Legislature(2003 - 2004)
03/08/2004 09:05 AM Senate FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE BILL NO. 274 "An Act relating to the housing assistance loan fund in the Alaska Housing Finance Corporation; creating the housing assistance loan program; repealing loans for teacher housing and providing for loans for multi-family housing; making conforming amendments; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill "replaces the Housing Assistance Loan Fund with a new Housing Assistance Loan Program." Mr. Fauske read testimony explaining this legislation into the record as follows. Senate Bill 274 will make two changes to the rural loan program. It will replace the Housing Assistance Loan Fund, known as the HALF, with a Housing Assistance Loan Program, and it will replace the Rural Teacher Housing Loan Program with the Rural Multi-Family Loan Program. Changing the Housing Assistance Loan Fund (the HALF) from a fund to a program is necessary as a result of liquidity concerns of the Corporation. The current revolving nature of the fund limits the fund to being used only to purchase new loans under this program. For fiscal year 2003, over a third of the Corporation's net income was in this fund. With the Corporation paying a dividend of $103 million to the State, the funds paid to the State have continued to come entirely out of our working capital because of the restriction of the rural loan fund. This has resulted in the liquid assets of the Corporation declining at an accelerated rate. In addition, the revolving fund hasn't really revolved for several years. The new loans made in the program have exceeded the cash available in the fund causing the Corporation to use its working capital to purchase and hold loans for reimbursement from the fund. This legislation will allow the program to operate in the same way our other loan programs do. Other than this change, the program will continue to operate in the same way. Now, the next is the Rural Multi-Family Loan Program. The other change SB 274 will make is to change the Rural Teacher Loan Program to the Rural Multi-Family Loan Program. The passage of SB 181 in 2002 changed our rural multi-family non- owner occupied loan program into the Rural Teacher Loan Program. This change required anyone using the program to fill their duplex, four-plex, or any other multi-family building with at least one teacher in every unit. As a result of this restriction, in the year and a half that the program has existed, there has not been a single loan made. Before this change, the multi-family program made up to two and three percent of our rural business. This bill will change the program back into a rural multi- family program available to anyone including teachers. It will also allow an owner to occupy one of the unit if they so chose. The changes that SB 274 will make will be good not only for the Corporation but for Alaskans, especially in our rural areas and around the state. Co-Chair Wilken asked the link between SB 279 and SB 274. He understood that SB 279 authorizes the sale of bonds. Mr. Fauske responded that the changes proposed in SB 274 are necessary to "generate the liquidity to pay for 279." He relayed that the Corporation had proposed to the Murkowski Administration the concept of purchasing $40 million State assets to generate cash flow for the State. He stated that this did not occur although the need for cash remained and the Corporation suggested selling debt, taking advantage of low interest rates and "running the debt service out of the capital budget." He updated that the decision was made to sell $20 million in bonds as reflected in the proposed amendment. Senator Bunde recalled the need for teacher housing was addressed three years prior and expressed concern of repealing a program so recently established. He asked if there was no longer a need for teacher housing. Mr. Fauske replied these changes would continue to provide opportunities for teacher housing. He explained that the current provisions exclude this program from individuals constructing a multi family housing unit, residing in one unit and renting other units to teachers, if the owner is not a teacher. He said this practice is common in rural communities. He furthered that the Corporation also has to "reassert on an annual basis, the qualifications"; explaining that as teacher tenants moved out of a unit, and non-teachers moved in, the interest rates on the loans must be reassessed and increased. He stated this is a hardship on lending institutions. He predicted the proposed changes to this program would be successful in conjunction with other existing programs in creating housing for teachers. Senator Bunde recalled the current program requires that a teacher occupy one unit of a multi-family unit complex. Mr. Fauske corrected that current requirements stipulate that at least one teacher must occupy every unit. This legislation, he explained would eliminate that requirement. Senator Bunde asked if different interest rates would be available for the proposed changed program as are available for teacher housing. Mr. Fauske affirmed and described the separate program that offers interest rates at one percent below the taxable rate on the first $250,000 of a loan. Co-Chair Wilken clarified this legislation maintains the $250,000 limitation instituted in the HALF program three years prior. Co-Chair Wilken asked about the replacement of regions established in AS 18.56 with "small communities" on page 4, line 26. BRIAN BUTCHER, Legislative Liaison, Alaska Housing Finance Committee, Department of Revenue, deferred to Mr. Kapansky. PAUL KAPANSKY, Mortgage Operations Director, Alaska Housing Finance Corporation, Department of Revenue, testified via teleconference from an offnet location that this language unified the definition of the population served by the rural program. He defined small community as having a population of 6,500 or fewer and is not connected by road or rail to Anchorage or Fairbanks. Co-Chair Wilken asked the regions established in AS 18.56. Mr. Kapansky was unsure and stated he would provide the information. Co-Chair Wilken next referenced Section 8 on page 5, line 7, which repeals AS 18.56.420(b) and 15.56.570 and asked what these statues pertain to and the effect of their repeal. Mr. Fauske replied that AS 18.56.420(b) relates to the HALF fund and that 15.56.570 relates to the Rural Teacher Housing Program. Mr. Kapansky affirmed. Co-Chair Wilken understood that AS 18.56.420 relates to how the Legislature uses the funds of the HALF program to administer the program. JOE DUBLER, Chief Financial Officer, Alaska Housing Finance Corporation, Department of Revenue, explained that AS 18.56.420(b) allowed the Legislature to appropriate funds for the hiring of personnel to administer the revolving fund. He noted that because this legislation would change the fund into "just another mortgage program" within the Corporation, it would be subject to the separate statutes governing the entire corporation in which the Legislature appropriates funds for operation. Co-Chair Wilken asked for further explanation of the regional allocation referenced in AS 15.56.570. Mr. Kapansky responded that in the past, the Corporation allocated funds from the revolving loan fund according to regions. He surmised this occurred because the Corporation had limited resources. However, he stated that since the Corporation merged with the rural loan program in 1992, additional resources were available for the program and the regional allocations were no longer necessary. Co-Chair Wilken clarified that the language change to "small communities" in Section 6 of the bill allows for the repeal of AS 15.56.570. Mr. Kapansky affirmed. Senator B. Stevens referenced Sec. 18.56.580(b)(2) in Section 7 on page 5, lines 5 and 6, which reads as follows. (2) "multi-family housing" means a multi-family residence containing two or more dwelling units that may be nonowner-occupied or owner-occupied. Senator B. Stevens asked about programs available for nonowner- occupied housing and the definition of nonowner-occupied. Mr. Fauske deferred to Mr. Kapansky. Mr. Kapansky told of the history of the program, prior to passage of SB 181, in which owners could not occupy units of multi-family housing. Currently, he was unaware of any program of the Corporation that allows nonowner occupancy. He defined "nonowner occupied" as housing at which the borrower does not live and all the units are leased or rented. Senator B. Stevens asked the criteria required of the borrower of nonowner occupied housing, whether the borrower must be a Native corporation, a school district or similar entity. He surmised this legislation would extend the program to anyone, and exampled that he could borrow money and build rental units in a community of less than 6,500. He asked how broad this provision would be. Mr. Kapansky defined those eligible, as "anyone or any entity that can enter into a legal contract and qualify otherwise, can be a borrower under the rural loan program." Co-Chair Wilken furthered that those eligible could "enjoy" discounted interest rate for the first $250,000 of the loan. Mr. Kapansky affirmed. Mr. Fauske noted that legislation adopted the previous session, SB 25, extended a no down payment requirement to Rural Education Attendance Areas (REAA) and school districts. Senator B. Stevens understood, but questioned the extension of the proposed program to any applicants as broadening the intent and would allow any party to become property owners of nonowner- occupied housing in small communities. Co-Chair Wilken clarified Senator B. Stevens's concern with the inclusion of a nonowner-occupied provision in this legislation. SFC 04 # 33, Side B 09:55 AM Senator B. Stevens remarked that under the proposed provisions he could build units in a village, such as St. Paul and become the landlord utilizing an AHFC loan. He wanted this understood in the discussion on this bill. Mr. Butcher explained that prior to passage of SB 181 in 2002, the program was specifically a rural nonowner-occupied loan program. Senator Hoffman noted that the lower interest rate could only be garnered for the first $250,000 of the loan, which could be translated into two units of a six-unit housing facility. Mr. Fauske affirmed. Senator Hoffman commented that although this proposal might seem to be extending the program significantly, only a limited number of borrowers could take advantage of it. He spoke of housing difficulties and the benefits of encouraging investment in rural communities. Mr. Dubler clarified that AHFC has nonowner-occupied