Federal Home Loan Bank reform is in the air in Washington D.C.
The White House recently endorsed a plan to double FHLBanks’ mandatory contributions to affordable housing programs from 10 to 20% of their net income, following a recommendation by the Federal Housing Finance Agency. And the Coalition for Federal Home Loan Bank Reform, a group that I chair and started as a small group of D.C. insiders, has become a true coalition of nine national organizations representing hundreds of thousands of Americans.
Despite billions of dollars in public support, few Americans know about FHLBanks. The Federal Home Loan Bank system is made up of 11 regional banks that pass on discounted loans to their membership of banks, credit unions, and insurance companies. As a government-sponsored enterprise (GSE), the FHLBank system is Congressionally chartered to receive unique subsidies, tax exemptions, and powers, in exchange for providing the public benefits of supporting affordable housing and community development.
The Congressional Budget Office published a new report, which for the first time in two decades put a dollar amount on the public subsidies that FHLBanks receive, estimating that in 2024 the FHLBank system will receive $7.3 billion dollars(!) in government subsidies.
As I show in Figure 1, this subsidy partly flows from the FHLBanks’ tax-free status and regulatory exemptions. But the bulk of the subsidy comes from the way GSE status confers an “implied federal guarantee” on FHLBank debt: the perception that the federal government will stand for FHLBank debt if the system fails. CBO concluded that GSE status reduced FHLBanks borrowing costs by 0.4% and noted that if the system was “private instead of public” its credit rating would fall to AA or A instead of the current AA+ rating. None of these subsidies require Congressional appropriations but rely on federal guarantees, including the high costs of public bailout, were the FHLBanks to fail.
Under the current system, most of these billions in public subsidies flow on as private profits, rather than support public benefits. Congress mandates that FHLBanks devote 10% of their net income every year to affordable housing programs, which support affordable housing development and downpayment assistance. But that meant that in 2023, FHLBanks only paid $355 million towards Affordable Housing Programs while paying out nearly 10x that amount, or $3.4 billion, as dividends! Through these payouts, FHLBanks are redistributing a public subsidy as a profit to banks and insurance companies.
FHLBanks still believe in trickle-down economics. They claim that their discounted loans and dividends to members may trickle down to consumers in the form of discounted mortgage rates. However, many of their members are not even in the mortgage business anymore: a Bloomberg investigation found that 42% of FHLBank members had not originated a single mortgage over the last five years. It is unclear how cheap loans and big dividend payouts to insurance companies help Americans buy their first house or find an affordable rental.
Even the technocratic, impartial CBO questions this twisted system when it dryly noted in its report: “Other stakeholders of FHLBs, including the executives and owners of banks, might also realize benefits.” That is, parts of today’s public subsidy simply go towards supporting seven-figure executive pay at the 11 FHLBanks.
Whether it is coming from the White House, the FHFA, the Congressional Budget Office, or the Coalition, the status quo at FHLBanks is unacceptable. Wasteful government spending, especially amidst a national housing crisis where both parties are seeking solutions to our housing supply shortage, is a bipartisan issue.
Congress should demand greater accountability on how these public subsidies support public benefits. They can start by passing legislation that greatly improves the Affordable Housing Program contributions that FHLBanks make, from the current meager 10% to at least 30% – a set-aside that FHLBanks have shown they can sustainably make when they paid REFCORP contributions from 1989 to 2011.
I think it is time that the public learned about FHLBanks and how they are skirting their responsibility to help support our nation’s housing troubles. There is so much untapped potential here: imagine having the full leverage of $7.3 billion in public subsidies to truly support imaginative housing solutions.
Sharon Cornelissen is the chair of the Coalition for Federal Home Loan Bank Reform and Director of Housing at the Consumer Federation of America, a national pro-consumer advocacy and research non-profit.
Interest-only mortgages let you pay just the accruing interest on your loan for an introductory period — but they come with high payments once that period ends.
These loans mainly benefit those planning to move or anticipating a big income increase within a decade.
Since the Great Recession, interest-only mortgages have been hard to find due to their high risk.
An interest-only mortgage allows you to pay only the interest on your loan for a set period. This type of mortgage can help you more easily afford the payments in the short term — but not without some drawbacks. Here’s what to know.
What is an interest-only mortgage?
An interest-only mortgage is a home loan that allows borrowers to make interest-only payments for a set amount of time, typically between seven and 10 years, at the start of a 30-year term. After this introductory period ends, the borrower pays principal and interest for the remainder of the loan at a variable interest rate.
In the early 2000s, homebuyers gave in to the instant gratification of mortgages that allowed them to make interest-only payments at the start of the loan, so long as they took on supersized payments over the long term. This was one of the risky practices that contributed to the housing crisis in 2007, leading to the Great Recession. In the end, many people lost their homes.
Some lenders still offer interest-only mortgages today — often as an adjustable-rate loan — but with much stricter eligibility requirements. They are now considered non-qualified mortgages (non-QM loans) because they don’t meet the backing criteria for Fannie Mae, Freddie Mac or the other government entities that insure and repurchase mortgages. Simply put: an interest-only mortgage is a riskier product.
How do interest-only mortgages work?
With an interest-only loan, you’ll pay interest at a fixed or adjustable rate during the interest-only period. The interest rates are comparable with what you might find with a conventional loan, but because you’re not paying any principal, the initial payments are much lower. However, they may still include property taxes, homeowners insurance and possibly private mortgage insurance (PMI).
Even though you’re only required to pay the interest at first, you still have the option of paying down the principal during the loan’s introductory period.
At the end of the initial period, borrowers must repay the principal either in one balloon payment at a set date, which can be very large, or in monthly payments (that also include interest) for the remainder of the term. These payments of principal and interest are going to be larger than the interest-only ones. And, because your principal payments are being amortized over only 20 years instead of 30, those payments will be higher than those of someone with a traditional 30-year loan.
You can refinance after the interest-only period is over, although fees will likely apply.
