SENATE BILL NO. 150 "An Act relating to interest rates for small community housing mortgage loans under the housing assistance program of the Alaska Housing Finance Corporation." This was the first hearing for this bill. DAN FAUSKY, CEO/Executive Director, Alaska Housing Finance Corporation, Department of Revenue, came to the table at the request of Senator Al Adams. Senator Al Adams wanted to know how much money would be made in rural Alaska using the one-percent proposal. In looking at the rural versus urban situation, he wondered how much money had been spent on this program in Anchorage. Senator Al Adams knew it was required that a portion of the earnings of this program be spent on certain housing programs. He asked where the proceeds of the one-percent interest rate went. Did they really go to rural Alaska or were they spread among communities across the state? Dan Fauske responded that the majority of the subsidized loans or enhancement programs went to Anchorage. That was a condition of the population base. He listed figures showing that. Regarding the consideration of removing the one-percent interest rate provision for rural Alaska, he noted the corporation could make more money if the percentage was increased. He anticipated however, that if it were eliminated there would be about a 16 percent drop in loan portfolio activity. Therefore, the program would break even and there would be no gain. He pointed out that in rural areas, and even less rural areas by Alaska standards, mortgage insurance could not be obtained. Therefore, if there were not a subsidy of some sort more down payment money would have to be required from residents. He explained that the rate established in statutes was one- percent of the taxable rate would have been had bonds been issued. This was a revolving fund and bonds were not sold to fund it. Generally, once the one-percent was removed, compared to a tax of the program, the rate was the same on a thirty-year mortgage. The rural program would exceed the tax-exempt program by an eight of a point for a fifteen- year mortgage. Senator Al Adams asked if the rural communities along the road system would be affected by this legislation. Dan Fauske answered that the current program required the population of communities along the road system had to be 1600 residents or less to qualify. Off the road system, the population requirement was 6500. The corporation had discussions with some realtors who would like to see those limits raised. He noted the program had tripled over the last three years. He listed the number of loans done in various rural communities during that period. Another concern raised was with communities that were annexed into a borough. Those residents would no longer qualify for the program. This had happened for areas in the Kodiak Island Borough and the Haines Borough. Dan Fauske believed it was a program that was necessary. Whether it stood up to strict economic standards was another issue. Charging a higher interest rate could always make more money. His concern was with the mortgage insurance. Senator Randy Phillips asked if the criteria for the program were the same for every person in Alaska regardless of where they lived. He noted the different number of loans given in various communities Dan Fauske said it was the same. Senator Randy Phillips asked if this applied to all of the programs the corporation offered. If the criteria were different, he felt it should be examined. Dan Fauske agreed. The only differences were found in the urban areas because of access to amenities such as ease of access or the quality of the property. Senator Randy Phillips asked about the mortgage insurance. Dan Fauske said that under the program, the borrower would still have to pay a ten-percent down payment. AHFC then assumed a part of the risk that would normally be covered under mortgage insurance. Under most programs, more than ten-percent would be required to obtain mortgage insurance. That was just the way the industry operated, he stressed. Senator Dave Donley was entertained by the witness testimony that if the subsidy was removed, fewer people would borrow money and the corporation would make the same amount of money. That seemed to argue for extension of the one-percent program to all Alaskans. Dan Fauske did not disagree. He was only trying to make an analogy and he didn't know how much business would be lost with the elimination of the one-percent provision. Senator Dave Donley referred to the comments that the rural loans were more difficult to make, which was the reason the AHFC was involved. For that reason, he doubted the private sector would choose to pick up the estimated sixteen- percent drop. Senator Dave Donley then noted the Boundary Commission's latest report that specifically identified this program as one of the most problematic and biggest inhibitors of the formation of local governments. This was because communities would not qualify for the program if they joined or formed boroughs. In his opinion, the lack of formation of local governments was one of the biggest problems facing the state today. He asked if the witness could propose a solution. Dan Fauske responded that the corporation was not trying to advocate a program that was based on these problems. He hoped to alleviate the problems associated with the qualifications of some properties based on which side of the road they were located. He had heard this concern from realtors. Senator Dave Donley made further comments on the formation of local boroughs. Senator Dave Donley then pointed out that other programs operated by AHFC applied to all