loan programs for housing located in urban areas and that this program would only apply to rural areas. He emphasized this program is the only funding source that has typically been available for rural multi- family housing, and since enactment of SB 181 no loans have been issued. Senator B. Stevens wanted to clarify this proposal would not only allow for construction, but also would provide loans for the purchase or refinance of existing multi-family housing. He stressed this would provide State funding for nonowner- occupied ventures. He did not oppose this, provided it was fully understood. Senator Bunde asked if currently these loans are limited to nonowner-occupied housing, unless the borrower is a teacher. Mr. Butcher explained that both owner-occupied and nonowner- occupied are allowed. Senator Bunde asked if the intent is to amend the program to allow owner occupancy. Mr. Butcher replied that the original program applied to nonowner- occupied housing; the changes implemented in 2002 limited occupancy to teachers, whether owner-occupied or nonowner-occupied; and the proposed change would retain the owner and nonowner-occupied provision although eliminate the teacher occupancy requirement. Senator Bunde ascertained this change could result in increased participation in the program. Mr. Fauske affirmed. Co-Chair Wilken added that the $250,000 limit was imposed in conjunction with the changes made in 2002. Senator Olson asked if the reason no applications were received for the existing program was because only a limited number of rural residents had adequate collateral on loans for multifamily housing. Mr. Fauske replied that no loans were made under this program, in part because some who would have participated were excluded because they were not a teacher. He stated the program placed restrictions on lenders for interest rate compliance and therefore lenders did not promote the program. Senator Olson asked if the proposed changes would therefore encourage investors to construct multi-family residences in rural Alaska. Mr. Fauske answered it could. Senator Bunde expressed concern with removing the teacher occupied requirement, since the original legislation was intended to "apply some gentle pressure" to borrowers that to participate, they must assist in meeting a need. He could understand that it would be burdensome to require every unit be teacher occupied and suggested a requirement that at least one unit must be occupied by a teacher. Co-Chair Wilken asked if the current provisions stipulate that a teacher must occupy one unit. Mr. Fauske corrected that at least one teacher must occupy every unit. Mr. Fauske predicted that the goal of providing teacher housing would be reached. He noted the current program offering loans with no down payment to school districts and REAAs is expanding. He also told of $4.1 million for the teacher housing loan program included in the proposed FY 05 capital budget. He further described efforts of the Corporations underwriters to ensure the success of these programs. Mr. Fauske pointed out the difficulties in operating a multi-family housing facility in which every unit must be occupied by at least one teacher. He informed that many teachers remain in the rural community only nine months of the year and the owner must either find temporary occupants or absorb the lost rental revenue. Co-Chair Wilken recalled discussion prompted by a Division of Legislative Audit report of three to four years ago about abuses in the HALF system. He noted the problems were repaired and that now those repairs are being adjusted. He asked whether the proposed changes could result in a return to the situation in which the abused first existed. Mr. Fauske assured the proposed changes would not. He opined that some of the identified abuses were the result of misunderstandings. He exampled a loan to a doctor in Dillingham. He stated that the limit of the reduced interest rates to the first $250,000 of a loan would address the Committee's concern. Senator Olson surmised that the number of rural residents able to participate would become fewer due to less funding to rural communities, such as revenue sharing and longevity bonus payments, as well as the State's fiscal problems. He expressed that this "pessimistic financial attitude" has affected businesses and asked whether AHFC shared this observation. Mr. Fauske replied that the combination of housing programs to assist teachers and nurses have "created an opportunity for more optimism instead of pessimism." He explained that education funding is allocated to rural communities, some of which is used to pay salaries and miscellaneous expenses. He stated that if AHFC could leverage some of those funds to ensure housing is developed, the overall economy would benefit. He admitted that funding reductions in other areas would have impacts, although these efforts would be helpful. He also noted the changes in this legislation would promote investment from funding sources other than education funding. Senator Olson commented that as a businessman from rural Alaska, he has "reined in" his optimism because of the "dismal" forecast. Co-Chair Wilken opined that money is always available for "good mortgages" based on sound lending principles. Co-Chair Wilken ordered the bill HELD in Committee.