Berkeley City Council
November 3, 2022

CA Dream For All and other DPA programs are financially sustainable policy interventions to close the racial wealth gap primarily because sufficient cash savings to

DPA CONSENT CALENDAR

afford 20% combined loan-to-value (CLTV) down payments for a first home demonstrably do not correlate with future debt servicing capacity. However, Black households disproportionately lack access to high quality mortgages. Nationally, Black households nationally had a median debt-to-income ratio of 41% in 2020, compared to 37% for white households; in October 2020, 45% of Black consumers had subprime credit scores, compared to 18% of White consumers. Black and Latino homebuyers disproportionately rely on federal assistance through FHA loans, which private lenders perceive as riskier and thus have larger mortgage payments to account for lower down payments. However, the California Treasurer’s Office reports that sellers are indifferent to the use of shared appreciation loans (SALs) covering down payments, which makes them a potentially effective and scalable tool for reducing racial disparities in homeownership.6
6 CA Fwd. et al. (2022). California Dream For All: A Proposed Shared Appreciation Loan Investment Fund for the State of California. California Treasurer’s Office. Retrieved from https://www.treasurer.ca.gov/publications/ca-dream-for-all-report.pdf

DPA CONSENT CALENDAR

The Treasurer’s report further states: “SAL’s most compelling advantage is the combination of reducing the monthly payment to a household, while generating revenue to serve future households and providing protection to the homebuyer in the event of depreciation. The biggest drawback is the financial complexity of the terms for a SAL… A well-designed SAL can provide borrowers the opportunity to build wealth in upside scenarios and share losses in downside scenarios.”

DPA CONSENT CALENDAR

In order to maximize reparative racial justice outcomes and maintain fiscal sustainability for future generations, a municipal DPA initiative should include the following program considerations:

1. Ensure that applicant eligibility is compatible with existing DPA programs so that applicants can “layer” multiple loans to cover 100% combined loan- to-value (CLTV). As a second lien program, Alameda County has approved layering AC Boost loans with subordinate loan programs such as WISH Funds, NeighborhoodLIFT Funds, the Black Wealth Builders Fund, and several closing cost assistance programs. However, the lotteries of AC Boost applicants and their corresponding applications for subordinate loans may not necessarily overlap, making layering more difficult.

2. As much as feasible, integrate administrative processes so that applicants in high-cost cities can seamlessly layer state and regional assistance programs, including CA Dream For All loans and future programs planned for the Bay Area Housing Finance Authority (BAHFA).

3. Enable SALs to cover closing costs in addition to down payments. Consider cost-benefit tradeoffs for limiting closing cost assistance to escrow fees (e.g. escrow services, title insurance, document preparation, recording fees, etc.) rather than lender fees (e.g. mortgage origination).

ENVIRONMENTAL SUSTAINABILITY AND CLIMATE IMPACTS
AC Boost’s down payment assistance fund includes incentives to reduce Vehicle Miles Traveled (VMT) while mitigating displacement by encouraging home purchases close to jobs and public transit. According to Wheeler et al (2018), the urban core of the San Francisco Bay Area (including Berkeley) contains some of the lowest carbon emissions per capita in California, making urban infill housing a key policy lever for cities to reduce carbon footprints by reducing VMT per capita.7 Preventing displacement from Berkeley also prevents increased emissions from households who would otherwise be priced out to areas with higher per capita emissions.

CONTACT PERSON
Councilmember Taplin Council District 2 510-981-7120

ATTACHMENTS

1. CA Dream For All - Treasurer’s Office Report

2. AC Boost: Measure A1 Oversight Committee Presentation

3. Black Wealth Builders Fund - Frequently Asked Questions 7 Wheeler, S. M., Jones, C. M., & Kammen, D. M. (2018). Carbon footprint planning: quantifying local and state mitigation opportunities for 700 California cities. Urban Planning, 3(2), 35-51.

1 CALIFORNIA DREAM FOR ALL:

A PROPOSED SHARED APPRECIATION LOAN

INVESTMENT FUND FOR THE STATE OF CALIFORNIA
JUNE 2022

FIONA MA, CPA

CALIFORNIA STATE TREASURER

ACKNOWLEDGMENTS
This report was prepared for the California State Treasurer’s Office by California Forward with assistance from HR&A
Advisors, CSG Advisors, and California Community Builders.

For more information, please contact [email protected].

3 TABLE OF CONTENTS
I. EXECUTIVE SUMMARY ..........................................................................................................................................6 II. INTRODUCTION & BACK GROUND ................................................................................................................... 10 Introduction ........................................................................................................................................................... 10 Why a focus on communities of color? ........................................................................................................... 11 Access to Affordable Homeownership in California .................................................................................... 14 III. SHARED APPRECIATION LO AN ........................................................................................................................24 IV. FUND DESIGN .........................................................................................................................................................31 California Dream for All: Fund Goals ................................................................................................................31 Key Program Terms and Design Considerations ............................................................................................31 Shared Appreciation Loan Terms .....................................................................................................................32 Borrower Eligibility ..............................................................................................................................................42 V. FUNDING AND FINANCING ...............................................................................................................................47 Parameters for Funding and Financing to Be Successful ...........................................................................47 Funding Options .................................................................................................................................................. 50 Feasible Financial Approach ............................................................................................................................58 Comparing Shared Appreciation to Fixed Interest .....................................................................................73 VI. OUTREACH, EQUITY AND IMPLEMENTA TION ..............................................................................................77 Community and Stakeholder Feedback ..........................................................................................................77 Monitoring and Evaluation ..................................................................................................................................81 Conclusion & Final Recommendations ........................................................................................................... 84 VII. APPENDIX ...............................................................................................................................................................85 Glossary ..................................................................................................................................................................85 Case Studies ......................................................................................................................................................... 94 Program Guidelines .............................................................................................................................................97 Regions of Analysis & Financial Analysis .....................................................................................................104 Analysis of Alternative Funding Options ......................................................................................................109 Detailed Financial Comparison of Shared Appreciation vs. Fixed Interest Second Loans ............... 113

4 FIGURES
Figure 1: Rising Home Price to Income Ratio in California ............................................................................................15 Figure 2: Change in Housing Tenure by Income in California (2010-2019) .............................................................15 Figure 3: Statewide Progress Toward RHNA Target (Unit Deficit/Surplus; 2015-2023) ....................................16 Figure 4: Units Built Affordable to Moderate-, Low-, or Very Low-Income Households (2018-2020) ........16 Figure 5: Percentage Above or Below AMI Required to Purchase Median-Value Home ...................................17 Figure 6: Loans Originated for First-Time Buyers in the US (2005-2020) .............................................................17 Figure 7: Mortgage Insurance Requirement by Types of Mortgage Products .......................................................18 Figure 8: Mortgage Payment Comparison - FHA vs. Conventional Loan ................................................................19 Figure 9. Share of Total Borrowers with High Debt (>42% DTI) by Region (2020) ............................................19 Figure 10: Income Required to Make a 10% and 20% Down Payment ......................................................................21 Figure 11: Racial Disparities in Home Purchase Loan Access in California (2020) ..............................................22 Figure 12: Loan Application Denial Rates for All Applicants and Applicants Over 120 AMFI, by Race ......22 Figure 13: Loan Application Denial Rates for Low-Debt and High-Debt Applicants, by Race .......................22 Figure 14: Share of Conventional and FHA Loans Issued to Borrowers, by Race ...............................................23 Figure 15: Conventional Home Purchase vs. Shared Appreciation Home Purchase ...........................................24 Figure 16: Shared Appreciation Loan at Purchase and Sale ........................................................................................24 Figure 17: Key Features of Private Shared Appreciation Programs ..........................................................................25 Figure 18: Comparison with Shared Equity Homeownership Models.......................................................................26 Figure 19: Common Homeownership Financing Options for First-Time Homebuyers ......................................26 Figure 20: Public and Homebuyer Priorities by Various Financing Options ......................................................... 27 Figure 21: Shared Appreciation Benefits Compared to FHA Loan ............................................................................29 Figure 22: Illustrative Example of Shared Appreciation Loan in Downside and Upside Scenarios ..............29 Figure 23: Impacts on Borrower Equity - Shared Appreciation vs. Fixed Rate....................................................29 Figure 24: Impacts of Recycling Funds - Shared Appreciation vs. Fixed Rate ...................................................30 Figure 25: California Median Prices of Existing Single-Family Homes.....................................................................30 Figure 26: Mechanisms to Limit the Loan Amount .........................................................................................................32 Figure 27:Impacts on Homebuyer Equity, Shared Appreciation Loan at 17% vs. 37% of Home Price .........34 Figure 28: Combined Impacts on Household Equity from Shared Appreciation Loan Size and Appreciation Split .........................................................................................................................................................................34 Figure 29: Minimum Down Payment Requirements for Various Programs ............................................................35 Figure 30: Implied Down Payment by Race .......................................................................................................................36 Figure 31: Impacts on Fund Recycling from Appreciation Split .................................................................................38 Figure 32: The Impact of Appreciation Split on Homebuyer Equity, CA Dream for All Equity, First Mortgage Balance
.........................................................................................................................................................................38 Figure 33: Statewide Mortgage Origination by Area Median Income and Type of Loan (2020) .................43 Figure 34: Geography of CalHFA lending and of home sales in California ............................................................49 Figure 35: Funding Options for the CA Dream for All Program ................................................................................51 Figure 36: Key Assumptions under Financial Approaches .........................................................................................59 Figure 37: Expected Case Over 40 Years............................................................................................................................62

5 FIGURES
Figure 38: More Conservative Case Over 40 Years .........................................................................................................64 Figure 39: Projected Borrowers Served Under the Expected Case ..........................................................................65 Figure 40: Projected Borrowers Served More Conservative Case ............................................................................65 Figure 41: Dollar Amount of Projected CA Dream for All Originations Expected Case (# Billions) Annual ...............................................................................................................................................................................................66 Figure 42: Dollar Amount of Projected CA Dream for All Originations Expected Case ($ Billions) Cumulative
.......................................................................................................................................................................................66 Figure 43: Dollar Amount of Projected CA Dream for All Loan Originations More Conservative Case ($ Billion) Annual
..........................................................................................................................................................................67 Figure 44: Dollar Amount of Projected CA Dream for All Loan Originations More Conservative Case ($ Billion) Cumulative
..................................................................................................................................................................67 Figure 45: Borrower Share of Home Price Appreciation Expected Case ($ Billions) Annual ........................68 Figure 46: Borrower Share of Home Price Appreciation Expected Case ($ Billions) Cumulative ..............68 Figure 47: Borrower Share of Home Price Appreciation: More Conservative Case ($ Billions) Annual .....69 Figure 48: Borrower Share of Home Price Appreciation: More Conservative Case ($ Billions) Cumulative
.....................................................................................................................................................................................69 Figure 49: Comparison of State Appropriation Pledge Bonds and Revenue Bonds Overcollateralized by CA Dream for All Fund ........................................................................................................................................................ 72 Figure 50: Shared Appreciation and 3% Fixed Interest Loans Over 40 Years: Expected Case ..................... 74 Figure 51: Shared Appreciation v. 3% Fixed Interest Loans Over 40 Years: More Conservative Case ........ 75 Figure 52: Present Value Comparison of State Investment in Generating Household Wealth ......................76 Figure 53: Regions Considered in Analysis.......................................................................................................................104 Figure 54: Household Level Loan Calculation Base Scenario ...................................................................................106 Figure 55: Household Level Loan Calculation Upside Scenario ............................................................................... 107 Figure 56: Household Level Loan Calculation Downside Scenario .........................................................................108 Figure 57: Impact of Individual Average CA Dream for All Loan of $130,000 ................................................... 114 Figure 58: Impact of Individual Loan Fixed interest at 3% and at 5% vs. Shared Appreciation ................... 114 Figure 59: Overall Impact of Shared Appreciation and Fixed Interest Over 40 Years: Expected Case .....115 Figure 60: Overall Impact of Shared Appreciation and Fixed Interest Over 40 Years: More Conservative Case ...................................................................................................................................................................... 116 Figure 61: Borrower Share of Home Price Appreciation Expected Case ...............................................................118 Figure 62: Borrower Share of Home Price Appreciation Conservative Case ...................................................... 119

6 I. EXECUTIVE SUMMARY
This report provides a design framework for
the California Dream for All, a proposed shared
appreciation loan investment fund for the
state of California. In July 2021, the California
legislature enacted Assembly Bill 140 (AB 140),
which empowered the California State Treasurer’s
Office to develop a design framework for the
California Dream for All program that makes
homeownership more affordable to low- and
moderate-income Californians.

California faces an unprecedented gap in access
to housing that is affordable, particularly for
ownership. Home prices across the state have
spiraled upwards for years. According to the
California Association of Realtors, the median
sales price for a single-family home was $786,000
in 2021—a 38% increase since 2018, before the
onset of the COVID-19 pandemic. Meanwhile,
incomes have failed to keep pace with increasing
prices. In 2020, the median home price was 8.5
times median yearly income —a level that is nearly
four times the ratio in 1969. Lack of affordability is
a challenge in every community across the state,
but is more acute in some regions than others. For
example, the median house price in the Bay Area
is nearly double the median house price in the
Inland Empire. Aspiring homeowners in the Inland
Empire still struggle to find the resources to afford
a home, but in the Bay Area, the challenge is even
more acute. These types of regional variations
abound across the state.

The high price of homeownership has
disproportionately impacted first-time
homebuyers. As house prices grew, so did the
amount of wealth necessary to make a down
payment on a house. In 2021, a 20% down
payment on a median price home would total
$119,000; this represents one and half times the
amount that the average household in California
makes in a year. Very few first-time homebuyers
have access to this level of savings, and as a
result, most choose to make much smaller down
payments, which in turn increases their monthly
mortgage costs. According to a survey by the
California Association of Realtors, first-time
homebuyers put down 6% compared to repeat
buyers who put down 12%. Homebuyers who
make smaller down payments must often take on
supplementary costs like mortgage insurance, and
frequently face additional fees or higher interest
rates. These costs make it difficult for first-time
homebuyers to maintain homeownership, or to
access the wealth benefits that homeownership
may offer.

Accessing homeownership and making a large
down payment is often even more difficult for
low-income communities and communities
of color. This program is designed to provide
assistance to homeowners from all disadvantaged
groups, especially those that have been the
targets of both legal and social discrimination.

Black and Latino households, for example, are far
less likely to receive down payment assistance
than are White households, and the percentage of
home loans going to Black and Latino families are
both approximately 20% lower than their shares
of the population. As a result, statistics on racial
disparities will often be used to highlight the gap
between communities of economic and social
privilege and those that need this program to
access the California dream of homeownership.

Yet it’s also clear that challenges extend far
beyond racial discrepancies—between 2010
and 2019, for example, the homeownership rate
decreased from 48% to 44% for all households
with incomes of less than $100,000. This program
is designed to benefit disadvantaged communities
of all demographics, and racial disparities are far
from the only driver of action.

California has a wide range of homebuyer
assistance programs that help households
access ownership, but their impact is limited.

The majority of homebuyer assistance programs
administered statewide offer between 3% and
5% down payment support, which is not enough
to eliminate the need for mortgage insurance in
most cases. And many of these programs at the
local and state level are constrained by uneven
funding allocations that make it difficult to serve
even a fraction of the need across the state.

Nevertheless, these programs have benefitted
many homeowners and will often work in
concert with the program outlined in this report
in some cases eliminating the need for a down
payment entirely. And the existing ecosystem of
service providers, mortgage underwriters and
community financial counselors that support
potential homebuyers through these programs
can be leveraged to serve a far larger number of
households.

One option to expand access to homeownership
in California is through a “shared appreciation”
loan (SAL) supported by the State. SALs
are repaid through a portion of the amount
that the home price appreciates in value over
time. Homebuyers do not make a payment on
the loan until they sell the property. A SAL as
designed below even splits the risk of home price
depreciation with homebuyers. The result of
this financing structure is both dependable and
lower monthly housing costs than other financing
options available to homebuyers with limited
savings. While a SAL cannot by itself solve the
supply-side issues that dramatically impacted
housing affordability in California, there may be
future opportunities to link shared appreciation to
other reforms in order to increase housing supply.

With a few key design decisions, a SAL
supported by the State could significantly
expand access to homeownership by making
homeownership more affordable and by
reducing the amount of wealth required to
purchase a home. Several privately-funded SAL
programs exist, but they generally have program
features that are less favorable to homebuyers
due to the rate of return required by the private
capital. In order to maximize public benefit and
support first-time homebuyers, a sustainable and
prudent long-term product should include the
following design features:
§ A loan amount that ensures a 20% down
payment, but no more than 30%;
§ Income targeting between 100% and 150%
of area median income to allow for regional
variation in home pricing;
§ A 1 to 1 (or “pro rata”) split between
the homebuyer and the program in the
appreciated value of the home;
§ Flexibility to target originations and design
terms to support disadvantaged communities
Helping households reach a 20% down payment
significantly reduces the cost of homeownership
and increases affordability. The size of the first
mortgage is reduced, and mortgage insurance
is eliminated, which substantially cuts monthly
payments. For example, if a household used a
SAL to achieve a 20% down payment instead
of relying on a Federal Housing Administration
(FHA) loan to purchase a median-priced home,
their monthly payment would fall by almost
$1,200. Shared appreciation offers a lower cost of
homeownership that makes it more sustainable
for homebuyers who would otherwise be unlikely
to own a home.

WHAT IS A SHARED APPRECIATION LOAN?
SALs offer an alternative to either public subsidy
or conventional mortgage financing. That is, a SAL
is repaid through a predetermined percentage of
the appreciation, or depreciation, in the home’s
value. This contrasts with conventional mortgages
that have a fixed or variable interest payment on
the outstanding loan amount. It also is different
from a subsidy program where the assistance is
not repaid.

At the time of the home purchase, SALs reduce
the amount of down payment borrowers need to
pay into the transaction. A SAL replaces some
or all of the down payment a household would
provide for a conventional loan.

SALs are commonly structured as second
mortgages. Second mortgage lenders can have
specific credit, equity and income requirements
that borrowers must meet. The primary
difference between a second mortgage and a
first mortgage is how repayment is prioritized. If
the borrower cannot repay the debt in full, both
loans are secured with the same asset, but the
first mortgage receives priority if the home is
foreclosed or sold to repay the debt. The second
mortgage lender therefore assumes more risk.

A SAL does not have monthly payments, and is
therefore often called a “silent second” mortgage.

The financial arrangement more closely resembles
an equity investment in the property than a
loan against the property. The basic terms of
the second mortgage, such as interest rate and
amortization schedule, are also set independently
of the first mortgage. A SAL can align with the
underwriting requirements of first mortgage
lenders and the requirements of the secondary
mortgage market because it becomes “junior”
to the first mortgage. In other words, the first
mortgage will be paid first in the event of a
borrower default resulting in a foreclosure sale.

Sellers or developers are indifferent to whether
a homebuyer uses a SAL. SALs do not directly
impact the buyer or seller; homes are sold at
a market rate through conventional market
transaction processes. The seller, whether an
investor, developer, or homeowner, lists the
property and can receive offers from potential
buyers with and without shared appreciation
financing.
7

8 The State can support SALs through a statewide
revolving fund: the CA Dream for All Fund. The
goal of the Fund would be to increase access
to homeownership for first-time homebuyers
and disadvantaged communities, including
previously redlined neighborhoods and historically
marginalized groups like communities of color.

The value created through appreciation will allow
the initial public funding to help new homeowners
in California for decades to come; for example,
with a present value investment of $10.8
billion, the State would help generate about
six times that amount in household wealth for
low- and moderate-income homebuyers, while
still continuing to receive future repayments
to assist later borrowers. If capitalized with
$1 billion annually for 10 years, the CA Dream
for All Fund is projected to be able to make
approximately $48 billion in loan originations over
40 years, benefitting 157,000 homebuyers in the
process. Assuming a rate of price appreciation
that matches the last 40 years in California,
assisted homebuyers would gain $134 billion in
wealth—a return that represents nearly six times
the taxpayer cost of capitalizing the Fund. With
this structure, the State faces very limited financial
risk because the allocations are expected to
revolve without exposure to additional financing
needs. The CA Dream for All Fund could be
financed through a combination of annual budget
allocations, general obligation bond funds and
revenue bonds.

Clear requirements should govern the program’s
financing options in order to optimize its
impact. To determine and assess program
financing options, several minimum thresholds
were set:
§ The funding approach should not limit who
the program can help, such as excluding
areas of the state or preventing the program
from assisting lower-income borrowers or
those who need larger amounts of assistance.
§ The funding approach must be compatible
with Fannie Mae and Freddie Mac
underwriting requirements and not prevent
borrowers from using government-sponsored
enterprise (GSE) first mortgages.
§ The funding approach should provide an
ongoing way to help first-time buyers
over many years to come, rather than only
helping buyers in the next few years, given
future affordability pressures anticipated in
California.
§ Investments of taxpayer funds need to be
sustainable, without significantly impacting
the State’s borrowing capacity, ability to
promote housing that is affordable or ability
to meet other critical needs.
§ The funding approach should not expose
the State to any meaningful future financial
risk—for example, by requiring the Stateto
cover shortfalls because of the CA Dream for
All portfolio’s performance.
§ The State should leverage taxpayer monies
with non-taxpayer monies so as to expand
the number of borrowers who are ultimately
served—consistent with the purposes of
the program, without narrowing who can be
helped, violating other minimum thresholds or
reducing borrower equity.

These basic minimum thresholds operate as
extremely important guardrails when considering
different financial approaches and structures.

Governance of the CA Dream for All Fund will
require collaboration between a variety of
stakeholders. The CA Dream for All Fund should
have a board as well as an administrator. In order
for the fund to meet its goals of supporting
first-time homebuyers and disadvantaged
communities, a community advisory board will
also be critical. The community advisory board
will help to ensure that specific groups or areas of
the state remain represented in the CA Dream for
All Fund’s borrowers.

The success of the CA Dream Fund for All will
depend on how well it connects to existing
systems and supports homebuyers who have
traditionally been left out and left behind.

In order to ensure that homebuyers both
benefit from and comprehend the terms of a
SAL, the CA Dream for All Fund will need to
incorporate housing counseling into every step
of the loan origination and servicing process.

Borrower outreach will also be critical to
ensure that mortgage lenders, counselors and
target homebuyers fully understand the loan
repayment mechanisms. Effective outreach will
require making clear and easy-to-understand
materials available in many languages. This is
especially important since the wealth building
benefits of the CA Dream Program accrue
slightly more slowly than standard fixed interest
rate down payment programs, and it is vital
that homeowners understand the benefits and
drawbacks of paying off their CA Dream for All
loan. Furthermore, it will be important that the
benefits of the program are clear to the real

9 estate industry—a group that includes not only
real estate brokers, but also developers who may
be able to structure new housing projects for CA
Dream for All Fund borrowers over time.

The following report offers a blueprint for
progress. First, it lays out the barriers to affordable homeownership facing Californians today, and the
necessity for decisive action. Second, it explains
the mechanics, uses and value of tools like shared
appreciation loans to tackle the problem. Third,
it proposes a comprehensive program designed
to address our challenges and accomplish our
objectives. Fourth, it lays out methods and
structures for funding and financing this program
in order to safeguard the State’s resources and
promote positive results. Fifth, it recommends
strategies for outreach, equity and implementation
to achieve the most effective impact. The report
is accompanied by an appendix of supplemental
materials including a glossary of terms, case
studies, preliminary program guidelines, and
additional supporting analyses.

Through deep research and analysis, this report
presents a clear view of a complex issue. It
demonstrates the stakes of our task and the
scope of our solutions. Ultimately, it serves as a
guide—describing where we have been, detailing
where we are, and illuminating a sustainable and
affordable pathway for homeownership.

10 II. INTRODUCTION & BACKGROUND
In July 2021, the California Legislature enacted
Assembly Bill 140 (Chapter 111, Statutes of 2021),
which provided for a study to be undertaken by
the California State Treasurer, in collaboration with
the California Housing Finance Agency and the
California Department of Housing and Community
Development and other relevant parties, to
develop a framework for a project called the
“California Dream for All” program.

Following the 2007-2009 financial crisis and the
ensuing Great Recession, capital requirements
for banks originating and holding mortgage
loans were altered in significant ways. The
resulting tightening of lending standards has
presented challenges to would-be first-time
homebuyers everywhere—but in California, where
median home prices in urban areas nearest to
employment opportunities have risen to all-time
highs, the problem is particularly acute.

The enabling legislation is aimed at reducing the
cost of home ownership for lower- and middle-
income Californians. The conceptual plan is also
intended to enable and encourage homebuilders
to sell homes at prices that are more attainable by
purchasers in these demographics.

Introduction
This report provides a design framework for
the California Dream for All, a proposed shared
appreciation loan investment fund for the
state of California. In July 2021, the California
legislature enacted Assembly Bill 140 (AB 140),
which empowers the California State Treasurer’s
Office to develop a design framework for the
California Dream for All program that makes
homeownership more affordable to low- and
moderate-income Californians.

This report by California Forward (CA FWD)
provides a summary of the challenges to
affordable homeownership facing Californians
today, the mechanisms by which a shared
appreciation loan (SAL) investment fund could
increase access to homeownership, the required
fund design to meet policy priorities, an approach
to financing and the implementation and
governance needs of the proposed design.
1 “Housing, Homeownership, and the Racial W ealth Gap.” California Community Builders, March 2022. Retrieved from: https:/ /www.ccbuilders.org/housing-homeownership- and-the-racial-wealth-gap/
2 “The State of the nation’s housing.” Cambridge, Mass.: Joint Center for Housing Studies of Harvard University, 2021. Retrieved from: www.jchs.harvard.edu/state-nations- housing-2021
3 Shapiro, T homas, Tatjana Meschede and Sam Osoro. “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide.” Institute on Assets and Social Policy, 2013. Retrieved from: drum.lib.umd.edu/bitstream/handle/1903/24590/racialwealthgapbrief.pdf What the RFP required
The State Treasurer’s Office RFP said that a core
goal of the CA Dream for All project would be
“making home ownership more affordable by
reducing the cost of such ownership for lower-
and middle-income Californians.” The project
team has committed to designing a program that
effectively broadens choices for disadvantaged
and vulnerable communities of all demographics—
especially those that have been victims of historic
and ongoing inequity in access to mortgage
financing and homeownership, including
communities of color.

A key component of fulfilling this commitment is
ensuring that, as the program is implemented, it
creates direct benefits for families and individuals
whose ability to participate in the mortgage
market has been impeded by current and historic
policy decisions.

Why this is important1
Homeownership provides people with the
opportunity to build generational wealth, and can
often be a tool for long-term economic prosperity
and success. Homeowners can take advantage of
economic opportunities like tax subsidies, and can
increase wealth by gaining value in assets that will
appreciate over time.

The ability to withstand a temporary loss of income
or significant unexpected expense depends
largely on having a reserve of wealth. In this
regard, homeowners have a huge advantage over
renters; in 2019, the median wealth of homeowners
was $254,900—more than 40 times the $6,270
median for renters. Even when we don’t account
for home equity, the median wealth of owners is
$98,500—more than 15 times that of renters.
2 Data
from a long-term study that followed about 1,700
households from 1984 through 2009 revealed that
a difference in years of homeownership was the
largest driver of the wealth gap between White
and Black families, accounting for 27% of the total
gap—a greater influence than household income,
differences in unemployment, college education,
inheritance and pre-existing family wealth.
3

11 Wealth changes our conception of social
inequality, its magnitude and its origins. We know
that wealth does not only rely on hard work or
discipline; it depends greatly on systemic factors
like access to capital, homeownership and other
wealth building tools. In many cases, these are
tools that the United States government made
accessible for some families while intentionally
leaving others behind—especially families of color
and immigrants.
4 The intergenerational nature of
wealth means that, without public interventions, it
will be impossible for families that have historically
been excluded from homeownership to catch up.
5 Access to homeownership should not be viewed
as a housing or shelter issue, but instead as one
concerning economic and social justice.