Example of an interest-only mortgage
Say you obtain a 30-year interest-only loan for $330,000, with an initial rate of 5.1 percent and an interest-only term of seven years. During the interest-only period, you’d pay roughly $1,403 per month.
After this initial phase, with our interest-only loan example, the payment would rise to $2,033 per month — assuming your rate doesn’t change. Many interest-only loans convert to an adjustable rate, so if rates rise in the future, yours will, too (and vice versa).
With a 30-year fixed-rate mortgage for the same amount, you’d pay $1,882 per month. This includes principal and interest, and also accounts for the higher rate on this type of loan — in this case, 5.54 percent.
With both the traditional fixed-rate option and our interest-only loan example, you’d pay a total of about $677,000, with around $347,000 of those payments going toward interest. As you can see, however, you’d ultimately have a higher monthly payment with an interest-only loan. If your interest-only loan requires a balloon payment instead, you’d be on the hook for several hundred thousand dollars.
How to qualify for an interest-only mortgage
Interest-only loans have been harder to come by since the housing crisis of the mid-2000s. Fewer lenders offer them, and banks have set stricter requirements to qualify.
Banks generally only offer an interest-only mortgage to a well-qualified borrower. You’ll likely need:
A credit score of 700 or more
A debt-to-income (DTI) ratio of 43 percent of less
A down payment of 20 percent or more
Solid proof of future earning potential
Ample assets
Should you consider an interest-only mortgage?
The best candidates for an interest-only mortgage are borrowers who have full confidence they’ll be able to cover the higher monthly payments when they arise. This kind of home loan might be right for you if:
You’re in graduate school and want to keep repayments low for now — but anticipate having a high-paying job in future
You have a trust that will start releasing assets at a future date
You flip houses and need to keep expenses down during the remodel
You expect to move before the end of the introductory period
Interest-only loans can be a prudent personal finance strategy under certain circumstances, but they’re not a good idea for everyone. Here are some pros and cons:
Pros of interest-only mortgages
You get more house for your money. You can enjoy a larger home for less money while you save up for a larger mortgage. That’s assuming you have a sound plan in place for when those larger payments eventually kick in. Bankrate’s affordability calculator can help you estimate how much house you can afford.
Interest-only payments are smaller than conventional mortgage payments. The initial monthly payments on interest-only loans tend to be significantly lower than payments on conventional loans, and the interest rate may be fixed during the first part of the loan. Bankrate’s interest-only mortgage calculator can help you determine what your monthly payment would be.
You kick higher payments down the road. You can delay making large mortgage payments or avoid them entirely if you plan to move out of your home before the introductory period ends.
If interest rates are high now, you can avoid them. If rates are anticipated to be lower in the future, you can keep your monthly payments relatively affordable and then reap the benefits of lower rates by the time the interest-only period ends.
Cons of interest-only mortgages
You won’t build home equity. As long as you’re only paying interest, you’re not building equity in your home. And if your home’s value depreciates, you could end up upside-down on your mortgage or risk negative amortization.
You might get an unaffordable payment after the interest-only period. You could encounter serious sticker shock when the interest-only period ends, and your monthly payments suddenly double or triple, or if you have to make a sizable balloon payment at the end of the initial period.
You’ll be at the mercy of market interest rates. If rates have risen since the loan originated, when the intro period ends, you may have a payment much higher than you want.
If your income changes, the home may be unaffordable down the road. Your anticipated future income might not match your expectations, saddling you with more house than you can afford.
Alternatives to an interest-only mortgage
Before you take on this kind of loan, ask yourself: what is an interest-only mortgage going to do for you? Make sure you think long-term.
If you want to avoid this higher-risk form of home financing, you can explore other types of mortgages. Many adjustable-rate mortgages also have a long, low-interest introductory rate period — and, since the payments include some principal, you’ll be building equity during it.
If you’re drawn to interest-only loans because of the low monthly payment, explore government-backed loans like one from the Federal Housing Administration (FHA). These can give you more affordable payments without the future jump that comes with an interest-only mortgage.
Can I change to an interest-only mortgage?
It is possible to refinance a traditional mortgage to an interest-only loan, and borrowers might consider this option as a way to free up money to put toward short-term investments or an unexpected expense. So, how do interest-only loans work as a refi? You would meet the same scrutiny and requirements as you would if applying for a first-time interest-only loan.
The same eligibility criteria for refinancing also apply, and some lenders may raise the bar since it is a higher-risk loan.
In any refinance, you will need to receive a home appraisal and pay closing costs and fees. Refinancing can cost 3 percent to 6 percent of the home’s total amount. In addition, if you have less than 20 percent equity in your home, you will be required to pay PMI.
Lately, mortgage rates have surged higher, climbing from as low as 2% to over 8% in some cases.
Despite this, home builders have been enjoying healthy sales of newly-built homes.
And somewhat incredibly, they haven’t had to lower their prices in many markets either.
The question is how can they continue to charge full price if financing a home has gotten so much more expensive?
Well, there are probably several reasons why, which I will outline below.
Home Builders Don’t Have Competition Right Now
The first thing working in the home builders’ favor is a lack of competition. Typically, they have to contend with existing home sellers.
A healthy housing market is dominated by existing home sales, not new home sales.
If things weren’t so out of whack, we’d be seeing a lot of existing homeowners listing their properties.
Instead, sales of newly-built homes have taken off thanks to a dearth of existing supply.
In short, many of those who already own homes aren’t selling, either because they can’t afford to move. Or because they don’t want to lose their low mortgage rate in the process.
This is known as the mortgage rate lock-in effect, which some dispute, but logically makes a lot of sense.
At the same time, home building slowed after the early 2000s housing crisis, leading to a supply shortfall many years later.
Simply put, there aren’t enough homes on the market, so prices haven’t fallen, despite much higher mortgage rates.
They Don’t Need to Lower Prices If Demand Is Strong
There’s also this notion that home prices and mortgage rates have an inverse relationship.
