State agency foreclosing on borrowers who rent out their homes

A state agency that provides low-interest mortgages to first-time home buyers is foreclosing on a small number of clients, even though the borrowers are current on their monthly payments, according to a state Senate watchdog group.

The California Housing Finance Agency has initiated or threatened foreclosure on about 200 borrowers because they are no longer living in the homes as required by state regulations. Some of them have rented out their homes to cover the mortgage payments and moved to more affordable quarters, mainly because of financial hardship or changes in their jobs or personal lives, the Senate Office of Oversight and Outcomes said Monday.

The borrowers, who owe more on their mortgages than their homes are worth, are reluctant to sell the properties because they would lose much of their investment, the Senate report said.

“The collapse of the housing market … put many homeowners underwater,” the report said. “Under current conditions, borrowers forced to sell face severe losses. Instead, several hundred CalHFA borrowers who have gotten married, had children, started a home-based business or had another change in life circumstances have rented out their former homes.”


The agency, known as CalHFA, finances its $4.2 billion worth of low-interest mortgages through the sale of tax-free bonds. U.S. Internal Revenue Service rules specifically prohibit that money from the sale of bonds be lent to home buyers who do not live in their properties, CalHFA Marketing Director Ken Giebel said.

The agency makes some exemptions for clients who have suffered severe economic problems, such as losing their jobs, Giebel said.

But in 21 cases, CalHFA foreclosed on borrowers who rented out their homes without permission, something that is specifically prohibited by loan document disclosures, Giebel said. Those cases represent less than one-thousandth of 1% of all CalHFA loans, he said. The agency holds the loans for about 23,000 first-time home buyers.

“We are not looking to foreclose. It costs us money,” said Giebel. “It would be great if they could rent all these homes out, but the rules don’t say that. We’ve been told we can’t look the other way” as some other states are doing. A typical foreclosure proceeding costs the agency $50,000, he said.

One hundred eighty-six CalHFA loans are being threatened with foreclosure even though the borrowers have stayed current on their monthly loan payments, the oversight office said. And 49 other borrowers are delinquent and at high risk of losing their homes, the report said.

Tight rental restrictions were recommended to the agency by its bond counsel before the collapse of the state’s housing market and the deep recession of 2007-09.

“It’s been our policy for 35 years,” Giebel said. “It says very clearly when we finance the loan that the homeowner cannot convert the home to a rental property.”

Instead, Giebel said, struggling homeowners should consult with CalHFA about modifying the terms of their loans to make them easier to pay. The agency has modified more than 600 loans, he said.