California voters will decide in November whether to authorize the California Housing Finance Agency to issue up to $25 billion in revenue bonds to fund down-payment assistance for homebuyers. The proposal, known as Proposition 37, aims to reduce upfront cash requirements for buyers by covering a portion of the down payment through a state-backed second mortgage.
Under the plan, a buyer could put down as little as 3% of a home's price. The state program would then provide a second mortgage covering up to an additional 17%, while the buyer finances the remaining 80% through a traditional first mortgage. Although the program reduces the initial cash needed to close on a home, the 17% portion is a loan that must be repaid, not a grant.
The measure does not use California's general fund. Instead, it relies on revenue bonds intended to be repaid through borrowers' mortgage payments. The state's independent legislative analyst estimates there will be no direct costs to state or local governments. Supporters argue that facilitating financing for newly constructed homes could encourage builders to increase housing supply, a point they cite as a legitimate economic benefit.
Critics, including Fox News contributor Ted Jenkin, argue that increasing borrowing capacity without increasing housing supply may not make homes more affordable and could instead drive prices higher. Jenkin notes that if more buyers have access to larger financing packages but the number of available homes remains static, basic economic principles suggest upward pressure on prices. He compares this dynamic to conditions observed during the 2008 financial crisis and the pandemic era, where increased purchasing power did not necessarily lower asset values.
To illustrate the financial impact, Jenkin uses a hypothetical scenario involving an $800,000 home. A traditional buyer would need $160,000 in cash for a 20% down payment and borrow $640,000. Under Proposition 37, that buyer might put down only $24,000 (3%), with the state lending $136,000 (17%) and the buyer borrowing $640,000 (80%). While this reduces the upfront cash requirement by $136,000, it increases total mortgage debt by the same amount.
Jenkin calculates that assuming hypothetical interest rates of 6.5% on the first mortgage and 7% on the second, both over 30 years, monthly principal and interest payments would rise from approximately $4,045 to $4,950. This represents an increase of roughly $900 per month, excluding property taxes, insurance, and maintenance costs. He emphasizes that actual program interest rates have not yet been established, making these figures illustrative rather than definitive.
Jenkin contends that addressing housing affordability requires tackling the underlying shortage of homes rather than just easing access to credit. He suggests measures such as reducing permitting delays, lowering construction costs, and allowing more housing in high-demand areas are more effective solutions than expanding loan programs. He argues that helping buyers qualify for more debt is distinct from reducing the actual price of housing.