Homeownership is an important part of the
American Dream. More than 80% of renters
in America hope to own a home someday.
6 Homeownership helps families build wealth, and
when lending is done responsibly, it creates a
foundation for economic stability in the form
of fixed housing costs. Yet there is persistent
and well-documented inequality across racial
lines in the ability to access and maintain
homeownership.
7 White households are more
likely to own their homes than any other racial
group. For those non-White households lucky
enough to be homeowners, most are more recent
homeowners who are more likely to have high-risk
mortgages and are most vulnerable to foreclosure
and volatile housing prices.
8 The value of homeownership includes control
over one’s own space, stable monthly payments,
tax incentives and improved credit scores.
9 Home
equity accounts for 60% of the total wealth
among America’s middle class.
10 Eliminating racial
disparities in homeownership rates and home
equity gains would shrink the racial wealth gap by
31% and 16%, respectively, according to a recent
analysis by Demos.
11 4 Shapiro, T homas M. “Race, homeownership and wealth.” Wash. UJL & Policy 20, 2006. Retrieved from: openscholarship.wustl.edu/cgi/viewcontent. cgi?article=1242&context=law_journal_law_policy
5 Weller, Christian, and Lily Roberts. “Eliminating the Black-White Wealth Gap Is a Generational Challenge.” Center for American Progress, 2021. Retrieved from:
www.americanprogress.org/issues/economy/reports/2021/03/19/497377/eliminating-black-white-wealth-gap-generational-challenge/ 6 Shahdad, S. “Renters R eport Future Home Buying Optimism, Financial Assistance Available to Population with Higher Homeownership Rates.” Fannie Mae (blog), 2017.

Retrieved from: http:/ /www.fanniemae.com/portal/research-insights/perspectives/renters-homeownership-optimism-shahdad-092817.html. “2018 NAR Aspiring Home Buyers Pr ofile.” National Association of Realtors, 2018. Retrieved from: https:/ /www.scribd.com/ document/370976565/2018-Aspiring-Home- Buyers-Profile.
7 McCargo, Alanna, Jung Hyun Choi, and E dward Golding. “Building Black Homeownership Bridges: A Five-Point Framework for Reducing the Racial Homeownership Gap.” Urban Institute, 2019. Retrieved from: https:/ /www.urban.org/sites/default/files/publication/100204/building_black_ownership_bridges_1.pdf 8 Shapiro, T homas, Tatjana Meschede and Sam Osoro. “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide.” Institute on Assets and Social Policy, 2013. Retrieved from: drum.lib.umd.edu/bitstream/handle/1903/24590/racialwealthgapbrief.pdf 9 Darity, William Jr ., et al. “What We Get Wrong About Closing the Racial Wealth Gap.” Insight Center for Community Economic Development (2018). Retrieved from:
http:/ /narrowthegap.org/images/documents/Wealth-Gap---FINAL-COMPLETE-REPORT.pdf De La Cruz-Viesca, Melan y, et al. “Fifty Years After the Kerner Commission Report: Place, Housing, and Racial Wealth Inequality in Los Angeles.” Russell Sage Foundation (2018). Retrieved from: https:/ /www.rsfjournal.org/content/rsfjss/4/6/160.full.pdf 10 Shapiro, T homas M. “Race, homeownership and wealth.” Wash. UJL & Policy 20 (2006). Retrieved from: openscholarship.wustl.edu/cgi/viewcontent. cgi?article=1242&context=law_journal_law_policy
11 Sullivan, Laura, T atjana Meschede, Lars Dietrich, Thomas Shapiro, Amy Traub, Catherine Ruetschlin, and Tamara Draut, “The Racial Wealth Gap: Why Policy Matters,” Demos (2016). Retrieved from: www.demos.org/research/racial-wealth-gap-why-policy-matters In sum:
§ Wealth grants families and individuals many
benefits that impact their quality of life.

Of two families with the same income, but
different levels of wealth, the family with more
wealth has greater access to higher-quality
education, more funds for retirement, better
health, an improved ability to wait for the right
job, a greater possibility of passing on wealth
and better overall financial stability.
§ The ability to accumulate wealth does not
rely on factors like hard work or persistence.

Rather, it relies on access to resources and
capital that help individuals build wealth.

Today, for example, communities of color who
have not historically had access to wealth-
building tools face a racial wealth gap that
impedes their ability to reach economic
prosperity and stability.
§ Access to capital has been and remains a
major barrier to homeownership for low-
and moderate income families, people of
color and other disadvantaged communities.

Discrimination in lending practices and policies,
as well as other barriers, have impacted
disadvantaged communities for centuries—and
the results hare still being felt today.

Why a focus on communities
of color?
The California Legislature has for the past
five years shown a significant and consistent
commitment to addressing systemic inequality
and the needs of disadvantaged communities,
including communities of color, with a particular
focus on creating equitable outcomes for all.

Since 2018, examples of this commitment include
the creation of the Collaborative on Race and
Equity; passage of Assembly Constitutional
Amendment 5 of the 2019–20 Regular Session,

12 affirming the State’s commitment to race and
equity; creation of the Task Force to Study the
Impact of Reparations for the Black Community;
introduction of Senate Concurrent Resolution 92
of the 2019–20 Regular Session, which declared
racism a public health crisis; and the passage of HR
39, which resolved that the Assembly will explore
methods to integrate equity more formally into its
daily activities, including the potential adoption of
equity impact analysis into the existing committee
and floor bill analysis process.
12 An approach focused on equity and equitable
outcomes is especially important in efforts related
to homeownership. As the long-term financial
impact of the COVID-19 pandemic continues
to take shape, policy makers should learn from
the aftermath of the Great Recession and the
generational economic setbacks it caused for
communities of color. While the foreclosure crisis
caused the average family to lose 29% of their
wealth, Black Americans lost 48% due to the
dominant role of home equity in their wealth
portfolios and the prevalence of predatory
high-risk loans in communities of color.
13 At
the same time, the Latino community lost a
devastating 67% of total wealth.
14 Communities
of color shouldered the burden of the crisis and
were forced to either burn through their hard-
earned savings or go into debt. For example,
Black families’ holdings of stock and mutual
funds plummeted by two thirds—and given the
long-term impacts of compounding interest, it
will be very difficult to make up for this loss.
15 Discriminatory practices like redlining, mortgage
steering and racially restrictive covenants—in
addition to even wider structural problems like
a lack of access to credit and lower incomes—
have blocked the path to homeownership for
12 Adapted from March 26, 2022 “Equity Impact Assessment of Bills” briefing held by PolicyLink/Greenlining/EdTrust West. 13 Asante-Muhammad, Dedrick, Jamie Buell and Joshua Devine . “60% Black Homeownership: A Radical Goal for Black Wealth Development.” National Community Reinvestment Coalition, 2021. Retrieved from: https:/ /ncrc.org/60-black-homeownership-a-radical-goal-for-black-wealth-development/ 14 Shapiro, T homas, Tatjana Meschede and Sam Osoro. “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide.” Institute on Assets and Social Policy, 2013. Retrieved from: drum.lib.umd.edu/bitstream/handle/1903/24590/racialwealthgapbrief.pdf 15 Weller, Christian, and Richard Figueroa. “Wealth Matters: The Black-White Wealth Gap Before and During the Pandemic.” Center for American Progress, 2021. Retrieved from: www.americanprogress.org/issues/race/reports/2021/07/28/501552/wealth-matters-black-white-wealth-gap-pandemic/ 16 Shapiro, T homas M. “Race, homeownership and wealth.” Wash. UJL & Policy 20, 2006. Retrieved from: openscholarship.wustl.edu/cgi/viewcontent. cgi?article=1242&context=law_journal_law_policy
17 Shapiro, T homas M. “Race, homeownership and wealth.” Wash. UJL & Policy 20, 2006.: 53. Retrieved from: openscholarship.wustl.edu/cgi/viewcontent. cgi?article=1242&context=law_journal_law_policy
18 McCargo, Alanna, Jung Hyun Choi and E dward Golding. “Building Black Homeownership Bridges: A Five-Point Framework for Reducing the Racial Homeownership Gap.” Urban Institute, 2019. Retrieved from: https:/ /www.urban.org/sites/default/files/publication/100204/building_black_ownership_bridges_1.pdf 19 Park, K. A., & Quercia, R. G. “Who Lends Beyond the Red Line? The Community Reinvestment Act and the Legacy of Redlining.” Housing Policy Debate 30, no. 1:
4–26, 2020. https:/ /doi.org/10.1080/10511482.2019.1665839. As cited in Reid, Carolina. “Crisis, Response, and Recovery: The Federal Government and the Black/White Homeownership.” The Terner Center for Housing Innovation, UC Berkeley, 2021. Retrieved from: https:/ /ternercenter.berkeley.edu/research-and-policy/crisis-response-and- recovery-the-federal-government-and-the-black-white-homeownership-gap/ 20 Krimmel, J. “Persis tence of Prejudice: Estimating the Long Term Effects of Redlining.” Working Paper. Philadelphia, PA: University of Pennsylvania, 2018. Retrieved from:
https:/ /osf.io/uxeaz/. As cited in Reid, Carolina. “Crisis, Response, and Recovery: The Federal Government and the Black/White Homeownership.” The Terner Center for Housing Innovation, UC Berkeley, 2021. Retrieved from: https:/ /ternercenter.berkeley.edu/research-and-policy/crisis-response-and-recovery-the-federal-government-and- the-black-white-homeownership-gap/
households among communities of color, while
reinforcing racial neighborhood segregation.

Federal policies created in the 1930s during
the Great Depression made widespread
homeownership and middle-class wealth
accumulation possible by subsidizing and insuring
long-term, low-interest mortgages with a much
smaller down payment than was ever previously
possible. This action put homeownership within
reach for millions of people for the first time.

Future policies sustained this effort, including
by creating additional tax incentives and
by subsidizing highways to allow suburban
development. These efforts have contributed
to America’s 69% homeownership rate, which is
higher than in many other countries. However,
most of these subsidies only helped White
households—and at a time when homeownership
was becoming the primary vehicle for wealth-
building for the White middle-class,
non-White
communities were intentionally excluded from the
homeownership market for decades.
16 Today, the racial homeownership gap is widest
for those between 25 and 29 years old and
closes incrementally with age. The earlier in life
a person buys a home, the more wealth they
can accumulate as the home appreciates and
the mortgage loan gets paid down.
17 As a result,
home purchasing worsens wealth inequality for
future generations.
18 Neighborhoods that were previously redlined
still have higher poverty rates and less
economic mobility for children.
19 They still
experience a reduced housing supply, offering
fewer opportunities to buy.
20 Communities in
these neighborhoods tend to have a lower life

13 expectancy, and a higher incidence of chronic
diseases.21 At the same time, they also experience
lower quality broadband access as well as lower
house values and homeownership rates.
22 These disparities are clear—yet simply increasing
homeownership rates for households of color is not
enough. Under current conditions, homeowners of
color go into greater debt for less valuable homes.

The average first home of a Black purchaser is
valued at $127,000 and has $90,000 in mortgage
debt, while White first-time homebuyers have an
average home value of $139,000 with $75,000 in
mortgage debt.
23 Reasons for the homeownership
gap and home equity rising so much more for
White homeowners include:
§ The home-appraisal process has contributed
significantly to the racial wealth gap. The
history of redlining has led to homes in
predominantly White neighborhoods
appraising at nearly three times the value of
a comparable home in a neighborhood with
more communities of color.
24 § Financial institutions reject households of
color for home mortgages 60% more often
than White families, even with comparable
credit scores.
25 § White families have more wealth to give as
inheritances or to help with down payments,
allowing their children to buy homes and start
acquiring equity an average eight years earlier
than Black families.
26 § Due to having less money for down payments,
families of color face higher interest rates. As
a result, they tend to pay off their mortgages
more slowly while paying much more in
interest over the length of the loan.
21 “Redlining and Neighborhood Health.” National Community Reinvestment Coalition, 2010. Retrieved from: https:/ /ncrc.org/holc-health/. As cited in Reid, Carolina. “Crisis, Response, and Recovery: The Federal Government and the Black/White Homeownership.” The Terner Center for Housing Innovation, UC Berkeley, 2021. Retrieved from:
https:/ /ternercenter.berkeley.edu/research-and-policy/crisis-response-and-recovery-the-federal-government-and-the-black-white-homeownership-gap/ 22 Aaronson, D., Hartley, D., & Mazumder, B. “The Effects of the 1930s HOLC ‘Redlining’ Maps.” Chicago, IL: Federal Reserve Bank of Chicago, 2020. Retrieved from:
https:/ /www.chicagofed.org/publications/working-papers/2017/wp2017-12.

As cited in Reid, Carolina. “Crisis, Response, and Recovery: The Federal Government and the Black/White Homeownership.” The Terner Center for Housing Innovation, UC Berkeley, 2021. Retrieved from: https:/ /ternercenter.berkeley.edu/research-and-policy/crisis-response-and-recovery-the-federal-government-and-the-black-white- homeownership-gap/
23 Asante-Muhammad, Dedrick, Jamie Buell and Joshua Devine . “60% Black Homeownership: A Radical Goal for Black Wealth Development.” National Community Reinvestment Coalition, 2021. Retrieved from: https:/ /ncrc.org/60-black-homeownership-a-radical-goal-for-black-wealth-development/ 24 Howell, Junia, and Elizabeth Korver-Glenn. “Reassessing Value: Towards A Racially Equitable Appraisal Industry.” University of Pittsburgh, 2021. Retrieved from:
https:/ /www.minneapolisfed.org/~/media/assets/events/2021/racism-and-the-economy-focus-on-housing/howell-housing-proposal.pdf?la=en 25 Shapiro, T homas M. “Race, homeownership and wealth.” Wash. UJL & Policy 20, 53, 2006. Retrieved from: openscholarship.wustl.edu/cgi/viewcontent. cgi?article=1242&context=law_journal_law_policy
26 Shapiro, T homas, Tatjana Meschede and Sam Osoro. “The roots of the widening racial wealth gap: Explaining the black-white economic divide.” Institute on Assets and Social Policy, 2013. Retrieved from: drum.lib.umd.edu/bitstream/handle/1903/24590/racialwealthgapbrief.pdf 27 “Housing and Homeownership: Homeownership Ra te.” FRED Economic Data. Retrieved from: https:/ /fred.stlouisfed.org/release/tables?rid=296&eid=784188 28 Asante-Muhammad, Dedrick, Jamie Buell and Joshua Devine . “60% Black Homeownership: A Radical Goal for Black Wealth Development.” National Community Reinvestment Coalition, 2021. Retrieved from: https:/ /ncrc.org/60-black-homeownership-a-radical-goal-for-black-wealth-development/ 29 De La Cruz-Viesca, Melan y et al. “Fifty Years After the Kerner Commission Report: Place, Housing, and Racial Wealth Inequality in Los Angeles.” Russell Sage Foundation, 2018. Retrieved from: https:/ /www.rsfjournal.org/content/rsfjss/4/6/160.full.pdf 30 Asante-Muhammad, Dedrick, Jamie Buell and Joshua Devine . “60% Black Homeownership: A Radical Goal for Black Wealth Development.” National Community Reinvestment Coalition, 2021. Retrieved from: https:/ /ncrc.org/60-black-homeownership-a-radical-goal-for-black-wealth-development/ 31 “The State of the Nation’s Housing.” Cambridge, Mass.: Joint Center for Housing Studies of Harvard University, 2021. Periodical. Retrieved from:
www.jchs.harvard.edu/state-nations-housing-2021
§ Households of color typically have higher
student debt.

All these factors contribute to White families
having a homeownership rate that is 23
percentage points higher than the average for
non-White families throughout the country.
27 So, while homeownership has the potential to
create wealth for anyone, unfair and unequal
circumstances around homeownership widen
the racial wealth gap. Of all the assets that lead
to wealth, homeownership is often the first step
and acts as a launching pad to asset diversity.
28 To ensure a future of wealth and racial equity,
we must develop new ideas on how to increase
homeownership opportunities and build wealth
more equitably.
29 Low-wealth homebuyers have needs that
mainstream mortgage and homebuying
programs often fail to address. For example,
33% of Black households have thin credit files,
or credit-use levels that are insufficient for
generating a credit score, compared to only
18% of White households.
30 Structural racism
and other systemic factors that contribute to
unemployment, income and student loan debt
all affect credit history, which is a crucial factor
in the mortgage loan approval process. Black
borrowers fall 135 points below the overall
average credit score for conventional loans, and
Latino borrowers are 85 points lower.
31 Evidence
suggests that this difference has little or nothing
to do with individual borrower responsibility, and
a lot to do with the fact that the credit scoring
system is the product of a financial services
industry that has structurally disadvantaged
communities of color. Credit scoring systems
are well-known for disadvantaging households
of color. Including rent, cell phone and utility

14 payments in credit scoring could help households
of color demonstrate their creditworthiness.

While many of these issues have affected
individuals who have lived in America for
generations, more recent immigrants face
unique challenges. Although Asian and Pacific
Islander (API) households have a relatively high
homeownership rate of around 60% as a whole,
less than half of Pakistani (43%), Laotian (45%),
Thai (46%), Korean (46%), Pacific Islander (41%)
and Cambodian (39%) households own their
homes.
32 This disparity shows the importance
of disaggregated data when analyzing racial
equity indicators. Data broken down by ethnicity,
micro-geography and many other factors gives
us information that a broad category like “Asian
American” or “API” tends to obscure.

The Home Mortgage Disclosure Act (HMDA)
requires financial institutions to provide
mortgage data to the public. The first HMDA data
disaggregated by race collected in 1991 revealed
a striking racial disparity in loan denial rates for
different groups: Black households were denied
almost 250% more than White households, and
the Latino denial rate was 50% higher than the
White denial rate.
33 A study published in the
American Economic Review concluded that ‘‘even
after controlling for financial, employment, and
neighborhood characteristics, Black and Latino
mortgage applicants in the Boston metropolitan
area are roughly 80% more likely to be turned
32 Henderson, Jamila. “Homeownership is Unattainable f or Most Bay Area Black, Latinx, Cambodian, and Pacific Islander Households.” Bay Area Equity Atlas, 2021. Retrieved from: https:/ /bayareaequityatlas.org/node/65531
33 Appel, Ian. “Pockets of P overty: The Long-Term Effects of Redlining.” Boston College, Carroll School of Management, 2016. Retrieved from:
https:/ /papers.ssrn.com/sol3/papers.cfm?abstract_id=2852856 34 Appel, Ian. “Pockets of P overty: The Long-Term Effects of Redlining.” Boston College, Carroll School of Management, 2016. Retrieved from:
https:/ /papers.ssrn.com/sol3/papers.cfm?abstract_id=2852856 35 Galante, Carol, Carolina Reid and Rocio Sanchez-Moyana. “Expanding Access to Homeownership through Lease-Purchase.” The Terner Center for Housing Innovation, UC Berkeley, 2017. Retrieved from: https:/ /ternercenter.berkeley.edu/research-and-policy/lease-purchase/ 36 Traub, Amy, et al. “The Racial Wealth Gap: Why Policy Matters.” Demos, 2016. Retrieved from: https:/ /www.demos.org/research/racial-wealth-gap-why-policy-matters 37 Galante, Carol, Carolina Reid and Rocio Sanchez-Moyana. “Expanding Access to Homeownership through Lease-Purchase.” The Terner Center for Housing Innovation, UC Berkeley, 2017. Retrieved from: https:/ /ternercenter.berkeley.edu/research-and-policy/lease-purchase/ 38 McCargo, Alanna, Jung Hyun Choi and E dward Golding. “Building Black Homeownership Bridges: A Five-Point Framework for Reducing the Racial Homeownership Gap.” Urban Institute, 2019. Retrieved from: https:/ /www.urban.org/sites/default/files/publication/100204/building_black_ownership_bridges_1.pdf down than whites.’’34 Since the Great Recession, it
has become even more difficult for lower-income
families to access mortgage credit as lenders
tightened their lending rules.
35 If racial and ethnic
disparities in homeownership rates caused largely
by disparities in access to credit were eliminated,
the Black-White wealth gap would shrink by 31%.
36 Limiting access to homeownership only serves to
weaken the U.S. economy and widen the wealth
gap.
37 Securing enough cash for closing and a down
payment creates another huge barrier to
homeownership for many families. More than
half of renters see the down payment as the
major obstacle to buying a home. Increasing
the visibility of and access to down payment
assistance will especially benefit young
homebuyers of disadvantaged groups like
communities of color, who are less likely to receive
parental support when purchasing a home than
their White counterparts.
38 Access to Affordable
Homeownership in California
Californians have limited access to affordable
homeownership due to a series of barriers that
are detailed in the following section. The first
set of barriers is at the market level, where
the gap between housing demand and supply
continues to increase and home prices are
growing faster than household income. The result
is that homeownership is becoming increasingly
inaccessible to moderate-income renters, who
are remaining in rental units or moving out of the
state. The second set of financial barriers involves
more limited and expensive mortgage options
for first-time homebuyers than conventional
mortgage financing. There are also barriers at the
household level where homebuyers, particularly
from lower-income households, face difficulty
saving for closing costs and down payments,
often as a result of long-term racial inequality.

Finally, COVID-19 created market shocks
throughout the state that have further reduced
access to homeownership.

According to the most recent data
from the California Dream Index,
the homeownership rate is 35% for
Black families and 44% for Latino
families. White families have a 59%
homeownership rate.

15 Market Barriers: Supply Gap and
Price Growth
Despite strong income growth in the past decade,
housing prices have far outpaced income growth,
leading to larger affordability gaps. Figure 1 shows
that growing disparity: in 1960, the median house
price was 2.6 times the median income, but in
2020, the median house price had expanded to

8.5 times the median income. That increase has
been particularly steep over the last decade.

As a result, higher-income households have
39 Johnson, Hans. “Who’s L eaving California-and Who’s Moving In?” Public Policy Institute of California, 2022. Retrieved from: https:/ /www.ppic.org/blog/whos-leaving- california-and-whos-moving-in/
remained in apartments, which has crowded out
lower-income households. For instance, Figure
2 shows that, since 2010, the number of owner-
occupied housing units have only increased for
households earning more than $150,000, which
implies that homeownership has only been rising
for those households. A clear outcome of this
dynamic is people moving both within California
and out of state.
39 The growth in higher-income
renters is also an indication of the barriers to
homeownership in California.

Figure 1: Rising Home Price to Income Ratio in California 1969

0.0 2.0

6.0 10.0

4.0 8.0

12.0 1974
1969: 2.6
2020: 8.5
1979 1989 1999 20091984 1994 2004 2014 2019
Median House Price to Income Ratio
Source: California Association of Realtors 2021; California Department of Housing and Community Development 2021; HR&A Advisors Figure 2: Change in Housing Tenure by Income in California (2010-2019) -16%
Up to $25K $25K to $49K $50K to $99K $100K to $149K $150K or more Owner-occupied housing units
Renter-occupied housing units
-21%-12% -7%
-16%
+16% +66%
292234
-360
-254 -105
-125 -200
766
389
+169%
+1%
+1%
56%800000
600000
Number of Households
400000
200000
-200000
-400000
-600000
0 Source: American Community Survey 2010 and 2019; HR&A Advisors

16 Housing Demand and Supply
Imbalance
Declining homeownership can be linked in part
to the state’s housing shortage. In recent years,
statewide housing construction has lagged
relative to demand. Based on the Regional
Housing Needs Allocation (RHNA) projections
set by the California Department of Housing and
Community Development (HCD), the California
Housing Partnership estimates that the state must
develop at least an additional 490,000 housing
units (both rental and for-sale) by the end of
the Fifth Housing Element Cycle (approximately
40 California’s 1969 Housing Element Law requires all cities and counties to engage in detailed residential planning as part of comprehensive plan updates every five to eight years.
early 2024) in order to meet demand for very
low-, low- and moderate-income households.
40 For example, California is short nearly 110,000
units that are affordable to moderate-income
households (both deed- and non-deed-restricted)
and 238,000 units that are affordable to very low-
income households. The state appears unlikely to
meet these targets based on recent development
activity, as it only built 37,000 affordable units
between 2018 and 2020. In this same timeframe,
the median sales price of single-family homes
grew by at least 8% in every regional market.

Figure 3: Statewide Progress Toward RHNA Target (Unit Deficit/Surplus; 2015-2023) Moderate-Income
-109,739
Low-Income
-145,253
Very Low-Income
-237,870
-250,000 -200,000 -150,000 -100,000 -50,000 0
Source: California Housing Partnership 2021
Figure 4: Units Built Affordable to Moderate-, Low-, or Very Low-Income Households (2018-2020) Central
Valley
SacramentoInland
Empire
Bay AreaSan Diego-
Imperial
Los
Angeles
Central
Coast
Shasta/
Cascades
Sierra
Nevada
Redwood
Coast
Orange
Source: California Department of Housing and Community Development

17 Figure 5: Percentage Above or Below AMI Required to Purchase Median-Value Home OrangeCaliforniaLos AngelesBay AreaCentral
Coast
San Diego-
Imperial
Redwood
Coast
Inland
Empire
SacramentoSierra
Nevada
Central
Valley
Shasta/
Cascades
Source: California Association of Realtors 2021; California Department of Housing and Community Development 2021; HR&A Advisors Affordability and market conditions also vary by
region. Figure 7 shows the required percentage
of Area Median Income (AMI) needed to afford
a median-priced home across subregions in
California with a 20% down payment. In the Los
Angeles region, where the median home value is
over $788,000, a household requires an income of
at least $111,900, or 140% of the AMI, to purchase
a home affordably at that price. Other high-cost
markets face similar challenges, including Orange
County, the Bay Area, the Central Coast and San
Diego-Imperial. This affordability gap may be
attributed to the slow rate of for-sale housing
production in these areas. Despite accounting for
more than two-thirds of the state’s population,
these five submarkets accounted for just 12% of
affordable for-sale housing construction between
2018 and 2020. Figure 6 shows the regional
breakdown of for-sale units built between 2018
and 2020 that are affordable to moderate-, low-
or very low-income households.

Financing Barriers: Expensive Loan
Products
For many homebuyers, the viability of
homeownership also depends on the types of
mortgage finance to which they have access.

Though there are many types of mortgages, most
can be classified as either government-insured
mortgages or conventional mortgages. These
mortgages offer significantly different terms
and service different homebuyers. Conventional
mortgages are offered by a range of private
financial institutions and generally require higher
down payment amounts than the government-
insured mortgages. Government mortgage
insurance, meanwhile, is primarily provided by the
three main agencies:
§ Federal Housing Administration (FHA): FHA is
an agency within the Department of Housing
and Urban Development (HUD) and is the
largest provider of government mortgage
insurance. Because FHA requires a minimum
of only 3.5% down payment from borrowers,
FHA loans are popular among first-time
buyers who have little savings or have credit
challenges.
§ Department of Veterans Affairs (VA): The VA
provides a guarantee on certain mortgages
made to veterans.
§ U.S. Department of Agriculture (USDA): The
USDA administers a direct loan program for
low-income borrowers in rural areas and a loan
guarantee program for low- and moderate-
income borrowers in rural areas.

Figure 6: Loans Originated for First-Time Buyers in the US (2005-2020)

2.5M
loans

1.2M
loans

1.6M
loans

2.4M
loans
Loan
Originator
Source: National Mortgage Database 2022

18 Figure 7: Mortgage Insurance Requirement by Types of Mortgage Products Loan Product Minimum Down
Payment
Insurance Type Upfront Premium Annual Payment*
FHA 3.50% Mortgage Insurance
Premium (MIP) 1.75% of loan amount ~0.85-1.05% of loan amount Conventional 3.00% Private Mortgage
Insurance (PIM) None ~0.58-1.86% of loan amount
Conventional 20.00% - None None
*Depends on the borrower’s down payment, first mortgage size, loan term, and credit score. 41 “FHA-Insured Home L oans: An Overview.” Congressional Research Service, January 21, 2022. Retrieved from https:/ /crsreports.congress.gov/product/pdf/RS/RS20530/3 42 FHA Annual Management Report Fiscal Year 20 21, p. 15. U.S. Department of Housing and Urban Development. https:/ /www.hud.gov/sites/dfiles/Housing/documents/ FHAFY2021ANNUALMGMNTRPT.pdf. These figures are for FHA-insured forward mortgages and do not include FHA-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs).
43 Ibid.
44 Genworth Mortgage Insurance, Ginnie Mae, and Urban Institute. FHA rate from MBA Weekly Applications Survey. Conforming rate from Freddie Mac Primary Mortgage Market Survey. Note: Rates as of March 24, 2022.
45 Ibid; assuming ra tes for borrowers with FCIO 760 and higher FHA-insured mortgages play a particularly
large role for first-time homebuyers, low- and
moderate-income households and minorities both
because of its smaller down payment requirement
and because of its less stringent requirements
related to credit history compared to conventional
loans.
41 For example, since 2000, approximately
80% of FHA mortgages were made to first-time
homebuyers and one-third of FHA loans were
made to borrowers in communities of color.
42 In
fact, twice as many FHA mortgages are made
to Black and Latino borrowers as the rest of the
market.
43 Notably, FHA loans represent about
24% of all loans made to all households making
less than 100% AMI. This share is even higher for
Black and Latino households, where the share
of FHA loans is 36% and 39% respectively. The
FHA clearly plays a central role in providing
credit to borrowers not adequately served by the
conventional market. This role has increased since
the Great Recession, with both FHA loans and
other government-insured loans accounting for a
larger share of first-time homebuyer’s’ mortgages
in 2020 than in 2005.

