An open letter to Sacramento and Congress:  firsttuesday’s legislative proposals for a stable, more vigorous California real estate market.  The most recent updates are shown in red. Proposed changes enacted by the California Legislature are shown in green.

Updated 02/01/21

General

CALIFORNIA: Foregoing needless political correctness in legislative language

This legislation would end the practice of using or needlessly updating legislation to include pronouns correcting gender. Instead of using “he” or “she”, we propose the use of the pronoun “they” to convey male and female, both singular and plural. This would serve to clarify law without creating an unnecessary division of gender, and prevent the legislature from spending valuable resources on extraneous updates of legislation merely for the sake of political correctness.

CALIFORNIA: Correcting urban zoning along metro lines to promote higher density housing

Zoning to allow a higher amount of multi-family housing developments alleviates the rental crush, and frees up funds for down payment savings. More housing units meets excess demand and organically keeps rents from escalating beyond the reach of long-term neighborhood residents. Additionally, more residents moving to the area is a boon to local businesses, local tax revenues and commercial startups.

Related articles:

Change the law: amend zoning laws to promote multi-family construction

CALIFORNIA: Including economics in all standard high school curriculum

Standardizing a more comprehensive economics education prepares students for their future as participants in a capitalist system. Mandatory econ-education provides them with information to help them plan for financial decisions, like residential leasing and a home purchase, comprehend recessions and recoveries and understand how asset markets function.

Related article:

Change the law: Require financial literacy for high schoolers

Property Disclosures

CALIFORNIA: Requiring a Criminal Activity Disclosure Statement on all single family residential (SFR) sales

Criminal activity undisclosed by the seller and their broker constantly results in an asymmetry of critical property information between them and the buyers and their selling agents. Prospective buyers are not presently provided known information on criminal activity at the property or in the area. Buyers might value the property differently if they actually know what the sellers and the seller’s agents know regarding relevant criminal activity — the sole reason known or readily-available material facts are disclosed. [See RPI Form 321]

Related article:

Change the law: Require disclosure of criminal activity on SFR sales

Safety disclosures: crime and the prospective buyer

CALIFORNIA: Requiring a statement disclosing an SFR’s operating expenses

Prospective homeowners (especially those taking the leap from tenancy to first-time homeownership) need to be informed about the full cost of owning and operating a home as a standard matter of seller and seller’s agent conduct. An SFR’s operating data is known and readily available to the seller and their agent, is not known to the buyer, and if it were known might alter the buyer’s pricing of the property on a comparison of its operation costs with other available properties. This disclosure would be very similar to the Annual Property Operating Data (APOD) ever present on the sale of income properties. [See RPI Form 306]

Related article:

Change the law: Require a statement disclosing an SFR’s operating expenses

CALIFORNIA: Applying use of the agency law disclosure to all properties

Currently, the agency law disclosure applies to all residential and commercial properties sales except for two-to-four multi-family residential units and lease transactions with lease terms longer than one year. Expanding the use of both the agency law disclosure and agency confirmation provision to include all residential, commercial and land transactions ensures proper disclosure of agency relationships in all real estate transactions.

Related articles:

Universal agency disclosure – the rules of professional relationships

Expanded agency disclosures: the trade union balks at transparency

Agency law for commercial brokers – shedding light on conduct

Landlord/Tenant Relationships

CALIFORNIA: Granting anti-accrual protections for non-paying residential tenants

Like defaulting owner-occupants who receive anti-deficiency protection against their purchase-money mortgage debt for housing, limiting the mortgage holder’s remedy solely to the value of the property when the owner-occupant fails to make monthly payments, defaulting tenants also need equal-type protection for their leasing arrangement debt for housing, limiting the landlord’s remedy solely to recovery of possession of the property when the tenant fails to make monthly payments. To equalize the risk of loss for the landlord under an anti-accrual rule, a sufficient security deposit is needed that covers the landlord’s losses accrued during a diligent effort by management to promptly serve the tenant with all notices required to evict for failure to pay rent. A lack of diligence in serving documents means an increase in the landlord’s risk of loss, the duty to mitigate losses by re-renting already existing in landlord-tenant law.

