Legislature(1997 - 1998)

02/07/1997 08:06 AM CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 HB 70 - AHFC HOUSING FUNDS & PROGRAMS                                       
 Number 1528                                                                   
 JOHN BITNEY, Alaska Housing Finance Authority, came forward to                
 testify on HB 70.  This bill passed the house last year 37 to 1,              
 moved through some senate committees and didn't pass for some lack            
 of time, along with other considerations.  In summary, this                   
 legislation is an attempt to try and improve some of their loan               
 programs to enhance efforts in rural Alaska to provide loans there            
 for housing.                                                                  
 MR. BITNEY provided a short summary of this legislation's main                
 features.  It designates the Regional Housing Authorities to be a             
 servicing agency and an offerer for some of their loan programs.              
 They want to use some of the Housing Authorities' expertise in                
 making some of these loans in these communities.  This is also an             
 attempt to improve and modify a building materials loan program in            
 order to meet the needs and conditions in the rural areas.  They              
 also hope to provide the re-financing of loans.                               
 MR. BITNEY stated that there were other technical changes in the              
 bill.  He believed there was a sectional summary analysis, as well            
 as some backup provided to show some of the needs in these                    
 communities.  This legislation also has a zero fiscal note.                   
 Number 1670                                                                   
 REPRESENTATIVE OGAN referred to page 2, line 3 and asked about the            
 language, "...in a small community," where the word "make" was the            
 original language and he noted the addition of the words "originate           
 and service loans."  He noticed that along with this change the               
 legislation had a fiscal note attached to it.  He stated there                
 should be costs associated with this legislation and that it must             
 come out of Alaska Housing funds which is an off budgeted item.  He           
 asked if this was correct.                                                    
 MR. BITNEY stated that this part of the section allows Regional               
 Housing Authorities to begin offering their mortgage programs.                
 Presently, Alaska Housing gets authorization to operate their                 
 mortgage programs annually.  In the operating budget, they have               
 become an on-budget item in the last year.  This current fiscal               
 year is the first year that their mortgage programs are subject to            
 legislative review in appropriations.  These programs are now on-             
 budget items.  They estimate an overall yearly aggregate amount to            
 bring before the legislature for their mortgage activity.  Section            
 1 provides the opportunity for Regional Housing Authorities to be             
 more active in promoting, serving and originating Alaska Housing              
 programs in these communities.                                                
 Number 1753                                                                   
 REPRESENTATIVE OGAN asked if the Regional Housing Authorities were            
 state agencies.                                                               
 MR. BITNEY responded that these were not state agencies, but they             
 are established in state law and recognized statewide by boundary             
 lines designating Regional Housing Authorities.  Not only will they           
 originate and service mortgage loans, but they will also be                   
 administrators and a pass-through agency for federal Indian Housing           
 Number 1785                                                                   
 REPRESENTATIVE OGAN asked who pays their salaries.                            
 MR. BITNEY stated that he believed there were Housing Authority               
 representatives on line and that they would be better prepared to             
 answer this question.  He didn't believe that Alaska Housing paid             
 their salaries and noted there might be some administrative                   
 allowances in the grant funds and such.                                       
 Number 1804                                                                   
 REPRESENTATIVE OGAN said he was looking at a zero fiscal note with            
 a loan program that essentially creates a bunch of work for a bunch           
 of loan officers and he was trying to figure out who would pay for            
 CHAIRMAN IVAN said he could make some general comments to this                
 issue.  His understanding is that the Regional Housing Authorities            
 exist throughout the state which was a federal program established            
 between the Regional Corporation boundaries and negotiated through            
 the Housing and Urban Development (HUD) program and Indian Housing.           
 These systems are already established and their support is                    
 negotiated by indirect costs.  He also shared his perspective as an           
 individual from the small community of Akiak.  He stated stated               
 that in the past, AHFC funds were targeted to already built up                
 communities such as Anchorage with its already surveyed lots.  With           
 communities such as Akiak without subdivisions, the banks would be            
 hesitant to deal with them.  He understood and appreciated the                
 intent of this legislation which is to spread this same opportunity           
 to rural Alaska.  He noted that not all of the villagers are on               
 welfare and, given the opportunity, they could take advantage of              
 the Housing Finance Corporation services.                                     