Although FHA-insured loans expand access to
homeownership, the mortgages can be more
expensive than conventional loans. Figure 11
details the mortgage insurance requirements
for FHA and conventional loans.
44 Mortgage
insurance protects lenders from the risk of higher
leverage loans by limiting losses if the borrower
defaults. Borrowers with FHA-insured mortgages
pay Mortgage Insurance Premiums (MIPs), which
carry an upfront cost (UPMIP) equal to 1.75% of
the loan amount and an annual premium ranging
from 0.85% to 1.05% of the original loan amount
for the life of the loan, mostly depending on loan
size. Borrowers with conventional mortgages
who have down payments less than 20% are
required to pay Private Mortgage Insurance
(PMI), which is structured as a monthly payment
ranging from 0.58% to 1.86% of the original
loan amount per year mostly depending on the
borrower’s credit score until the homeowner
reaches 78% loan-to-value or the borrower has
22% equity in their home.

With insufficient income or savings to afford
a 20% down payment, asset-poor households
have to take out a higher mortgage amount and
incur higher monthly payments due to mortgage
insurance premiums, which further contributes
to the housing burden and deteriorates their
financial condition. As illustrated in Figure 10,
if a household is able to afford a 20% down
payment on a median-priced home in California
($786,000), or $157,000, their monthly mortgage
payment is at $3,157 with conforming loan at rates
prevailing at the time this report was prepared. If
the household is only able to afford a 3% down
payment, the monthly mortgage payment will
have to increase by $1,018 due to the larger
mortgage amount and the lender’s requirement
for private mortgage insurance.
45 If the household
opts for a FHA loan with a 3.5% down payment,
the monthly payment is even higher at $1,180 as a
result of the FHA mortgage insurance premium.

19 Figure 8: Mortgage Payment Comparison - FHA vs. Conventional Loan Conventional Loan FHA
Down Payment 20.00% 3.50% 3.50%
1st Mortgage Payment $3,160 $3,810 $3,800
PMI / FHA MIP $0 $370 $540
Total Monthly Mortgage Payment $3,160 $4,180 $4,340
Monthly Savings $1,020 $1,180
46 HMDA 2020.
47 “What is a Qualified Mortgage?” Consumer Financial Protection Bureau, 2019. https:/ /www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/ 48 Ibid.
49 Goodman, Laurie, and Rat cliffe, Janneke. “The Tight Housing Market Boxes Out Government-Insured Borrowers, Widening Homeownership Gaps.” Urban Institute, 2021. https:/ /www.urban.org/urban-wire/tight-housing-market-boxes-out-government-insured-borrowers-widening-homeownership-gaps Despite the differences in monthly mortgage
payments, asset-poor households can also
struggle to secure a competitive mortgage. In
2020, mortgage applicants with debt-to-income
(DTI) ratios above 42% were nearly 2.5 times as
likely to be denied loans as those with ratios at or
below 35%.
46 This reflects the “ability to pay rules”
that set the highest DTI a borrower can have at
43% DTI for qualified mortgages.
47 Regulation Z
sets the requirements for qualified mortgages,
which demonstrate to the secondary market
that the creditors have made a “reasonable,
good faith determination of a consumer’s ability
to repay any residential mortgage loan.” The
maximum DTI to receive Qualified Mortgage
status is 43%. Homebuyers with higher DTI loans
must take out non-qualifying mortgages that
have additional fees and higher interest rates
than qualifying loans. In California, more than a
third of homebuyers had a DTI over 42%, which
implies many Californian’s have non-conforming
mortgages.
48 Furthermore, it reveals that many
households access homeownership by putting
themselves in precarious financial situations.

The combination of a small down payment and
a less competitive mortgage further constrains
how much a household can offer for a home. This
puts many buyers at a significant disadvantage,
especially in market environments where home
costs are accelerating faster than wages and
income. Small down payment mortgages are
also less attractive to sellers, putting borrowers
at a further disadvantage—especially in highly
competitive markets. A recent survey found that
89% of home sellers would be “likely” to accept
an applicant with a conventional loan, but only
30% would be likely to accept an applicant with a
loan backed by either the FHA or the Department
of Veterans Affairs (VA).
49 This discrepancy may
be attributed to the additional terms that come
with government-issued mortgages as well as a
perception of elevated risk associated with the
buyer’s ability to secure financing. All-cash offers,
by contrast, offer more guarantees that the sales
transaction will close.

Figure 9. Share of Total Borrowers with High Debt
(>42% DTI) by Region (2020)
Redwood Coast, 37%
Sierra
Nevada,
32%
Bay
Area,
24%
Shasta/
Cascades,
33%
Central Valley,
34%
Central Coast, 36%
Los Angeles, 36%
Orange, 33%
Insland
Empire, 45%
San Diego-Imperial,
45%
Sierra Nevada,
32%
Sacramento,
40%
<30%
30% – 35%
36% – 40%
>40%
Overleveraged Borrowers
by Region
Source: HMDA 2020

20 Household Barriers: Savings, Wealth
and Racial Inequality
Limited assets pose a major barrier to accessing
homeownership. Surveys at the national level
indicate that a lack of assets for a down payment
may be the most significant barrier for prospective
homebuyers. A 2021 survey of 2,500 non-
homeowners found that 54% could not afford
a down payment.
50 This result is consistent
with a separate 2017 survey, in which 68% of all
respondents cited down payment as a barrier.
51 While many low- and middle-income households
struggle to save, asset-building is even more
difficult for households of color. For instance, the
median-income White household typically requires
nine years of savings to afford a 5% down payment
compared to 14 years for Black households and 11
years for Latino households.
52 This disparity reflects
mortgage lending practices that deny households
of color access to homeownership and economic
mobility, perpetuating an intergenerational racial
wealth gap.

High student debt further constrains homebuyers’
ability to save for a down payment. In 2019, the
median net worth of young renter households
with a bachelor’s degree was $62,000 if they were
debt free—more than twelve times the net worth
of a similar household with debt (-$4,860).
53 The
difference between these two situations shows
how student debt impacts wealth accumulation.

Although a bachelor’s degree may lead to higher
earning potential over an individual career, the
additional income often goes to pay off student
debt in the early years. This added debt burden
50 McNair, Kamar on. “48% of Renters Worry They’ll Never Be Able to Buy; Down Payments Biggest Barrier.” LendingTree, 2021. https:/ /www.lendingtree.com/home/ mortgage/homeownership-renting-survey/
51 Gudell, Svenja. “Do wn Payment the Top Hurdle Holding Back Would-Be Home Buyers.” Zillow, 2017. https:/ /www.zillow.com/research/down-payment-hurdle-zhar-14790/ 52 “Hardship for Renters: Too Many Years to Save for Mortgage Down Payment and Closing Costs.” Center for Responsible Lending, April 2021. https:/ /www.responsiblelending.org/research-publication/hardship-renters-too-many-years-save-mortgage-down-payment-and-closing-costs 53 “Hardship for Renters: Too Many Years to Save for Mortgage Down Payment and Closing Costs.” Center for Responsible Lending, April 2021. https:/ /www.responsiblelending.org/research-publication/hardship-renters-too-many-years-save-mortgage-down-payment-and-closing-costs 54 “2021 Homebuyer Insights Report. First-Generation Homeowner Spotlight.” Bank of America, 2021. makes it more difficult for potential homebuyers to
save the necessary down payment.

Furthermore, first generation homebuyers are
also constrained by a lack of intergenerational
wealth transfers that help them save for a down
payment. One survey found that only 37% of
first-generation homebuyers received help from
their parents, compared to 51% of all first-time
homebuyers.
54 This difference begins to reveal
how beneficial homeownership is for multi-
generational wealth building. Homeownership
offers an opportunity to pass wealth between
generations that puts first-generation
homebuyers at a disadvantage when trying to
save for a down payment.

As a result of these constraints, many homebuyers
are priced out of the market. A smaller down
payment correlates to higher mortgage payments,
which many low- and moderate-income
homebuyers cannot afford. Figure 10 shows
how much more savings a homebuyer needs to
accumulate to make a 20% down payment on a
median price compared to a 10% down payment
in different regions across the state. The difference
ranges from approximately $5,200 to $18,000. The
implication is that first-time homebuyers may need
to save for many more years, and may never have
enough savings to make a 20% down payment.

These conditions create a competitive market that
strongly disadvantages low- and moderate-income
households.

21 Figure 10: Income Required to Make a 10% and 20% Down Payment Source: HR&A Advisors
55 “HMDA Data R eveals Refi Boom During Pandemic, But Not For Black and Hispanic Homeowners.” National Community Reinvestment Coalition, 2021. https:/ /www.ncrc.org/hmda-data-reveals-refi-boom-during-pandemic-but-not-for-black-and-hispanic-homeowners/ 56 HMDA, 2020.
57 HMDA, 2020.

Racial Disparity in Access to
Homeownership
Despite federal legislation prohibiting
discrimination in the homebuying process,
people of color continue to have more limited
access to mortgage finance. While Latino and
Black households account for 39% and 5% of all
California households, respectively, they accessed
just 31% and 4% of all home purchase loans in
2020.
55 Many households of color who do access
loans may still be at a competitive disadvantage.

Figure 11 shows that Latino households accounted
for 56% of all government-issued mortgages, but
just 23% of conventional mortgages. Mortgage
underwriting criteria are partially responsible for
these disparities; Black households nationally had
a median DTI ratio of 41% in 2020, compared to
37% for White households, and as of October
2020, 45% of Black consumers nationally had
subprime credit scores, compared to 18% of White
consumers.
56 However, economic characteristics do not fully
explain racial disparities in mortgage access. In
2020, California lenders made fewer loans to
Black applicants than White applicants, even
when their incomes were high, $100,000 a year or
more, and even when accounting for household
debt.
57 In fact, high-earning Black applicants with
low debt were rejected more often than White
applicants in the same category and nearly as
often as high-earning White applicants with
high debt. Black applicants are also nearly twice
as likely to be denied conventional mortgages
as White applicants, even when controlling for
income.

22 Figure 11: Racial Disparities in Home Purchase Loan Access in California (2020) Figure 12: Loan Application Denial Rates for All Applicants and Applicants Over 120 AMFI, by Race All Applicants Applicants Over 120 AMFI
Figure 13: Loan Application Denial Rates for Low-Debt and High-Debt Applicants, by Race Low Debt High Debt
Source: HMDA 2020

23 Figure 14: Share of Conventional and FHA Loans Issued to Borrowers, by Race 58 “Measuring the Crisis: Housing Data during the CO VID-19 Pandemic.” Urban Institute, 2020. 59 Mortgage Credit Availability Index. Mortgage Bankers Association. Retrieved from: https:/ /www.mba.org/news-and-research/research-and-economics/single-family- research/mortgage-credit-availability-index-x241340
COVID-19 Impacts
The COVID-19 pandemic has negatively impacted
existing and prospective homeowners. Through
the first several months of the pandemic, an
estimated 9.8% of American homeowners could
not pay their mortgage on time.
58 These hardships
have coincided with a reduction in home loans
issued by banks and other mortgage lenders—also
known as “credit tightening.” Credit tightening can
result from lenders requiring more stringent terms
or the application of more restrictive regulation of
the credit underwriting process, as was the case
following the Great Recession. According to the
Mortgage Credit Availability Index (MCAI), the
availability of home loans nationwide dropped
nearly 35% between February and September
2020. Credit availability has slightly rebounded
since then, with a 5% increase between
September 2020 and January 202,2 but it remains
far below pre-pandemic levels. These constraints
persist amid a continued escalation of home
prices. Between 2020 and 2022, the median home
price in California rose more than 26%.
59 In response to this crisis, the State has dedicated
funding to address housing affordability as part
of its recovery effort. Through the California
Comeback Plan, the State will dedicate over $3
billion to increase the supply of housing that is
affordable to low-income families and increase
access to homeownership. The CA Dream for
All program is an important component of this
allocation.

24 III. SHARED APPRECIATION LOAN
The following will lay out the basics of a shared
appreciation loan, or SAL; how it benefits
households compared to other home financing
options; and the limitations of a SAL, particularly
in a supply-constrained market like California.

SALs offer an alternative to either public subsidy
or conventional mortgage financing. That is, a SAL
is repaid through a predetermined percentage of
the appreciation, or depreciation, in the home’s
value. This contrasts with conventional mortgages
that have a fixed or variable interest payment on
the outstanding loan amount. It also is different
from a subsidy program where the assistance is
not repaid.

At the time of the home purchase, SALs reduce
the amount of down payment borrowers need to
pay into the transaction. A SAL replaces some
or all of the down payment a household would
provide for a conventional loan. For example,
Figure 15 shows a conventional loan with a 20%
down payment and first mortgage. The SAL
example reduces the down payment to 5% and
replaces the balance with the SAL by providing
down payment funds from a third party source.

Figure 15: Conventional Home Purchase vs. Shared
Appreciation Home Purchase
Source: HR&A Advisors
SALs are commonly structured as second
mortgages. Second mortgage lenders can have
specific credit, equity and income requirements
that borrowers must meet. The primary
difference between a second mortgage and a
first mortgage is how repayment is prioritized. If
the borrower cannot repay the debt in full, both
loans are secured with the same asset, but the
first mortgage receives priority if the home is
foreclosed or sold to repay the debt. The second
mortgage lender therefore assumes more risk.

A SAL does not have monthly payments, and is
therefore often called a “silent second” mortgage.

The financial arrangement more closely resembles
an equity investment in the property than a
loan against the property. The basic terms of
the second mortgage, such as interest rate and
amortization schedule, are also set independently
of the first mortgage. A SAL can align with the
underwriting requirements of first mortgage
lenders and the requirements of the secondary
mortgage market because it becomes “junior”
to the first mortgage. In other words, the first
mortgage will be paid first in the event of a
borrower default resulting in a foreclosure sale.

Sellers or developers are indifferent to whether
a homebuyer uses a SAL. SALs do not directly
impact the buyer or seller; homes are sold at
a market rate through conventional market
transaction processes. The seller, whether an
investor, developer, or homeowner, lists the
property and can receive offers from potential
buyers with and without shared appreciation
financing.

Figure 16: Shared Appreciation Loan at Purchase and
Sale
Conventional Home Purchase
Purchase PurchaseSales Sales
Shared Appreciation Loan
Home Purchase
Source: HR&A Advisors
The cost of a SAL to a borrower depends mainly
on the level of home price appreciation and is
aligned with market condition and household
repayment capacity. One way to understand the
cost of the loan is to evaluate the true annual cost
as measured by the effective annual interest rate
(EAR). With a pro rata SAL, the EAR is the annual
rate of home price appreciation of the property,
despite the size of the SAL. The EAR takes into
consideration regional variances and differences
in home conditions and valuation.

25 Existing Shared Appreciation Loan
Programs
Among existing SAL programs, privately and
publicly funded programs focus on different
homebuyers. The privately funded SAL programs
tend to bear higher cost of capital and therefore
restrict eligible markets, property types and
borrowers to increase the program’s expected
return to the entity providing the capital. This is
a result of private sector investors’ demand for
higher returns on investment to meet their cost
of capital. Such returns are anything but arbitrary;
they are driven by market forces in an investment
world that balances risks with rewards. The result
is that private programs cannot provide sufficient
subsidy or long-term investment to meet many
low-and-moderate income households’ needs,
largely because of uncertainty around the timing
of repayments of the initial capital investment.

Private and public SAL programs target different
homebuyers. That is, private programs offer
both lines of credit for existing homeowners
and upfront financing for first-time homebuyers.

Private programs typically provide loans to
high-income or moderate-income households
in housing markets with strong appreciation.

Finally, private program terms are weighted to
provide a greater share of appreciation to the SAL
loan repayment than the typical public program
that is often pro rata sharing or forgivable (See
Appendix B for more detailed information on
existing shared appreciation programs). Public
SAL programs, on the other hand, tend to focus
on first-time homebuyers and target low- to
moderate-income homebuyers.

Comparison with Other Shared
Equity Models
It should be noted that a SAL is fundamentally
different from other shared equity models
like limited equity cooperatives (LECs) and
community land trusts (CLTs). Most other shared
equity homeownership models aim to preserve
affordability by adding a long-term restriction on
the sales prices rather than allowing households
to reap the full benefits of home appreciation at
sale. Meanwhile, a SAL program typically does not
have an affordability component, and is focused
on building assets for borrowers and sharing
market risks.

Figure 17: Key Features of Private Shared Appreciation Programs Program Feature General Definition
Program Serves Existing homeowners and first-time homebuyers Funding Sources Private investors incl. institutional investors, venture capital, REITs Loan Amount 5%-30% of beginning property value
Maximum loan amounts in the range of $120,000 - $600,000 Borrower Eligibility 500+ credit score, 75%-95% LTV, some down payment contribution Appreciation Share Split Programs receive appreciation split of 2.5:1 or higher.

Downside Protections Most programs share downside risk but may apply an upfront risk adjustment Repayment Events Repayment typically occurs at borrower buy-out of the loan, home sale, or refinance. In some cases, borrower can refinance without repaying the SAL.

Examples Landed, Unison, Hometap, Noah, The Point

26 Shared Appreciation Loan and Traditional First-Time Homebuyer Assistance There are a number of existing types of public support that a first-time homebuyer can access, as described in Figure 19. Though the exact terms vary, the common limitation is the amount of assistance, which is typically below 5% of purchase price. In addition, most programs operate at a small scale with a long waiting list. A well-designed statewide SAL program could complement the existing financing options to overcome limitations of the existing programs.

Figure 18: Comparison with Shared Equity Homeownership Models Model Type Primary Goal Description
Limited Equity
Cooperative
(LEC)
Shared Equity
Long-term
affordable
housing stock
Residents jointly own shares in a cooperative which in turn owns housing units. Co-op members pay a monthly fee to
cover shared expenses. Ownership shares can be sold based on a formula which typically maintain affordability.

Community
Land Trust
(CLT)
Shared Equity
Long-term
affordable
housing stock
A nonprofit entity (the CLT) purchases and holds a portion of the property (typically, the land value) and an income- qualified homebuyer owns the remaining portion (typically, the house). The CLT retains ownership of its portion at sale, which much be made to another income-qualified homebuyer, thus preserving the home for affordable homeownership.

Shared
Appreciation
Loan (SAL)
Shared
Appreciation
Wealth-building
for homebuyers
A lender provides a “silent second” mortgage to a homebuyer or existing homeowner in exchange for a share of the
appreciated value on the home over the term of the loan.

Figure 19: Common Homeownership Financing Options for First-Time Homebuyers Public Finance Instrument General Definition
Forgivable Down Payment
Assistance
Public subsidy with no repayment and interests, typically within a range of 3-5% of purchase price with the rare exception up to 10%, such as the CalHFA Forgivable Equity Builder Loan
Fixed Rate Down Payment
Assistance
Silent second mortgage with fixed simple interest rate that accrues and is due at exit, typically up to 3-4% of purchase price, such as the CalHFA MyHome Program Closing Cost Assistance
Program
Silent second mortgage with zero interest, typically up to 3-4% of purchase price with zero interest, such as the CalHFA ZIP Program
Shared Appreciation Silent second mortgage with no monthly payment and is due at exit based on a percentage share of home price appreciation or depreciation CalHFA MyHome Program
The MyHome program is second, silent mortgage that covers the lessor of 3% of the loan amount and $15,000 (up to 3.5% for FHA), sits in te second lien position, and can be layered with any CalHFA first mortgage. To qualify for the MyHome program, the borrower must be first-time homebuyer, complete homebuyer education, and meet the CalHFA income limits of 150% of county AMI by household size. Public school and Fire Department employees, new construction properties, manufactured housing properties, and single-family homes with ADUs are exempt from the loan amount limit.

Loan Amount: 3% (3.5% for FHA) of the first mortgage up to $15,000 Eligible Use(s): Down Payment and Closing Coast Assistance 60 60 MyHome Assistanc e Program. CalHFA, 2022. https:/ /www.calhfa.ca.gov/homeownership/programs/myhome.pdf

27 CalHFA Forgivable Equity Builder Loan
The Forgivable Equity Builder Loan (FEB Loan) is an forgivable, zero percent interest second lien for first-time homebuyers that covers the loan amount up to 10% of the sales price of appraised value. To qualify for the FEB Loan, the borrower must receive approval for any CalHFA first mortgage that does not utilize the ZIP program, earn income at or below 80% AMI, be a first- time homebuyer, and take education. The Loan is forgiven is the borrow stays in the residence for five years; or, if paid off or sold before the first five years of the term, is forgiven on an annual pro-rated basis. The program is funded by federal proceeds from the Build Back Better bill.

Loan Amount: 10% of the sales price or appraised value
Eligible Use(s): Down Payment Assistance
61 CalHFA ZIP Program
The ZIP is used to cover closing costs, it will not reduce the first mortgage amount and thus cannot reduce the LTV on a first mortgage. To qualify for the ZIP program, the first mortgage must be CalPLUS Conventional or CalPLUS FHA, limiting eligibility to borrowers with income at or below 80% of county AMI, set by Fannie Mae, and those who have completed homebuying counseling. The ZIP program provides closing cost assistance equal to 2 or 3% of the loan amount and sits in the third lien position.

Loan Amount: 2-3% of the first mortgage
Eligible Use(s): Closing Cost Assistance
62 Advantages of Shared Appreciation
As illustrated in Figure 20, each of these home purchase financing options has its unique benefits and drawbacks in terms of its ability to balance public and homebuyer priorities. With limited public funding resources, there is a direct tradeoff between the need to maximize the number of households assisted and the level of support provided to each individual homebuyer. SAL’s most compelling advantage is the combination of reducing the monthly payment to a household, while generating revenue to serve future households and providing protection to the homebuyer in the event of depreciation. The biggest drawback is the financial complexity of the terms for a SAL.

Figure 20: Public and Homebuyer Priorities by Various Financing Options Financing
Instruments Public Priorities Homebuyer Priorities
Financing Option Recycle to new
home buyer
Targeting specific
population
Downside
protection
Reduced monthly
mortgage
Financial
simplicity
Forgivable DPA
Fixed Rate DPA
Shared Appreciation
FHA Loan w/o DPA
Source: HR&A Advisors
61 CalHFA Con ventional Loan Program Handbook. CalHFA, 2022. https:/ /www.calhfa.ca.gov/homeownership/programs/archive/2022/20220510/loans-conventional-05-10.pdf 62 Forgivable Equity Builder Loan. CalHFA. 2022. https:/ /www.calhfa.ca.gov/homeownership/programs/ForgivableLoan.pdf

28 Reduced Monthly Mortgage Payment
A SAL structure can provide deeper down
payment assistance than most existing public
down payment assistance (DPA) programs. That
is, most existing forgivable and fixed rate DPA
programs offer assistance equal to 3-5% of the
purchase price. A few programs offer up to 10%
assistance. The size of existing subsidies reflects
that large forgivable down payment assistance to
individual homebuyers is financially unsustainable,
since the funds do not replenish. In contrast, a
much larger average loan size, close to 20% of
the purchase price, is financially sustainable with
a SAL because the loan repayments replenish the
initial investment.

For a SAL to significantly impact wealth
accumulation and bestow the benefits of
homeownership, a 20% down payment is
necessary to eliminate high mortgage insurance
premiums and significantly reduce monthly
housing costs. As mentioned earlier, households
must contribute a minimum 20% down payment
in order to access conventional loans without
private mortgage insurance. For example, to
purchase a median-priced home in California
($786,000 in 2021) with a conventional loan,
a homebuyer would need to make a $157,000
down payment. With a 17% SAL, a homebuyer can
save $133,000 and only need to put 3% down.

The homebuyer would also reduce their monthly
mortgage payments by 27%, or $1,180, by avoiding
mortgage insurance premiums and taking a lower
leverage first mortgage, as illustrated in Figure 23.

SALs allow homebuyers to access
homeownership with lower incomes than either
conventional or FHA loans. A large SAL lowers
monthly payments, reducing the financial burden
and lowering the income required to qualify for
the first mortgage. As shown in Figure 21, to
purchase the median price house with a SAL,
homebuyers would need an income of $88,000,
or 114% of median income. Without the SAL,
homebuyers would need an income of $121,000,
or 156% of California’s median income. Although
the FHA loan supports increased access to
mortgage financing, the current structure puts
homeownership out of reach for a large share of
Californians.

Support Wealth Accumulation
A well-designed SAL can provide borrowers the
opportunity to build wealth in upside scenarios
and share losses in downside scenarios. Figure
22 illustrates the impact to homebuyer equity with
a pro rata SAL that provides 17% of the purchase
price under both an upside scenario assuming 6%
annual home price appreciation and a downside
scenario where property value stays flat.

When the borrower sells the property at Year
10 in the upside scenario, the effective interest
rate for SAL is 6%, and households are able
to earn 22.9 times their initial down payment
equity due to first mortgage amortization and
shared appreciation sharing the upside. In the
downside scenario, the effective interest rate for
a SAL would be 0%. Households are still able
to gain 2.3 times for their equity due to a first
mortgage amortization and shared appreciation
not charging any effective interests. This scenario
shields the borrower from an economic downturn
and adjusts the second mortgage repayment
amount in alignment with market conditions.

When compared to a fixed rate silent second
mortgage of the same loan amount that charges
a 3% annual simple-interest over 10 years, a pro
rata SAL enables the borrower to accumulate
more equity in a downside scenario at $55,000
compared to $15,000, since the effective interest
rate for a SAL would be 0%, which is significantly
lower than the fixed rate. For the fixed rate
program, even if property value growth does not
keep up with the interest rate, the same amount
of repayment is due and leaves the borrower in a
worse financial condition before homeownership.

In an upside scenario with 6% annual home price
appreciation, the effective interest rate for a SAL
would be 6%, and higher than the fixed rate loan.

The SAL charges a higher repayment amount,
but is within the borrower’s ability to repay,
thanks to the significant appreciation in property
value. Households are still able to gain a 22.9
times multiple of their initial down payment with
the SAL.

29 Figure 21: Shared Appreciation Benefits Compared to FHA Loan Shared Appreciation FHA Loan
1st Mortgage Payment $3,160 $3,800
FHA MIP $0 $540
Total Monthly Mortgage Payment $3,160 $4,340
Savings from Shared Appreciation $1,180
Required Household Income $88,110 $121,030
% California Median Income 114% 156%
Figure 22: Illustrative Example of Shared Appreciation Loan in Downside and Upside Scenarios Home Purchase Exit at Year 10
3% Homebuyer down payment
17% Shared Appreciation
80% First mortgage
Downside Scenario
0% Annual price appreciation

3.4x homebuyer’s equity
0% gain/lost to the fund
Upside Scenario
6% Annual price appreciation

20.4x homebuyer’s equity

1.7x the Fund’s equity
Sources: HR&A Advisors
Figure 23: Impacts on Borrower Equity - Shared Appreciation vs. Fixed Rate Shared Appreciation (17%) Fixed-Rate (17%)
Homebuyer Equity Equity Multiple Homebuyer Equity Equity Multiple Downside Scenario $79,357 3.4 x $39,257 1.7 x
Upside Scenario $480,525 20.4 x $532,586 22.6 x
Sources: HR&A Advisors

30 Downside Risk Sharing
A well-designed SAL product provides both
a wealth building opportunity and downside
protection when home values drop. That is, if the
value of a home is less than the purchase price
then there is no appreciation to share with the
SAL; the SAL principal is repaid, but the effective
interest rate is zero. This allows the SAL principal
to be recycled to a new borrower. At the same
time, the borrower is protected from additional
debt burdens that a more conventional interest
rate structure creates. As a result, with a SAL and
decreasing property values a borrower can still
build wealth due to an amortizing first mortgage
that reduces the loan amount over time.

In contrast, a fixed rate mortgage does not
offer downside risk sharing. Even if home price
appreciation is lower than the interest rate on
the fixed interest rate, the full payment is due.

The value of the fixed interest rate is the same
regardless of market fluctuations, leading to
worse financial outcomes for a borrower when
appreciation rates are lower or more negative
than a SAL.

Recycling Public Funding
An initial public investment in a SAL will generate
revenue that can be recycled to fund loans for
multiple rounds of homebuyers over time. The
public sector does not have to write off the value
of the SAL to make the home affordable, as they
do with forgivable down payment assistance,
which increases the number of homebuyers who
can be supported. Because the payment on a
SAL is not due until sale or a repayment event
(cash-out refinancing, etc.), the reduction in the
cost of homeownership for the homebuyer is like
a grant. A SAL combines the benefit of improved
affordability with recycling public funding by
tying payment to appreciation.