Related article:

Change the law: Grant anti-accrual protections for residential tenants

CALIFORNIA: Establishing parameters and time periods for late charges on residential rentals

Unregulated late charges lead directly to their unlawful use by landlords as penalty amounts, windfalls unrelated to the cost of collection or loss of use of the late payment. Case law so dictates, but is ignored or gamed by discounting rent if paid before it’s delinquent. Late-charge legislation controlling mortgage lender late charges, the grace period for delinquencies and restrictions on duration and amounts of mortgage prepayment penalties has kept lender conduct in line with the best interests of society, limited to the lender’s actual costs — no profit permitted for collection efforts.

Related article:

Change the law: Establish laws for late charges and grace periods in residential leases

CALIFORNIA: Establishing statutory late charges and grace periods for residential rental and lease agreements

Late charges for delinquent rent payments under rental and lease agreements need to be set by statute, just as they are with mortgage payments. The necessity for a universal statutory limit on delinquent rent is simple: to avoid abusive and excessive late charges in the rental of a dwelling.

Housing – shelter – cannot be subject to punitive extraction by vengeful landlords. Consider a grace period of ten days (home mortgage payments currently have a 15-day grace period) with a maximum late charge of the lesser of $35.00 or 5%. Only one late charge may be imposed for any delinquency until it is brought current. A payment made during the month following the nonpayment or late payment is counted as an on-time payment for the next month’s rent, just as with mortgage payments. Thus, late fees do not compound from month to month when the tenant falls one month behind.

Related article:

Change the law: Establish laws for late charges and grace periods in residential leases

CALIFORNIA: Eliminating rent control across the state

Rent control is intended to prevent rents from rising beyond the financial abilities of long-term tenants. In theory, this creates more stable neighborhoods since tenants won’t be constantly forced out due to rapidly rising rents. However, this arrangement makes a perversion of the landlord/tenant relationship as landlords benefit from encouraging their tenants to leave by various means so they can legally demand higher rents from new tenants. More importantly, rent control removes the motivation for city councils to zone for more rental units to be built in the area. Eliminating rent control in favor of less restrictive urban zoning allows for more residential developments to meet increased demand and help stabilize rental rates.

Related article:

Change the law: Eliminate rent control in favor of more low-income housing

Lending

CALIFORNIA: Create a state agency that lends to small residential builders

California’s housing shortage has escalated during the past decade, causing prices to rise well beyond the rate of incomes and contributing to lower homeownership rates, rising homelessness and a decreased quality of life. We propose the creation of a new state agency to lend to builders who will use the funds to construct more housing to be set aside for renters or owner-occupants. The funds will come from California’s budget surplus.

Related article:

Change the law: Create a state agency to fund small residential builders

CALIFORNIA: Implement a down payment savings account program for first-time homebuyers

Slow wage growth and excessive rent rates have prevented many first-time homebuyers from saving a down payment to purchase a home, the economics of which will take years to correct. To incentivize saving, the California legislature needs to create a program that provides savings accounts with tax-free income as deposits, tax-free interest income and employer tax-free contributions used exclusively as a down payment to purchase a residence they will occupy.

Related article:

Change the law: Start a down payment savings program for first-time homebuyers in California

CALIFORNIA: Add statutes barring lenders from using state law trustees and courts to foreclose on a call under a due-on clause

California law bars lenders without state law justification from calling a mortgage on a transfer of title to a creditworthy buyer. However, lenders can enforce the due-on clause under a 1982 federal law using federal courts, not state courts or trustees. Amending state law to bar lenders from foreclosing due to a call on a transfer triggering the due-on clause will protect buyers who take title to property subject to an existing mortgage — sometimes called an assumption — from the fees and interest rate/payment modifications lenders use solely to extract windfall profits. These revisions will promote a more vibrant real estate market as buyers will be more likely to purchase homes by assuming existing mortgages in the coming decades of rising interest rates.