In that if one goes up, the other must surely come down. Problem is this isn’t necessarily true.
When mortgage rates rose from record lows to over 8% in less than two years, many expected home prices to plummet.
But instead, both increased. This is due to that lack of supply, and also a sign of strength in the economy.
Sure, home buying became more expensive for those who need a mortgage. But prices didn’t just drop because rates increased.
History shows that mortgage rates and home prices don’t have a strong relationship one way or the other.
Things like supply, the wider economy, and inflation are a lot more telling.
For the record, home prices and mortgage rates can fall together too!
Lowering Prices Could Make It Harder for Appraisals to Come in at Value
So we know demand is keeping prices mostly afloat. But even still, affordability has really taken a hit thanks to those high rates.
You’d think the home builders would offer price cuts to offset the increased cost of financing a home purchase.
Well, they could. But one issue with that is it could make it harder for homes to appraise at value.
One big piece of the mortgage approval process is the collateral (the property) coming in at value, often designated as the sales price.
If the appraisal comes in low, it could require the borrower to come in with a larger down payment to make the mortgage math work.
Lower prices would also ostensibly lead to price cuts on subsequent homes in the community.
After all, if you lower the price of one home, it would then be used as a comparable sale for the next sale.
This could have the unintended consequence of pushing down home prices throughout the builder’s development.
For example, if a home is listed for $350,000, but a price cut puts it at $300,000, the other homes in the neighborhood might be dragged down with it.
That brings us to an alternative.
Home Builders Would Rather Offer Incentives Like Temporary Buydowns
Instead of lowering prices, home builders seem more interested in offering incentives like temporary rate buydowns.
Not only does this allow them to avoid a price cut, it also creates a more affordable payment for the home buyer.
Let’s look at an example to illustrate.
Home price: $350,000 (no price cut) Down payment: 20% Loan amount: $280,000 Buydown offer: 3/2/1 starting at 3.99% Year one payment: $1,335.15 Year two payment: $1,501.39 Year three payment: $1,676.94 Year 4-30 payment: $1,860.97
Now it’s possible that home builders could lower the price of a property to entice the buyer, but it might not provide much payment relief.
Conversely, they could hold firm on price and offer a rate buydown instead and actually reduce payments significantly.
With a 3/2/1 buydown in place, a builder could offer a buyer an interest rate of 3.99% in year one, 4.99% in year two, 5.99% in year three, and 6.99% for the remainder of the loan term.
This would result in a monthly principal and interest payment of $1,335.15 in year one, $1,501.39 in year two, $1,676.94 in year three, and finally $1,860.97 for the remaining years.
This assumes a 20% down payment, which allows the home buyer to avoid private mortgage insurance and snag a lower mortgage rate.
If they just gave the borrower a price cut of say $25,000 and no mortgage rate relief, the payment would be a lot higher.
At 20% down, the loan amount would be $260,000 and the monthly payment $1,728.04 at 6.99%.
After three years, the buyer with the higher sales price would have a slightly steeper monthly payment. But only by about $130.
And at some point during those preceding 36 months, the buyer with the buydown might have the opportunity to refinance the mortgage to a lower rate.
It’s not a guarantee, but it’s a possibility. In the meantime, they’d have lower monthly payments, which could make the home purchase more palatable.
Home Price Cuts Don’t Result in Big Monthly Payment Savings
Price Cut Payment
Post-Buydown Payment
Purchase Price
$325,000
$350,000
Loan Amount
$260,000
$280,000
Interest Rate
6.99%
6.99%
Monthly Payment
$1,728.04
$1,860.97
Difference
$132.93
At the end of the day, the easiest way to lower monthly payments is via a reduced interest rate.
A slightly lower sales price simply doesn’t result in the savings most home buyers are looking for.
Using our example from above, the $25,000 price cut only lowers the buyer’s payment by about $130.
Sure, it’s something, but it might not be enough to move the needle on a big purchase.
You could take the lower price and bank on mortgage rates moving lower. But you’d still be stuck with a high payment in the meantime.
And apparently home buyers focus more on monthly payment than they do the sales price.
This explains why home builders aren’t lowering prices, but instead are offering mortgage rate incentives instead.
Aside from temporary buydowns, they’re also offering permanent mortgage rate buydowns and alternative products like adjustable-rate mortgages.
But again, these are all squarely aimed at the monthly payment, not the sales price.
So if you’re shopping for a new home today, don’t be surprised if the builder is hesitant to offer a price cut.
If they do offer an open-ended incentive that can be used toward the sales price or interest rate (or closing costs), take the time to consider the best use of the funds.
Those who think rates will be lower in the near future could go with the lower sales price and hope to refinance. Just be sure you can absorb the higher payment in the meantime.
Read more: Should I use the home builder’s lender?
According to a report released today by Challenger, Gray & Christmas, the 153,105 job cuts in the financial sector announced last year beat the previous record set in 2001 by a hefty 31 percent and more than tripled the amount at the end of 2006.
In the mortgage sector alone, 86,126 jobs were cut during the year as the mortgage crisis shuttered hundreds of lending operations nationwide.
And despite the record numbers, Challenger expects more layoffs in the struggling financial sector in 2008.
“Job cuts in the financial sector declined in November and December, but major job-cut announcements may be on the horizon for Citigroup and Merrill Lynch,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.
Last year, Citigroup announced that it would lay off roughly 17,000 employees and top mortgage lender Countrywide Financial cut at least 12,000 jobs.
“Furthermore, some experts are predicting that the credit crisis resulting from investments in subprime home loans will spread to those who invested in mounting consumer credit card debt,” Challenger added.
Overall, 768,264 jobs were cut in 2007, 8.5 percent less than the cuts announced in 2006 and the lowest since 2000, Challenger reported.
The 44,416 job cuts for the month of December were down by about 39 percent from November and down 18.7 percent from December a year ago.