Because a SAL payment is tied to the
appreciation of home prices, it will remain
equally effective as it recycles, even in a rapidly
appreciating housing market. During the height
of COVID-19, and from 2010-2015 (see Figure
25), property values grew dramatically. The high
rates of appreciation mean that when it comes
time for a SAL to recycle, more funding is needed
to provide the same level of support and to get
a homebuyer to 20% down. While a second
mortgage with a fixed rate might fail to keep
up with market growth in a rapidly appreciating
market, leaving insufficient funding to recycle in
order to provide equal support to later rounds of
homebuyers, a SAL is tied to the market and will
remain equally effective after multiple rounds or
recycling. See Figure 24 for how a pro-rata SAL
recycles funds over five years compared to a fixed
rate, 3%, simple-interest. silent second program,
assuming the purchase of a median-priced home
at $786,000 with a 6% annual price appreciation.

Figure 24: Impacts of Recycling Funds - Shared
Appreciation vs. Fixed Rate
Shared
Appreciation
Fixed-Rate
Initial Second Mortgage
Amount $134,000 $134,000
Repayment Amount
Due at Year 10 (Upside
Scenario)
$226,000 $174,000
Down Payment Required
for Next Borrower $226,000 $226,000
Surplus/Shortfall $0 ($52,000)
Figure 25: California Median Prices of Existing Single- Family Homes
Sources: California Association of Realtors
Drawbacks of SAL Include
Financial Complexity

A SAL is more complicated and less familiar than
a conventional fixed rate mortgage. The amount
that a homebuyer will have to pay is the biggest
increase in complexity versus other types of
public homeownership assistance products.

There is neither a fixed interest rate nor a
payment schedule that a homebuyer can refer to
in order to understand what they will owe in the
future. This uncertainty, along with other features
of a SAL (setting the value for a home in a cash-
out refinance, making partial payments, etc.),
can be confusing and off-putting to potential
homebuyers.

31 IV. FUND DESIGN
California Dream for All: Fund
Goals
As outlined in AB 140, the CA Dream for All Fund
(“the Fund”) should be designed to:

1. Provide significant down payment
assistance to meaningfully expand access
to homeownership through a shared
appreciation loan, particularly to first-time and
first-generation homebuyers;

2. Support wealth accumulation for homebuyers
who purchase a home, particularly in
communities that historically face more
systemic barriers to homeownership;

3. Maximize the number of households assisted
over time with the public funding available;
and

4. Complement existing down payment
assistance and first mortgage programs at
the federal, state and local levels.

A well-designed SAL product can not only provide
the initial homebuyers with sufficient upfront down
payment assistance and access to competitive
first mortgage options, as well as enable wealth
accumulation through homeownership; it can
also revolve the funds to serve new homebuyers
at exit. By offering SALs, the CA Dream for All
Fund could increase access to homeownership
by providing homebuyers a second source of
financing, which would reduce the homebuyer’s
upfront down payment, the first mortgage amount
and monthly debt payments.
63 64 The result
63 “Homeownership is Aff ordable Housing.” Urban Institute, 2021. Retrieved from: https:/ /www.urban.org/sites/default/files/publication/104214/homeownership-is- affordable-housing_0_0.pdf
64 “How does homeownership contribute to wealth building?” Habitat for Humanity., 2021. Retrieved from https:/ /www.habitat.org/sites/default/files/Evidence-Brief_ Wealth-building-for-homeowners.pdf
65 “Evaluating Homeownership as the Solution to Wealth Inequality.” Federal Reserve Bank of Cleveland, 2021. Retrieved from: https:/ /www.clevelandfed.org/newsroom-and- events/publications/economic-commentary/2021-economic-commentaries/ec-202122-evaluating-homeownership-as-the-solution-to-wealth-inequality.aspx would be greater access to homeownership. As
elaborated in the Introduction and Background
section, apart from wealth accumulation,
homeownership brings additional benefits to
households, including increased financial health
and improved educational outcomes for children.
65 A SAL product with loan terms that do not benefit
first-time homebuyers and primarily focus on Fund
returns would defeat the purpose of the program.

Key Program Terms and
Design Considerations
To ensure that the CA Dream for All Fund
can meet its goals and priorities, it is critical
to contemplate the following set of design
considerations that will determine the type of
loans made by the Fund. The following section
lays out the range of options and considerations
for designing the Fund and highlights some of the
challenges and opportunities involved.

As the Fund moves through the State’s legislative
and regulatory processes, it should balance
the mandate to meet a large range of policy
objectives without creating disruptive, unintended
consequences in an already tight housing market,
particularly as a statewide program. Once the
Fund is set up, it should have its own governance
model to be responsive to a wide range of
internal and external stakeholders. This will give
the program administrator the ability to adjust
key terms and the operational plan based on the
Fund’s performance and market conditions.

32 Shared Appreciation Loan Terms
The degree to which the CA Dream for All Fund can build wealth and protect homebuyers from future price fluctuations in home prices is largely dependent on the following key design decisions.

Loan Amount
RECOMMENDATIONS:

The Fund should enable households to make at least a 20% down payment with the opportunity to go up to a 30% down payment for high-cost markets or priority target homebuyer groups.

RANGE OF OPTIONS:

The amount of the SAL available to each individual borrower would determine who can access the CA Dream for All Fund, the location of homes that can be purchased, and the level of income required to support mortgage payments. There are multiple parameters that can be set to limit a homebuyer’s loan amount, including the maximum loan amount, maximum purchase price and debt-to-income ratio.

Figure 26: Mechanisms to Limit the Loan Amount
Mechanism Description
Absolute Maximum
Loan Amount
An absolute maximum loan limit constrains the Fund’s contribution to a single borrower to a fixed amount. Assuming the loan amount represents a fixed percentage of the property value, the higher the absolute maximum, the greater the home value affordable to the borrower. This method lacks flexibility to market conditions and geographic differences in home value.

Purchase Price Cap
A purchase price maximum sets a cap on the home value a borrower may purchase. Limiting the purchase price ensures borrowers are not “over-housed” and select a specific set of homes in the market. While a purchase price limit, places a ceiling on the home value, it does not offer flexibility to market volatility.

Minimum and
Maximum Housing
DTI
A maximum DTI limits the percentage of monthly income dedicated to making mortgage and other monthly housing payments to ensure a responsible portion of a borrower’s income is dedicated to housing payments. The monthly mortgage expense is a function of the property purchase price, first mortgage leverage, and interest rate.

Percentage of
Property Value
A cap on the percentage of the property value that can be funded by a SAL limits the Fund’s equity stake in a borrower’s property. The CA Dream Fund illustrative design restricts the loan amount to 17% of the property value.
66 “Resident Salaries and Benefits.”Cottage Health, 2022. https:/ /www.cottagehealth.org/medical-professionals/residency-programs/resident-salaries-and-benefits/ Most existing public SAL programs are local, as
opposed to statewide, which makes it feasible
to set an absolute maximum loan amount. Some
provide variation based on income level or other
borrower characteristics (e.g., occupation). For
instance, Alameda County’s DPA program has
two maximum loan limits based on a homebuyer’s
income. That is, the loan limit is $210,000 for
households earning less than 100% AMI and
$160,000 for households earning between
100% and 120% AMI. Similarly, San Francisco’s
DPA programs offer higher loan limits but also
provide additional support for the Dream Keeper
Initiative with a loan limit of $500,000 compared
to $375,000 for the general DPA program.

Another privately funded program sets a loan
limit of $300,000 specifically for physicians
relocating to Santa Barbara County.
66 An absolute
maximum loan amount allows homebuyers to
easily determine the potential support from the
Fund but does not respond to changing market
conditions or regional variation that is necessary
at the state level.

The loan amount can also be determined through
a maximum purchase price cap or a maximum
percentage of purchase price. For instance, in a
Santa Clara County program, SALs are limited by

33 both a maximum purchase price of $1,100,000 and
a maximum percentage of 17%.67 Setting both a
price and percentage limit offers tighter targeting
to specific homebuyers but reduces adaptability
to market conditions. This is easier to manage
when the program is spread across a single local
jurisdiction, rather than at the state level where
there are a multitude of variables influencing local
markets. If the loan size is too small, a significant
segment of Californians, neighborhoods or types
of home can be effectively excluded from the CA
Dream for All Fund.

Another option is to set a limit on the back-end
debt-to-income ratio (DTI), which indirectly limits
the loan amount by restricting the purchase price
a household can finance given their income. The
back-end DTI is the share of monthly income
that goes to paying all debt, including mortgage
payments. For instance, Alameda County’s DPA
program has a back-end DTI limit of 43% as well
as a minimum expenditure of 25% of income on
housing costs. In this case, the DTI limit provides
that homebuyers have sufficient resources for
other expenses but also requires that homebuyers’
housing costs are not fully subsidized by the
Fund. DTI limits can help reduce the risk that
borrowers are over-leveraged. DTI limits put a cap
on homebuyers’ leverage compared to monthly
income. The first mortgage lender will have strict
underwriting guidelines that cap DTI. For instance,
Fannie Mae restricts DTI to 36% of monthly income
with an exception of up to 45% if the homebuyer
has additional reserves or a high credit score.
68 In
other words, regardless of the Fund’s cap, the first
mortgage will set a DTI limit.

Key Considerations for Loan Amount:

1. A statewide fund will face wide regional
variation in home prices, making it
impossible to set an effective singular
absolute maximum loan amount. To be
useful to potential homebuyers throughout
the state the CA Dream for All Fund must
accommodate regional variation. For instance,
in 2021 the median house price in the San
Francisco Bay Area was nearly double those
in the Inland Empire.
69 A statewide maximum
loan amount or maximum purchase price does
not allow for this variation. It would establish a
loan amount that was either too low to benefit
potential homebuyers in the San Francisco
Bay Area or disproportionately high in the
Inland Empire.
67 “Empower Homebuy ers SCC.” Housing Trust Silicon Valley, 2022. https:/ /housingtrustsv.org/programs/homebuyer-assistance/empower-homebuyers-scc/ 68 “Selling Guide,” Chapt er B3-6: Liability Assessment. Fannie Mae. https:/ /selling-guide.fanniemae.com 69 HR&A analysis of 2021 Calif ornia Association of Realtors Median House Price data.

In contrast, loan limits based on a percentage
of appraised property value at loan
origination allows for regional price variation.

House prices are growing at different rates
across the state, which requires flexibility
to accommodate. A universal limit, or
other specific regional caps, would not
allow the Fund to respond to changing
market dynamics. Setting loan value as a
percentage of property value will alleviate the
administrative burden of adjusting limits and
reduce the need to revisit Fund guidelines as
economic conditions change.

2. Establishing a maximum debt-to-income
ratio will put borrowers using the CA Dream
for All Fund at a disadvantage when they
attempt to purchase a home. First mortgage
lenders, in coordination with the secondary
mortgage market, establish maximum debt-
to-income ratios. If the CA Dream for All Fund
established a DTI ratio lower than what first
mortgage lenders have set, it would reduce
the amount of the first mortgage a household
could access. This would undermine the
primary benefit of the CA Dream for All Fund:
providing financial support to help households
purchase homes that could not otherwise
afford. As the Fund begins operations and an
administrator is selected, they will determine
the list of qualified first mortgage lenders who
will have their own DTI limits. This process
should prevent CA Dream for All borrowers
from selecting a high-risk, non-GSE conforming
product. By placing the responsibility for
setting the DTI limit with the first mortgage
lender, the CA Dream for All Fund will increase
access to sustainable homeownership and
ensure that homebuyers are not entering into
overly-risky mortgage products.

3. Ensuring households reach a 20% down
payment provides the greatest financial
benefit to households. A SAL larger than
20% might hinder the borrower’s capacity
to build wealth through homeownership. As
illustrated in the Introduction and Background
sections, when the loan-to-value (LTV) on
the first mortgage is greater than 80%,
the typical homebuyer is required to pay
mortgage insurance—a burden that adds to
the borrower’s monthly housing payment.

Therefore, it is critical that the Fund provides
sufficient proceeds to enable the borrowers to
reach a 20% down payment and eliminate the

34 need for any mortgage insurance. It is also in
the borrower’s interest to maximize their first
mortgage closer to 80% LTV, since it offers the
fastest route to wealth accumulation through
a combination of house price appreciation and
loan amortization.

To illustrate, Figure 27 shows that homebuyer
wealth accumulation is more than 40% higher
with a 17% SAL versus a 37% SAL.
70 In both
scenarios, the homebuyer makes a 3% down
payment, or $24,000. With an additional
SAL of 17%, after 10 years the homebuyer’s
equity grows to $279,000, or 11.8 times their
initial investment. If the SAL increases to 37%
of the home price, the homebuyer’s equity
only grows up to $194,000, or 8.2 times the
original amount. As the amount of the SAL
increases, the homebuyers might be able to
afford higher priced homes, but they also
accumulate wealth at a slower pace than they
would if they maximized their first mortgage.

Figure 27:Impacts on Homebuyer Equity, Shared
Appreciation Loan at 17% vs. 37% of Home Price
Source: HR&A Advisors

4. A second mortgage that is more than 20%
LTV results in support for fewer households
through the CA Dream for All Fund. A
25% increase in the average size of the
second mortgage translates directly to a
25% decrease in the number of households
assisted. Keeping the target level of assistance
at 20% will benefit the greatest number of
homebuyers.

5. For households in high-cost areas or for
populations of homebuyers that face bigger
barriers to accessing homeownership,
larger loans may be required. In some
circumstances, house prices are so out of
reach that even with a 20% CA Dream for
70 Assuming the purchase of a median-priced home at $786,275 in California with 3.0% annual appreciation over 10 years and a pro-rata SAL program 71 Assuming the purchase of a median-priced home at $786,275 in California with 3.0% annual appreciation over 10 years and a pro rata SAL program 72 “CalHFA Con ventional Loan Programs Matrix.” CalHFA. Retrieved from https:/ /www.calhfa.ca.gov/homeownership/programs/archive/2022/20220228/tool-matrix- conventional-02-28.pdf
All Fund loan, homeownership will still be
unattainable for either first-time homebuyers
in general or for specific target groups. The
disadvantage of larger loans, as discussed
earlier, is that it takes longer for homebuyers
to accumulate wealth and to be able to pay
off the SAL. Therefore, loan amounts above
20% should be exceptions that can be granted
by the program administrator. The key design
insight is that it will be critical that the Fund
has the flexibility to review and refine the key
terms as implementation experience is gained.

6. Together, the CA Dream for All Fund loan
amount and how appreciated value is
distributed determine the degree to which
a household can build wealth. Figure 28
provides examples of the interaction between
loan size and the distribution of appreciated
value, or appreciation split.
71 A 17% SAL
enables the borrowers to realize $279,000 in
net equity with a pro rata, or 1:1, appreciation
split. With the same loan amount and a 2.5:1
appreciation split, the borrower’s net equity
reduces to $211,000. Meanwhile, with a 37%
SAL, the borrower’s net equity is further
reduced with an appreciation split of 2.5:1.

That is, 92.5% of the appreciated value—or
37% times 2.5—goes to repay the Fund, and
the homebuyer’s net equity is just $44,000.

The effect of this interaction suggests that
lower loan amounts coupled with an equal
appreciation split are most advantageous to
building homebuyer wealth. The mechanics of
the appreciation split will be further explored
below.

7. A final consideration is the Fund’s
compatibility with other down payment
assistance programs. The Fund should not
preclude homebuyers from taking advantage
of existing programs where possible. For
instance, the CalHFA MyHome program could
be layered to reduce the CA Dream loan by
$15,000.
72 Allowing additional programs to
layer into financing could make the Fund
more efficient by lowering loan amounts
and helping homebuyers cover the full cost
of buying a home. Homebuyers should
have access to housing counselors to help
them navigate compliance between various
programs.

35 Figure 28: Combined Impacts on Household Equity from Shared Appreciation Loan Size and Appreciation Split Homebuyer loses -$213k of equity
from the combined impacts
Appreciation Split 1:1
(Pro Rata)
Appreciation Split 1:1
(Pro Rata)
Appreciation Split 2.5:1 Appreciation Split 2.5:1
17% Shared Appreciation 37% Shared Appreciation
Source: HR&A Advisors
Borrower Down Payment
RECOMMENDATION:

The CA Dream for All Fund should not impose additional parameters regarding the amount and sources of down payment beyond guidelines from the first mortgage lenders. The borrowers will have to follow all closing requirements as dictated by the first mortgage lender. The Fund is intended to remove barriers to homeownership, not create additional ones.

RANGE OF OPTIONS:

Most mortgage loan programs require a cash contribution from borrowers to ensure that homebuyers have “skin in the game” and share the lender’s risk. The minimum down payment requirement for first mortgage programs could go as low as 3.5% for FHA loans, which are backed by the FHA for borrowers with at least a 580 credit score, and as low as 3.0% for conventional mortgages backed by GSEs such as HomeReady and HomePossible or HomeOne programs.
73 74 There are also special loan programs—such as VA loans that are guaranteed by the VA and USDA loans that are backed by the USDA’s Rural Development program—that have no down payment requirement. Another common benchmark adopted by conventional loan lenders is a 20% down payment that does not require borrowers to pay private mortgage insurance. 75 Figure 29: Minimum Down Payment Requirements for Various Programs Loan Type Min. Down Payment Conditions
USDA / VA 0.00% Backed by U.S. Department of Veteran Affairs or U.S. Department of Agriculture
PMI Insured GSE 3.00% Backed by government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac; HomeReady and HomePossible programs
FHA 3.50% Backed by Federal Housing Administration
Minimum 580 credit score
Conventional GSE 20.00% Conventional borrowers are not required to pay PMI if their down payment is above or equal to 20%
73 “97% Loan to Value Options.” Fannie Mae, 2022. https:/ /singlefamily.fanniemae.com/originating-underwriting/mortgage-products/97-loan-value-options 74 “HomeOne.” Fr eddie Mac, 2022. https:/ /sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/home-one 75 Lam, Ken, Robert Dunsk y and Austin Kelly. “Impacts of Down Payment Underwriting Standards on Loan Performance – Evidence from GSE and FHA portfolios.” Federal Housing Finance Agency, 2013. https:/ /www.fhfa.gov/policyprogramsresearch/research/paperdocuments/2013-12_workingpaper_13-3-508.pdf

36 Key Considerations of Borrower Down
Payment Requirement:

1. Setting down payment requirements will
create a major obstacle to homeownership for
homebuyers with savings and wealth barriers,
particularly in high-cost areas of California.
76 The National Association of Realtors found that
first-time homebuyers put down 6% and repeat
buyers put down 16% for an average 12% down
payment across the country.
77 This implies that
a homebuyer would need to put $94,000 down
to buy a California median-priced single-family
home of $786,000, which is approximately
equal to the state’s median income at $81,000
as of 2021—and likely much greater than the
average savings of a homebuyer. The reality of
high prices, particularly in coastal cities, means
that adding down payment requirements
through the CA Dream for All Fund would
heighten existing barriers to homeownership for
first-time buyers.

2. Households of color are often disadvantaged
by requirements due to pre-existing wealth
disparity. Household savings are unequally
distributed in the United States and in
California. For instance, 60.7% of Latino
households and 56.7% of Black households are
76 “An Essential Role for Down Payment Assistance in Closing America’s Racial Homeownership and Wealth Gaps.” Urban Institute, 2021. https:/ /www.urban.org/sites/ default/files/publication/104134/an-essential-role-for-down-payment-assistance-in-closing-americas-racial-homeownership-and-wealth-gaps_0.pdf 77 “2020 Downpayment Expectations and Hurdles to Homeownership Report.” National Association of Realtors Research Group, 2020. https:/ /cdn.nar.realtor/sites/default/ files/documents/2020-downpayment-expectations-and-hurdles-to-homeownership-report-04-16-2020.pdf 78 “Report: More than a third of California households have virtually no savings, are at risk of financial ruin.” The Mercury News. 2017. https:/ /www.mercurynews. com/2017/07/26/more-than-a-third-of-california-households-have-virtually-no-savings-are-at-risk-of-financial-ruin-report-says-3/ 79 HMDA. 2020.
80 Stegman, Michael “How the presence and type of down payment assistance affects the performance of affordable mortgage loans.” Joint Center for Housing Studies of Harvard University, 2019. https:/ /www.jchs.harvard.edu/blog/how-the-presence-and-type-of-down-payment-assistance-affects-the-performance-of-affordable- mortgage-loans
considered “liquid asset poor,” meaning that
they have virtually no savings, while the term
applies to just 28.2% of White households.
78 As a result of this inequality, Black and Latino
homebuyers tend to be less able to make
sizable down payments.

Figure 30 shows that Black and Latino
households in general purchase lower
value homes with smaller down payments.

The median down payment from a Black
or Latino homebuyer was more than
half of that of the median White and
Asian homebuyer. Without the wealth
for a large down payment, homebuyer’s
offers are less attractive, which puts them
at a disadvantage when attempting to
purchase homes. This inequality persists
in the distribution of borrowers with FHA
loans, where Black and Latino borrowers
account for 33% of all borrowers but make
up 63% of all FHA loan originations.
79 Households of color are also less likely to
receive financial assistance from family
members to help them afford a down
payment.
80 Figure 30: Implied Down Payment by Race
Race Median Property Value Median Loan Amount Property-Loan Difference (Median)
Implied Down
Payment
White $585,000 $475,000 $110,000 19%
Black $445,000 $415,000 $30,000 7%
Asian $745,000 $575,000 $170,000 23%
Latino $425,000 $385,000 $40,000 9%
Total $555,000 $465,000 $90,000 16%
Source: HMDA 2020

37 3. Because down payment requirements do not reduce risk, the program should instead encourage homebuyers to focus on building cash reserves. As an alternative to additional down payment requirements, the CA Dream for All program should explore how reserve saving accounts could be established to increase access to liquid savings. Small but successful programs like Blue Hub Capital’s SUN Capital Reserve Accounts could be adapted and scaled. 81 Homeowners should be required to hold
liquid savings not only at origination but also over the life of the loan. Instances of default were found to follow losses of liquidity “regardless of the homeowner’s equity, income level, or payment burden.” 82 To
ensure borrowers retain savings specifically for home payments and improvements, some lenders require borrowers to set aside funds in emergency mortgage or home repair reserve accounts. Further, lender restrictions on reserve accounts that ensure borrowers only use funds during periods of personal financial stress or economic downturns can help reduce default rates. Borrowers can also tap into their home equity with mortgage modifications. Modifications that increased liquidity were found to reduce the rate of default while modifications that increased home equity did not have an impact on the default rate. 83 81 “Foreclosure Relief.” Blue Hub Capital, 2022. https:/ /bluehubcapital.org/foreclosure-relief 82 “Trading Equity for Liquidity.” JP Morgan Chase. 2019. https:/ /www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-trading- equity-for-liquidity.pdf
83 “Market Snapshot: First T ime Homebuyers.” Consumer Financial Protection Bureau, 2020. https:/ /files.consumerfinance.gov/f/documents/cfpb_market-snapshot-first- time-homebuyers_report.pdf
84 Based on information r etrieved Landed and Unison website as of May 24, 2022; More detailed terms of public and private shared appreciation loan program are summarized in Appendix E.

Appreciation Share

RECOMMENDATIONS:

The Fund should offer a pro rata or 1:1 appreciation split, where the Fund is repaid the same share of the appreciated value as the initial investment, with the ability to increase the split up to 1.5.

This maximum appreciation split, 1.5, combined with the maximum loan amount of 30%, ensures that the homebuyer will always have a larger share of the appreciated value than the Fund.

RANGE OF OPTIONS:

There is a wide range of potential appreciation splits between the CA Dream for All Fund and the homebuyer, reflected in the range of terms between existing public and private programs.

Most public programs offer a pro rata or 1:1 appreciation split. A SAL of 17% of the purchase price would result in a repayment of the original loan amount plus 17% of any increase or decrease in the property value from the date of purchase. Meanwhile, private programs tend to take a larger share of the split than their original investment to account for the returns demanded by private investors. For instance, Landed, a shared appreciation program serving mostly “essential professionals,” applies an appreciation split of 2.5:1, while Unison, a shared appreciation program with more generous eligibility criteria, applies a 4:1 appreciation split. 84 Key Considerations of Appreciation Share Split:

1. The appreciation split should balance individual borrower wealth accumulation and the overall impact of the Fund in terms of the number of households served over time. Having a low appreciation split, such as 1:1 or pro rata, allows borrowers to benefit from a greater share of the appreciated value of their home and maximizes borrower wealth accumulation. On the other hand, a relatively high appreciation split will increase the Fund’s financial performance and potentially expand the impact of the Fund by recycling more funds per borrower.

For example, when a borrower makes a 3% down payment with a 17% loan from the CA Dream for All Fund to buy a $786,000 home, after 10 years of 3.0% price appreciation the home would be worth $1,056,000. With a pro rata or 1:1 appreciation split, the household needs to repay the program the original loan amount plus 17% of any increase or decrease in the property value. In this case, the Fund would get $46,000 on top of the original loan amount of $133,000, and the household would receive a net equity of $279,000. If the appreciation split increases to 4:1, the Fund receives 68% of the appreciated value. The Fund would get $184,000 on top of the original loan amount compared to a net equity of $142,000 for the homebuyer. With the higher appreciation split, the Fund can recycle an additional $138,000 and serve more households, but the initial homebuyer would accumulate less wealth.

38 Figure 31: Impacts on Fund Recycling from Appreciation Split Appreciation Split 1:1
(Pro Rata)
Appreciation Split 2.5:1 Appreciation Split 4:1
Source: HR&A Advisors

2. The appreciation split directly affects when the initial borrowers have sufficient equity to repay the Fund, which has an indirect impact on their repayment incentives and the amount of recycled funding available for future borrowers. For instance, Figure 32 below shows the expected equity value of the homebuyer versus CA Dream for All equity over 30 years, assuming a purchase of a median-priced home in California with a 3.0% annual price appreciation. Over time, the value of the homebuyer’s equity continues to increase compared to the CA Dream for All Fund’s equity. When the appreciation split is 1:1, the homebuyer’s equity is equal to the value of the shared appreciation loan in seven years.

In contrast, when the appreciation split is 2:1, it takes ten years for the homebuyer’s equity to exceed that of the Fund.The borrower should have more incentive to repay early if the Fund takes a larger share of the appreciated value. As the Fund is implemented, it will be important to monitor borrower repayment speed to ensure that the loans are revolving at a reasonable rate.

Figure 32: The Impact of Appreciation Split on Homebuyer Equity, CA Dream for All Equity, First Mortgage Balance
Source: HR&A Advisors

3. Appreciation split is a key factor in determining a borrower’s effective annual interest. As described in the Introduction and Background section, a relatively low appreciation split, such as 1:1 or pro rata, implies a low effective annual interest rate that is on par with the annual home price growth rate.

In this case, homebuyers take a relatively larger share of home price appreciation in a booming real estate market, while also sharing a relatively larger risk in a market downturn. On the other hand, with a high appreciation split, the Fund will be able to relend to more households. A major advantage of a SAL is that the effective annual interest rate moves along with property valuation in different real estate market conditions and provides borrowers with more downside protection in an economic downturn compared with a fixed rate mortgage that has no downside risk sharing at all.

39 Repayment Events

RECOMMENDATIONS:

Repayment should be due upon sale, transfer, and cash-out refinancing, and there should be no penalties for prepayment. The CA Dream for All program should rely on an informational approach to encourage prepayment, and the program administrator should reserve the authority to establish penalties if SALs are not being repaid on time to serve future Californians.

RANGE OF OPTIONS:

Repayment events are partial or full payments towards the borrower’s mortgage principal and interest. Mortgage repayments are typically required when the borrower 1) reaches the end of loan term, 2) transfers the title of the property, typically through a sale, and 3) defaults on any outstanding mortgages. For public second mortgage programs there are often additional requirements, including refinancing the first mortgage and having the loss of primary residence status.

The term of a SAL varies based on the goals of the loan program. Most local shared appreciation programs focus on serving low-income first-time homebuyers, so the loan term is set to maximize wealth accumulation and to comply with GSE loans. As a result, they often have 30- year terms that are subordinated to first mortgages. A few public programs have even removed the loan term entirely to avoid forcing a major repayment event for homeowners who may be on a fixed income or who may have accumulated few other assets to repay the loan (the San Francisco DALP program, for example, recently removed their loan term). 85 In contrast, private
shared appreciation programs have a wider range in loan terms depending on their investment goals—from as short as 10 years to as long as 30 years.