FEDERAL: Phase in the Qualified Residential Mortgage

firsttuesday is in favor of a phased-in QRM. Rather than overwhelming the recovering real estate market with full-blown standards right away, a gradual introduction of the QRM starts by requiring a 5% down payment. As employment levels increase, the minimum down payment standard is increased. Eventually, the down payment will reach the ideal 20% in seven to ten years when the economy’s potential has fully recovered from this financial crisis. This achieves the long-term goal of greater housing market stability during future recessions. In the process, the short-term lack of qualified buyers is avoided.

Related article:

CFPB issues mortgage underwriting standards: down payment requirement to come

FEDERAL: Reinstate California’s restraints on lender use of “due-on” clauses

Property owners must be able to freely transfer property and buyers take title subject to any encumbrances of record (as they could before lender de-regulation in 1982) without title being fettered and sales inhibited by lender interference through demands for exactions to permit a transfer of the property. Lenders should not be able to seize the opportunity on receipt of a request for a beneficiary statement sought in a transfer/sales escrow to increase their portfolio yields by exacting assumption fees in excess of credit analysis costs to analyze the buyer and modifying interest rates, payment schedules, due dates, etc. simply because the property is security for a mortgage.  California can implement this policy by denying a mortgage lender the right to use a trustee’s non-judicial sale or California courts in a judicial sale in an effort to enforce a call based on a transfer of the property to a creditworthy buyer.

FEDERAL: Returning mortgage principal reduction power to bankruptcy judges

In order to force lenders to take serious steps towards meaningful loan modifications for insolvent negative equity homeowners, lenders must have competition to do so in the form of judicial cramdowns in bankruptcy (as they did before 2006). The return of hundreds of thousands of California homeowners to solvency is a social and economic good voluntarily accomplished by the lender or involuntarily imposed on them by the bankruptcy courts.

CALIFORNIA: Discontinuing the CAL-VET program

The CalVet program is a California government-operated financing scheme which issues bonds to fund variable rate mortgages made to veterans. CalVet mortgages are structured as archaic land sales contracts with title vested in the name of CalVet, not the veteran buyer. CalVet loans are more stringent and restrictive against the veteran-borrower‘s  rights of possession and equity financing arrangements than a mortgage insured by the Federal Housing Administration (FHA) or the federal Veterans Administration (VA). They are also peculiarly all variable interest rate loans, which should not be the staple of any stable mortgage program sold to anyone other than the wealthiest among us who can absorb the risks of ARM type mortgages, and especially not of one that is run by the state government. The CalVet program is an unnecessary burden on both the administration of the state and on veterans and should be discontinued and phased into the private mortgage banking sector over time.

FEDERAL: Changing federal housing policy to provide mortgage assistance by eliminating the MID

A federal amendment to create a mortgage payment assistance program, comparable to Section 8 housing for tenants, will help promote homeownership and benefit more homeowners. Eliminating the mortgage interest deduction (MID) recovers lost revenue from the wealthiest homeowners who currently disproportionately benefit from MID, and redirects funds to assist homeowners in need. Further, elimination of the MID avoids the resulting artificial price inflation.

Related articles:

Change the law: Eliminate the MID and create a mortgage assistance program

Subsidize the down payment, not the mortgage

Licensing/DRE

Prohibit the California DRE Commissioner from holding memberships in real estate trade organizations while in office

The California Department of Real Estate (DRE) Commissioner and designated DRE employees are prohibited from receiving honoraria and are limited from receiving gifts. The DRE commissioner is also required to disclose all investments, business interests and positions in real property and income. But they are not prohibited from maintaining membership in real estate trade associations while in office. Limiting DRE involvement in real estate trade unions draws firmer lines between the DRE’s mission to safeguard public interests and the interests of private enterprise. Therefore, firsttuesday proposes to prohibit the DRE Commissioner from maintaining memberships with a real estate trade association.