 Number 1934                                                                   
 REPRESENTATIVE KOOKESH said that he was familiar with the Tlingit             
 and Haida Housing Authority in Juneau and knew that a lot of the              
 money they receive is from HUD.  As he understood it, there is no             
 money that will be used to service this plan other than the federal           
 monies received which is already budgeted.                                    
 Number 1960                                                                   
 REPRESENTATIVE RYAN said that he understood the purpose of this               
 legislation, but hoped there weren't different state programs                 
 working at cross purposes.  He noted within this legislation                  
 exemptions from energy standards and the existence of a program               
 that gives people funds to help meet these energy standards while             
 upgrading their homes.  He also offered that many people cannot get           
 financing on their houses because of their non-standard                       
 construction characteristics.  Then, when they do get financing,              
 the rates are very high since they don't meet code criteria.  He              
 asked if they were encouraging this same sort of thing through this           
 Number 2011                                                                   
 MR. BITNEY responded that the exemption in this bill only applies             
 to the building materials loan which is a loan program for someone            
 to get building materials for up-grades.  The maximum limit on this           
 program is $20,000.  They don't look to exempt any kind of finance            
 program for the construction of an entire home.  In order to meet             
 energy standards, building standards, etc., it is necessary to fly            
 an inspector or a rater out to a village or remote site in order to           
 make sure that this work meets all these standards.  With such a              
 small loan amount this inspection would create a large cost within            
 Number 2062                                                                   
 REPRESENTATIVE OGAN asked if this program would apply to                      
 communities, possibly in his district, of 1600 people or less.  He            
 referenced language in the bill about a small community and                   
 wondered what the limit was.  He was concerned about a possible               
 disparity and fairness in this legislation.  He asked what the                
 definition of community would be.                                             
 Number 2108                                                                   
 MR. BITNEY responded that the definition of a community is tied to            
 the second class boundaries.  For example, the population center of           
 Palmer would be considered for this area and would not qualify.  A            
 small community is defined as 1600 if it's connected on the road              
 system.  Palmer exceeds the 1600 limit within it's municipal                  
 boundaries.  For those communities which meet this definition, the            
 statute allows the Rural Mortgage Program to charge up to one                 
 percent lower than the taxable rate for those loans.  This rate is            
 set monthly.                                                                  
 Number 2158                                                                   
 REPRESENTATIVE KOOKESH noted that this legislation made no                    
 reference to native or non-native.  He assumed that if someone is             
 in a rural area, whether they are native or not, they are eligible            
 to participate.                                                               
 MR. BITNEY responded that this was correct.  This legislation is              
 driven by the population definitions.                                         
 Number 2184                                                                   
 BRUCE KOVARIK, Executive Director, Bering Straits Regional Housing            
 Authority, testified by teleconference from Nome on HB 70.  He is             
 a member and he chairs the legislative committee for the                      
 Association of Alaska Housing Authorities.  The Housing Authorities           
 also represent the Alaska Housing Finance Corporation.  They too              
 support HB 70.                                                                
 MR. KOVARIK stated that they support this bill because it helps               
 them do their job by supplying additional tools.  It allows them to           
 more fully participate in the AHFC loan program.  These are                   
 traditions that are not well established in their villages, yet               
 they know how difficult it is to get funding whether federal or               
 state matching.  These funds are scarce and they have over 300                
 families on waiting lists for housing.                                        
 MR. KOVARIK noted that "one real small change that this bill                  
 provides for is with the supplemental housing grant long enough to            
 use grant funds, not just for on-site sewer and water, but also               
 off-site sewer and water."  Despite the good intentions and the               
 desire they have for improving their sanitation facilities                    
 throughout the state, it's still a struggle.  The expectations or             
