Endorsement: No on Proposition 37, a risky $25 billion housing experiment

Proposition 37 on the November ballot is a peculiar mix of philanthropy, tort reform, housing construction, worker protection and Wall Street bond underwriting fees. Presented to voters as a solution to the lack of affordable homes for willing buyers, Prop. 37 aims to encourage developers to build "middle-class" housing and help "middle-class" families buy them without taxpayer assistance.

For builders, the program offers some protection from construction defect litigation and high attorney fees if they agree to be "qualified builders" (accepting liability for labor violations by contractors and subcontractors) and build "qualified new homes" (new construction or conversion with a price cap on each unit that does not exceed 125% of the conforming loan limit for that county, approximately $1 million to $1.5 million).

For buyers, the program offers fixed-rate second mortgages for 17% of the purchase price, no need for private mortgage insurance (PMI), and alternative "cash-flow underwriting" for buyers who otherwise might not qualify for a second mortgage. Borrowers are required to qualify for a first mortgage, and they must put down 3% of the purchase price from their own funds. To be eligible, borrowers must be California residents for at least one year and have a household income no higher than 200% of the area median income, adjusted for family size.

The program is financed with $25 billion in revenue bonds, issued by the state but repaid by adding the principal, interest and program administration costs to the payments made by the borrowers. Taxpayers have no direct risk.

The deceptive part of Proposition 37 is the representation, as stated in the ballot argument in favor of the measure, that "consumer benefits include below-market, fixed-rate loans." Nothing in the measure guarantees that the second mortgages offered in the program will be less expensive for borrowers than loans available from private lenders.

The contention that the cost of the loans will be "below-market" rests on the assumption that foundations and non-profits will be willing to buy the bonds at a below-market interest rate of 3%. These are revenue bonds, and the interest is not tax-free. In addition, they are not without risk. In the event of foreclosure, these second mortgages sit behind the first mortgages, with no back-up or guarantee from taxpayers.

That's the part of the program that depends on philanthropy. The idea is that tax-exempt organizations will buy these bonds out of the goodness of their hearts and forgo the higher interest rates available from other bonds they could buy instead.

If that doesn't happen, the California Housing Finance Agency will sell the bonds in the market and pay market interest rates, potentially making the Prop. 37 second mortgage loans even more expensive for borrowers than loans offered by commercial lenders who don't have to recoup the cost of administering this program.

Any developer can build price-capped "qualified new homes" eligible for the down payment assistance loans, but only "qualified builders" who accept the labor rules get the program’s protection from litigation and attorney fees. They lose the protection for an entire building, proponent Bob Hertzberg told our editorial board, if even one unit in it sells for above the capped price.

Home buyers should be aware that if a house or condominium sells for less than its fair market value, the county tax assessor will assess the property based on its fair market value, not on its purchase price.

Proposition 37 attempts to be a path through California's minefield of regulations and liability in the housing sector, but it's relying on the hope that non-profits will subsidize second mortgages so income-limited families who don't have the money for a down payment can have two mortgage payments, not to mention the cost of homeowners insurance, HOA fees, property taxes and utility bills.

It sounds to us like it won't have a good outcome. Vote no on Proposition 37.

Copyright 2026 Tribune Content Agency. All Rights Reserved.