After the financial services sector, the automotive industry saw the most layoffs in 2007, with 78,880 jobs cut, including 13,000 at Chrysler amid the automaker’s sale to private equity firm Cerberus Capital.
Challenger reported that the weakening dollar has led to high demand for U.S. exports, preventing the housing crisis from leading to widespread job losses in other sectors.
The California Association of Mortgage Brokers (CAMB) released its annual mortgage survey for 2008 this week, claiming that the ongoing housing crisis could lead to a recession if the conforming limit isn’t raised in California.
When asked if the current housing slump will create a recession in 2008, 47 percent of mortgage brokers surveyed said yes, while 43 percent believe the real estate market will not fully rebound until 2009.
“In order to stem the tide of a possible recession, CAMB is calling upon state and federal legislators to designate California a high cost state, which will increase the limit for conforming loans in California and provide a more stable mortgage product for consumers,” said Pete Ogilvie, president of the California Association of Mortgage Brokers, in a statement.
Despite the recession worries, 48 percent of members believe that housing affordability will get a little better in 2008 and 17 percent believe it will get a lot better.
“While home prices will continue to decrease into 2008, more stable loan products will reappear for consumers looking to purchase a home,” said Ogilvie. “2008 will be the year of market self-correction, and should also reward those who have been waiting for affordable housing prices.”
Fifty-five percent of those surveyed believe the FHA loan will return to popularity in 2008, while 18 percent feel products such as mortgage insurance will rise in popularity.
At the same time, 59 percent of members believe that qualifying borrowers will be more difficult in 2008 due to tighter underwriting standards, especially for those with below-average credit scores.
And 41 percent think it will be more difficult to find a loan program for qualified borrowers next year.
Additionally, 60 percent of those surveyed believe cash-out refinances will decrease in 2008 as homeowners will likely be wary of refinancing their homes during a declining market, assuming they have any home equity to begin with.
Finally, 31 percent of surveyed members believe that April-June of 2008 will be the best time to buy a home, with 28 percent saying the January-March period will be the right time.
As 2023 ended, independent mortgage banks could be forgiven for saying “good riddance.” Last year accelerated a trend of skyrocketing mortgage rates, making it harder for families to buy a home and collapsing the market for refinances.
But there was also reason for optimism heading into 2024. A year-end bond rally brought mortgage rates down from 8% to 7%. And most IMBs have now downsized expenses to fit reduced loan and revenue volumes caused by the collapse of the refi market.
This recap of 2023 is just one of the subjects addressed in the “CHLA 2023 IMB Report,” just released by the Community Home Lenders of America (CHLA). As the only national association that exclusively represents IMBs, CHLA has for almost a decade released this report annually, with a primary goal of educating Congress and federal officials about the critical role IMBs play in ensuring access to mortgage credit for first-time, minority, and other underserved homebuyers.
This year’s report leads off with key takeaways for federal mortgage policy makers. Number one on the list is CHLA’s call for the Federal Reserve (and the GSEs) to buy mortgages, to reduce historically excessive spreads between mortgage rates and 10-year Treasuries — a key to homeownership affordability.
Another takeaway is CHLA’s request for action on our “Consumer Mortgage Bill of Rights.” Consumers should be protected from the abusive practice of trigger leads, where a consumer is bombarded with texts, phone calls, and emails just because they are initiating a mortgage application. Consumers should be served only by mortgage loan originators that are fully licensed and qualified. And quasi-monopolistic pricing should be scrutinized – like FICO credit scores, whose costs have increased by 500% in just 13 months.
Another key takeaway is just how important IMBs have become for the mortgage and home buying process since the 2008 housing crisis. In fact, IMBs now originate 81% of all new mortgages. And IMBs dominate the most critical programs for first-time, minority, and underserved borrowers – originating 90% of FHA and VA loans.
CHLA’s IMB Report cites a myriad of statistics and reports confirming that IMBs outperform banks in lending to minority and underserved borrowers. For example, a 2022 Urban Institute report concluded that “banks substantially underperformed nonbanks in serving borrowers and neighborhoods of color.“
Fortunately, when it comes to mortgage policies that help IMBs and the consumers they serve 2023 was a good year. The year started with an FHA premium cut, and with excessive VA loan fees expiring. The year ended with Fannie and Freddie starting to replace loan repurchase demands, which hurt both lenders and borrowers, with an indemnification option.
Going into 2024, our IMB Report lays out a detailed policy agenda that prioritizes access to mortgage credit to address significant affordability challenges for borrowers facing high mortgage rates.
The final objective of CHLA’s report is to rebut false, but persistent, myths about IMBs. Many people would be surprised to learn that mortgage borrowers have substantially more consumer protections when they get a mortgage loan through an IMB than when they get a mortgage loan through a bank.
Every IMB is subject to supervision from the Consumer Financial Protection Bureau (CFPB) – while 97% of banks are exempt from CFPB supervision. Every mortgage loan originator that works for an IMB is licensed (SAFE Act test, independent background check, and continuing education) – while bank loan originators are exempt from all these requirements.
The other pervasive – but completely false – myth is that IMBs are risky. This canard is pulled out whenever there is a crisis – like COVID or the Silicon Valley Bank demise last March. But these prophesies of doom are always proved wrong, as they ignore the realities of the IMB business model.
As this year’s IMB Report explains, IMBs overwhelmingly originate federal agency mortgage loans, then sell them to diversified investors through securitization or sell them to aggregators. As a result, even if there are mortgage loan losses or declining mortgage asset values, IMBs are very much insulated.
The simple truth is that if an IMB loan originator goes out of business – which some did last year – the only real impact is that the lender is no longer around to originate new loans. And, for IMB mortgage servicers, there is virtually no taxpayer or systemic risk, except for a handful of mega-servicers.
You can sense it in the ubiquitous “Help Wanted” posters in artsy shops and restaurants, in the ranks of university students living out of their cars and in the outsize percentage of locals camping on the streets.