Some shared apprecia tion programs stipulate that repayment is also triggered in a cash-out refinancing event, where a borrower refinances for a new loan amount that is greater than the balance of the existing loan and receives the difference in a cash payment. 86 This is different
from a rate refinancing event, during which a borrower refinances the first mortgage only to take advantage of a lower rate and reduce monthly mortgage payment but does not take out cash from the refinancing events.
85 Based on interview with city s taff administering the San Francisco DALP program 86 “Recent Trends in Enterprise Cash-Out Refinances.” Federal Housing Finance Agency, 2021. https:/ /www.fhfaoig.gov/sites/default/files/WPR-2021-008.pdf 87 “Staff Reports: Understanding Mortgage Spreads.” Federal Reserve of New York, 2018. https:/ /www.newyorkfed.org/medialibrary/media/research/staff_reports/sr674.pdf Key Considerations of Repayment Events:

1. How the Fund approaches first mortgage
refinancing has direct implications on a
borrowers’ ability to build wealth through
homeownership and to access that wealth.

The Fund assumes a 30-year loan term to
match conventional loan terms, and yet the
typical homeowner refinances much earlier—
between years 6 and 12.
87 If CA Dream for All
Fund borrowers behave similarly to typical
homeowners, most will pay back their loan
well before the end of the term. However, since
there will be no monthly payments on the CA
Dream for All Fund loan, some homeowners
may choose to repay more slowly and will seek
to resubordinate their loan.

2. A refinance to obtain a lower interest rate
is inherently different from a cash-out
refinance in terms of risk and public policy
benefit. When a homeowner refinances to
obtain a lower interest rate, they are increasing
their ability to afford their home and reducing
their risk of default. This advances the mission
of the CA Dream for All program and reduces
the Fund’s risk. When homeowners refinance
to take equity out of the property, it changes
the loan to value and increases the risk to the
CA Dream for All Fund. It also indicates that
the homeowner can afford to pay for a larger
mortgage and pay off some or all of the CA
Dream for All Fund second mortgage, which
then could be recycled to another household.

3. There will be hardship cases where
households need to be able to access
equity without fully repaying the CA Dream
for All Fund second mortgage. One of the
advantages of homeownership is building
asset value that can be accessed to pay for
other needs. In these instances, a borrower
may need a cash-out refinance of their first
mortgage. Still, a cash-out refinance might

40 not generate sufficient capital to repay the
full outstanding SAL amount. Forcing the
homebuyer to fully repay in these scenarios
could add to a household’s financial hardship
and eventually result in a default. The program
will need a process to evaluate requests
under these scenarios, and ongoing financial
counseling may help to identify these cases
and enable alternative solutions.

4. Prepayment incentives are critical in order
to increase the pace of recycling and the
overall impact of the Fund. Encouraging
homebuyers to prepay before the 30-year
term will enable the Fund to reinvest in new
borrowers. Yet given the loan amount under
consideration, it is expected that borrower’s
prepayment speed will be slower than existing
DPA programs.
88 Furthermore, first-time
homebuyers also have lower prepayment rates
than repeat homebuyers.
89 As discussed previously, a higher appreciation
share split is one option to provide a stronger
incentive for borrowers to repay the Fund
earlier. A higher split might be viable as long
as it ensures that borrowers still maintain a
fair share of the home price appreciation and
complies with Fannie Mae guidelines. However,
a higher appreciation split also increases the
amount a household must repay, which will
limit the ability of some households to repay
faster. Any use of a higher split would need to
be carefully evaluated.

There are international precedents to
charge an annual fee or interest rate after
a prescribed period to encourage fund
recycling. By increasing the minimum required
88 Mayer, Chris, Tomasz Piskorski and Alexei Tchistyi. The inefficiency of refinancing: Why prepayment penalties are good for risky borrowers.” Journal of Financial Economics, 2013. https:/ /www0.gsb.columbia.edu/faculty/cmayer/papers/JFE-Mayer-Piskorski-Tchistyi-2013.pdf 89 Stacy, Christina, Brett Theodos and Bing Bai. “How to prevent mortgage default without skin in the game: Evidence from an integrated homeownership support nonprofit.” Journal of Housing Economics, 2018. https:/ /homewise.org/wp-content/uploads/page/How-to-prevent-mortgage-default-without-skin-in-the-game-Stacy- Theodos-and-Bai-2018.pdf
90 “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z).” Federal Register, 2013. Retrieved from https:/ /www.federalregister. gov/documents/2013/01/30/2013-00736/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z payment over time, borrowers are incentivized
to purchase back their equity early and retain
more ability to build wealth.
90 A program in
the United Kingdom, for example, charges
interest after five years in addition to shared
appreciation—but because this approach
would pose compliance concerns with existing
Fannie Mae underwriting guidelines, it has not
been recommended.

We can also encourage prepayment through
informational outreach and homebuyer
education, although this approach comes with
additional administrative costs. Quarterly or
annual statements could show the estimated
property value compared to outstanding debt
to remind homebuyers when there is likely
sufficient accumulated equity to repay the
loan. These informational incentives will not
penalize households, and if used correctly,
could help increase prepayment.

5. Penalty clauses should be a last resort
in the event of late payment. The Fund
should have a governance model in place to
monitor performance and make necessary
adjustments. A clearly-defined penalty
clause for late payment might be effective
in incentivizing repayment, but it should
only be considered after exhausting other
repayment incentive options. Any penalty
clause consideration should balance the need
to enforce repayment, recycle funds and
maximize the number of households assisted
over time with the Fund’s goal to support
wealth accumulation through homeownership.

INTERNATIONAL CASE STUDY
United Kingdom Shared Ownership Model - Prepayment Incentives In 2016, the United Kingdom initiated “Shared Ownership,” a national down payment assistance program with a shared equity model in England. The program offers interest-bearing equity on new construction home purchases for up to 20% of the purchase price, with up to 40% in London, and requires the borrower to make a minimum 5% down payment. The program charges interest on the loan to encourage an earlier property sale and permits partial loan repayments. The interest charged on the loan increases throughout the loan term. There is no interest charged in the first five years, after which the interest rate is

1.75% in year 6, and 1.75% plus inflation tied to the CPI thereafter. 91 Partial repayments are permitted using the staircasing method. The minimum voluntary repayment is 10% of the market value at repayment and carries an administrative cost. 92 The decision to place
a floor on the partial repayment value, a minimum voluntary repayment, is due to the high cost of property appraisal and mortgage restructuring. The borrower is also required to pay outstanding loan fees at prepayment. The borrowers’ repayment speed has been faster than expected, with almost 50% of borrowers repaying in the first five years of the mortgage term. 93 Faster repayments reduce the
expected return to the program since less interest is charged to homebuyers and appreciation over the longer term is not captured.
91 “Help to Buy scheme – ev erything you need to know.” Moneyhelper.org, 2022. https:/ /www.moneyhelper.org.uk/en/homes/buying-a-home/help-to-buy-scheme-everything-you-need-to-know 92 “Homebuyers’ guide to the Help t o Buy: Equity Loan.” Gov.uk, 2022. https:/ /www.gov.uk/government/publications/help-to-buy-equity-loan-buyers-guide/homebuyers- guide-to-the-help-to-buy-equity-loan-2013-to-2021-accessible-version#:~:text=The%20Help%20to%20Buy%20scheme,less%20than%20when%20originally%20purchased 93 Ward, Benjamin. “Designing a Nationwide Downpayment Assistance Program.” Harvard Joint Center for Housing Studies, 2020. https:/ /www.jchs.harvard.edu/sites/ default/files/research/files/harvard_jchs_downpayment_assistance_ward_2021.pdf 41

42 Borrower Eligibility
Eligibility requirements will shape who the Fund serves and the degree to which it meets its goal of expanding access to homeownership among traditionally disadvantaged Californians. In determining these requirements, the program must balance serving those with the greatest needs and serving those with the ability to secure the first mortgage necessary to take advantage of the second mortgage from the Fund.

Eligibility requirements that are too restrictive will leave the Fund with unused resources and fail to serve the most Californians possible. Overly broad eligibility will result in most support going to households who could have accessed homeownership even without the Fund’s loan. In order to provide appropriate support to the right populations, level of targeting will have to be actively managed over the life of the Fund.

Income Limits

RECOMMENDATION:

The Fund should target an income level up to 100% of Area Median Income (AMI), with the option to go up to 150% of AMI, without any asset tests. The program administrator should have the authority to adjust the target income up to 150% of AMI and to vary the eligible income level by county in order to reflect diversity across the state.

RANGE OF OPTIONS:

Existing homeownership assistance programs target a range of income levels, with public programs targeting lower-income homebuyers than private programs. Publicly funded homeownership programs often set specific target ranges with additional conditions for income qualification. Several programs target homebuyers with a maximum income of 80% AMI, such as the CalHFA Forgivable Equity Builder Loan program, while others allow up to 150% AMI, such as the CalHFA MyHome program. In general, the more proceeds or subsidies that are offered, the lower the AMI target.

In contras t, many private shared appreciation programs focus on occupation groups, or those that are highly educated but not rich yet (“HENRY”) rather than a specific income band.

Examples of HENRY borrowers include doctors completing their training, recently-graduated lawyers and other highly-educated job categories. HENRY households typically pose a lower risk of default, and are likely to repay in a relatively short timeframe and buy homes in up-and- coming neighborhoods where appreciation is greater.

Key Considerations of Income Limits:

1. Targeting homebuyers that are on the cusp
of being able to access homeownership
will result in the greatest increase in
homeownership. If the income target is set too
low, then even with a CA Dream for All Fund
loan a homebuyer will not be able to qualify
for a first mortgage large enough to make a
competitive offer. If the income band is set
too high, then much of the CA Dream for All
Fund will be used by households that would
have been able to purchase a home regardless.

Targeting homebuyers with an income up
to 150% AMI will create a pool of eligible
borrowers who have enough income to qualify
for first mortgages but would struggle with
down payment, closing costs and high monthly
payments involved in current financing options.

2. The edge of the homeownership market
varies greatly across California, and the
CA Dream for All program will need to be
flexible enough to align with the market.

In 2020, the lowest income range to be able
to access homeownership varied across the
state from around 80% of AMI to nearly 150%
of AMI, as shown in Figure 33. Regions with
high home costs are also those with the most
acute affordability challenges. For example,
in the Los Angeles region, the median home
value is over $788,000; a household would
require an income of at least $111,900, or 140%
of the AMI, to affordably purchase a home
at that price. This suggests that the price of
housing in high-cost markets is particularly
inflated, even relative to their higher-earning
populations. While homeownership is
affordable to the median-income household in
six regional markets, low-income households
still face challenges; except in Sierra Nevada,
the income required to purchase a home in
these markets exceeds 80% AMI.

A close examination of the mortgage market
in California helps to identify who is and is not
getting access to mortgage financing, and

43 who is relying on FHA loans. Figure 33 shows that the majority of loans across California are made to borrowers with 100% AMI and above, and that, although lower-income households account for a much larger share of FHA loans than all loans, Californians across the income spectrum rely on FHA loans. 94 “First-Time Homebuyers.” HUD HOC Reference Guide, U.S. Department of Housing and Urban Development. Retrieved from https:/ /archives.hud.gov/offices/hsg/sfh/ref/ sfhp3-02.cfm
95 Harrington, Elizabeth et al. “Enabling First-Gener ation Homeownership in Massachusetts.” Northeastern University, 2020. https:/ /cssh.northeastern.edu/policyschool/wp- content/uploads/sites/2/2020/07/First-Gen-Presentation_NEU-1.pdf 96 “Saving Toward Affordable Sustainable Homeownership.” Massachusetts Affordable Housing Alliance, 2022. https:/ /mahahome.org/STASH Figure 33: Statewide Mortgage Origination by Area Median Income and Type of Loan (2020) AMI Level Conventional FHA RHS or FSA VA Total
<80% AMFI 30,514 9,906 430 3,913 44,763
80-100% AMFI 26,792 11,034 581 4,529 42,936
100-120% AMFI 29,468 10,678 524 4,449 45,119
120-150% AMFI 39,884 11,355 300 5,511 57,050
>150% AMFI 113,865 11,362 121 9,370 134,718
Total 240,523 54,335 1,956 27,772 324,586
Source: HMDA 2020
First-Time Homebuyers

RECOMMENDATION:

The program should require that borrowers are first-time homebuyers—but it should adopt a broad definition of “first-time.” The program administrator should have the ability to add a preference for first-generation homebuyers in order to further target the CA Dream for All Fund to potential homebuyers who require additional assistance to access homeownership.

RANGE OF OPTIONS:

First-time homebuyers are a natural target population of the program—but although “first- time homeowner” sounds like a straightforward concept, housing programs define the term in a wide range of ways. On the most conservative end, it is defined as having never owned a home. Yet very few housing programs apply this strict definition, because it excludes a large number of households that do not currently own homes and are in need of assistance to access homeownership. The more common definition, set by the Department of Housing and Urban Development (HUD) and used by most programs is, “An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property.” 94 Accordingly, we recommend that the program consider adopting this definition as a starting point.

Creating a firs t-generation requirement is a newer concept that has only been attempted in a limited number of homeownership assistance programs. The intent is to target households that have never benefited from homeownership and cannot draw on the intergenerational wealth homeownership often creates. The exact definition for first-generation homeowner varies across programs; in some cases, it might mean that none of the homebuyers’ parents have previously owned homes, and in others, it might simply mean that one of the parents of the homebuyers is not currently a homeowner. In Massachusetts, the Saving Toward Affordable Homeownership (STASH) program matches borrower savings for homebuyers below the area median income who are “first- time homebuyers whose parents or guardians have never owned a home or owned a home that was foreclosed on.”
95 96 STASH is a “race-conscious” pilot program intending to help those without intergenerational assets to close Massachusetts’ acute homeownership and wealth gaps. In the City of Boston, the First-Gen Partnership matches up to $5,000 for savings up to $2,500.

Just as important as the definition of “first gener ation” is the documentation required to prove it.

A variety of documentation requirements are being applied by different programs, and it will be incumbent upon the administrator of the CA Dream for All program to establish a standard that is credible for discouraging false claims but also feasible for those who are not in contact with their parents.

44 Key Considerations of First-time
Homebuyers Requirement:

1. Serving existing homeowners does not
advance the CA Dream for All program’s
mission to expand access to homeownership
to homebuyers who have been marginalized
historically.

2. HUD’s definition of first-time homebuyers is
appropriate for homeownership programs,
as it allows for households who went
through foreclosure to access the fund and
begin building wealth again. The program
administrator should also adapt and apply
existing carve-outs for individuals who
were separated from their spouse and are
purchasing a home for the first time as an
individual.

3. Intergenerational wealth has a meaningful
impact on homeownership access, but a
first-generation only requirement would
exclude too many potential homebuyers and
limit the impact of the Fund. In a Bank of
America survey, only 37% of first-generation
homebuyers received help from their parents
(compared to 51% of all first-time homebuyers
surveyed in a separate study).
97 98With down
payments forming one of the greatest
barriers to homeownership access, children
of non-homeowners may be at a significant
disadvantage when searching for one of their
own. Still, a focus on only first-generation
homebuyers necessarily leads to a significantly
smaller pool of eligible households and blunt
the program’s mission. To remedy this issue,
the administrator should be able to create a
preference for first-generation homebuyers if
given guidance by policy makers to do so.

4. Restricting borrower eligibility to
first-generation homebuyers presents
documentation issues. Not all homebuyers
are in touch with their parents, and many
cannot offer documentation on their
family’s ownership history. Furthermore, the
documentation process presents additional
administrative burdens and can slow down
the underwriting process and increase costs.

These documentation and administration
issues may end up excluding the homebuyers
the Fund is intended to target.
97 “2021 Homebuyer Insights Report. First-Generation Homeowner Spotlight.” Bank of America, 2021. 98 “Affordability Surprises First-Time Homebuyers While Parental Assistance, Savings and Wishlist Compromises Prove Common, Survey Finds.” Realtor.com, 2021. https:/ / news.move.com/2021-02-03-Affordability-Surprises-First-Time-Homebuyers-While-Parental-Assistance-Savings-and-Wishlist-Compromises-Prove-Common-Survey-Finds

PROPERTY TYPE RESTRICTIONS
Given the supply constraints in the
California housing market, the Fund should
allow for a board range of property types
including the following:

Primary Residence: The property should
not be an investment property or a second
home for the duration of the CA Dream
Fund loan. This may imply additional
oversight and monitoring costs, but it will
ensure that the program serves those with
the most need.

New and Existing Properties: Restricting
to new properties would create an
additional incentive for reducing the
supply gap. However, there are a multitude
of other issues facing new construction
projects that it is not with the scope of the
CA Dream for All Program to address. The
program would be available to both new
and existing properties.

Up to 4 Units: While the vast majority
of the housing stock in California is
single family homes, recent legislation
aims to encourage accessory dwelling
unit production. The CA Dream Fund
should encourage this type of division
and purchasing, even for first time
homebuyers. Therefore, the housing types
should include detached single family,
townhomes and condominiums.

45 Priority Communities
99 Kahlenberg, R.D and K. Quick, K. “Attacking the Black–White Opportunity Gap That Comes from Residential Segregation.” The Century Foundation, 2019. 100 “Home Lending to C ommunities of Color in California.” Greenling Institute, February 2022. 101 “Hardship for Renters: Too Many Years to Save for Mortgage Down Payment and Closing Costs.” Center for Responsible Lending, April 2021. 102 HR&A Advisors
103 Palaniappan, M., Wu, D., Kohlreiter, J. “Clearing the Air: Reducing Diesel Pollution in West Oakland.” Pacific Institute, 2003. 104 “How pollution impacts health in West Oakland.” Environmental Defense Fund. https:/ /www.edf.org/airqualitymaps/oakland/pollution-and-health-concerns-west-oakland

RECOMMENDATION:

The CA Dream for All program should have the ability to adjust the terms and requirements of the second mortgage and prioritize specific communities of Californians. The barriers to homeownership vary for different groups of Californians, and to be effective at overcoming those barriers, the CA Dream for All program will need to adjust terms and requirements. To serve those with the greatest need, as determined by policy makers, the program will need to prioritize the allocation of mortgages to them.

Key Considerations to Approach Priority
Communities:

Some groups have for decades been unable to
meaningfully build wealth because of who they
are, where they live or what they can afford.

Homeownership can be a powerful means
by which to support these households, but
policymakers must determine which communities
should be prioritized. For the purposes of this
report, low-income households, people of color,
environmental justice communities and student
debtholders are described as potential priority
communities.

Communities of Color
Many of the income-based barriers described
above disproportionately impact communities
of color. Since the onset of urbanization in the
early 20th century, nonwhite households have
been repeatedly denied the ability to build wealth.

Racial and exclusionary zoning first emerged as
legal mechanisms by which to preserve racial
segregation, prohibiting landowners from selling,
leasing or renting properties to Black and minority
households. As this practice peripheralized Black
communities to live in disinvested neighborhoods,
redlining subsequently denied these households
the chance to purchase a home and build
intergenerational wealth. Between 1934 and 1968,
White households received 98% of all home loans.
99 Today, communities of color are still
underrepresented in mortgage lending. Despite
forming 39% and 5% of California’s population,
respectively, Latino and Black households
access just 22% and 3% of all home purchase
loans.
100 This may be partly attributed to income
disparities rooted in the racial wealth gap; a 2021
report from the Center for Responsible Lending
(CRL) found that while median-income White
households typically require nine years of savings
to afford a 5% down payment, median-income
Black and Latino households require 14 and 11
years, respectively.
101
As a result of these systemic issues, racial
disparities in homeownership access persist in
California. Across the state, White households
are more likely to be able to afford a home than
Black households. In the Bay Area, only 5% of
Black renters earn sufficient income to afford a
median-price home, compared to 21% of White
renter households.
102 These disparities persist even
after controlling for income; in most regions, the
White homeownership rate exceeds the Black
homeownership rate even within the same income
band. Such disparities signal systemic barriers
to homeownership, which limit opportunities for
households of color and perpetuate the racial
wealth gap.

Environmental Justice Communities
Environmental justice issues pose another
major challenge. Many low-income households
live in areas that expose them to high levels
of pollution and other environmental hazards,
including poor air quality, water contamination,
lead and chemical waste. Individuals in these
areas are also more likely to be characterized by
vulnerabilities like pre-existing health conditions,
poverty and poor health care access that put
them at even higher risk of experiencing health
complications arising from pollution exposure.

As of 2013, the community of West Oakland
suffered from diesel pollution at an average rate
90 times that of the rest of California per square
mile; as a result, residents were found to suffer at
disproportionately high rates from asthma, stroke
and congestive heart failure.
103 104

46 The “environmental justice” movement has
emerged in an effort to address precisely
these harms. As part of this effort, the State
has established the CalEnviroScreen tool that
scores each California census tract based on
environmental hazards and exposures, public
health factors and socioeconomic issues. Local
governments have followed suit by advancing
several strategies to address land use issues in
highly-burdened areas, such as by establishing
“buffer zones” that distance polluting industries
from sensitive land uses like schools and
residential neighborhoods.

Homeownership programs can play an important
role in this movement, too. By targeting
homebuyers living in tracts scoring highly on the
CalEnviroScreen index, the State can provide
households a chance to move to safer, healthier
neighborhoods.

Student Loan Debtors as Homeowners
After mortgages, student loans form the greatest
household debt category in the nation, affecting
more than 43 million borrowers who owe a
collective $1.7 trillion in loan debt.
105 California is
no stranger to this issue, as nearly four million
borrowers owe a collective debt of $147 billion.
106
Among debtholders, this amounts to an average
loan payment of $221.17 per month—the fifth
highest of any state in the nation.
107
As is the case with low-income households,
student debt holders may struggle to access
mortgage financing and may have difficulty
saving for a down payment. Student debt
naturally contributes to a household’s overall debt
portfolio, and missing a monthly loan payment
can negatively impact a household’s credit score.

Given high debt-to-income (DTI) ratios, limited
savings and potentially lower credit scores,
mortgage underwriters may be less likely to
preapprove households with high outstanding
debt obligations.

These factors likely underpin the negative impact
of student debt on homeownership. A 2020 study
from the Federal Reserve found that a $1,000
increase in student loan debt among recent public
college graduates was associated with a 1.8%
reduction in the rate of homeownership within the
same group.
108 In a separate survey conducted by
105 “Student Loan Debt Statistics.” Education Data Initiative, 2020. https:/ /educationdata.org/student-loan-debt-statistics 106 “California DFPI Hosts Webinar to Help Student Loan Borrowers.” California Department of Financial Protection and Innovation, 2022. https:/ /dfpi.ca.gov/2022/03/28/california-dfpi-hosts-webinar-to-help-student-loan-borrowers/ 107 Brown, Mike. “How Big is the Average Monthly Student Loan Payment in Your State?” LendEDU, 2021. https:/ /lendedu.com/blog/average-student-loan-payment/ 108 Mezza, A., Ringo, D., Sherlund, S., Sommer K. “Student Loans and Homeownership.” Journal of Labor Economics, 2019. 109 “Student Loan Debt Holding Back Majority of Millennials from Homeownership.” National Association of Realtors, 2021. https:/ /www.nar.realtor/newsroom/student-loan- debt-holding-back-majority-of-millennials-from-homeownership the National Association of Realtors, 60% of non-
homeowning millennials claimed that student debt
has delayed their ability to purchase a home.
109
While a shared appreciation program may not be
able to impact a household’s DTI or credit score,
it can increase the size of its down payment to
increase the odds of mortgage preapproval.

Other Priorities
The terms of the CA Dream for All program can
be flexibly designed to accommodate changing
needs and priorities. As requirements and
preferences change, the State can periodically
reassess the terms of the program to ensure that
it targets the households in greatest need.

Approach to Prioritization
The program administrator will need to evaluate
how best to provide additional support to a
specific community, as the barriers they face
and thus the support the Fund can offer will
vary. Any term in the CA Dream for All program
might be adjusted—from eligible income levels,
to maximum loan sizes, to appreciation splits.

If households with high student debt were
selected as a priority, then allowing for a larger
loan size—for example, up to 30% of purchase
price—might be appropriate. A larger loan amount
from the Fund would help offset the smaller first
mortgage a household could qualify for as a
result of outstanding student debt payments. If
the typical appreciation split was set to 1.5:1, the
program administrator might allow for a lower
split of 1:1 for first-generation homebuyers to help
them build wealth faster and offset the lack of
intergenerational wealth available.

Besides adjusting the terms of the loan, the Fund
could support specific communities by setting
aside a portion of total funding for them. For
example, of a $1 billion allocation, $100 million
might be reserved for households currently
living in neighborhoods with environmental
contamination. This type of support will be
most important if the CA Dream for All Fund
receives more demand than it can satisfy with the
resources it has available.

47 V. FUNDING AND FINANCING
How can the program design outlined in Chapter III be most effectively funded and financed? In particular, how can the State use the key programmatic benefit of shared appreciation mortgages—that loan repayments help keep pace with the cost of assisting subsequent homebuyers—to create an ongoing program for future generations even if prices keep rising dramatically? How can non-taxpayer funds be most effectively leveraged to create a self-sustaining model? To answer these questions, we:

1. Defined what any funding approach for
such a program would need to do to be
successful, including key requirements and the
scale and timing of funding involved;

2. Evaluated a wide range of funding options
from both taxpayer and non-taxpayer sources
to understand their implications for the
program, the State, and borrowers;

3. Outlined a financing approach, based on
this evaluation, that is likely to be practical
and efficient both in the short- and long-run,
identified potential risks and how they can be
mitigated and created and tested a financial
model under a range of future economic
environments; and

4. Compared shared appreciation to a fixed
interest rate approach to see the impact on
borrowers, the total appreciation they are
projected to earn and the efficiency of the
State’s investment.

Parameters for Funding and
Financing to Be Successful
Minimum Requirements for How the
Program is Funded
The many possible ways of trying to use taxpayer
and non-taxpayer monies for shared appreciation
lending make it especially important to first define
the key requirements for any funding approach.

This helps assure that the program drives financing
choices, not the other way around.

From AB 140, discussions with the State
Treasurer’s Office and legislative staff, secondary
market sources and experience of first-time
homebuyer programs both in California and other
states, we identified several minimum thresholds
for any type of CA Dream for All financing.
§ The funding approach should not limit who
the program can help, such as excluding
areas of the state or preventing the program
from assisting lower-income borrowers or
those who need larger amounts of assistance.
§ The funding approach must be compatible
with Fannie Mae and Freddie Mac
underwriting requirements and not prevent
borrowers from using GSE first mortgages.
§ The funding approach should provide an
ongoing way to help first-time buyers
over many years to come, rather than only
helping buyers in the next few years, given
future affordability pressures anticipated in
California.
§ Investments of taxpayer funds need to be
sustainable, without significantly impacting
the State’s borrowing capacity, ability to
promote housing that is affordable or ability
to meet other critical needs.
§ The funding approach should not expose
the State to any meaningful future financial
risk—for example, by requiring the Stateto
cover shortfalls because of the CA Dream for
All portfolio’s performance.
§ The State should leverage taxpayer monies
with non-taxpayer monies so as to expand
the number of borrowers who are ultimately
served—consistent with the purposes of
the program, without narrowing who can be
helped, violating other minimum thresholds or
reducing borrower equity.

These basic minimum thresholds may seem
simple, but they operate as extremely important
guardrails when evaluating different financial
approaches and structures.

Annual Scale
At the heart of determining potential funding
needs for the program is estimating a practical and
appropriate annual scale for the CA Dream for All
program. With limits on taxpayer resources and a
risk of inflaming California’s housing markets, how
many borrowers should the program be designed
to help each year? How much annual shared
appreciation lending would that involve?
In considering a reasonable potential scale for
designing funding and financing options, we took
several factors into consideration:

48 § The importance of CA Dream for All not itself
further inflating real estate prices;
§ An annual number of loans that would be both
meaningful and administratively feasible; and
§ The sustainability of State resources for an
ongoing multi-year program.

Sizing to Not Inflate Home Prices
Potential demand. There is little limit to the
potential demand for a program providing
significant SALs. After all, the number of eligible
California renter households who could potentially
buy homes with a SAL for approximately 20%
of the purchase price is vast. The Harvard Joint
Center for Housing Studies has estimated that
about 12% of all households nationally could
purchase a home with significant down payment
assistance.
110 Landed has indicated that, in offering
shared equity programs through school districts
and other essential employers in California, almost
14% of employees showed interest in such down
payment assistance.

