Proposition 37, appearing on the November 3 ballot, proposes to establish a new loan program designed to assist California residents with down payments for home purchases. If approved, the measure would allow the state to borrow up to $25 billion to fund this initiative.
Unlike traditional state bonds, Proposition 37 is structured to function with the state acting as a loan broker. The California Housing Finance Agency would secure funds from private lenders by selling bonds. This money would then be re-lent to homebuyers to cover a portion of their down payments. Homebuyers would be responsible for repaying these loans, with the funds and interest returning to the private bondholders. The measure specifies that state taxpayers would not directly bear the cost if homebuyers fail to make payments; instead, private lenders would absorb the losses. However, some analysts have expressed skepticism, noting that political pressure might lead state lawmakers to intervene in the event of widespread defaults.
This program aims to address the significant barrier that down payment size presents for many Californians aspiring to homeownership. While buyers would still need to secure a primary mortgage for the bulk of the home price, this program could cover as much as 17% of a home's value. For instance, on an $800,000 home requiring a 20% down payment (or $160,000), a loan from this program could reduce the buyer's out-of-pocket down payment to $24,000. California currently has one of the lowest homeownership rates in the nation.
Eligibility for these loans is broadly defined. Individuals or families earning less than double their county's typical income would qualify. This income cap ranges significantly across the state, from approximately $116,000 in Imperial County to over $410,000 in San Mateo County for a family of three. A Public Policy Institute of California analysis indicates that this wide range could include roughly 90% of all renters. Hertzberg, identified as the measure's author and a former state Assembly Speaker and Senate majority leader, along with supporters like the California Association of Realtors, views this broad eligibility as a positive step towards helping the middle class.
However, some opponents, including the League of Women Voters of California, have voiced concerns that such broad eligibility might disproportionately benefit those with considerable existing wealth or access to family assistance, thereby reinforcing existing economic and racial disparities. They worry that individuals who need the help least might be most likely to secure the loans.
The program includes specific restrictions on the types of homes eligible. To qualify, a home must be newly built or newly converted into housing, meaning the borrower must be the first occupant, and resales are not permitted. This design choice aims to ensure that the new demand generated by the down payment assistance is matched by an increase in housing supply, rather than simply shifting who purchases existing homes. The measure also sets price caps for eligible homes, up to about $1 million in inland areas and up to $1.5 million in regions like Los Angeles, Orange County, and the Bay Area.
To encourage construction of eligible homes, Proposition 37 includes a “qualified builder” option. Builders who agree to adhere to the measure's price caps and accept legal responsibility for meeting basic labor requirements would receive protections from certain construction defect lawsuits, provided they repair any mistakes to the homeowner's satisfaction. Legal fees would also be capped in disputes.
An analysis commissioned by the Yes on 37 campaign suggests the program could lead to the construction of as many as 190,000 homes, though this is considered a high-end estimate. The actual number would depend on various factors, including builder participation, the number of homes that would have been built regardless, and buyer demand.
The nonpartisan Legislative Analyst’s Office highlighted two primary unknowns regarding the measure's implementation: the willingness of investors to purchase these riskier bonds and the interest rates they would demand, as well as the actual demand from homebuyers for these types of loans. Financing second mortgages is considered riskier due to the increased debt burden on borrowers, the first mortgage's priority in repayment, and the absence of implicit guarantees from the state or federal mortgage giants. Edward Pinto, co-director of the Housing Center at the American Enterprise Institute, noted that investors would likely seek higher interest rates to compensate for the added risk, potentially making the second mortgages more expensive for homebuyers.