CALIFORNIA: Require a licensee who operates as a team leader to hold a broker license

A real estate team is a group of real estate licensees who pool resources and leads to promote and expand their practice. A team consists of two or more licensees, none of which needs to be a licensed broker. While they are still technically under their employing broker’s supervision, in practice teams can perform very independently from the rest of the brokerage. This leaves the employing broker open to risks. These risks can be mitigated by requiring the team leader to be a licensed broker, who by virtue of their license has more education and typically more experience than sales agents.

Related article:

All about real estate teams

 

CALIFORNIA: Require arbitrators to report licensees they find violate real estate law

Many real estate disputes are resolved through private arbitration due to the arbitration provision found in trade union forms. However, arbitration proceedings are not public record. Thus, those real estate licensees who violate real estate law are not made public or known to regulators. Imposing a duty on arbitrators to report violations of real estate law by licensees in cases before them to the Department of Real Estate (DRE) for remedial disciplinary action ensures unethical, dishonest or grossly negligent licensees are subjected to a licensing review. This exposes improper conduct in the real estate industry to better protect members of the public who seek out and use licensed real estate services.

Related article:

Change the law: Require arbitrators to report real estate law violations by licensees

CALIFORNIA: Reestablish the DRE Code of Ethics

The DRE repealed its Licensee Code of Ethics in 1996 under pressure from deregulation hawks. Resurrecting the DRE code of ethics will provide a background of ethical conduct, regulated by the DRE, for every broker and sales agent licensed in the state of California, regardless of union affiliation.

Related articles:

Change the law: Reestablish the DRE code of ethics

Real(i)ty check: resurrect the DRE Code of Ethics

CALIFORNIA: Real estate licensing for the industry’s “gray area” practitioners

This legislation would require all individuals providing real estate sales and property management services to be licensed, regardless of citizenship or residency status. Those who work in the industry must be policed if we are to protect real estate consumers from dishonest conduct — no matter the characterization of the individual who is the source of the service. Issuing licenses to all honest individuals operating as agents in California and controlling them through the DRE’s present structure (as they did before the early 1990s) is better than adding a requirement for escrow officers to verify (police) licensing before disbursing broker fees.

Update: Beginning in 2019, the DRE is no longer able to require information on a licensee applicants’ citizenship or immigration status, nor is the DRE able to reject a licensee applicant solely based on their citizenship or immigration status.

Related article:

California DRE now prohibited from requiring information on licensees’ citizenship, immigration status 

CALIFORNIA: Mandating the disclosure of an employing or corporate broker’s license number on all first-point-of-contact materials

This legislation would require sales agents and brokers who represent real estate consumers to disclose the DRE license number of their employing or corporate brokers in addition to their own DRE license number on any materials meant to be the first point of contact with real estate consumers. This legislation would provide greater transparency to the consumer and compel employing brokers to more closely monitor the actions of the licensees working under their direction.

Update: the requirement to disclose an employing broker’s identity in advertisements was enacted in October 2016 and became effective January 1, 2018.

Related article:

Updated identification requirements for DRE licensees on signs and advertising

CALIFORNIA: Establishing a DRE Office Management endorsement, and an apprenticeship requirement for new sales agents

Increased scrutiny is required to straighten brokers’ lax oversight of sales agents, a negligence which helped bring about the Great Recession and the current lack of public confidence in real estate licensees. Brokers with more than three agents working under their license will be required to obtain a California Department of Real Estate (DRE) endorsement for Office Management, subject to an additional three to six hours of continuing education and an annual renewal fee as set by the DRE, say $25. Additionally, newly-licensed sales agents need to be “apprenticed” to a broker for a period of two years before they can directly act on behalf of a broker with a client. The same sort of training and timeframe is currently required of appraisers, who are in positions to be of far less harm to the public than wayward and unschooled agents.

