve affordable housing. When they sell non­performing loans from a savings and loan institution, they don't give non­profit developers or local cities an opportunity to purchase the loan. Instead, they package the loans and sell them together as a pool. 

For example, SCHDC identified an RTC project in Rancho Cucamonga that the agency was trying to sell. SCHDC and the City of Rancho Cucamonga bid on the loan with the idea of foreclosing on it, with SCHDC then taking over the project with the city's assistance. Our bid was $3 million higher on this single loan than anyone else's, but RTC also receives bids on a pool of loans of which this loan was a part. Needless to say, it's more advantageous for RTC to sell the entire pool instead of peeling off one loan. 

The private investor who purchased the pool of loans, including the one SCHDC had bid on, came back to us and offered to sell the loan — but at a $3 million profit to him and absolutely no benefit to taxpayers. 

In my testimony to the RTC, I said they have to change the process. There is still $6 billion in assets controlled by the RTC in California, and although we're closer to the end of the disposition process than the beginning, perhaps we can still save a substantial number of units — if some changes are made. I recommended that before RTC auctions any more loan pools, they permit an interim period, such as 120 days, during which non-profit developers and for-profit developers, cities and other interested parties could acquire the loans for affordable housing projects.

Lastly, if you were to become Secretary of HUD under a future President Wilson, what would be your department’s central mission? How would it be different from Sec. Cisneros’? 

Well, I think what HUD is going through now is something that they have to do. If I were to advise someone who was Secretary of HUD, I would say that you will no longer have the resources you once had, neither financial nor human. Therefore, take the tools you do have and leverage them by creating partnerships at the state level with finance agencies such as CHFA, non-profits, and large cities such as Los Angeles, San Francisco, Chicago or New York. 

And since you don't have a lot of financial resources, use what I think is the best tool HUD and the Federal Housing Administration (FHA) have at their disposal: mortgage insurance. It's not widely known, but CHFA has its own mortgage insurance operation called the California Housing Loan Insurance Fund. In the mortgage insurance business, having credit enhancement is absolutely critical to the creation of financing for affordable housing in order to get a bank to make a loan. Having the credit enhancement or guarantee, however you want to call it, of an outside agency such as HUD or FHA, it can make things happen.

Therefore, HUD should recognize that California and other states have the talent to address their own problems. For example, CHFA was the first agency to successfully establish a FHA risk-share program. The first projects went through the pipeline last year and the program doesn't utilize much money or personnel from FHA. 

To the degree that HUD partners with state and local public agencies - as well as the degree to which those agencies, in turn, partner with the private sector, including for-profit and non-profit entities like SCHDC - our national affordable housing stock will improve and grow and our public housing investment dollars will be greatly leveraged.