Keeping Our Children in California: Hertzberg on the Middle-Class Homeownership Act

The LA Times’ George Skelton recently broke a story about the Middle-Class Homeownership Act, the ballot initiative you’re championing to address the gap between taxpayer-subsidized affordable housing and market-rate supply. What motivated you to put this together?

I’ve been working on this Revenue Bond to support middle-class home ownership for four or five years. I started when I was the Majority Leader of the California Senate, trying to come up with a proposal to build, not just multi-family, affordable housing in California, but specifically middle-class housing. 

In a nutshell, it became nearly impossible to craft a viable housing solution for the middle class in the Legislature. Right now, Assemblywoman Buffy Wicks and Senator Chris Cabaldon are working on a $10 billion affordable housing measure, which I support. 

But this bond is completely different. It’s aimed specifically at brand-new construction for ownership housing for the middle class. It’s important to offer Californians a distinct solution for middle-class homeownership—one that enables families to build generational wealth. This should not be confused with broader affordability challenges around rental housing, nor with programs limited solely to first-time buyers.

After I left government, Anthony Portantino, who was Senate Appropriations Chair, tried to carry on and do the same thing, and he couldn’t get it done either. It was literally impossible to get it through the Legislature, because the only way was to make a deal that included everybody, and that just wasn’t possible.

Once it became clear that the legislature couldn’t deliver on middle-class housing, what explains why you stayed committed to this issue?

I left government over two and a half years ago, and as a private citizen, not on any payroll and with no fancy title, I kept working on this. One of my big takeaways from being in government is that we no longer, as the late Kevin Starr predicted in California: A History, have the internal resources to do something big.

So, even back when I was Majority Leader, I hired people—a former Director of Finance, lawyers, and others—to help fashion a creative financial solution. Alongside that, I raised a bunch of money from the likes of Facebook, the building trades, and the carpenters. All of it went directly into research and into actually developing this idea.

Personally, I’ve been working on it and pushing it forward all this time without pay because it’s just the right thing to do. I’ve been doing the homework, drilling into the numbers, making sure it works, and really thinking through how it aligns with federal law. It’s taken a ton of time and hundreds of thousands of dollars, but I’ve just stuck with it.

After all that work, what exactly are you attempting to fix? What is the elegant solution you are proposing? 

The two big things are: one, increasing the supply of middle-class housing, and two, figuring out—at a very human level—what’s keeping people from getting into homeownership. A lot of the current publicly assisted housing programs are really limited. If your parents ever owned a home, you’re out. If your FICO score isn’t high enough, you’re out.

I wanted to create something that would support the building of, and therefore supply, more middle-class housing. We need to increase supply. Because these subsidy programs, most of them, just end up increasing the cost of housing. You wind up buying your grandma’s house with bad pipes and a leaky roof, and then you’re stuck with all those expenses. The subsidies raise prices, but they don’t add supply. And lately, everything has been focused on affordable rental housing.

This is about ownership. Because, as I always say, home is where the wealth is. 

And what are the current barriers, in your view, for middle-class folks trying to buy a home?

The first thing is the down payment. Most young people—or even not-so-young people—can’t come up with $150,000 or $200,000. It’s just too expensive. Then you’ve got government programs and rental schemes that are too restrictive. They’re hard to figure out, full of red tape. You’ve got FICO scores that don’t reflect whether someone can actually repay. A person might’ve missed a credit card payment or had a student loan issue, and now they’re locked out. 

And the last thing is, when politicians roll out these programs with fanfare, people can’t access them unless they’ve got a PhD in navigating bureaucracy. There’s no structure to sell it, nor an incentive, while we struggle with supply [1]. That’s what we’re fixing.

Expand on the objective, eligibility, and financial design of your proposed State revenue bond measure.

First, it only applies to new construction, because the whole point here is to increase supply. Second, we’ve built in a 3% down payment program. So, for example, on a $700,000 new home, a traditional 20% down payment would be $140,000. Under this program at 3%, the cost is brought down to $21,000. That makes it possible for families who could otherwise afford a mortgage but not the upfront cash.

We define a middle-class person as someone making up to 200% of the Area Median Income, which averages about $193,000 statewide, though it varies by county. A middle-class home is defined as 125% of a federal benchmark, so roughly $1 million. In some counties, that’s closer to $750,000; in others, it could be $1.2 million.