 cooperation they have with public health service or village safe              
 water the (indisc.) are not always there.  Any barrier they can               
 break down to help them achieve these improvements for sanitation             
 facilities is helpful.  To allow the supplemental housing grant               
 funds to be used for off-site as well as on-site water services               
 will be a big benefit.                                                        
 MR. KOVARIK responded to Representative Ogan's question about the             
 salaries and administrative costs for this portion.  The majority             
 of his salary for these costs come from the home buyers, people               
 from their region who participate in the housing program, buy their           
 homes and pay for them with their required monthly payments.  Part            
 of these payments go into the operation and administration of the             
 housing authority.  For the overall operations, they get very                 
 little HUD money.  This money usually goes into the development,              
 the hardware, the houses, etc. for families.  Likewise with the               
 origination fees or the servicing of AHFC loans.  The                         
 administrative cost of the program comes from the borrower through            
 a percentage any where from a quarter to a half percent of the                
 payment as a servicing fee.                                                   
 Number 2358                                                                   
 REPRESENTATIVE SANDERS asked if Mr. KovARIK was working on                    
 MR. KOVARIK stated that, no, he was not.  He outlined the regional            
 program there which has 441 houses under management.  The Regional            
 Housing Authority has a contract with HUD who owns these houses,              
 along with the individual home buyer families.  Part of the                   
 required monthly payments in their region goes to fire insurance,             
 part of it goes to the operation of the Housing Authority, and part           
 of it goes into equities for the house.  This is a home ownership             
 program and in addition to paying the operating costs, including              
 the housing authorities to administer these programs, it also                 
 provides to the extent that the families are able to pay based on             
 family income.  This program also maintains equity revolving funds            
 that revolve into new housing for the future.  The little bit of              
 extra money that the family pays every month, over and above the              
 administrative costs, goes into an equity account.  The Housing               
 Authority holds it in trust for a 25 year cycle and after this                
 time, this fund is available for new housing in this community.  He           
 noted that this is how they work this program in their region.                
 Number 2443                                                                   
 REPRESENTATIVE RYAN stated that he was interested in what kind of             
 a financing structure they have invested in these homes and what              
 the interest would be on the money with all these other charges               
 added in.  He asked what the total interest package would be and              
 how would it break out.                                                       
 Number 2466                                                                   
 MR. BITNEY said that by originating and servicing the loans, the              
 Housing Authorities would have the same opportunity to charge a fee           
 on the loans, which is the same rate, same method that a bank in              
 the state does.  This is the way their mortgages function.                    
 TAPE 97-5, SIDE B                                                             
 Number 000                                                                    
 KAY MURPHY, Mortgage Operations Director, Alaska Housing Finance              
 Corporation, testified on HB 70.  In response to the issue about              
 how the Housing Authorities would be involved in originating Alaska           
 Housing Loans, Mr. Bitney correctly responded by stating that they            
 would act in the same capacity as existing lenders.  Alaska Housing           
 Finance Corporation sets the interest rates based on what their               
 cost of funds would be.  They change these rates on a monthly                 
 basis.  Their current cost of funds for taxable financing is 8 3/8            
 percent.  Under their rural loan program, the borrowers get a 1               
 percent interest rate reduction from this.  Today they're being               
 charged 7 3/8 percent.                                                        
 MS. MURPHY responded to the issue regarding service expenses.  The            
 servicing expenses of the corporation are an off-budget item, so              
 this does not impact the fiscal note for this particular bill.  As            
 for a service fee paid to lenders, if it's a rural loan they pay              
 1/2 percent service fee, if it's an urban loan they take 3/8                  
 percent service fee.  The reason for the difference is because it             
 is more difficult and more costly to service loans in some of the             
 more remote, rural areas of the state.  The way they account for              
 this is their income from the interest on the loan payments which             
 they would receive, the service fee is netted out of this income.             