This seaside county known for its windswept beauty and easy living is in the midst of one of the most serious housing crises anywhere in home-starved California. Santa Cruz County, home to a beloved surf break and a bohemian University of California campus, also claims the state’s highest rate of homelessness and, by one measure based on local incomes, its least affordable housing.
Leaders in the city of Santa Cruz have responded to this hardship in a land of plenty — and to new state laws demanding construction of more affordable housing — with a plan to build up rather than out.
A downtown long centered on quaint sycamore-lined Pacific Avenue has boomed with new construction in recent years. Shining glass and metal apartment complexes sprout in multiple locations, across a streetscape once dominated by 20th century classics like the Art Deco-inspired Palomar Inn apartments.
And the City Council and planning department envision building even bigger and higher, with high-rise apartments of up to 12 stories in the southern section of downtown that comes closest to the city’s boardwalk and the landmark wooden roller coaster known as the Giant Dipper.
“It’s on everybody’s lips now, this talk about our housing challenge,” said Don Lane, a former mayor and an activist for homeless people. “The old resistance to development is breaking down, at least among a lot of people.”
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Said current Mayor Fred Keeley, a former state assemblyman: “It’s not a question of ‘no growth’ anymore. It’s a question of where are you going to do this. You can spread it all over the city, or you can make the urban core more dense.”
But not everyone in famously tolerant Santa Cruz is going along. The high-rise push has spawned a backlash, exposing sharp divisions over growth and underscoring the complexities, even in a city known for its progressive politics, of trying to keep desirable communities affordable for the teachers, waiters, firefighters and store clerks who provide the bulk of services.
A group originally called Stop the Skyscrapers — now Housing for People — protests that a proposed city “housing element” needlessly clears the way for more apartments than state housing officials demand, while providing too few truly affordable units.
City officials say the plan they hope to finalize in the coming weeks, with its greater height limits, only creates a path for new construction. The intentions of individual property owners and the vicissitudes of the market will continue to make it challenging to build the 3,736 additional units the state has mandated for the city.
“We’ve talked to a lot of people, going door to door, and the feeling is it’s just too much, too fast,” said Frank Barron, a retired county planner and Housing for People co-founder. “The six- and seven-story buildings that they’re building now are already freaking people out. When they hear what [the city is] proposing now could go twice as high, they’re completely aghast.”
Susan Monheit, a former state water official and another Housing for People co-founder, calls 12-story buildings “completely out of the human scale,” adding: “It’s out of scale with Santa Cruz’s branding.”
Housing for People has gathered enough signatures to put a measure on the March 2024 ballot that, if approved, would require a vote of the people for development anywhere in the city that would exceed the zoning restrictions codified in the current general plan, which include a cap of roughly seven or eight stories downtown.
The activists say that they are trying to restore the voices of everyday Santa Cruzans and that city leaders are giving in to out-of-town builders and “developer overreach laws.”
The nascent campaign has generated spirited debate. Opponents contend the slow-growth measure would slam on the brakes, just as the city is overcoming decades of construction inertia. They say Santa Cruz should be a proud outlier in a long string of wealthy coastal cities that have defied the state’s push to add housing and bring down exorbitant home prices and rental costs.
Diana Alfaro, who works for a Santa Cruz development company, said many of the complaints about high-rise construction sound like veiled NIMBYism.
“We always hear, ‘I support affordable housing, but just not next to me. Not here. Not there. Not really anywhere,’ ” said Alfaro, an activist with the national political group YIMBY [Yes In My Back Yard] Action. “Is that really being inclusive?”
The dispute has divided Santa Cruz’s progressive political universe. What does it mean to be a “good liberal” on land-use issues in an era when UC Santa Cruz students commonly triple up in small rooms and Zillow reports a median rent of $3,425 that is higher than San Francisco’s?
Beginning in the 1970s, left-leaning students at the new UC campus helped power a slow-growth movement that limited construction across broad swaths of Santa Cruz County. Over the decades, the need for affordable housing was a recurring discussion. The county was a leader in requiring that builders who put up five units of housing or more set aside 15% of the units at below-market rates.
But Mayor Keeley said local officials gave only a “head nod” to the issue when it came to approving specific projects. “Well, here we are, 30 or 40 years later,” Keeley said, “and these communities are not affordable.”
Today, with 265,000 residents, the county is substantially wealthy and white.
An annual survey this year found Santa Cruz County pushed past San Francisco to be the least affordable rental market in the country, given income levels in both places. And many observers say UC Santa Cruz students contend with the toughest housing market of any college town in the state.
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State legislators have crafted dozens of laws in recent years to encourage construction of more homes, particularly apartments. While California has long required local governments to draft “housing elements” to demonstrate their commitment to affordable housing, state officials only recently passed other measures to actually push cities to put the plans into practice.
Regional government associations draw up a Regional Housing Needs Assessment, designating how many housing units — including affordable ones — should be built during an eight-year cycle. The state Department of Housing and Community Development can reject plans it deems inadequate.
For years 2024 to 2031, Santa Cruz was told it should build at least 3,736 units, on top of its existing 24,036.
Santa Cruz and other cities have been motivated, at least in part, by a heavy “stick”: In cases when cities fail to produce adequate housing plans, the state’s so-called “builder’s remedy” essentially allows developers to propose building whatever they want, provided some of the housing is set aside for low- or middle-income families. In cities like Santa Monica and La Cañada-Flintridge, builders have invoked the builder’s remedy to push ahead with large housing projects, over the objections of city leaders.
The Santa Cruz City Council resolved to avoid losing control of planning decisions. A key part of their plan envisions putting up to 1,800 units in a sleepy downtown neighborhood of auto shops, stores and low-rise apartments south of Laurel Street. Initial concepts suggested one block could go as high as 175 feet (roughly 16 stories), but council members later proposed a 12-story height limit, substantially taller than the stately eight-story Palomar, which remains the city’s tallest building.