Limiting impact on prices. The very magnitude
of this potential demand shows how important
it is to set a reasonable limit on the number of
buyers that the CA Dream for All program might
serve in a year. The CA Dream for All program
is essentially designed to help many potential
buyers who are now largely excluded from the
market. If it dramatically increases the number of
buyers competing for homes in a given region, the
CA Dream for All program—like any new product
that significantly increases homebuyer purchasing
power—could itself affect the affordability it is
designed to address.

Number of borrowers. To take this market impact
concern into account, we looked at what the
program volume might be if the CA Dream for All
program was limited to assisting 2% of the home
purchase mortgage transactions in a region.
§ While 2% might translate into about 5% to
6% of entry-level home purchases in a region,
the impact on increasing competition for any
given home is likely to be quite modest. For
example, in the entire Bay Area, 2% would be
about 1,300 home purchases, or about 300 in
a given quarter, in a region where more than
60,000 homes were sold in 2020.
§ Another way to consider this 2% potential
increase in the number of buyers is that much
of what has driven the recent escalation of
home prices in California and nationally has
110 Kristin Perkins, et al. “The Potential for Shared Equity and Other Forms of Down Payment Assistance to Expand Access to Homeownership.” Joint Center for Housing Studies of Harvard University, October 21, 2019.
been a more than 20% reduction in inventory
from 2020 to 2021. This extraordinary drop in
supply has created a widely-publicized level
of buyer competition that has further driven
demand and offers, fueling additional price
increases.
§ The CA Dream for All program, by contrast,
would simply make a limited number of
additional buyers able to shop for particular
homes they look at as part of the general
market. Rather than having a highly visible
impact on buyer and seller behavior in a
concentrated time frame, such CA Dream for All
assistance would slightly and gradually expand
the number of potential buyers each year.

From a statewide perspective, 2% would mean
assisting about 7,700 home purchases per year.

We then looked at how this approximate level
of sizing might compare with other ways of
evaluating program scale.

Sizing to be Meaningful and
Administratively Feasible
Relative program scale. A key standard of
comparison for a program to help homebuyers
in California is CalHFA’s existing single-family
program. CalHFA’s program, which provides
first mortgage financing and down payment
assistance loans, has served approximately 8,000
homebuyers a year in the last two years (6,557 in
2021 versus 9,372 in 2020).

Thus, a CA Dream for All program designed to
help some 7,700 first-time buyers annually would
be about the same size as CalHFA’s current
lending program, and would roughly double
the number of buyers that the State is currently
helping each year.

CA Dream for All program impact. More
important than simply doubling the total
number of borrowers is the different impact
that the CA Dream for All program would have.

CalHFA’s current program links first mortgages
with down payment assistance loans of 3%
to 3.5% of the purchase price (3% on Fannie
and Freddie loans, and 3.5% on FHA-insured
loans). This limited amount of down payment
assistance per borrower makes it difficult to serve
borrowers in higher-cost areas of the state. As
a result, although CalHFA’s program has higher
income limits than the proposed CA Dream for
All program, it serves relatively few borrowers
in coastal California, and is more successful in
lending in less expensive parts of the state.

49 Figure 34: Geography of CalHFA lending and of home sales in California Area CalHFA
lending in 2021
% of CalHFA total
2021 lending
% of homes being
sold statewide
111
Difference in
number of homes
Bay Area 234 4% 13% - 526
Los Angeles County 359 5% 17% - 862
Orange County 60 1% 7% - 360
San Diego County 169 3% 9% - 338
Subtotal 822 13% 47% - 2,086
Kern County 758 12% 3% +2,274
Fresno, Merced, San
Joaquin and Stanislaus
Counties
1,455 22% 8% +2,546
Inland Empire 1,504 23% 18% +418
Subtotal 3,717 57% 29% +5,238
111 “California Home Sale Activity by City.” CoreLogic, February 2022 https:/ /www.corelogic.com/wp-content/uploads/sites/4/2022/03/CA-Home-Sale-Activity-by-City- February-2022_.pdf
The difficulty of helping low- and moderate-
income buyers in higher-cost parts of the state
reflects the unaffordability of homes in these
parts of the state without substantially greater
assistance than current programs.

Ultimately, the CA Dream for All program’s SALs
could not only help approximately double the
number of buyers assisted by the State; they
could also complement the existing program by
enabling the State to help buyers in precisely
those areas where it has become extremely
difficult.

This comparison suggests that a CA Dream for
All program helping roughly as many borrowers
as CalHFA’s existing program—while relatively
modest given the overall homeownership problem
in California—would be significant in terms of the
impact of State efforts.

Administratively feasible scale. That a new
program would be similar in number of borrowers
to CalHFA’s existing program also makes it
easier to gauge the administrative feasibility of
operating at this scale. The CA Dream for All
program would follow the same basic model as
CalHFA’s existing program in purchasing first
mortgages in the form of AAA-rated mortgage-
backed securities together with deferred payment
second mortgages.

Sizing to be Financially Sustainable
An important consideration for this program is the
level of total funding that would be needed for a
SAL program to help this many borrowers, given
increases in home prices throughout California.

Annual shared appreciation lending amount.

Assuming that SALs average about 20% of the
purchase price (with some being smaller and
some as much as 30% depending on program
targeting), a program assisting in about 2% of
home purchases in each region could require
about $1 billion of SALs a year.

Translated into individual SALs, $1 billion would
be able to fund 7,700 loans at an average of 20%
of a $650,000 purchase price (this purchase
price level, which we have used in our financial
modeling for the CA Dream For All program,
is slightly above 90% of the statewide median
purchase price of $700,000). In terms of total
home purchases, such shared appreciation
loans and linked Fannie Mae/Freddie Mac first
mortgages would help homebuyers purchase
about $5 billion of homes a year, or about $25
billion in homes over five years.

Over time, if house prices increase, the average
dollar amount of a CA Dream for All loan would
need to be higher (and the program would
receive appreciation when loans are repaid). Thus,
if possible, the program should be designed so
that through repayments, the program can keep
assisting roughly the same number of borrowers
each year.

Geographic allocation. This funding level and
number of borrowers assisted assumes the
program is designed to assist homebuyers
proportionately throughout the state, both in
high-cost and lower-cost areas—that is, assisting
approximately the same percentage of home
sales in each of the regions of the state.

50 The program could instead be designed to
provide more of its lending in lower-cost areas
at a lower average dollar amount per borrower,
thereby helping more borrowers with the same
$1 billion . However, this allocation would assist
borrowers in those regions where there is less of
an affordability gap for first-time buyers. Such
a program would replicate the same difficulties
faced by CalHFA’s existing program by working
disproportionately in less expensive parts of
California.

To meet the unique needs that a California
SAL program can serve—providing significant
assistance that is repaid in a way that allows
the State to help future borrowers regardless of
rising prices—we have conservatively assumed
a program sizing to help 7,700 borrowers would
require about $1 billion of SALs.

Sustainable level of public resources.

Along with
identifying ways to leverage taxpayer funds with
non-taxpayer monies, we wanted to be certain
that even if the program had to rely solely on
taxpayer funds it would involve a level of State
funding that could be sustained over many years.

To achieve this program sizing, the maximum
amount of taxpayer funds invested each year
would be $1 billion for SALs, plus 10%, or $100
million, for administrative and servicing costs.

The program is intended to be a multi-year
program, with at least the same amount of
shared appreciation lending for many years, given
the nature of the housing affordability crisis in
California. To ensure the program is financially
sustainable for the State, program sizing should
be evaluated on the assumption that in the most
conservative case—without any non-taxpayer
funds—the investment of taxpayer funds would
total $1 billion for SALs each year for 10 years,
plus an ongoing $100 million per year for
administrative and servicing costs.

This long-term funding cost estimate is not
intended to limit future State decisions. The
State may, of course, decide to continue funding
loans beyond 10 years, or reduce or terminate
funding for new loans at any time based on
program experience and results. Rather, this level
and period is designed to enable legislators, the
State Treasurer’s Office and the Administration
to determine whether the State can invest in
a program of this scale without significantly
affecting the State’s borrowing capacity, ability
to promote housing that is affordable or ability
to meet other critical needs.

Sustainability and future price appreciation
.

The very purpose of creating a SAL program is
to be able to continue assisting first-time buyers
each year even though home prices may continue
to rise. Over the long run, repayments of SALs
(both the original loan principal amount and the
program’s share of appreciation) are intended
to keep pace with home price appreciation. This
can only happen, of course, as homes are resold
and initial SALs are repaid many years later. In the
interim, the number of buyers assisted each year
(with ever-larger SALs as prices rise) is likely to
drop gradually unless new funding increases.

Rather than try to create a funding plan where
new funding increases each year based on
unknown rates of future home appreciation,
we have conservatively assumed the same $1
billion per year of shared appreciation lending,
supplemented by revolving payments as they are
received.

Conclusion: Using These Parameters
Given these minimum requirements for what
funding needs to achieve and an estimated annual
scale of $1 billion a year of funding needed for the
CA Dream for All program, we evaluated a range
of funding options to see how they might operate
in practice.

Funding Options
In order to consider the variety of ways the CA
Dream for All program could be funded, we
looked at a wide range of approaches in three
broad categories:
§ Options that are 100% taxpayer funded;
§ Options that are funded from a combination
of taxpayer and non-taxpayer moneys; and
§ Options that use almost entirely non-taxpayer
funding of the SALs, together with taxpayer
dollars for administrative and other costs.

Our aim was to understand how each of these
options might work, their ability to fund the
annual scale of SALs, the expected cost of funds,
and, most importantly, the extent to which each
option would meet key threshold requirements.

The aim was to narrow down the options to those
that seem most feasible for carrying out the
purposes of the program. Figure 40 summarizes
the options across these categories.

51 Figure 35: Funding Options for the CA Dream for All Program 100% Taxpayer Funded Hybrid Funding Limited State
Investment
Method Revolving
Fund
Repay
Taxpayer
Monies
Taxpayer Funds
with Revenue
Bonds
Blended
Taxpayer
Funds and
Private
Capital
Private
Fund with
Significant
State
Investment
Private Funds
with Limited,
Indirect State
Assistance
Reason to
consider
Endowment
for future
buyers
Ultimately
repay
taxpayers,
with limited
cost to
State
Leverage
taxpayer monies
Leverage
taxpayer
monies
Leverage
taxpayer
monies
Minimize cost to
taxpayers
Program State-run State-run State-run State-run Privately run Privately run Financing State-run State-run State-run with
revenue bonds
State-run
with blended
capital
Private, with
significant
taxpayer
monies
Private
with State
administrative
cost support, tax
benefits or risk
mitigation
How
Funding
Works
Over
Time
Loan
repayments
are used to
make new
loans
Loan
repayments
pay back
State
General
Fund
Loan principal
pays down
revenue
bonds first.

Appreciation
and subsequent
revenue bonds
fund new loans.

State pays
annual interest
on revenue
bonds
Loan
repayments
pay back
private
capital first.

Any return to
State helps
make new
loans
Loan
repayments
pay back
private
capital first.

Any return to
State helps
make new
loans
Loan
repayments back
private capital.

No financial
repayment to
State
100% Taxpayer-Funded Approaches
By taxpayer funding, we mean any source—
whether budget appropriations or General
Obligation (GO) bonds—that is paid for by, or
imposes an obligation on, the State’s General
Fund. Non-taxpayer funding
includes all other
sour
ces not derived from or backed by the
General Fund, from revenue bonds to private debt
or private equity.

There are two distinct ways that the State can
utilize 100% taxpayer funding.
§ The State uses repayments of loans to make
future loans. This enables the State, after
an initial period of funding loans with State
appropriations, to no longer do so. Instead,
the program would become self-sustaining up
to the level of loan repayments.
§ Alternatively, the State would use loan
repayments to reimburse the General Fund for
monies spent to make those loans (through
the debt service on GO bonds or annual
appropriations that funded loans directly).

This reimbursement would occur many years
in the future, as loans are repaid. Once the
initially funded loans had been made, the
program would no longer make future loans.

In both cases, as outlined in AB 140, long-term
“ongoing State support [would be] limited to
nominal administrative costs.”
These two approaches serve very different
purposes and accomplish very different
objectives. The revolving fund approach is
designed to enable the State to help subsequent
borrowers, and to do so in a way that keeps
pace with the rate of home appreciation. The
reimbursement approach is designed to help the
first borrowers, and then to recover the State’s
investment.

Option 1. Revolving Investment Fund
Purpose of approach. The purpose of this
option is to create an ongoing endowment for
future first-time homebuyers, with repayments
of CA Dream for All loans re-lent to subsequent
borrowers. It reflects the way that public shared
appreciation programs such as San Francisco’s,
and down payment assistance programs of
CalHFA and many other state housing finance
agencies, use repayments to continue making
loans to future buyers.

How it would work. The State would create a
separate, independent governing body to oversee
the Fund and engage a program administrator
to implement the Fund’s objectives. Examples of
such an approach include the various committees
established under GO bond acts, which typically
include the State’s three primary financial and
fiscal officers—the Director of Finance, the State
Controller and the State Treasurer. These ex officio
roles are sometimes supplemented by appointees
with specialized subject matter experience, such
as the case for bonds sold for the Department of
Veterans’ Affairs, the High-Speed Rail Authority
and the like.

The Fund would receive annual budget
appropriations and/or proceeds of State GO bonds
authorized by the voters. These monies would
be deposited as received in (a) a loan account to
purchase SALs, and (b) an administrative/servicing
reserve fund to pay all administrative, origination,
marketing and outreach, counseling, and servicing
costs, with the Program Administrator contracting
with outside firms to carry out such tasks. The
program administrator would thus be responsible
to the board or committee for the efficient use of
the funds.

Repayments of principal and of appreciation
on all SALs would be redeposited in the Fund,
and amounts not needed to replenish the
administrative/servicing reserve fund would be
dedicated to making new SALs each year.

Precedent. This approach is generally similar
to that used by San Francisco for funding its
Downpayment Assistance Loan Program (DALP)
over the last 40 years, but it would operate on a
much larger scale.

Taxpayer investment. An annual scale of $1 billion
in SALs would require that amount of funding plus
10%, or $100 million, for origination, administrative
and servicing costs.

The program can be envisioned to provide such
funding on an annual basis for 10 years, and
thereafter rely on loan repayments to provide loans
to future buyers. The State could also choose at
any time not to continue providing new loan funds,
so long as it continues providing funds for ongoing
administrative costs for loans already made and
those recycled from such loan repayments.

The taxpayer funds can be provided either
through the annual budget or through issuance of
GO bonds to be repaid by the State, or through a
combination of the two options.

Ability to meet programmatic needs. The
funding approach would not limit who can be
helped, in terms of areas of the state, lower-
income borrowers or those needing larger
amounts of assistance. The program would
receive pro rata appreciation or could set a higher
share of appreciation to provide more funds to
help future borrowers, but there is no requirement
or pressure from any investor to do so. This
financing method is thus highly compatible with
enhancing borrower household wealth.

Compatibility with Fannie Mae and Freddie Mac
first mortgages. Both Fannie Mae and Freddie Mac
require that shared appreciation seconds linked
with their first mortgages must be publicly funded,
so this approach would fully meet their rules.

Ongoing way to help future first-time buyers.

This funding approach is designed precisely to
help first-time buyers over many years to come.

Sustainable investment for the State. The
intent is to set an annual projected scale of
State investment that the State expects would
not significantly adversely affect its ability to
meet other needs or obligations. The State,
however, is not obligated to make any new
budget appropriation for funding loans or to issue
additional GO bonds (but would still need to
provide administrative costs).

No future financial risk to the State. There is no
financial impact on the State from any defaults or
losses on any SALs. If there are any losses, they
reduce the total amount of repayments that can
be used to make loans to future buyers. The State
is never out of pocket beyond the investment it
originally made. This approach, if funded from
proceeds of GO bonds, would require repayment
of such bonds without regard to the success (or
lack thereof) of the Program
Leverage taxpayer monies with non-taxpayer
monies to expand the number of borrowers
ultimately served. This financing approach
expands the number of borrowers ultimately
served by relending the repayments received from
borrowers over many years, rather than utilizing
non-taxpayer monies that need to be repaid with
a rate of return to investors.
52

53 Option 2. Repayment of State Capital
Purpose of approach. This financing method is
intended to repay taxpayer money and thus be
relatively costless to the State.

How it would work. The State would typically
issue GO bonds, providing proceeds to purchase
SALs. Origination, servicing and administrative
costs would either be paid from bond proceeds
or by an annual budget appropriation. The State
would pay principal and interest on the GO bonds
each year (together with any appropriation for
ongoing administrative costs).

Repayments of principal and of appreciation on
all SALs would be deposited in the State’s General
Fund, thus helping reimburse the State for its GO
bond payments. (Such amounts could also be
used to redeem the GO bonds directly).

Because the timing of loan repayments is
uncertain, as is the amount of appreciation, there
is no necessary relationship between when funds
are received or the amount of funds received
each year and the regularly-required payments on
the GO bonds. The State will typically be out of
pocket for many years since loan repayments are
likely to be very slow, depending largely on when
borrowers with these large SALs sell their homes.

The long-run objective of this approach is that
loan repayments ultimately enable the State to
recoup its funds spent on loans and administrative
costs. Whether this will happen depends on
the rate of home appreciation compared to the
interest rate on the bonds, plus what is needed
for origination, servicing and administrative costs
and any loan losses. In an ideal case, the State
might ultimately recover its costs for the program.

If the appreciation is less or there are significant
loan losses, the State will be unlikely to recover its
costs fully.

Precedent. This financing method is similar
conceptually to the way State GO bonds have
long been used to fund certain CalVets farm and
home loans to veterans. However, the Cal Vets
loans are regular interest-bearing, fully amortizing
loans, so the State is never expected to be out of
pocket on its bond payments. A portfolio of SALs
is very different, and the State, at best, would be
out of pocket for many years.

Taxpayer investment. The State would issue GO
bonds, up to a maximum amount authorized by
the voters, to fund an annual scale of $1 billion
of SALs. The origination, administrative and
servicing costs would be funded either by bond
proceeds or by the State providing annual budget
appropriations.

Ability to meet programmatic needs. As with
a revolving fund, this approach would not limit
in any way who can be helped, in terms of areas
of the state, lower-income borrowers, or those
needing larger amounts of assistance. The
program could be designed to receive pro rata
appreciation, but the intent of this method—to
fully recover the cost of the GO bonds—could lead
the State to seek a higher share of appreciation.

Compatibility with Fannie Mae and Freddie Mac
first mortgages. This funding method would be
compatible with Fannie Mae and Freddie Mac
requirements.

Ongoing way to help future first-time buyers.

This funding approach would not recycle any
loan repayments into new loans. It would thus
only help initial buyers. It does not provide an
endowment for future homebuyers.

Sustainable investment for the State. The total
authorized amount of the bonds would impact
the State’s borrowing capacity (even if they
are not fully issued for many years). Neither
investors nor rating agencies would count on
the State receiving loan repayments at the times
or amounts needed to repay the bonds, and so
would view the bonds as a net cost to the State.

Thus, the full amount of the authorization would
significantly affect the State’s ability to borrow for
other purposes.

No future financial risk to the State. The purpose
of this funding method is to avoid any long-term
cost to the State, and any loan losses will impede
the ability to accomplish that goal. In effect, the
State will have borrowed funds that may not be
fully repaid.

Leverage taxpayer monies with non-taxpayer
monies to expand the number of borrowers
ultimately served. This financing approach does
not leverage taxpayer funds nor recycle them to
help subsequent generations of borrowers.

54 Methods Combining Taxpayer and
Non-Taxpayer Funds
These methods are intended to leverage taxpayer
monies together with non-taxpayer monies to
reduce at least the initial burden on taxpayer funds
and/or ultimately help more borrowers with the
same amount of taxpayer monies, with the aim,
as set forth in AB 140, of “evolving the program
over time to be self-sustaining utilizing private
investments to create a self-sustaining model.”
The most important, and perhaps most surprising
finding, however, is that although there is
widespread investor interest in participating in
the rising prices of housing in California, there are
crucial challenges to relying on many types of
private capital to:
§ Consistently help fund the scale of the CA
Dream for All Program; and
§ Help fund CA Dream for All loans while
meeting the program’s key requirements.

Understanding the nature of these challenges is
important in considering financing options with
non-taxpayer monies.

Scale of funding. For more than five years,
highly-sophisticated financial technology
companies have been working with a wide range
of private investors to fund home purchase SALs
in California and nationally. They have worked
extensively with hedge funds, pension funds,
real estate investment trusts, foundations and
major banks. These companies have received
venture capital for their internal costs, structured
offering documents, worked through legal issues,
designed securitizations and established a lending
track record.

Yet raising significant large-scale amounts of
capital to invest in home purchase SALs has been
difficult. Landed provides one example. Despite
its focus on essential professionals buying homes
in high-cost areas, seed capital from the Chan
Zuckerberg Initiative, a special waiver from Fannie
Mae, partnerships with 143 school districts and
other employers and indications of interest from
23,000 potential borrowers, Landed was able
to raise a total of $53 million in seven rounds of
funding through last September.
112
As we sought lessons from Landed and other
fintech companies, what became clear is that
there is a divergence in the market.
§ There is extensive investor interest in home
price appreciation in many areas of California
112 “Landed.” Crunchbase. https:/ /www.crunchbase.com/organization/landed/company_financials and elsewhere, as witnessed by the billions of
dollars that hedge funds and others have raised
to buy and rent out single-family homes.
§ But shared appreciation lending, in addition
to being relatively new, creates unique
challenges for investors. The loans are in
second mortgage position and thus are
inherently riskier than first mortgages, of
course, but it is not the risk of principal loss
that makes it difficult to attract investors.

Rather, it is the deferred repayment of such
loans. The investor does not know, and has
no control over, when SALs will be repaid, nor
what their return will be. Nor do they receive
any ongoing interest or other interim income.

These fundamental uncertainties make it
very difficult for most investors to value such
investments or consider committing large
amounts of capital to them.

Even with fintech companies setting their share
of appreciation at 2.5 times their percentage of
the original purchase price and projecting investor
rates of return between 9% and 15%, this basic
uncertainty makes it hard to reliably raise the
kind of large-scale amounts of capital that the CA
Dream for All program would need.

As part of our outreach efforts, we also examined
government-sponsored enterprises (GSEs).

GSEs are vast participants in the mortgage
markets, have enormous amounts of capital, face
significant duty-to-serve requirements that the
CA Dream for All program can help meet, and
could potentially see a CA Dream for All program
as a national model for increasing affordability.

Federal Home Loan Banks, however, have generally
been unwilling to accept even amortizing second
mortgages simply as collateral for advances to
their member institutions. Discussions with Fannie
Mae, Freddie Mac and their regulator, the Federal
Housing Finance Agency, indicated that the CA
Dream for All program could be highly compatible
with their missions. But their interest was limited to
GSE first mortgage products that would be used in
conjunction with such a program—not in their own
investing in a shared appreciation product.

Discussions with major CRA banks also did not
indicate any interest in directly investing in a State
SAL program. These banks did, however, see a
large ongoing market for revenue bonds they
could underwrite for such a program at relatively
low interest rates—if such bonds were effectively
overcollateralized and had a way of assuring
interest payments.

55 As a result, we believe that at least for the
foreseeable future, the most realistic and low-cost
way to raise significant amounts of non-taxpayer
money for the CA Dream for All program would
be through revenue bonds. These investments
would be debt rather than equity, offer a fixed
interest rate to the investor (rather than a share
of home appreciation) and make payment of such
interim interest highly predictable. Option 3 shows
one way this could be accomplished.

Integrating private capital in the CA Dream
for All program. The second challenge in using
funds other than revenue bonds is the difficulty
in meeting key CA Dream for All objectives. This
challenge turned out to be more fundamental and
structural than expected.

We started, for example, with the assumption
that while different types of private capital might
require high rates of return, such monies could
be blended with taxpayer monies that would
receive a much lower return. For example, if
private capital by itself requires receiving a share
of appreciation that is 2.5 times its percentage
of the purchase price (e.g., for putting up 10% of
the home price, the investor receives 25% of the
appreciation), we thought such private capital
could be used with enough taxpayer monies to
charge the borrower pro rata appreciation. The
taxpayer monies could in theory take the first risk
position, or fund a loan loss reserve, that would
lower risks for the private investor.

During discussions with several fintech companies,
however, we encountered significant challenges
in trying to use monies they might raise together
with taxpayer money to meet CA Dream for All
objectives. One concern is structural. It would
be difficult to structure two tiers of funding for a
common pool of loans. More importantly, there
are parts of the state—particularly areas with
lower population density—where a dearth of
home sale data makes it difficult to raise and use
any private investor capital at all.

Even more significantly, the private equity model
is based on relatively quick repayments of
borrower loans, with an expected average life of
five years. This may be possible where the amount
of the SAL is a relatively small percentage of the
purchase price (e.g., 10%) and can potentially be
refinanced with the first mortgage. When the
SAL is much larger, however—as in the CA Dream
for All program—quick repayment is extremely
unlikely. Thus, it would be very difficult to use any
private equity capital to fund the larger loans that
the CA Dream for All program would be designed
to make. The problem is not merely that private
investors in SALs are seeking a high rate of return;
they are making investments that they expect to
be repaid quickly.In short, these sources of capital
can be thought of as “less patient” and more
demanding of certainty of both return and timing.

Implications. For reasons of scale and challenges
in integrating taxpayer and non-taxpayer monies
to fund a common pool of CA Dream for All loans,
we believe that if the State wants to leverage
taxpayer monies with non-taxpayer monies, it is
most practical to do so with revenue bonds.

A program using revenue bonds can meet
some of the objectives of AB 140, “evolving
over time to be self-sustaining utilizing private
investments” to fund future loans. But ongoing
State financial support would not be “limited
to nominal administrative costs.” To make such
revenue bonds marketable, the State would need
to provide ongoing State appropriations to assure
interest payments on revenue bonds.

From a broader perspective, we recognize that
one of the implicit reasons for seeking to use
non-taxpayer monies is not only to reduce the
taxpayer investment per borrower but to validate
the State’s efforts—that is, to show that parties
other than the State itself are willing to invest in
these loans.

Sales of revenue bonds can help do this. But when
it comes to private equity capital, the validation
may work the other way. Those raising capital
for private shared appreciation lending hope
that a large-scale CA Dream for All program will
help validate and promote the idea of shared
appreciation lending in general, including with
capital markets, GSEs, lenders and the real
estate industry. This seems more likely than the
State validating its own program by integrating
significant amounts of private equity.

Conclusions
The first of these methods, Option 3, a revolving
investment fund with revenue bonds can
potentially meet the CA Dream for All program’s
overall purposes in the way it assists borrowers,
and is detailed below. The specifics of the other
methods, Options 4 and 5, that have fundamental
problems in meeting the needs of the program,
are included in Appendix D.

Option 3. Revolving Investment Fund with Revenue Bonds
Purpose of approach. The purpose of this option
is to supplement taxpayer funds with revenue
bonds to finance SALs.

How it would work. The state agency that would
oversee and administer the CA Dream for All
Fund would issue revenue bonds backed by the
entire pool of SALs made by the CA Dream for All
program. In the first several years, all loans would
be funded by taxpayer monies; as a portfolio
and track record is established, revenue bonds
would be issued annually. The net proceeds of the
revenue bonds, together with a reduced amount
of new taxpayer monies would help fund new
loans.

Security for revenue bonds. The total amount of
revenue bonds would be limited to a maximum
percentage of all CA Dream for All loans.

Based on initial discussions with investment
bankers, we expect this could be 60% of all CA
Dream for All loans. This provides significant
overcollateralization for the revenue bonds. All
principal recoveries on loans would be used
to pay down revenue bonds, enabling further
revenue bonds to be issued up to the same
percentage limit. The appreciation received would
provide revolving taxpayer monies to help fund
a portion of the cost of new loans together with
new revenue bond proceeds.

Monies for new loans. Under this leveraged
approach:

In years 1 through 3, new taxpayer monies would
be provided for $1 billion of SALs each year.

In years 4 through 12, the amount needed from
new taxpayer monies would drop to $400 million
per year. This would be used together with new
proceeds from revenue bonds to make loans.

After year 12, no more new taxpayer monies
would be appropriated for loans. All future loans
would be based on repayments of outstanding
loans. Loan principal would pay down revenue
bonds, allowing a similar amount of ‘replacement’
revenue bonds. Such proceeds together with
appreciation received on past loans would fund
new CA Dream for All loans.

As a result, instead of $10 billion in taxpayer
monies for the revolving fund without revenue
bonds, the amount of taxpayer monies for SALs
would be approximately $6.6 billion ($1 billion per
year for three years plus $400 million per year for
nine years).