 The way lending institutions, whether the Housing Authority or a              
 bank, earns money to offset the expense associated with origination           
 is in addition to that service fee they receive, they charge the              
 borrower an origination fee.  This fee will vary depending on the             
 loan amount.  As for the housing which Mr. Kovarik spoke about, she           
 believed that the financing, the cost and the rates charged on                
 these is related to their funding which they receive from HUD for             
 various types of housing.  They are not necessarily related to loan           
 programs that this bill would allow them to be involved in.                   
 Number 094                                                                    
 REPRESENTATIVE RYAN asked if these loans were being offered with a            
 variable interest rate to the borrower.                                       
 MS. MURPHY clarified that this was not a variable interest rate.              
 Once the borrower is committed to an interest rate, this rate is              
 fixed for the term of the loan, but their cost of funds is based on           
 what's happening in the bond market.  They establish these rates on           
 a monthly basis depending on what's happening in various bond                 
 markets, whether tax exempt, taxable or veteran.  The borrower's              
 interest rate is fixed for the life of the loan.                              
 REPRESENTATIVE RYAN said he understood the time value of money and            
 noted that seven and 3/8 was a very favorable rate.  He asked if              
 the state of Alaska has a triple A rating or a double A?                      
 MS. MURPHY said that there are some rating agencies where they have           
 a double A and she wasn't sure about the triple A.                            
 Number 140                                                                    
 REPRESENTATIVE RYAN stated that they would be very close to the               
 marginal rate.  He asked what the margin was and stated that it               
 couldn't be more than a 1/2 of a percent.                                     
 MS. MURPHY responded that he was absolutely right.  They don't add            
 onto their cost of funds a high basis point for the administrative            
 cost or margin.                                                               
 REPRESENTATIVE RYAN asked if this origination fee was a percentage            
 of the loan or if it was a flat fee?                                          
 Number 157                                                                    
 MS. MURPHY said that typically the lenders will charge a 1 percent            
 origination fee or a minimum of $750.00.  Currently, in statute,              
 for the rural loan program, the origination fee is capped at 1                
 percent of the loan.                                                          
 REPRESENTATIVE RYAN noted that the reason he wondered is because he           
 knew there was not a lot of money in the rural areas.  It is                  
 difficult at best for people with the expenses as high as they are,           
 it is difficult for people to put together long term financing.               
 Number 190                                                                    
 REPRESENTATIVE OGAN asked about the statement which Mr. Kovarik               
 made about his salary being paid by the people who get these loans.           
 He also referred to the testimony presented about the lack of a               
 high administrative fee.  He expressed his concern that if they               
 expand this program they'd be expanding the cost to the federal               
 government.  He said he was skeptical that they were not adding               
 costs to someone, somewhere, for this program.  He asked what the             
 default rate was for this program.                                            
 Number 255                                                                    
 MS. MURPHY said she could speak for Alaska Housing and their rural            
 loan program.  It is funded from a revolving loan fund that's been            
 established for years.  The interest rates are set based on that              
 one percentage point less than their taxable cost of funds.  The              
 revolving loan fund puts money out into the market at a particular            
 interest rate.  All the payments received come back to the                    
 corporation and are deposited back into this revolving loan fund.             
 From a business standpoint, the way they pay for their expenses is            
 the income that they earn from those mortgages which they make.               
 Number 301                                                                    
 REPRESENTATIVE OGAN asked if the interest pays for the cost of                
 doing business.                                                               
 MS. MURPHY responded that they certainly believe so.  Their                   
 earnings received are either financial investments with liquid                
 assets or the interest income received from loans is probably the             
 major portion of the income producing assets of the corporation               
 which pays all of their expenses.                                             
 REPRESENTATIVE OGAN asked specifically if this particular program             
 pays for itself.                                                              
 MR. BITNEY stated that yes it does.                                           
 Number 338                                                                    
 REPRESENTATIVE RYAN asked Mr. Bitney if his organization was                  
 engaged in any form of arbitrage with their liquid assets?                    