City planners say focusing growth in the downtown neighborhood makes sense, because bus lines converge there at a transit center and residents can walk to shops and services.
“The demand for housing is not going away,” said Lee Butler, the city’s director of planning and community development, “and this means we will have less development pressure in other areas of the city and county, where it is less sustainable to grow.”
A public survey found support for a variety of other proposed improvements to make the downtown more attractive to walkers, bikers and tourists. Among other features, the plan would concentrate new restaurants and shops around the San Lorenzo River Walk; replace the fabric-topped 2,400-seat Kaiser Permanente Arena, which hosts the Santa Cruz Warriors (the G-league affiliate of the NBA’s Golden State Warriors), with a bigger entertainment and sports venue; and better connect downtown with the beach and boardwalk.
Business owners say they favor the housing plan for a couple of reasons: They hope new residents will bring new commerce, and they want some of the affordable apartments to go to their workers, who frequently commute well over an hour from places such as Gilroy and Salinas.
Restaurateur Zach Davis called the high cost of housing “the No. 1 factor” that led to the 2018 closure of Assembly, a popular farm-to-table restaurant he co-owned.
“How do we keep our community intact, if the people who make it all happen, the workers who make Santa Cruz what it is, can’t afford to live here anymore?” Davis asked.
The city’s plan indicates that 859 of the units built over the next eight years will be for “very low income” families. But the term is relative, tied to a community’s median income, which in Santa Cruz is $132,800 for a family of four. Families bringing home between $58,000 and $82,000 would qualify as very low income. Tenants in that bracket would pay $1,800 a month for a three-bedroom apartment in one recently completed complex, built under the city’s requirement that 20% of units be rented for below-market rents.
The people pushing for high-rise development say expanding the housing supply will stem ever-rising rents. Opponents counter that the continued growth of UC Santa Cruz, which hopes to add 8,500 students by 2040, and a new surge of highly paid Silicon Valley “tech bros” looking to put down roots in beachy Santa Cruz would quickly gobble up whatever number of new units are built.
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“They say that if you just build more housing, the prices will come down. Which is, of course, not true,” said Gary Patton, a former county supervisor and an original leader in the slow-growth movement. “So we’ll have lots more housing, with lots more traffic, less parking, more neighborhood impacts and more rich people moving into Santa Cruz.”
Leaders on Santa Cruz’s political left say new construction only touches one aspect of the housing crisis. Some of the leaders of Tenant Sanctuary, a renters’ rights group, would like to see Santa Cruz tamp down rents by creating complexes owned by the state or cooperatives and enacting a rent control law capping annual increases.
“No matter what they build, we need housing where the price is not tied to market swings and how much money can be squeezed out of a given area of land,” said Zav Hershfield, a board member for the group.
The up-zoning of downtown parcels has won the support of much of the city’s establishment, including the county Chamber of Commerce, whose chief executive said exorbitant housing prices are excluding blue-collar workers and even some well-paid professionals. “The question is, do you want a lively, vital, economically thriving community?” said Casey Beyer, CEO of the business group. “Or do you want to be a sleepy retirement community?”
Just days after the anti-high-rise measure qualified for the March ballot, the two sides began bickering over what impact it would have.
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Lane, the former mayor, and two affordable housing developers wrote an op-ed for the Lookout Santa Cruz news site that said the ballot measure is crafted so broadly it would apply to all “development projects.” They contend that could trigger the need for citywide votes for projects as modest as raising a fence from 6 feet to 7 feet, adding an ADU to a residential property or building a shelter for the homeless, if the projects exceed current practices in a given neighborhood.
The authors accused ballot measure proponents of faux environmentalism. “If we don’t go up,” they wrote, “we have less housing near jobs — and more people driving longer distances to get to work.”
The ballot measure proponents countered that their critics were misrepresenting facts. They said the measure would not necessitate voter approval for mundane improvements and would come into play in relatively few circumstances, for projects that require amendments to the city’s General Plan.
While not staking out a formal position on the ballot measure, the city’s planning staff has concluded the measure could force citizen votes for relatively modest construction projects.
The two sides also can’t agree on the impact of a second provision of the ballot measure. It would increase from 20% to 25% the percentage of “inclusionary” (below-market-rate) units that developers would have to include in complexes of 30 units or more.
The ballot measure writers say such an increase signals their intent to assure that as much new housing as possible goes to the less affluent. But their opponents say that when cities try to force developers to include too many sub-market apartments, the builders end up walking away.
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Santa Cruz’s housing inventory shows that the city has the potential to add as many as 8,364 units in the next eight years, when factoring in proposals such as the downtown high-rises and UC Santa Cruz’s plan to add about 1,200 units of student housing. That’s more than double the number required by the state. But the Department of Housing and Community Development requires this sort of “buffer,” because the reality is that many properties zoned for denser housing won’t get developed during the eight-year cycle.
As with many aspects of the downtown up-zoning, the two sides are at odds over whether incorporating the potential for extra development amounts to judicious planning or developer-friendly overkill.
The city’s voters have rejected housing-related measures three times in recent years. In 2018, they decisively turned down a rent control proposal. Last year, they said no to taxing owners who leave homes in the community sitting empty. But they also rejected a measure that would have blocked a plan to relocate the city’s central library while also building 124 below-market-rate apartment units.
The last time locals got this worked up about their downtown may have been at the start of the new millennium, when the City Council considered cracking down on street performers. That prompted the owner of Bookshop Santa Cruz, another local landmark, to print T-shirts and bumper stickers entreating fellow residents to “Keep Santa Cruz Weird.”
Santa Cruzans once again are being asked to consider the look and feel of their downtown and whether its future should be left to the City Council, or voters themselves. The measure provokes myriad questions, including these: Can funky, earnest, compassionate Santa Cruz remain that way, even with high-rise apartments? And, with so little housing for students and working folks, has it already lost its charm?
An L.A. County judge dismissed a lawsuit challenging L.A.’s “mansion tax” on Tuesday, marking the end of a months-long legal challenge from the luxury real estate community that looked to declare the measure unconstitutional.