Interest payments on revenue bonds. CA Dream
for All loans do not make regular interest
payments, but rather are paid off together with
appreciation. But since the timing of loan payoffs
is many years in the future and uncertain, there
must be a mechanism to pay interest on the
revenue bonds.

To make the revenue bonds marketable, it is
important that the bonds pay regular interest
each year (the alternative of using capital
appreciation bonds where the interest accretes
over the years is unattractive to investors in
taxable revenue bonds and rarely used for such
bonds. Such bondholders would owe income
tax each year on the accreting interest without
receiving cash to pay such tax).

In order to pay this interest on an assured and
regular basis—without waiting for appreciation
to be received on CA Dream for All loans—the
legislation for the program would include a pledge
to include in each year’s state budget proposal
the amount needed to pay interest due on such
bonds up to a maximum annual limit. While the
Legislature cannot bind future state legislatures,
this appropriation pledge is commonly used
by California and many other states for lease
payments and other purposes; such pledge is
rated one notch below the State’s GO bond rating
(which is presently listed as AA- by S&P, Aa2 by
Moody’s and AA by Fitch).

The total amount of revenue bonds outstanding is
thus limited both to 60% of outstanding loans and
by the maximum annual interest pledge by the
State. We have assumed this pledge would not
exceed $380 million per year (which should allow
somewhat over $6 billion of revenue bonds to be
outstanding at any one time). Interest would be
paid up to this limit on all revenue bonds as long
as they are outstanding.

Origination, servicing and administrative costs. As
with the revolving fund approach in Option 1, the
State would appropriate $100 million.

Precedent. Revenue bonds backed by pools
of mortgages, including in some cases second
mortgages, have long been sold by state housing
finance agencies. Deferred payment second
mortgages have been collateral for some of these
bonds, but we are not aware of revenue bonds
where the only collateral is such mortgages.

The revenue bonds are intended to have a low
investment grade rating. Even if the bonds are
unrated, this was true of over $5 billion of housing
revenue bonds issued by California joint powers
authorities over the last two years for workforce
rental housing, whose repayment depended on
future rent growth.
56

Option 3 continued from page 56
57 The annual appropriation pledge, in this case only
for interest payments, has been utilized on many
types of state and local financings in California
and nationally. One example of its use for housing
is Minnesota’s State Appropriation Bonds for
Housing Infrastructure, which has included 26
series of bonds over the last nine years. New York
City recently used such a pledge for infrastructure
bonds for its Hudson Yards project.

Taxpayer investment. The total taxpayer
investment would be similar to that for Option
1—a revolving fund without revenue bonds—
but the timing and types of payment would be
different. Although much less taxpayer money
would be needed for funding SALs, the State
would be appropriating funds each year to pay
interest on the revenue bonds as long as they
were outstanding.

Ability to meet programmatic needs. The
funding approach would not limit in any way
who can be helped, in terms of areas of the state,
lower-income borrowers or those needing larger
amounts of assistance.

The program would receive pro rata appreciation
or could set a higher share of appreciation to
provide more funds to help future borrowers,
but there is no requirement or pressure to do so
to make payments on the revenue bonds, since
appreciation payments are not used to pay down
the revenue bonds. This financing method is
thus highly compatible with enhancing borrower
household wealth.

Including revenue bonds would, however, limit
program flexibility in at least one key way. If the
State did not want to set a fixed 30-year maturity
on SALs (but instead, like San Francisco, wanted
to simply define the “maturity date” as the date of
sale, transfer or non-compliance) it could easily do
so if all the loan funds are provided by taxpayers.

Long-time owners who had not sold their home
in 30 years could simply wait to pay off the CA
Dream for All loan instead of refinancing it with a
new first mortgage. But any use of revenue bonds
would require a clear, stated 30-year maturity on
CA Dream for All loans.

Compatibility with Fannie Mae and Freddie Mac
first mortgages. Since both revenue bonds and
direct taxpayer monies are publicly funded, this
financing method should meet Fannie Mae and
Freddie Mac requirements.

Ongoing way to help future first-time buyers.

This funding approach, like the revolving fund
itself, is designed to help first-time buyers over
many years to come.

Sustainable investment for the State. This option
would set an annual projected scale of State
investment that the State expects would not
significantly adversely affect its ability to meet
other needs or obligations. The amount needed
for new loans would be significantly below that
in Option 1, without revenue bonds. However,
the State would be committed to making annual
interest payments for many decades to come on
all revenue bonds, up to the maximum annual
amount of the pledge, as well as providing annual
funds for administrative costs.

No future financial risk to the State. There
would be no financial impact on the State from
any defaults or losses on any SALs. If there are
any losses, they reduce the total amount of
repayments that can be used to make loans to
future buyers. The State is never out of pocket
beyond the budgeted appropriations. The
State would have no liability to make principal
payments on the revenue bonds, which are
backed solely by the principal on the CA Dream
for All loans themselves. We note that this
approach creates the potential for a “moral
hazard” to the State. In this circumstance, even in
the absence of a legal requirement to apply other
State resources to the repayment of the bonds,
the political pressure on State leaders to take
remedial action could force them into unwelcome
choices.

Leverage taxpayer monies with non-taxpayer
monies to expand the number of borrowers
ultimately served. The total number of borrowers
ultimately served is likely to be similar to the
number served by Option 1, the revolving fund
itself. Including revenue bonds is unlikely to
increase the number of borrowers served, so long
as the State makes a similar overall investment (in
both loans and annual interest payments) as in
Option 1.

58 Methods With Limited State
Investment
Finally, we looked at ways that the State could
encourage, incentivize and promote the use of
private capital to fund SALs that meet CA Dream
for All program objectives—without the State
itself needing to invest taxpayer monies in funding
such loans.

Our analysis suggests this is extremely unlikely.

The difficulty is not simply one of the State
spending less and getting less in return. Rather,
the two challenges of using private capital—of
scale and especially of using private capital to
meet CA Dream for All program objectives—are
even more fundamental when such capital fully
funds the SALs.

The State can provide all manner of indirect
support to encourage certain types of shared
appreciation lending—paying origination, servicing
and administration costs, providing relief from
state capital gains tax and creating a reserve fund
against loan losses. But this will not change the
fundamental problem that, given the uncertain
timing of loan repayment, investors are looking
for early repayments that make it hard to serve
those needing larger SALs. In other words, it is
impossible to gauge how “patient” the capital must
be when it is contributed by private investors.

The benefits that the State would provide may
not significantly increase the number of eligible
borrowers who actually receive SALs. Indeed,
since a significant portion of current borrowers
under private SAL programs would meet CA
Dream for All program income and first-time
buyer requirements, the State would be providing
benefits for some borrowers who would have
received the same SAL anyway.

While State support may help validate and
promote the concept of shared appreciation
lending in general, it is unlikely to make much
difference in the ability of first-time buyers to
purchase homes in California.

Option 6 with limited State investment is detailed
in Appendix D.

Funding Options To Consider
Based on this analysis of a wide range of
potential funding options for the CA Dream for
All program, the two that are most likely to be
practical—to raise the annual scale of funds, meet
the borrowing and household wealth needs of
first-time buyers and provide ongoing lending for
subsequent generations of such buyers even as
prices continue to rise—are:
§ A revolving investment fund (Option 1), and
§ A revolving investment fund combined with
revenue bonds (Option 3).

Feasible Financial Approach
Comparing Selected Funding
Options
How do these two options—a revolving
investment fund or a revolving investment fund
combined with revenue bonds—compare? Does
leveraging revenue bonds enable the State to
serve more borrowers?
Projections. In order to determine answers to these
questions, we created a long-term financial model
to show how these options would perform under
a variety of scenarios. These projections include
both a conservative “expected” case and a “more
conservative” case. They are designed to indicate
the projected amount of CA Dream for All loans
each year, how many borrowers might be served,
the amount of taxpayer monies needed and its
timing and the sustainability of the program. The
aim is not to predict the future, but to indicate a
reasonable range of impacts these funding options
may have in order to inform legislation.

Comparison of options. In order to make these
options comparable, we modeled each using
approximately the same aggregate total present
value of taxpayer investment. This approach
makes it easier to see the different impacts of
these options themselves.

To preview the results, we found that while revenue
bonds change the timing of when taxpayer
monies are needed and how such monies may be
budgeted, there is little difference in the number of
borrowers assisted over a 30-year period.

While the successful sale of such revenue bonds
would help indicate that investors are willing to
join with the State in funding the CA Dream for All
program, they bring several disadvantages. They
add significant complexity, require marketing a
new financing structure at a very large scale and
are subject to the interest rates at the time of
each bond sale, which rates may turn out to be
higher or lower than the ultimate appreciation on
the loans they help finance.

Share of appreciation. As part of these
projections, we also tested the impact of requiring
that borrowers pay 1.5 times the program’s
percentage of the home purchase price versus pro
rata appreciation. This helped show how a higher
required repayment would affect the number of
future homebuyers the State can assist with the
same original amount of taxpayer monies.

59 Assumptions
Figure 36 shows key assumptions. Differences between the expected and conservative cases are bolded, as are differences introduced by revenue bonds. Some important assumptions are discussed below.

CA Dream for All lending. The analysis is based on the approach to annual scale of CA Dream in the first section of this chapter, including that CA Dream for All loans fund on average 20% of the purchase price.

The program lending volume is limited to $1 billion per year plus the increase in the home appreciation rate and is assumed to initially serve approximately 7,700 borrowers per year.

In later years, after the State is no longer providing new taxpayer monies for loans, the dollar amount and number of loans will depend on repayments of outstanding loans.

Figure 36: Key Assumptions under Financial Approaches
Expected More Conservative
Average home purchase price in first year of program 650,000 same Portion financed by CA Dream for All loan 20% same
Average CA Dream for All loan in first year of program 130,000 same Borrowers assisted by $1billion of program loans in first full year of program 7,692 same
Max. amount of CA Dream for All loans per year $1 billion increasing at appreciation rate
$1 billion increasing
at appreciation rate
Home price appreciation (annual rate) 4.5% 3.0%
Weighted average life of CA Dream for All loans 15.8 years 17.3 years Losses on CA Dream for All loans
Annual % 0.20% 3.2%
Cumulative 0.35% 6.3%
Administrative/origination/servicing costs
Administration 10 million increasing at 3% per year same Loan servicing (as % of loan balance) 1.0% annual same
Loan origination 5% of loan amount same
Pre-purchase counseling $1,125 per new loan same
Post-purchase counseling 250 per outstanding loan per year, counseling increases 3% per year same
Taxpayer Funding: No revenue bonds
For new loans $1 billion per year for 10 years same
For administrative costs $50 million start-up, $100 million per year, Increasing at 3% per year same
Taxpayer Funding: With Revenue bonds
For new loans $1 billion per year for 3 years
$400 mill. for years 4 – 12 same
For administrative costs $50 million start-up, $100 million per year same
For interest on revenue bonds $380 million max. per year same Revenue bond assumptions
Years issued for new loans (plus issued for new loans years 4 – 12 same Interest rate 5% 6%
Maximum par outstanding as % of loan balance 60% same
Maximum annual interest cost $380 million same

60 Home price appreciation. We have assumed
two different long-term compounding rates of
price appreciation on a geographically diversified
portfolio of loans throughout the state. The
expected case uses 4.5%, slightly below the 4.7%
average rate for the last 40 years for homes in
California. The conservative case is set about
36% lower, at a 3% annual rate.

The actual rate will, of course, fluctuate from
year to year, with price declines as in the Great
Recession and periods of very high appreciation
as in the last several years. The natural incentives
to maximize their own gains on their homes
encourages borrowers to wait out periods
when prices have fallen, rather than sell into a
downmarket, and to sell their homes (and repay
SALs) when prices have recovered.

Average life of CA Dream for All loans. We have
assumed that CA Dream for All second loans
pay off on average in 15.8 years in the expected
case and 17.3 years in the conservative case. An
analysis of San Francisco’s shared appreciation
portfolio from 1998 through 2015 showed an
average life of slightly over 16 years. These
assumptions reflect the fact that borrowers with
large SALs are unlikely to be able to refinance
them (especially before they have significantly
paid down their first mortgage amount) and are
generally expected to repay CA Dream for All
loans only when they sell or transfer their home.

These average lives on deferred payment
loans can generally be compared to 23% PSA
prepayment speed* on borrowers’ first mortgages
(at an assumed loan rate of 5%) in the expected
case and 0% PSA prepayment speed* in the
conservative case.
113
Losses on CA Dream for All loans. Loan losses
can arise—that is, the program can fail to recover
the original principal amount of a CA Dream for
All loan—if two things happen together:
§ The borrower defaults on the payments due
on the first mortgage, leading to foreclosure
or forced sale, and
§ The proceeds at foreclosure or forced sale are
insufficient to pay off the first mortgage, the
borrower’s original cash down payment and
the full original principal amount of the CA
Dream for All loan.

In such an event, the program would not fully
recover its original investment.
113 The standard method of referring to and calculating prepayment speeds of mortgages is the model established by the Public Securities Association, currently the Bond Market Association, or “PSA” model based on an assumed rate of prepayment each month of the then unpaid principal balance of a pool of mortgages.

Loss levels. We have estimated the magnitude of
this risk under a range of scenarios, by first looking
back at public agency deferred payment loan
portfolios that went through the Great Recession.

In the case of San Francisco’s shared appreciation
portfolio, the cumulative losses on its 440 SALs
made from 1998 through 2015 were 0.3% of the
original principal amount (this 0.3% figure assumes
conservatively that as with the CA Dream for
All program, the loans had been subordinate to
the borrower’s original cash down payment. San
Francisco, in fact, had zero actual losses).

We then looked at the losses on Colorado’s
deferred payment loan portfolio for loans made
from 2003 to 2010, which had among the highest
loss experiences on public down payment
assistance loans linked to 30-year first mortgages
that were conservatively underwritten. The
cumulative losses on Colorado’s portfolio was 14%.

Looked at more closely, we found two key factors
that distinguish its portfolio from the kinds of loans
that the CA Dream for All program would make:
§ The vast majority of the Colorado deferred
loans were made in conjunction with FHA
first mortgages, on which default rates have
generally been two to three times higher
than on Fannie Mae or Freddie Mac first
mortgages that CA Dream for All program
borrowers would be required to use. Fannie
Mae and Freddie Mac first mortgages require
significantly higher credit scores and much
lower front-end and back-end ratios than FHA
first mor tgages. Indeed, of the deferred loans
made in conjunction with Fannie Mae loans
in that period (some 52 loans), far from a 14%
cumulative loss, there were zero losses.
§ Equally important, the Colorado deferred loans
(like those of most down payment assistance
programs nationally) were quite small, at
approximately $5,000. Thus, there was little
reason for the agency to bid at foreclosure or
forced sale to protect its position; the cost and
effort would not have been worthwhile. On
very large second mortgages, like those the
CA Dream for All program would provide, it
would be worthwhile for a program with a 20%
second mortgage to seek to recover half of its
principal balance even if there had been a 10%
decline in property value.

Taken together, the estimated equivalent
cumulative loss for a CA Dream for All portfolio
that goes through the same depth of recession
as Colorado’s program is likely to be about one

61 quarter as severe, or about 3.5%. The conservative
case assumption of 6.3% is much higher than this
figure.

Borrower incentives. Another feature of CA
Dream for All is likely to further reduce borrower
defaults that can lead to loan losses. Repayment
of the principal amount of the CA Dream for
All loan would be subordinate to the borrower
recovering his or her original cash down payment.

This can make a significant difference in how
borrowers deal with their first mortgage debt.
§ In a normal high-to-loan first mortgage (for
example, 97% of the purchase price), if home
prices go down by 5% or more, a borrower
who is financially stretched to make the
mortgage payment and all other expenses
may have little incentive to keep making first
mortgage payments. Since the value of home
is less than has to be repaid, the borrower may
see little point in essentially throwing good
money after bad, since there may seem to be
little prospect of recovering the borrower’s
down payment.
§ The same logic applies if the borrower has an
80% first mortgage and a deferred payment
second mortgage that is not subordinate to
the borrower’s down payment.
§ Under the CA Dream for All approach, however,
even if the value of the home is reduced by
20%, the borrower has every incentive to keep
making first mortgage payments, since the
down payment will not be at risk.
§ Thus, the value of the home could drop by
five times as much as with a typical down
payment assistance loan (20% vs. 4%), and
the borrower would still have a full incentive to
keep making first mortgage payments.

This incentive makes little difference, of course, to
a borrower that has no other choice but to default
on their first mortgage. But as mortgage lenders
found during the Great Recession, loans being
underwater had a very strong impact on loan
defaults occurring in the first place.

Administrative, origination and servicing costs.

Recognizing that the details of how a CA Dream
for All program would operate have not been pre-
decided, we have made assumptions about what
may be adequate amounts to carry out all the
functions required.

Administration and setup. We have assumed that
administration of the program itself, including
setting up the program and annual oversight of
third parties carrying out specific functions, would
not exceed $50 million in start-up costs, plus $10
million a year, increasing at 3% annually.

Loan origination. For costs of loan origination, we
have assumed 5% of the original principal amount
of the CA Dream for All loans (e.g., $50 million
on $1billion of lending in the first full program
year). Third-party functions include tracking
loan reservations, marketing and outreach,
communications and explanations with borrowers
and homebuyer counseling (it should be noted
that lenders originating first mortgages and
associated seconds, like CA Dream for All loans,
cannot receive additional compensation for such
seconds under Federal rules).

Homebuyer and homeowner counseling.

Counseling is a key component of the CA Dream
for All program. We have assumed homebuyer
counseling for all borrowers, with a per loan cost
of $1,125. Ongoing counseling for borrowers with
outstanding loans is assumed to cost $250 per
outstanding loan per year. Both of these costs are
assumed to increase at 3% per year.

Loan servicing. For loan servicing, we have
assumed 1% of the original principal amount of
the CA Dream for All loans (since the loan does
not amortize, the dollar amount for servicing a
loan typically remains the same). The servicing
function on these loans can include:
§ Quarterly updates to the program and
borrowers on not only the principal balance
of the loan (so the borrower is fully aware
that there is a debt to be repaid) but also of
the estimated amount that would be due for
appreciation if the home was re-sold (based
on automated home value estimates for that
geographic area);
§ Working with borrowers who may be
delinquent on their first mortgage, including
making referrals for loan counseling, in order
to reduce the chances of default; and
§ Dealing with loan repayments.

The 1% figure is similar to what state housing
finance agencies have paid for servicing modest-
sized amortizing second loan portfolios, where
the servicer has to collect monthly payments. It
has also been proposed by a fintech experienced
in SALs.

Revenue bonds. The revenue bond approach,
timing, security and other limits reflect Option

3. Based on input from investment bankers and
increasing rates in the current bond market, we
have assumed that these taxable revenue bonds
could be sold at an average of 5% in the expected
case and 6% in the more conservative case. Costs
of issuance, including underwriter discount and
agency issuance fees, are assumed at 0.75%.

62 Results and Implications
We have compared Option 1, a revolving
investment fund with all taxpayer money that
invests $1 billion a year for 10 years, and Option 3,
a revolving investment fund that starting in year
3 uses revenue bonds to reduce the amount of
taxpayer money needed for new loans in each
year. The present value cost of taxpayer monies
for these two options is approximately the same,
so it is easier to see how this choice affects the
program’s ability to assist borrowers.

In addition, to see what happens to the long-
term sustainability and endowment created by a
revolving fund, we also showed the impact of a
revolving fund where taxpayer money is invested
for an extra five years—15 years in total.

Figure 37 shows high-level results under the
expected case. The revolving fund for 10 years
is bolded because it provides a baseline against
which other financing options can be measured.

Note: This analysis does not include a terminal
value of residual assets and liabilities after the
40-year projection period. The borrower share of
home appreciation is (a) for loans paid off, the
total appreciation on homes at time of payoff
minus the appreciation owed to the program, and
(b) for loans outstanding at end of 40 years, the
total appreciation on homes with loans at that
time minus the amount that would be owed to the
program if the loan was paid off at that time.

Overall impact. The most important finding from
this analysis is that a significant investment in CA
Dream for All lending over the first 10 years of the
program creates a powerful endowment to help
future borrowers.
§ By investing $1 billion a year in new loans for
10 years and helping approximately 77,000
first-time homebuyers directly over that
period, the State creates a revolving fund that
would assist 80,000 additional first-time
buyers over the following 30 years.
§ Because these are SALs, the appreciation paid
back to the program lets the CA Dream for
All Fund provide buyers each year the larger
amounts they need to keep pace with rising
home prices. The greater the rate of home
price appreciation, the more important this is.
§ Beyond this initial funding period, the total
cost to the State is limited to $100 million
per year for administrative, origination and
servicing costs.
§ The State can, of course, choose to continue
funding such a program. By doing so for 15
years, it will increase the number of first-time
buyers it supports from 157,000 to 200,000.

Figure 37: Expected Case Over 40 Years
Funding Approach
Taxpayer Funding
of New Loans
for 10 years
Taxpayer Funding with
Revenue Bonds
for 12 years
Taxpayer Funding
Only
for 15 years
Option 1 Option 3 Option 1 plus 5 years
Taxpayer Funding
For loans $10.0 billion $ 6.6 billion $15.0 billion
For revenue bond interest 0 5.3 billion 0
For admin, origination and servicing costs 4.1 billion 4.1billion 4.1 billion Total over 40 years 14.1 billion 16.0 billion 19.1 billion Present value at 3.0% 10.8 billion 11.4 billion 14.3 billion CA Dream for All loan originations
Total over 40 years 47.6 billion 46.5 billion 62.5 billion Present value at 3.0% 25.3 billion 25.4 billion 32.6 billion Borrowers Assisted
Total over 40 years 157,200 159,800 199,700
Average annual 3,930 4,000 4,990
Total over 40 years 133.8 billion 133.2 billion 173.2 billion Present value at 3.0% 64.2 billion 65.6 billion 81.6 billion PV of borrower appreciation / taxpayer cost 5.9x 5.8x 5.7x

63 § After the 40-year period shown in these
projections, repayments of CA Dream for All
loans would continue to revolve to help future
borrowers as well.

Key differences among financing options. A few
insights stand out from this comparison of various
options:
§ A revolving fund program and a revenue bond
program with approximately the same present
value of taxpayer investment would make
about the same dollar amount of CA Dream
for All loans and assist a similar number of
borrowers over the course of 40 years.
§ Including revenue bonds starting in the
fourth year changes the timing of taxpayer
investment. Instead of $1 billion in taxpayer
monies annually from years four through 10 for
new loans, this amount drops to about $400
million a year. However, taxpayer monies are
needed to pay interest on revenue bonds. The
net result is that the total cost to taxpayers is
about the same in present value terms.
§ The form in which taxpayer money is
budgeted is different among these options.

To support the interest payments on
revenue bonds, State legislation establishes
an annual appropriation pledge, building
ongoing support for the program into future
budgeting. This is separate from the amounts
being spent in early years to fund new CA
Dream for All loans.
§ Revenue bonds introduce an added element
of interest rate sensitivity. The more expensive
the actual interest rate on a series of revenue
bonds, the less the total amount of revenue
bonds that can be outstanding at any
one time with the same maximum annual
appropriation pledge. If revenue bond interest
rates are higher, as assumed in the more
conservative case, it will reduce the number of
borrowers that the CA Dream for All program
will ultimately help.
§ If the State wants to expand the number of
first-time homebuyers who are ultimately
assisted, it can do so not by including
revenue bonds in the program but simply by
continuing to fund new loans for additional
years.

More conservative assumptions. An important
part of this analysis is understanding the
sensitivities of these results to different economic
environments and prepayment speeds.
§ These financing structures have been
designed so that there is no unexpected or
additional cost to the State depending on
the economic environments or prepayment
speeds.
§ Rather, the result of larger loan losses,
slower prepayment speeds, less home price
appreciation or higher interest rates is on the
number of subsequent buyers the CA Dream
for All program can assist.
§ The total dollar amount of CA Dream for All
loans that would be funded over 40 years in
this more conservative case is significantly
less—$31 billion compared to $48 billion—but
still more than double the amount of taxpayer
monies spent on new loans (and interest
payments in the case of revenue bonds).
§ The number of borrowers in the more
conservative case is only slightly smaller
(144,000 compared to 157,000). While the
lower assumed home appreciation rate
means less total appreciation payments to
be recycled into new loans, it also means that
the amount needed to help new homebuyers
is smaller as well. If prices rise much more
slowly than they have historically, less money
is needed to help the same number of buyers
purchase the same homes.
§ This analysis shows how a shared appreciation
program responds over many years to a
variety of future trends, ultimately providing
more money to assist new buyers when home
prices increase quickly and less money when
prices rise more slowly.
§ One factor that could significantly reduce the
number of future buyers assisted would be
a severe reduction in California home values,
resulting in larger-than-projected loan losses.

In this case, there may be less of a need for
CA Dream for All loans to fund as much of the
purchase price of homes that first-time buyers
are seeking to buy.

64 Figure 38: More Conservative Case Over 40 Years
Taxpayer Funding
of New Loans
for 10 years
Taxpayer Funding
with Revenue Bonds
for 12 years
Taxpayer Funding
Only
for 15 years
Option 1 Option 3 Option 1 plus 5 years
Taxpayer Funding
For loans $10.0 billion $6.6 billion $15.0 billion
For revenue bond interest 0 6.8 billion 0
For administration, origination and
servicing costs 4.1 billion 4.1 billion 4.1 billion
Total over 40 years 14.1 billion 17.4 billion 19.1 billion Present value at 3.0% 10.8 billion 12.2 billion 14.3 billion CA Dream for All loan originations
Total over 40 years $31.4 billion $30.0 billion $42.0 billion Present value at 3.0% 18.1 billion 18.1 billion 23.6 billion Borrowers Assisted
Total over 40 years 144,000 144,000 188,000
Average annual 3,600 3,600 4,700
Borrower Share of Home Appreciation
Total over 40 years 61.8 billion 61.3 billion 81.4 billion Present value at 3.0% 31.2 billion 32.1 billion 40.2 billion PV of borrower appreciation / taxpayer cost 2.9x 2.6x 2.8x Note: This analysis does not include a terminal
value of residual assets and liabilities after the
40-year projection period. The borrower share of
home appreciation is (a) for loans paid off, the
total appreciation on homes at time of payoff
minus the appreciation owed to the program, and
(b) for loans outstanding at end of 40 years, the
total appreciation on homes with loans at that
time minus the amount that would be owed to the
program if the loan was paid off at that time.

Impact on borrower household wealth. In
addition to comparing the impact of the program
in helping buyers purchase homes, the model
provided a way to project the impact on the
household wealth generated for such households
over a 40-year period.

In the expected case, the net appreciation
received or accrued by borrowers over the 40-
year period (after subtracting the portion of
appreciation due back to the program) is about
$133 billion for both the 10-year taxpayer funding
and the revenue bond approach. On a present
value basis, this is about $65 billion.

This means that for a present value
investment of $10.8 billion, the State
helps generate about six times that
amount in household wealth for low- and
moderate-income homebuyers, while still
continuing to receive future repayments
to assist later borrowers.

In the more conservative case, the net
appreciation received or accrued by borrowers
over a 40-year period is about $61 billion in the
10-year taxpayer funding and revenue bond
approaches. The present value is about half that.

Even if appreciation over this period is two thirds
what it has historically averaged over the last 40
years, the $10.8 billion present value taxpayer
investment in the CA Dream for All Fund will
help generate about three times that amount in
household wealth.

65 Figure 39: Projected Borrowers Served Under the Expected Case Figure 40: Projected Borrowers Served More Conservative Case

66 Figure 41: Dollar Amount of Projected CA Dream for All Originations Expected Case (# Billions) Annual Figure 42: Dollar Amount of Projected CA Dream for All Originations Expected Case ($ Billions) Cumulative

67 Figure 43: Dollar Amount of Projected CA Dream for All Loan Originations More Conservative Case ($ Billion) Annual Figure 44: Dollar Amount of Projected CA Dream for All Loan Originations More Conservative Case ($ Billion) Cumulative

68 Figure 45: Borrower Share of Home Price Appreciation Expected Case ($ Billions) Annual Figure 46: Borrower Share of Home Price Appreciation Expected Case ($ Billions) Cumulative

69 Figure 47: Borrower Share of Home Price Appreciation: More Conservative Case ($ Billions) Annual Figure 48: Borrower Share of Home Price Appreciation: More Conservative Case ($ Billions) Cumulative

70 Impact of requiring higher share of home
appreciation. All these analyses have assumed
the simplest version of SALs, in which CA Dream
for All receives a pro rata share of appreciation.

We also looked at what the impact would be
if CA Dream for All received 1.5 times pro rata
appreciation.

