What is it?

Prop 37 is a $25B state down payment loan program for middle-class buyers of newly built homes.

If an eligible buyer provides a 3% down payment, the California Housing Finance Agency (CalHFA) will issue the buyer a second mortgage covering up to 17% of the home's purchase price, to bring the total down payment to 20%. Buyers will then obtain a traditional mortgage.

These are revenue bonds, not general obligation bonds, so the state's General Fund does not back them. Bondholders get repaid out of borrowers' loan payments, so investors (institutions and individuals who buy the bonds), not taxpayers, carry the risk if borrowers stop paying.

No cost to taxpayers

CalHFA is a self-supported state agency that runs on its lending business, not taxpayer dollars. It sets the underwriting standards and decides how many of the bonds to sell. It will only lend at a risk level it judges acceptable. If a buyer defaults, the buyer loses the home and their down payment. Any remaining loss falls on bondholders, not on the state budget.

Who qualifies

A buyer must have lived in California for at least 1 year, earn no more than 200% of the area median income for their family size, and move into the home as their primary residence. The home must be brand new, with the buyer as the first owner, and priced at no more than 125% of the federal conforming loan limit for that county.

Construction defect lawsuits

Prop 37 has a second part aimed at the builders of those homes, because a down payment loan is only useful if there are new homes to buy. It targets the rules for suing over construction defects, which housing researchers say are a big reason California builds so few condos.

Currently, builders can be sued for defects in new homes for 10 years after construction, but for just 4 years for rentals. Researchers at UC Berkeley's Terner Center and SPUR say this is a big reason developers build apartments instead of condos: condos were just 3% of California's new multifamily housing from 2011 to 2021, versus 38% in Canada, and insuring a condo project costs three to four times as much as a similar rental. Lawyers often approach homeowner associations about suing as the 10-year deadline nears, and the Terner Center notes that contingency fees of up to a third of a cash settlement discourage settling for repairs alone. Housing groups including the Terner Center, SPUR, and California YIMBY have recommended changing these rules.

Prop 37 changes them for homes built under its program. Builders can opt in: in exchange for taking on labor standards, they get a reformed construction defect process under the Right to Repair Act for those homes. A defect claim must name each homeowner and each alleged defect, the builder can work with homeowners directly and get a signed release once repairs are done, and a lawyer suing on contingency can take at most 30% of what homeowners win unless a judge approves more. A builder who sells a home for more than 25% above the price cap loses these reforms for that home.

Read the full annotated legal text →

Why vote Yes?

Prop 37 will help restart condo construction, which has fallen to just 3% of new multifamily construction. Condos are the starter homes families can actually afford, and a critical problem stopped their construction: construction defect liability. Insuring a condo project costs three to four times what a rental costs, so builders build rentals instead.

Prop 37 fixes this for homes in its program. Builders who join get a reformed defect process: they can repair problems directly and get a signed release when repairs are done, instead of spending years in court. The down payment loans then supply buyers for the new starter homes.

We are normally skeptical of down payment subsidies because helping buyers bid on a fixed stock of homes simply raises prices for everyone. But Prop 37's loans work only on new construction, so the demand lands where supply can respond.

We would have preferred this fix by legislation in Sacramento, and it almost got there. AB 1903 passed the Assembly 68 to 0 and cleared the Senate, then died when the session ended before a final vote. Until Sacramento tries again, Prop 37 is the only relief available.

It's an experiment, and the Legislative Analyst's Office cannot say whether it will spur construction. But borrowers repay the loans, and if the program fails, taxpayers won't owe anything. Let's give it a shot and see if it works.