 MR. BITNEY stated that they do generate arbitrage, this is a budget           
 item included in the operating budget annually.  They try to                  
 establish low interest loan programs.  They are required to set up            
 programs to loan this money out at low interest rates in order to             
 avoid paying a penalty back to the federal government.                        
 Number 400                                                                    
 DON FANCHER, Executive Director, Association of Village Council               
 Presidents, Bethel, testified by teleconference from Anchorage.               
 They operate a mutual help program in their region.  In this area             
 there are about 1200 home buyers.  Their operating costs are                  
 covered by these home buyer's monthly payments.  This is important            
 legislation, not only because it helps provide matching grants that           
 leverage, say in their case, 10's of millions of dollars a year in            
 new development, in addition, it does help provide money in rural             
 areas where there is a desperate need to improve their water and              
 sewer needs, as well as utilities.  The entitlement programs                  
 through the federal government are being cut drastically and                  
 they're being forced to operate like private businesses much akin             
 to what this legislation provides.                                            
 MR. FANCHER continued that their housing authority is entering into           
 private agreements with school districts, health corporations,                
 etc., to raise their own revenues to try and leverage more money in           
 order to pay their own way.  There are no dollars spent on                    
 administration even in the development of projects.  It is true               
 that the users basically pay for this and that will become even a             
 greater requirement.  At present, there are not very many housing             
 authorities which charge interest on this mutual help program.  In            
 privatizing, they will have to leverage these federal and state               
 dollars with dollars they can raise on their own.  Every little bit           
 MR. FANCHER added, "If we can service these loans, generate these             
 loans and raise a little bit, our own revenues and combining this             
 with creative programs, for example, and numerous other -- agencies           
 provide, for example, low income housing tax credit programs and              
 basically have to combine all of these various sources of revenues            
 to do what we can to try and meet the housing needs and it is very            
 desperate, not just in rural Alaska, but there are probably roughly           
 18,000 units needed in Alaska and the majority of those are needed            
 in rural Alaska.  Because, as you know, lending institutions have             
 been very reluctant to allow any loans out in rural areas because             
 it is hard to go collect or evict and then get rid of the house."             
 Number 626                                                                    
 REPRESENTATIVE OGAN said that he had some basic problems with this            
 bill.  Section 5 exempts the projects under the building loan                 
 program from energy standards.  "We have a program in place that              
 you can't be a general contractor unless you go through extensive             
 training on energy standards and then we're exempting loans under             
 this program from those."  Section 6 exempts projects constructed             
 from construction standards.  He then quoted part of this section             
 as well.  Section 9 allows unsecured loans for borrowers with                 
 either restrictive deed lands or with no title at all.  He                    
 seriously questioned whether the state should be in the business of           
 making loans on buildings with no title or with restrictive deeds.            
 He suspected under these provisions that they would see an increase           
 in defaults because of a lack of collateral, a lack of building               
 standards, and a lack of standards for energy.  He stated that he             
 won't be supportive of the passage of this bill.                              
 Number 700                                                                    
 MR. BITNEY noted that the exemptions of this legislation are in               
 place just for the building materials loan program.  This program             
 is only for loans up to $20,000 to cover materials.  Any kind of              
 construction or financing for a regular home and for any of their             
 other programs, these homes will still have to meet the standards             
 which Representative Ogan outlined.  With this program, these                 
 exemptions are included because the loan for materials is small.              
 Once someone does work on their home, if the project is required to           
 meet these standards, they are required to fly an inspector or a              
 rater into a village to inspect the project.  The cost of the                 
 flight and the fee for the inspector would constitute a fairly                
 substantial percentage of this small loan.                                    
 MR. BITNEY stated that the unsecured loans feature of this                    
 legislation is unique to the rural areas because of the land that             
 is out there.  The default rate for rural loans runs about equal to           
 urban loans.  Yesterday, the 30 day delinquency rate was 6.5 for              
 rural and 6.2 for urban.  Alaska Housing Finance is a profit making           
 corporation.  There is an expectation on the corporation to                   
 generate annual profits of net income of the corporation of                   
 approximately $100 million which they split between giving back               
 money to the state and providing for capital expenditures.  They              
 look to continue this effort and to make good paying loans.                   