The transfer tax known as Measure ULA was passed in November and took effect April 1, bringing a 4% charge on all residential and commercial real estate sales in the city above $5 million and a 5.5% charge on sales above $10 million, pumping millions into housing and homelessness-prevention efforts.
Los Angeles County Superior Court Judge Barbara Scheper issued a tentative ruling dismissing the challenge on Monday after hearing arguments from both sides, and she officially dismissed the lawsuit on Tuesday, according to court documents.
The ruling is a big win for housing activists, who say that L.A. desperately needs the money raised by the tax.
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“This is a great day for Los Angeles,” said Joe Donlin, who serves as director of the United to House LA coalition, which brought the measure onto the ballot in November. “The judge’s ruling confirms what we knew all along: ULA is the law of the land and it’s the will of the people. And it reminds us of the power of the people to shape our city’s future for the good.”
Donlin said he was surprised the ruling came out so soon.
“Before the hearing, we thought it might take weeks or months, but this was a positive sign that the judge didn’t feel compelled by the plaintiff’s arguments,” he said.
Greg Bonett, senior staff attorney for the Public Counsel who worked to defend the measure, applauded the decision, calling it “a resounding victory for the power of the people to initiate transformative solutions to address our city’s housing and homelessness crises.”
The judge’s ruling is a blow for many in the luxury real estate community, who claim that the transfer tax has frozen the market and stifled development.
Keith Fromm, an attorney for Newcastle Courtyards, one of two groups challenging the measure, said he plans to appeal the decision.
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“The order contains numerous errors of law which the appellate courts will hopefully recognize and correct,” Fromm said. “The ruling is simply one step in a very long journey to justice.”
The legal battle — which was headed by two main groups: Newcastle and Howard Jarvis Taxpayers Assn. — became a national conversation, as other cities looked to L.A. to see how it would implement such a tax.
Other cities such as San Francisco, New York City and Culver City have implemented transfer taxes, but L.A.’s is unique in scope and scale, not just taxing home sales but all property sales above $5 million.
Voters approved the measure with a 57% majority in November, and the tax became a hot-button issue immediately after.
Advocates argue that the tax is a way for luxury property owners to contribute to solving L.A.’s housing crisis, while opponents say it discourages development and pushes owners out of L.A. and into cities that don’t have the tax, such as Beverly Hills, West Hollywood or Santa Monica.
“With Measure ULA, we are now going to lose billions of dollars every year in economic development and property tax revenue in order to raise less than $500 million through the tax,” said Jason Oppenheim, a real estate agent with the Oppenheim Group and star of Netflix’s “Selling Sunset.”
The luxury real estate market froze in the months after the measure took effect, as many luxury homeowners looked to find loopholes to avoid paying the tax. Many hired accountants to find workarounds, such as dividing their homes into three parcels and selling them separately to stay under the $5-million threshold at which the tax kicks in.
Many homeowners held off on selling their homes, hoping the lawsuit would overturn the tax. As a result, funds raised by the tax have fallen dramatically short of original projections since sales have slowed.
In November, proponents of the tax estimated it would raise roughly $900 million a year. In March, a report from the city administrative officer lowered that number to $672 million. Then in April, Mayor Karen Bass’s first budget proposal, a $13.1-billion plan, included only $150 million in projected revenue from Measure ULA.
The number was chosen out of caution, as the city wanted to funnel as much money as possible toward housing and homelessness issues but not so much that it wouldn’t be able to pay it back if the measure were ruled unconstitutional.
But with the court’s latest ruling, spending will likely increase.
On Wednesday, the L.A. City Council’s budget, finance and innovation Committee will meet to discuss the implementation process, and the ULA coalition will propose that $12 million be reallocated to short-term emergency assistance for renters.
In August, the City Council passed a $150-million spending plan for funds raised by Measure ULA. It was the first time funds were specifically allocated since the tax was passed in November, and the plan sent money to six programs: short-term emergency rental assistance, eviction defense, tenant outreach and education, direct cash assistance for low-income seniors and people with disabilities, tenant protections and affordable housing production.
Walk past the street-facing 1990s duplex and beyond a 1920s Sears Roebuck kit bungalow, and an accessory dwelling unit, or ADU, rises before you at the end of the property. It’s a slim, two-story rental clad in inexpensive white vertical corrugated metal.
Only then do you realize this single Venice lot has four rental units.
With Southern California in desperate need of housing and state and federal laws constantly evolving to make permitting ADUs easier, the detached home by architects Todd Lynch and Mohamed Sharif of Sharif, Lynch: Architecture feels like a harbinger of what’s to come.
“When the city encouraged us to increase housing, I thought of the Venice property,” said owner Ricki Alon, who had previously worked with the architects and builder Moshon Elgrably on another project. “Given the unique site constraints, I didn’t believe they could do it. I was worried it would be too crowded and negatively affect the small guest house.”
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Alon was hesitant at first, but after a persuasive Zoom call with the architects, they all agreed that a fourth unit would add value to the bustling community.
“We viewed it as a challenge and a way to transcend ADUs in an SB9 world,” Sharif said, referring to Senate Bill 9, the 2022 state law that allows homeowners to convert their homes into duplexes on a single-family parcel or divide the lot in half to build another duplex for no more than four units.
Alon loved their initial sketches despite her skepticism, and the project moved ahead.
“We decided to go as high as possible,” Sharif said of the eventual design, a slim, two-story ADU built on what was previously a driveway. Slipped into the lot, the 1,200-square-foot ADU, or IDU as the architects like to refer to the infill dwelling unit, was built an inch from the 1920s bungalow, five feet from the duplex and four feet from the property line.
Resting a few feet from a dingbat apartment to the south, the ADU is lifted off the ground to preserve two parking spots in the alley and a swimming pool in front. “Its entire width is dictated by that two-car side-by-side dimension,” said Sharif, who teaches in the undergraduate and graduate design studios at UCLA. Lifting the volume to preserve the pool also created shade and an open space that all residents could share.