Alaska's regardless of where they lived. He used veteran, disabled and first time homebuyer programs. This program was only available to those people who met a particular discriminatory category, in his opinion. Senator Randy Phillips noted he had potential conflict of interest because he works for a mortgage company. He offered a motion to be allowed to abstain from voting on the bill. Senator Dave Donley objected and the motion was denied. Senator Loren Leman asked if the intent was to increase the rate in the rural area market using the one-percent provision. He wanted to know why the corporation didn't reduce the rate charged in the rest of the state instead. Dan Fauske responded that the other programs were bonded programs that were driven by the rate the bonds could be sold. This program was established as a revolving fund so the rates were calculated. The corporation was exploring other options with regard to universal statewide programs. He noted that there were limitations under the tax-exempt programs for income limits that were established by the federal government. Co-Chair John Torgerson introduced Alex Grundmann, age 13, who was visiting the committee as a participant of Take Your Child to Work Day. He was serving in the capacity of co-chair. Senator Al Adams asked if of the money earned from by the corporation how much was spent on this program. He also wanted to know if this money could be used to match the supplemental housing project in the capital budget. Dan Fauske answered that in terms what was spent on the total program, he only knew of only $200,000 that was spent on this subprogram. He would find out the actual figures and supply them to the committee. To answer the question on whether the arbitrage could be used for the CIP, he told Senator Al Adams that the arbitrage could only be used for a loan that met the same perimeters of what the bond was issued for. It had to be used for a loan with a reasonable expectation of repayment. Co-Chair John Torgerson noted the bill would not be reported out of committee this meeting. Tape: SFC - 99 #105, Side A BRUCE KOVARIK, Executive Director, Association of Alaska Housing Authorities, testified via teleconference from Anchorage. He had submitted written testimony. The association opposed the bill. It was clear to them that it would focus significant and adverse impact on the availability of affordable mortgage loans in rural Alaska. The bill would not save money and would further discourage private lending activities in rural Alaska. It would increase the cost of housing and lessen the economic development in areas of the state that needed it the most. He disagreed with Senator Dave Donley's assumption that this program was a special discriminatory subsidy. SUE BENEDETTE, Vice President, First National Bank of Anchorage and Co-Chair, Alaska Mortgage Bankers Association, testified via teleconference from Anchorage. FNBA lends on a statewide basis and found this program to be very successful in allowing it to lend to rural Alaska. It helped offset the higher cost of housing in rural areas. ROBIN WARD testified via teleconference from Anchorage. She stated that the bankers associations, the homebuilders and affiliated businesses viewed the AHFC as their own permanent fund. She would submit further testimony in writing. DAVE MCCLURE, Executive Director, Bristol Bay Housing Authority, and Board Member, AHFC, testified via teleconference from Dillingham. He had submitted a policy brief from HUD to the committee. It stated that home equity was the largest single source of household wealth for most Americans. A decrease in the interest rate exemption would have a negative affect on the number of loans made. He urged the committee to maintain the current program as a method of maintaining economic stability in rural areas. ANNE WHITNEY, President-elect, Katchemak Board of Realtors, testified via teleconference from Homer. The cost of living and the cost of construction was much higher in rural areas and that was one reason the one-percent provision was put into place. It did not cost AHFC any money. First-time homebuyers in urban areas were able to take advantage of other interest rate reduction programs. Therefore, this was not a fairness issue. ANGIE NEWBY, President, Katchemak Board of Realtors, testified via teleconference from Homer. This program had made home ownership possible for many people on the Kenai Peninsula. She listed the figures. BOB BRODIE, Assoc. Realty, testified via teleconference from Kodiak. He felt the committee missed the point. The object of AHFC was to make housing affordable for all Alaskans. When the interest rate was raised only one point many people were eliminated from qualification for home ownership. Instead of taking the program from rural Alaska, he supported Senator Dave Donley's suggestion to make all the AHFC loans one-percent lower than the market rate. That would pick up the revenue from those loans that typically went to FHA and Fanny Mae programs. BONNIE AULABAUGH, Broker, Chelsea Realty, testified via teleconference from Kodiak in opposition to the bill. She believed the program was set up to allow for loan programs in rural areas. She attested to the higher cost of home ownership in rural Alaska. ED MAHONEY, President, Kodiak Building Industry Association, testified via teleconference from Kodiak. The association opposed the legislation. The impact to the community would be substantial. Co-Chair John Torgerson ordered the bill held in committee. ADJOURNED Senator Torgerson with the assistance of Alex Grundmann recessed the meeting at 10:52 AM. SFC-99 (18) 4/22/99