 Number 822                                                                    
 REPRESENTATIVE OGAN stated that he thought the intention of this              
 legislation was honorable.  He worried about authorization of                 
 $20,000 unsecured loans without inspections.  He didn't see any               
 mechanism to keep people from, "Well, you know, I got the 20 grand,           
 you know, spend 5 on some materials to make it look like I'm doing            
 something and spend another 15 to buy a skiff or snow machine or              
 something.  And, there's no collateral or -- it seems to me that              
 we're lowering the standards quite a bit with some of these                   
 provisions."  He said he would appreciate hearing anything to                 
 alleviate these concerns.                                                     
 Number 863                                                                    
 MS. MURPHY responded that the intent of the language to delete the            
 requirement for compliance with those particular state statutes               
 have come about as a result of the type of loans they have been               
 requested to provide financing for.  The statutes regarding energy            
 standards and construction standards apply to any new construction            
 that started after (indisc.) December 31, 1991, and for the                   
 construction inspections after June 30, 1992.  They support, very             
 strongly, energy standards and construction standards for anyone              
 building a new house.  It's in the borrowers best interest, as well           
 as the corporation's best interest to comply with the minimum                 
 energy standards in the building inspection.  The way the statutes            
 are written for the construction inspection is there has to be five           
 different inspections during construction.  She gave a rundown of             
 what these were.  In a lot of cases, these various inspections                
 don't apply to these small loans that are used to buy materials to            
 repair a roof, install a new well, etc.                                       
 MS. MURPHY continued in response to the scenario purchase of a boat           
 with this loaned money.  She stated that these are direct loans               
 from the corporation.  They disburse the funds based on percentages           
 of completion of the project.  They require evidence from the                 
 borrower to show the materials purchased.  If it's in an area where           
 they know an individual is available to look at the project for               
 them, they require an inspection report.  They don't make a $20,000           
 loan and write a check to the borrower.  These funds are put in a             
 controlled account and as the work proceeds, they disburse the                
 funds, either to the borrower or to the borrower and the supplier             
 who provided the materials.  They require an estimate of costs,               
 plans for what the improvements are, etc.  They inspect the project           
 when it's completed.                                                          
 Number 1025                                                                   
 REPRESENTATIVE JOULE commented that this legislation provides an              
 opportunity for people to fix up their current situation by doing             
 the work themselves while not worrying about high costs.  This                
 allows them to make these improvements at a rate they can afford.             
 $20,000 for people in rural areas and the hub communities goes a              
 long way to make the living conditions better.  This also lessens             
 the demand of further requests for federal housing and other                  
 Number 1086                                                                   
 REPRESENTATIVE KOOKESH stated that one of the nice things about               
 being in urban Alaska is that there are banks available, along with           
 available jobs and that needs are met when there are housing                  
 problems.  He said it's good to take care of Alaska as a whole and            
 to not just think of the sections of the state that they represent.           
 Alaska will be a better place if they all make it a better place.             
 Rural Alaska is as much a part of Alaska as urban Alaska.  As small           
 as this program is, it will benefit Alaskans.  He felt they needed            
 to encourage this type of development in Alaska because it makes              
 Alaska a better place for everyone.                                           
 Number 1132                                                                   
 CHAIRMAN IVAN made a closing remark concerning the legislation                
 before them.  He believed that this legislation will extend the               
 opportunity for individuals to have pride and responsibility in               
 taking care of themselves.  They are there to stay.  Everybody else           
 in the community realizes that if an individual takes advantage of            
 this program it extends opportunity and responsibility to                     
 individuals in the entire area of the state.                                  
 Number 1177                                                                   
 REPRESENTATIVE RYAN moved and asked unanimous consent to move HB 70           
 out of committee with individual recommendations and accompanying             
 zero fiscal note.  Hearing no objection, HB 70 was moved out of the           
 House Community and Regional Affairs committee.                               

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