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“They refused to get rid of it,” Alon said of the water feature. “They insisted on building around it.” Today she admits it was the right decision. “Now, when you walk in, you experience a wonderful, absolutely lovely environment. I’m glad they did not listen to me,” she added with a laugh.
The narrow living room, seen from the staircase, and the first-floor office and en-suite bathroom. (Jason Armond / Los Angeles Times)
Even though you can’t see the rental from the street, the ADU has enormous curb appeal and a touch of glamour. A Midcentury-style Sputnik pendant light hangs outside the front door, giving it an elegant feel, and the white cladding gives it a distinctive quality from the other rentals, which are clad in orange metal and gray siding.
Up a short flight of stairs, the front door opens to the ground floor and the two-story entry, which features a compact first-floor bedroom, study and en-suite bathroom.
“We wanted every room to have a bathroom to suit roommates,” Sharif said.
Tenant Henry Schober III, a 38-year-old attorney specializing in data privacy, uses the ground floor as his office and a bedroom for out-of-town guests.
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“It’s a place that I’m comfortable spending a workday in,” said Schober, who goes to the office once or twice a week. “I don’t feel like I’m trapped in my house.”
Tenant Henry Schober III takes advantage of the ADU’s rooftop deck, which offers panoramic views of Venice. (Jason Armond / Los Angeles Times)
Up the stairs to the second floor, the main living area and kitchen measure just 13 feet wide; large windows and operable skylights add light and cross-ventilation throughout the linear floor plan.
“The windows make you feel like you’re in an amazing penthouse in SoHo,” Alon said. “It gives the room a great energy.”
The rest of the second floor houses a powder room, bathroom and bedroom. Because of limited space, there was no room for a formal dining room. However, Schober said that’s easier to maneuver than the limited storage, which has taught him to think differently about how he stores and displays things.
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“I eat at the long breakfast bar, and when I have people over, I use the common space or the roof deck,” he said.
The home’s two floors feel like three, Lynch said, “because of the way the stairway draws one upward through the IDU and then because of how the roof steps up again.”
The roof deck serves as another outdoor room, further expanding the living space. From the rooftop deck, Schober has panoramic views of Venice, not to mention ample room for a dining table, barbecue and sauna.
After renting an apartment temporarily a few blocks from the beach, Schober was still determining whether he wanted to rent another apartment in Venice.
“It originally turned me off to Venice,” he said. “The price points were so high. It felt like people were paying for the ZIP Code. Landlords were asking five grand for an apartment next to a parking lot.”
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But when he saw the two-bedroom ADU, he changed his mind. “When I walked in, I thought, ‘I’m going to live here,’” said Schober, who is originally from Philadelphia and moved to Los Angeles from Switzerland.
“The apartment and the secluded feel changed my attitude,” Schober said. “You get the convenience of Venice and access to all the restaurants and shops, but you’re not in the thick of things. I lived in San Francisco for a decade, Europe for six years. I view the apartment as an oasis in a neighborhood that is not as transformed as others.”
Schober said the strength of the architects’ vision is that the unit is quietly tucked away in a congested neighborhood. “Since you are set back from the street, there is no foot traffic,” he added. “It doesn’t feel like I am living among a bunch of units. There is little street noise, and you would never know you live a stone’s throw from Lincoln Boulevard.”
Perhaps most impressive, the ADU defies the notion that you can’t have parking, privacy and quality of living, including a swimming pool, on a tight infill lot with other properties.
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In a sense, Schober said, “It seems the solution to the housing crisis is building up.”
“There is a community feeling, and people know each other,” Sharif said. “They sit around the pool, and it’s very intimate and private.”
After a 10-month building process, the team completed the project this spring at a cost of approximately $410 per square foot.
Looking back, Alon is grateful that she moved forward with the project.
“It’s not just a unit that brings value to the property,” she said. “It enhances the entire property for everyone. Adding housing in this condensed community is important, but this team made it something beautiful that people will enjoy. You don’t have to add a huge amount of square footage to add quality of living.”
Financial giant GMAC posted a $724 million fourth-quarter loss today after its ailing mortgage unit Residential Capital LLC took a $921 million hit during the quarter.
GMAC recorded a profit of $1 billion in the same period a year ago and $2.13 billion for all of 2006, before the housing crisis took center stage.
For all of 2007, Detroit-based GMAC lost $2.33 billion, thanks to a $4.35 billion loss at ResCap, the second-largest independent U.S. mortgage lender after Countrywide Financial.
Losses at the mortgage unit were tied to the usual issues, higher loan loss provisions, writedowns tied to the value of mortgage securities, and fewer loan originations and funded loans.
In fact, ResCap made only $15.5 billion in loans domestically during the fourth quarter, down from $41.2 billion during the same period a year earlier.
And for all of 2007, ResCap made just $94 billion in loans, down from $161.6 billion in 2006, making it the eighth-largest mortgage originator according to a preliminary count by Inside Mortgage Finance.
After the earnings release, Moody’s downgraded both GMAC and ResCap due to liquidity concerns and the uncertainty surrounding the mortgage unit’s future.
GMAC debt was downgraded one notch to “B1,” its fourth-highest “junk” grade, from “Ba3,” and ResCap’s debt was lowered two notches to “B2” from “Ba3,” with a “negative” outlook.
Chief Financial Officer Robert Hull said there may be more job cuts at ResCap this year, but noted that the “largest part” of the layoffs were already accounted for.
During the conference call, the company said it has no plan to inject additional capital into ResCap, and is actively pursuing strategic alternatives for the money-losing unit, including a possible sale of all or part of the unit.
Despite the loss, GMAC expects to return to profitability in 2008.
Shares of GM, which owns a 49 percent stake in GMAC, were down 33 cents, or 1.20%, to $27.24 in midday trading on Wall Street.