Related article:

Change the law: Require an apprenticeship period for new agents

CALIFORNIA: Requiring real estate syndicators to be licensed by the DRE

A DRE license not only lends a syndicator credibility, but it helps protect consumers from potentially risky investment activity. Just as real estate transactions open consumers to possible misrepresentation and fraud, so do real estate syndicates. Therefore, requiring syndicators to be educated on the many laws created to protect consumers and investors will only benefit consumers.

Related article:

Change the law: Require syndicators to be licensed by the DRE

CALIFORNIA: Creating more rigorous standards for the Real Estate Commissioner

The California Real Estate Commissioner is in a position to provide needed guidance and commentary on proper licensee conduct. However, the Commissioner has yet to fully use their pulpit to discuss pervasive agency issues in the industry. Requiring the Commissioner to engage with the licensee population ensures proper enforcement of real estate regulations and provides licensees with continued guidance about proper behavior and industry standards to protect the public from misconduct.

Related article:

The DRE reborn: recovering $4 million annually for licensees

Taxation

CALIFORNIA: Exclude underdeveloped properties in high-value locations from Prop 13 reassessment limitations

State property tax law needs to allow for the regular reassessment — not merely on a change of ownership — of commercial and multifamily zoned properties in high-value, urban locations unless owned and occupied by a person over 65. Prop 13 currently prevents long-held properties in metro regions from being reassessed, keeping the cost of ownership low. This preference allows owners to hold underdeveloped property without economic compulsion to develop them. A “highest and best use exception” would ensure properties in high-demand and high-population urban districts — for example, those near metro stations, commercial districts or city centers — are reassessed to their best use value.  Thus, the loss of static property taxes creates a significant financial incentive for property owners to develop existing properties for use as multifamily housing structures and meet the needs of local tenants.

CALIFORNIA: Oversight of qualified intermediaries in §1031 exchanges

Unbelievable as it may be after decades of thievery or gross negligence, no entity, either government or private, is responsible for the oversight of intermediaries in a §1031 exchange. To protect investors and their brokers from negligent or unscrupulous intermediaries, the Attorney General should be authorized to register and regulate these individuals before they can hold themselves out as intermediaries and accept funds or title to property.

Related article:

Change the law: Oversight of qualified intermediaries in §1031 exchanges

CALIFORNIA: Requiring licensees to discuss known tax aspects of a transaction as part of their fiduciary duties

Brokers and agents do not currently have to disclose their knowledge of pertinent tax consequences of a real estate transaction to their principal client, even when they are aware of the repercussions; repercussions which exist in every real estate sale. This legislation would mandate the disclosure to a client of known tax aspects of a transaction in an effort to combat the wide-spread phenomenon of the “dumb agent” — the agent of larger brokerage operations who, despite their knowledge, is legally allowed to remain silent about consequences known to them in a property sales transaction.  A preprinted, boilerplate advisory to see another professional if you have concerns about the tax aspects of a transaction does not disclose the agent’s knowledge, which if disclosed might affect the client’s decisions – and thus is a material fact deceitfully omitted.

Related article:

Change the law: Require agents to disclose known tax information

CALIFORNIA: Amending Proposition 13

Prop 13 permits investment companies to avoid paying property taxes as long as they do not transfer more than 50% of their ownership interest to one person or entity. This major loophole deprives local and state governments of revenue that vested owners cannot avoid paying. Meanwhile, homeowners carry the burden of paying increased property taxes with no ability to obtain relief as is available to passthrough entitles such as partnerships and LLCs. Amending Prop 13 to trigger reassessment on the transfer of, say, at least 20% of an entity’s ownership interest ensures commercial property owners and wealthy investment groups are paying their equitable share of local taxes.

Related articles:

Change the law: close Prop 13’s corporate tax loophole

Do you have a suggestion for legislation that will support the responsible growth of the real estate market in California? Submit your suggestions to editorial@firsttueday.us.