Using the expected case for a basic revolving
fund (Option 1), the total number of borrowers
helped would likely increase. Instead of 131,000
first-time buyers, CA Dream for All might be able
to assist 14% more buyers and increase the dollar
amount of loans by about 20%.

Given the relatively modest additional amount of
CA Dream for All lending that would result from
a higher share of appreciation and the impact on
borrower household wealth, we do not think the
decision on the share of appreciation should be
based on trying to help more borrowers in the
future, but rather on policy grounds.
114
Limiting Financial Risks
A final key dimension for how the program is
designed and funded is to limit risks to the State.

Since the possibility of any such risks ever arising
is ultimately based on what happens on the
underlying SALs, it is instructive to consider risks
at the individual borrower level.

Borrower risks. The program is designed to
avoid creating any risks for buyers beyond
those in conventional mortgage lending and
homeownership. The most important feature
of the program in this regard is that it requires
Fannie Mae or Freddie Mac first mortgages. Such
mortgages involve a significantly higher standard
of loan underwriting, credit scores and front-
end and back-end ratios than FHA, VA and Rural
Development loans used by the vast majority of
first-time homebuyers. This underwriting protects
the borrower as well as the mortgage lender (and
because a default on the first mortgage is what
would trigger a default on the SAL, it protects the
program as well).

Because the SAL is deferred and only due upon
sale or cash-out refinancing, it does not involve
any monthly payments or create any ongoing
financial costs or burdens on the homebuyer.

As with any mortgage lending, there is naturally
a risk that if the borrower defaults on the
first mortgage, the home value may not be
sufficient to repay the first mortgage and the
114 Adding to the uncertainty is that a higher share of appreciation may affect the average life of CA Dream for All loans in ways that are hard to project. Some borrowers may be incentivized to pay off their loans earlier as they see the amount potentially due increase more rapidly. Others, looking at these larger amounts, may decide to live in their house longer.
second mortgage. To limit such exposure to the
homeowner, the CA Dream for All SAL would be
designed to provide three protections:
§ There is no possible deficiency judgment
against any borrower;
§ There is no appreciation payment unless the
property has increased in value; and
§ Even if the property has dropped in value, the
CA Dream for All loan is subordinated to the
borrower recovering the full amount of their
original cash down payment.

The homeowner has every incentive to
continue making first mortgage payments and
maintenance on the home, since the borrower
receives the vast majority of the gain on the
property.

One natural question is what happens if the
borrower does not sell the home, pays off the
first mortgage at the end of 30 years and still
owes the SAL. At that point, since the borrower
has no monthly payments on the original first
mortgage, they can take out a new first mortgage
that pays off the SAL. Alternatively, the borrower
can always sell the home, pay off the shared
appreciation loan and receive the remaining gain
on the property.

A further, more basic question is whether the
program is putting the borrower at risk by making
it possible to buy a larger or more expensive
home than would otherwise be possible. Helping
overcome the financial barriers to homeownership
is, of course, the very purpose of any down
payment assistance program, from CalHFA’s
MyHome assistance to larger SALs. The question
is whether being able to access a larger amount
of assistance may create a greater risk for the
potential buyer, in a way that is not reflected in
the loan underwriting. Since the major possible
risk is that of unanticipated repairs, one benefit of
the CA Dream for All Program is that it enables
buyers to have a wider range of choice and
thus be able to buy homes with less deferred
maintenance or current repair needs.

Risks to the State of California. The program
itself and the funding options we have modeled
are designed to avoid creating future or
unanticipated financial risks to the State. If loan
losses are greater than projected, there is no
additional financial cost to the State’s General
Fund. Rather, the amount of future CA Dream for
All lending from loan repayments will be reduced.

71 We recognize that including revenue bonds in the
program may raise additional questions about
risk. If revenue bonds are included, the principal
on them will be payable solely from a senior
security interest in a highly overcollateralized level
of SALs (and the interest by a state appropriation
pledge). As a result, there is no financial or legal
risk to the General Fund. Nevertheless, having
such a large outstanding amount of such revenue
bonds issued by a state agency, ultimately over $6
billion, secured by second mortgage loans brings
reputational concerns. Very large loan losses, even
if far below the 40% loss level that could affect
ultimate repayment of principal, would make it
more difficult to sell additional series of revenue
bonds and continue funding CA Dream for All
loans in this way. For these reasons, and because
inclusion of revenue bonds does not increase the
number of borrowers who can be assisted with
the same amount of taxpayer monies, we advise
using taxpayer money to fund the program.

There is a final reputational concern about
whether borrowers will clearly understand the
nature of the loan obligations they are assuming.

The program would need to make an exceptional
effort to educate potential buyers about the loan
obligation and what is due upon payment, and to
inform borrowers regularly about the estimated
amount that would be due under their loan if
paid off in the current market. The websites and
educational efforts of several fintech companies
offer models for how this can be done.

Perhaps most important to note in thinking about
perceptions by borrowers is to compare SALs
with other ways of assisting the same potential
buyers. SALs subordinate to the borrower’s
original down payment pose far less risk to the
borrower than a deferred second mortgage with
an accruing interest rate, since no appreciation is
due if the house does not increase in value, unlike
accrued interest at a fixed interest rate.

Finally, SALs provide a way for the State to
reduce the risk to itself (and future homebuyers)
of being unable to provide resources that keep up
with the rate of home appreciation, and to reduce
cost of making homes affordable in the future.

The funding options described here are based
on the State providing the same fixed amount of
taxpayer funds each year ($1 billion for new loans
during the initial phase of the program and $100
million for ongoing administrative costs), without
any increases, while also being in a position to
provide larger and larger CA Dream for All loans
to buyers as California house prices increase. The
program can therefore provide the same level of
affordability without requiring more and more
taxpayer dollars each year.

Recommended Funding Option
Based on this extensive analysis, the recommended
approach for funding the CA Dream for All
Program is also the simplest: investing state
taxpayer monies in a revolving investment fund,
without requiring revenue bonds secured by CA
Dream for All loans. This approach would involve
the State investing $1 billion per year for new loans
for 10 years, together with an ongoing contribution
of $100 million per year for administrative costs.

Methods of Funding Taxpayer Investment
There are three funding methods by which
the State can provide these taxpayer monies:
budget funds for new loans each year, issue GO
bonds or issue bonds backed by a state annual
appropriation pledge.

State annual budget fund. The Legislature can
directly appropriate the monies to fund CA Dream
for All loans in each year’s budget (for example,
by including $1 billion in each year’s budget for
the first 10 years). This method has the highest
annual cost during those years, but avoids
requiring the State to pay interest on any bonds.

General Obligation Bonds. The State can request
voter authorization of GO bonds to fund CA
Dream for All loans. Such bonds could then be
issued in the amount needed each year, up to the
maximum total amount approved by the voters.

Interest on the bonds would be federally taxable.

Each series of bonds would typically be issued
with annual maturities through a final 20-year
maturity. The State would be obligated to fund
the annual debt service on these bonds as a GO
of the State. This approach spreads out the cost
to the State of its investment in each year’s CA
Dream for All lending over many years.

State appropriation pledge bonds. This method
is frequently used to fund state investments by
spreading out the cost over many years without
requiring voter authorization. California and other
states have often issued bonds backed by a state
appropriation pledge for capital facilities.

Under this approach, the Legislature authorizes
the issuance of state appropriation pledge bonds
for the CA Dream for All program and establishes
a maximum annual limitation on the debt service
that the State will pay on such bonds. The
State is committed to making such debt service
payments, but only to the extent that they are
budgeted and appropriated each year by the
Legislature. These bonds are effectively viewed as
‘moral obligations’ of the State, and are typically
rated by rating agencies one notch below the
rating on the State’s GO bonds.

72 This type of State pledge is the same as that
described earlier for revenue bonds for the CA
Dream for All program, but would cover both
principal and interest on the bonds. As a result,
bondholders would receive scheduled principal
payments funded by the State’s budget—not from
principal repayments of CA Dream for All loans.

This is an important distinction in several ways.

This appropriation pledge approach is commonly
used for certificates of participation and lease
revenue bonds for major projects, and it has
been used successfully over the last 10 years by
the State of Minnesota for housing infrastructure
bonds. The principal and interest on the bonds are
paid by the State, and the proceeds are used to
make soft second loans for permanent supportive
housing and other types of housing projects.

Under the appropriation pledge approach, the
Legislature would decide on a maximum annual
debt service. For example, if the maximum
annual amount was initially set at $480 million,
this would enable the State to issue bonds for $1
billion per year of CA Dream for All lending over
the course of approximately seven years. In the
future, the Legislature could decide to increase
the cap amount in order to continue investing in
the CA Dream for All program.

Like GO bonds or revenue bonds for the CA
Dream for All Program, appropriation pledge
bonds would be federally taxable.

Choice of funding method. Any of these methods
for investing taxpayer monies could be used
for the CA Dream for All Fund. Ultimately, they
simply reflect different ways of authorizing and
spreading out the cost of the same investment.

Figure 49: Comparison of State Appropriation Pledge Bonds and Revenue Bonds Overcollateralized by CA Dream for All Fund
State Appropriation Pledge
Bonds
Revenue Bonds Overcollateralized by CA
Dream for All Fund
Purpose Fund the full amount of CA
Dream for All loans made in
a year
Fund a portion of the cost of CA Dream
for All loans (together with direct taxpayer
monies)
Security for the Bonds State annual appropriation
pledge for both principal
and interest
Principal is secured by and depends on
borrower repayments of CA Dream for All
loans. Bonds must be overcollateralized (e.g.,
can only be issued for up to approx. 60% of
the amount of CA Dream for All loans).

Interest is paid by a state annual
appropriation pledge
Are Bondholders Affected by:

Timing of Repayment of CA
Dream for All loans?
No Yes
Losses on CA Dream for All
loans?
No Yes
Would there need to be a fixed 30-
year maturity on CA Dream for All
loans?
No Yes
Do bondholders have a lien on
repayments of CA Dream for All
loans?
No Yes
Maturity on Bonds Serial bonds through a final
maturity (such as 30 years)
Single term bond in 30 years that would be
redeemed earlier from CA Dream for All loan
repayments
Rating on Bonds One notch below California’s
general obligation rating
Significantly lower, investment grade rating
Is this a type of credit and security
that bond investors and rating
agencies are highly familiar with?
Yes No. Deferred payment second mortgage
loans have rarely been security for large-
scale bond issues

73 Comparing Shared
Appreciation to Fixed Interest
Beyond the funding option itself, we compared
the process and impact of using those same
taxpayer monies for two different types of second
loans to homebuyers:
a) Deferred payment second mortgages with a
fixed simple interest rate, such as 3%, and
b) SALs, where there is no interest and the
borrower repays a pro rata portion of the
appreciation on the home.

In exploring these options, we considered a range
of questions, including the differences in risks
involved, the total number of households who
could buy homes with CA Dream for All loans,
the total amount of these loans and the net
appreciation received by borrowers.

Risk
Loans that accrue interest at a fixed rate are
fundamentally different from SALs. With a fixed
interest rate loan, the borrower has to pay the
same amount of accrued interest at the loan
rate regardless of what happens to the value of
the home. The interest that accrues each year is
“hard,” meaning that it is due regardless of what
happens to the value of the home.

Accruing fixed rate loans creates two significant
risks compared to a shared appreciation loan. One
is a risk to the individual borrower; the other is a
risk to the ability of the CA Dream for All program
to help future borrowers.

Risk to the Borrower. A fixed interest rate on a
CA Dream for All loan creates considerably more
risk to individual homeowners if prices don’t
increase significantly.

Consider a scenario in which a home purchased
for $650,000 doesn’t increase in value when
re-sold 10 years later—for example, during a
recession. With shared appreciation, the borrower
owes nothing beyond paying back the original CA
Dream for All loan principal amount. With a 3%
simple fixed interest rate, however, the borrower
owes $39,000 in accrued interest, even though
there is no gain on the house. This amount is
about twice the value of a typical borrower’s
original down payment.

Risk to CA Dream for All being able to help
future borrowers. On the other hand, consider
a scenario in which home prices increase
dramatically—for example, by 6% a year over the
course of 10 years. With shared appreciation, the
CA Dream for All Fund would receive enough to
help a similar buyer purchase an equivalent home.

With a 3% simple fixed interest rate, however, the
Fund would be $64,000 short in trying to help a
new buyer.

The bottom line is that if home prices increase
at a faster rate than that on a fixed rate
loan, repayments will not be enough to help
subsequent buyers buy equivalent homes.

The last few years have underscored this risk.

Between 2018 and 2021, home prices in California
increased by 38%. A SAL program would have
allowed the CA Dream for All program to keep
pace during this time in order to help future first-
time homebuyers. Under a 3% fixed interest rate
loan program, however, the amount that the CA
Dream for All program would ultimately be able
to help future buyers would have gone up by only
9% at a time when prices increased by more than
four times that amount.

Nature of the risk. Setting a different rate on
a fixed interest rate loan does not eliminate
these risks. An interest rate of 5% instead of 3%,
for example, would increase borrower risk. If a
borrower purchases a home for $650,000 and
the value has not increased when reselling the
home 10 years later, a buyer with a 5% simple
interest loan would lose $65,000, reducing their
household wealth by $65,000. The same buyer
with a shared appreciation loan would not have
lost anything, and would recover their initial
down payment. Meanwhile, if home prices were
to rise faster than the fixed interest rate, the Fund
would not be able to help a new buyer afford an
equivalent home.

The higher one sets the fixed interest rate in
order to assist future buyers, the greater the risk
to any individual borrower. The risks created by
an accruing fixed interest rate on large deferred
payment second mortgage loans are thus
fundamental. If appreciation turns out to be less
than the fixed rate, the low/moderate-income
borrower loses money, compared to shared
appreciation. On the other hand, if appreciation
turns out to be more than the fixed rate, the CA
Dream for All Fund will not have enough to help
the next buyer purchase a similar home.

In essence, an accruing fixed rate second loan
creates a greater upside and a greater downside
for the borrower, while also making it much
more difficult for the State’s investment in the
CA Dream for All program to keep pace with
inflation. Shared appreciation creates fewer risks
to individual homebuyers and to the CA Dream
for All program’s ability to help families overall,
because it is linked to what actually happens to
the price of each borrower’s home.

74 Overall Impact of Fixed Interest vs.

Shared Appreciation
Expected case. Figure 50 shows key overall
impacts of these two different types of lending,
with the same amount of State investment in the
CA Dream for All Fund in the expected case.

If homes appreciate at 4.5% per year—slightly
less than the statewide average for the last 40
years—a shared appreciation CA Dream for All
program will assist approximately 32,000 more
borrowers than a 3% fixed interest rate loan
program. That number represents 26% more first-
time buyers who could purchase homes.

More striking still, a shared appreciation program
would provide $15 billion more in CA Dream for All
loans—46% more than the fixed rate program. This
program would help future borrowers keep up
with the increasing price of homes in California,
allowing buyers to purchase homes costing a total
of $238 billion compared to $163 billion.

Perhaps the most important part of this
comparison is the impact on borrower household
wealth; that is, how much borrowers receive
from the total appreciation of their homes
after subtracting what would be owed to the
program, either as a share of appreciation or as
accrued interest. The aggregate appreciation
that borrowers would be able to realize under a
shared appreciation program would be $133.8
billion—about 10% more than with a fixed rate
loan program.

Why does a shared appreciation program help
borrowers realize more total appreciation? After
all, any individual borrower in an escalating
housing market would be better off owing a
low interest rate rather than a pro rata share of
appreciation. But because a shared appreciation
program helps so many more borrowers, the total
borrower share of appreciation the CA Dream
for All program can generate over 40 years is
significantly greater.

Figure 50: Shared Appreciation and 3% Fixed Interest Loans Over 40 Years: Expected Case Shared
Appreciation
Fixed Simple
Interest 3%
Difference
CA Dream Loan Originations
Borrowers assisted over 40 years 157,200 124,800 32,400 $ of homes purchased $238 bill. $163 bill. $75 bill.

CA Dream loans 47.6 bill. 32.6 bill. 15.0 bill.

Present value at 3.0% 25.3 19.2 6.1
Borrower Share of Home Appreciation Through Year 40
Borrower share $133.8 bill. $120.6 bill. $13.2 bill.

Present value at 3.0% 64.2 60.8 3.4

75 Figure 51: Shared Appreciation v. 3% Fixed Interest Loans Over 40 Years: More Conservative Case Shared
Appreciation
Fixed Simple
Interest 3%
Difference
CA Dream Loan Originations
Borrowers assisted over 40 years 144,000 133,900 10,100 $ of homes purchased $157 bill. $141 bill. $16 bill.

CA Dream loans $31.4 bill. $28.2 bill. $3.2 bill.

Present value at 3.0% 18.1 16.9 6.1
Borrower Share of Home Appreciation Through Year 40
Borrower share $ 61.8 bill. $ 61.8 bill. $0 bill.

Present value at 3.0% 31.1 31.6 -0.4
More conservative case. Figure 51 shows the
results in the more conservative case, where home
prices rise at 3%—the same rate as that on an
assumed fixed rate loan program.

If home prices rise slowly—at about the same rate
as that on accruing fixed rate loans—there is much
less of a difference between shared appreciation
and fixed rate programs. In this case, shared
appreciation helps about 10,000 more first-time
buyers, or about 8% more. There is virtually no
difference in the total borrower share of home
appreciation over this 40-year period.

This point underscores the very purpose of a
shared appreciation program: to be able to keep
pace with the changing price of homes and thus
reduce the risk that loan repayments will not be
enough to help a similar buyer purchase a home.

In the same way that the fundamental purpose of
the CA Dream for All program is to help insulate
families from rising housing costs, the shared
appreciation feature helps insulate the CA Dream
for All program from being unable to help future
buyers in the kind of escalating market California
has experienced for decades.

Residual long-term benefits. The analysis up
to this point has only considered the impact on
appreciation by borrowers through 40 years.

Perhaps the most significant difference between
shared appreciation and fixed interest is in the
residual amount accrued by the CA Dream for
All Fund at the end of 40 years. These are the
repayments the CA Dream for All Fund would
ultimately receive from loans outstanding at that
date.

In the expected case, a shared appreciation
program would generate five times more
resources from repayments after year 40 than
a fixed rate program: $35.8 billion versus $7.6
billion. This difference is the extra amount that a
shared appreciation program would have to help
subsequent buyers.

In the conservative case, the difference is less but
still substantial. A shared appreciation program in
this case would generate about 75% more residual
resources than a fixed rate program, or about
$13.0 billion versus $7.5 billion.

Efficiency of State Investment in
Generating Household Wealth
Figure 52 takes into account these various
impacts. It envisions the program making loans
through year 40, but with any repayments
received after that date acting as repayments to
the State for its investment.

76 Figure 52: Present Value Comparison of State Investment in Generating Household Wealth State
Investment
Residual to
State After
Year 40
Net State
Investment
Borrower
Appreciation
Through Year 40
Borrower Appreciation
Divided by Net State
investment
Expected Case
Shared appreciation $10.8 billion $7.5 billion $3.3 billion $64.2 billion 19.4x Fixed interest $10.8 billion $1.7 billion $9.1 billion $60.8 billion 6.7x More Conservative Case
Shared appreciation $10.8 billion $2.7 billion $8.1 billion $31.2 billion 3.9x Fixed interest $10.8 billion $ 1.6 billion $9.2 billion $31.6 billion 3.4x What this shows is that in the expected case, in
present value terms, the State’s net investment
in a shared appreciation CA Dream for All Fund
would have been $3.3 billion, and would have
generated more than 19 times that amount in
borrower household wealth. The State’s net
investment in a fixed rate CA Dream for All
Fund, on the other hand, would have been $9.1
billion, and would have generated 6.7 times that
investment.

In the more conservative case, the State would
generate 3.9 times its investment using a shared
appreciation approach versus 3.4 times its
investment under a fixed rate approach.

Conclusions: Appreciation vs.

Fixed Interest Loans
In all these analyses, a few insights into fixed rate
programs stand out.
§ If the fixed interest rate turns out to be lower
than the average rate of appreciation (such
as in the expected case, with 3% simple
interest vs. 4.5% compounded appreciation), a
fixed rate program will help significantly fewer
buyers and generate much less household
wealth.
§ If the fixed interest rate turns out to be close
to the average rate of appreciation, such
as in the more conservative case (e.g., 3%
simple interest vs. 3% compounded home
appreciation), the differences from shared
appreciation are more modest. In the more
conservative case, shared appreciation helps
about 8% more borrowers over 40 years than
a fixed rate program and accrues significantly
more resources for helping subsequent
borrowers or for repaying the State. It is
also somewhat more efficient in generating
household wealth.
§ If the fixed interest rate turns out to be higher
than the actual appreciation on an individual
borrower’s home, there is a significant
adverse impact on that borrower’s household
wealth. Shared appreciation does not pose
this risk.

By being linked to what actually happens to
borrower homes, shared appreciation can be
seen as creating fewer risks both to individual
borrowers and to the program’s ability to
generate household wealth overall.

77 VI. OUTREACH, EQUITY AND

IMPLEMENTATION
Community and Stakeholder Feedback
115 A special thanks goes to those e xperts that agreed to be interviewed for the purpose of this report. These individuals include Blanca Arellano, Hope Through Housing Foundation; Carolyn Patton, West Angeles CDC; Al Abdullah at the San Diego Urban League; Sergio Szyrko at Fairway Independent Mortgage Corporation; Anne Vilagut, Montebello Housing Development Corporation; Maureen Sedonaen, Habitat for Humanity San Francisco; Dennis Santiago, National Asian American Coalition; Hyepin Im, Faith and Community Empowerment; Kaith Berghold, Fresno Metro Ministries; Clemente Mojica, Neighborhood Partnership Housing Services; Leah Miller, Habitat for Humanity Sacramento; Nikki Beasley, Richmond Neighborhood Housing Services; Bertha Garcia, Ventura County Community Development Corporation; Esther Carver, Lowell CDC; Leo Goldberg, California Community Land Trust Network; Farrah Wilder, California Association of Realtors.

Summary of Community Comments
and Themes
California Community Builders staff spoke to
stakeholders throughout the state from January
through March of 2022. These stakeholders
included housing counseling agencies, community
development corporations, mortgage originators,
Community Development Financial Institutions
(CDFI), real estate brokers and representatives of
community land trusts.
115
Interviewees almost universally supported the
program at a high level. In fact, even those who
did not think the program would be directly
applicable to their organizations and/or target
communities were supportive.

Two organizations brought up notable structural
questions. One organization asked whether the
proposed CA Dream for All program would do
enough to prioritize wealth building overall and in
all cases—and specifically, whether the CA Dream
for All program should ensure that in all cases,
including early home sales and cases of hardship,
the borrower’s financial equity is maximized.

On the other end of the spectrum, a separate
organization asked whether the program’s
intended flexibility would protect against highly-
educated-but-not-rich-yet borrowers (HENRYs)
over-subscribing to the program, and specifically
whether the CA Dream for All program would
inadvertently over-subsidize borrowers from
higher wealth communities that have already
historically been able to access homeownership.

These critiques were in the minority, and the
program team is confident that an equitable
approach informed by community input—as
described below—will address these more
systemic concerns. The remainder of the feedback
primarily addressed smaller-scale program details,
and even those interviewees with the strongest
concerns did not disagree with the overall
concept or argue that a shared appreciation
mortgage program should not exist.

Primary Interview Themes
California needs more tools to meet our
homeownership crisis. Stakeholders all voiced
the need and support for a new tool to address
the homeownership crisis.

Equity for disadvantaged communities needs
to be prioritized. Stakeholders agreed that
historically redlined and other marginalized
communities have specific needs and are not well
served by the existing mortgage market, while
existing down payment assistance programs
leave significant room for improvement. It’s clear
that any new mortgage product must ensure
outcomes that maximize accessibility, protection
and wealth building for these populations.

Housing practitioners need flexibility and
support. Stakeholders agreed that housing
professionals need diverse options to serve
diverse communities, and that programs with
built-in flexibility allow them to serve a variety
of unique borrower needs. Housing counselors,
who are on the front lines of supporting low-
and moderate-income families, need increased
resources to ensure maximal help to communities
that are often hard to reach, experience language
access issues or have little experience successfully
attaining homeownership. Stakeholders often
remarked during interviews that housing
counselors do two to three times more work than
they are compensated to perform.

The CA Dream for All program must work within
the context of the market as it exists today.

Stakeholders continually acknowledged the
extreme disadvantage facing low- and moderate-
income borrowers in every region of the state,
including those considered “low-cost.” A successful
program will need to ensure that borrowers can
compete in the private market efficiently and
effectively. Considerations like the timing of funds,
ease of execution and competition from borrowers
using only private-sector mortgages (as well as all-
cash buyers) must be taken into account.

78 Areas of Significant Support
Income flexibility. In general, interviewees were
most pleased with the flexibility the program
would provide around eligible borrower incomes,
since existing programs are very restrictive and
often targeted at families at or below 80% AMI.

Interviewees felt that this flexibility would either
be a tool to serve existing clients or an alternative
for those clients that would otherwise have been
turned away for having an income that is too high.

Further, several interviewees brought up the lack of
existing programs to serve 80-120% AMI families.

Student debt relief. Interviewees generally
supported a potential set-aside to help borrowers
convert expensive student loan debt into low-
cost, non-interest-bearing CA Dream for All debt,
although the issue was less pertinent for some
populations. Several interviewees suggested
that student debt could be a constraining factor
for their clients. Feedback from down payment
assistance administrators in Illinois indicated that
adding direct student debt support lowered the
average age of their borrowers and brought in
more diverse populations.

Average size of a CA Dream for All loan. Most
interviewees noted that one of the biggest, most
straightforward benefits of the program is that
it would remove the need forPrivate Mortgage
Insurance (PMI), which would result in significant
cost savings for borrowers and a larger overall
loan. The size of the CA Dream for All’s average
loan, approximately 17%, is big enough to ensure
that the majority of borrowers avoid an often
large and unnecessary cost.

CBO and nonprofit participation. Interviewees
thought a program that provided the above
benefits and included a significant role for
nonprofit community organizations could
serve populations and potential homeowners
that are not currently well served. Interviewees
generally spoke very highly of CalHFA’s
community collaboration structure and thought a
continuation of that approach would be beneficial
and necessary for this type of program.

Areas of Concern and Potential
Approaches to Address Those
Concerns
Complexity. Interviewees flagged the complexity
of the program as a potential obstacle to
maximizing positive benefits for targeted families.

While shared appreciation is relatively simple in
some ways (e.g., no interest paid, loan amount
is directly tied to purchase price, not payable
until sale, etc.), target borrowers will likely come
from families where homeownership may not be
common. Several interviewees suggested that
most borrowers will forget about the second
mortgage if they are not paying it, especially
after more than 10 years. Perhaps even more
importantly, SALs are not widely available, and
so borrowers, real estate professionals, housing
counselors and administrators will generally be
unfamiliar with the structure and concept at the
outset of the program.

To address the complexity of this program, the
CA FWD team recommends that a CA Dream
for All program maximize pre-and post-purchase
counseling. During the homebuying process, the
program should prioritize clear, simple marketing
materials, loan descriptions and documents, and
should resource home counseling organizations
to provide enhanced support to borrowers.

Post-purchase outreach and counseling will be
especially critical for inexperienced buyers if
problems arise. This should include regular written
communications to borrowers indicating that they
have a shared appreciation obligation, as well
as annual check-ins with housing counselors. It
will be useful to contact borrowers periodically
(ideally through post-purchase counseling) to
ensure this detail is not lost.

First-generation set-aside. The CA FWD team
was asked to evaluate a potential set-aside for
first-generation homebuyers, or buyers who
had not owned a home in the past three years
and whose parents had not owned a home in
three years. Interviewees were generally neutral
or opposed to the first-generation component.

Feedback indicated that a first-generation
component would be impractical to verify, would
further complicate an already complicated
program and would not add much value since
the majority of
first-time homebuyers are already
likely to be first-generation.

To address what could be a significant
administrative burden for small overall equity
impacts, the CA FWD team recommends the CA
Dream for All program focus primarily on first-
time homebuyers to avoid a logistical quagmire.

If a first-generation set-aside is included, it should
be structured as a self-certification to reduce the
administrative burden.

Down payment and closing costs. Most
interviewees mentioned the overall cost of a down
payment and closing costs being an impediment,
especially in high-cost markets. While a CA Dream
for All loan would only leave 3% for a borrower to
contribute as a down payment, even this amount
could be prohibitive for low-wealth borrowers and
communities, considering the average home cost
in the Bay Area, Los Angeles and most areas of
the state.