Then we looked at the problem of bureaucracy, which is just too hard for people to navigate. So, working with the California Bankers Association, under our proposal, the banks handle all the paperwork. We give them a half-point origination fee to do it. It’s just like when you buy a car—if there’s a rebate, the dealership takes care of the paperwork for you. Same idea here.

The financing structure is twofold. First, you’ve got your standard 80% loan from a bank. Second, there’s a 17% loan funded by revenue bonds. The state issues those bonds, private investors buy them, and the proceeds are loaned to buyers. But there’s no taxpayer risk—there’s no full faith and credit of the state behind them. If someone defaults, the bond buyer takes the loss, not the public. CalHFA would administer the program.

Importantly, there are no restrictions on buyers. If you had a house and lost it—fine. If you sold a home—fine. This isn’t about restricting access; it’s about helping middle-class buyers get into new homes and finally building the ownership housing stock California desperately needs.

Last but not least, FICO scores are truly a terrible measure. They don’t look at your rent payments. They don’t look at your cash flow. I’ve been working for over a year with Fannie Mae, Freddie Mac, and the federal government, trying to build a standard called cash flow underwriting. Basically: do you make money? Do you have money in the bank? Can you repay? Then you qualify. It’s a much better, fairer system.

Do you expect housing developers to buy in and build more middle-class homes?

The big reason they don’t build is “liability”, what’s called latent defects. We reformed the law to address this. We got the trial lawyers neutral, capped attorneys’ fees, and let the homeowner talk to the developer without lawyers in the middle. We also created a right-to-repair process that actually works.

We also included labor standards—not minimum wages, but standards that make sure people are paid properly. Now you’ve got an environment where a developer can say, “Okay, I can build a condo or townhouse or even a single-family home.” In parts of California, like San Francisco or Beverly Hills, there’s no middle-class housing left, but in all other parts of our state, it’s possible.

In any event, Bob, please describe how the funds raised would actually work and result in increasing the supply of middle-class homes.

The idea is that this bond creates a pot of money—a $25 billion bond fund—for loans secured by second trust deeds on loans to middle-class homebuyers. That fund finances 17% of the cost of new middle-class home construction. When you back that out, that translates into about $150 billion of new construction in California, which is the largest such investment in the state’s history. And the really great thing is, it’s a revolving fund.

A revolving fund means that when somebody sells or refinances their home, the money goes back into the fund. If they sell, they have to pay. If they refinance, they have to pay. And after 15 years, they also have to pay. That money then goes back into the pot to be lent to somebody else. So it’s not just $25 billion—it’s $25 billion ongoing and recurring.

This framework incentivizes developers, and at the same time, it makes it easier and realistic for people to buy a home.

I plan to approach those in California who are signatories to the Giving Pledge, as well as social impact funds, banks, corporations, and other philanthropic institutions, and ask them to buy the bonds at a discounted rate of 3% return. As a result, both the conventional bank loan and the second trust deed under this program make the combined mortgage payment for the new homebuyer much more affordable. These are like war bonds, because this is a war for the middle class.

It doesn’t mean these individuals and organizations are giving their money away. They’re simply keeping it on their balance sheet and accepting a 3% return instead of a higher one. But in doing so, they’re helping the middle class in California. We’ve got a significant social issue in the United States, and particularly in California, where people can’t afford to purchase a home. This keeps them on the economic ladder, and it’s fundamentally important to provide stability to a society that desperately needs it.

The bottom line is, this is really an elegant solution. It’s good for developers. It’s good for buyers. It’s good for the economy—and, most importantly, it helps families achieve homeownership and begin building generational wealth.

To conclude, what’s the early feedback—have you polled this State Revenue Bond? Will it win passage next November?

The polling shows support between 75 and 91 percent—it’s through the roof. And the reason it’s so high is that it realistically addresses middle-class homeownership. But because it does so without any tax burdens. In the way it’s designed, it addresses people’s credit reporting, caps fees for banks and lawyers, and is very consumer-friendly.

What’s happening now is that a lot of developers don’t want to deal with the bureaucracy, so they just end up building market-rate housing. And when down payment assistance comes directly from tax dollars, that creates its own set of problems. What we need is an economically intelligent approach that works from a business perspective, and that’s what we’re doing here with revenue bonds.

Those in the middle class—who we absolutely need to qualify for homeownership—are being left behind. Too many hardworking, taxpaying people are still shut out, and this initiative is about opening that door for them, too.