Low-Cost Housing Agency Aids Its Chief’s Hometown

SACRAMENTO —  A state agency created to aid financially strapped renters and home buyers has increasingly used its $3.5 billion in bond proceeds to help those with above-average incomes buy homes--particularly around Fresno, the hometown of the agency’s director.

A Times review of the performance of the California Housing Finance Agency--picked by Gov. George Deukmejian to operate his proposed $2-billion first-time home buyers program--shows that it has turned away from the heavily populated areas where the need for low-cost housing is greatest.

Instead, five Central Valley counties have received more than half of the homes financed by the agency, with Fresno County getting more than any other since July 1, 1988.

Fresno received twice as many agency-financed housing units as Los Angeles, Orange and San Diego counties combined--an area with more than 20 times Fresno’s population.

The director of the agency, Karney Hodge, said that the tilt toward Fresno is beyond the agency’s control and has nothing to do with his own ties to the community or to his friend and political patron, Senate Republican Leader Ken Maddy, who is also from Fresno.

But critics of the housing finance agency charge that under Hodge, the agency has done little more than make reduced-interest mortgages available mostly to middle-income, first-time home buyers in parts of the state where land costs are cheap and housing is still relatively plentiful and affordable.

And while the agency is run with businesslike efficiency--winning an enviable AA rating on its massive bond issues--it has also become a prime example of the workings of political patronage in California.

Hodge, a clothing store owner and longtime civic activist, was Maddy’s campaign treasurer from 1970, when the lawmaker first ran for the Legislature, until 1983, when Maddy successfully persuaded Deukmejian to name his friend and political ally as housing finance director. The salary for the job, set by the agency’s board, is $96,516 a year.

Once established in his new position, Hodge hired several individuals with strong ties to Fresno or to Maddy. Among those brought into the agency were Maddy’s sister, Marilyn Brazell, and Maddy’s son Donald, as well as former Maddy legislative aide Fred Noteware. The Republican lawmaker, Brazell and Hodge are also part-owners of a condominium on Huntington Lake, a resort area about 50 miles northeast of Fresno.

Both Maddy and Hodge say emphatically that there is no connection between their ties to Fresno and the drift of the agency’s activity toward their hometown.

Maddy said that he has never asked Hodge to direct agency loan money to his home district or to hire relatives. “I’ve never solicited or pushed or asked for any project per se,” Maddy said in an interview. “I don’t really have any knowledge of any particular project that (has) gone through.”

When asked about his hiring practices, Hodge said simply: “You go to people you know.”

On the high proportion of agency-financed housing going to Fresno in the last two budget years--16% of all homes and apartments--Hodge told a reporter: “They’re going there because of the market. There’s no way to change that.”

However, Hodge and his staff say now that there will be changes. They plan to divide the state into six districts, each of which would get an equal share of housing mortgage money. (The new plan would give about 35% of the agency’s home mortgage money to Los Angeles, Orange and San Diego counties, which combined make up 47% of the state’s population.)

Program director Noteware said that in the past the agency’s senior staff met regularly to review bids from mortgage lenders and developers and committed its funds to those offering the lowest-cost housing without regard to location. Consequently, very little of the state money has gone to urban home buyers in expensive real estate markets.

However, the agency’s critics, including some members of the agency’s own board of directors, say that the Fresno bias is symptomatic of an agency that has lost sight of its original purpose: to provide low-interest loans to home buyers with moderate incomes and for apartment developments that offer cheap rentals to the poor.

“We did some things (to reach the poor),” said former board member James Hendricks, “but clearly it did not go far enough. I’d be the first to tell you I’m not proud of the scope and depth we went in this area.”

A Fresno developer and a Democrat, Hendricks said he was appointed by Deukmejian to the board because he knew Hodge and was a college classmate of the governor’s appointments secretary, Marvin R. Baxter.

Hendricks said he was baffled as to why he was appointed to a slot on the board reserved for a tenant’s representative. “I’m black. I’m a developer. I have apartments. It may have been stretching the point to say I was the tenant representative.”

Deukmejian’s deputy press secretary, Tom Beermann, said that Hendricks “qualified as a tenant’s representative because his background with the Fresno Redevelopment Agency and his position as Fresno’s assistant city manager put him in a position of being involved with tenant and low-income housing issues.”

Whatever his qualifications, transcripts of board meetings show that Hendricks was one of several board members to raise questions about the use of agency bond money.

One current member of the board is even more outspoken about the agency’s performance. Allen P. Baldwin, another Deukmejian-appointed tenant representative on the board, is executive director of the Orange County Community Housing Corp.--a nonprofit agency that builds and manages apartments for low-income families.

“I continue to get irritated watching these dollars go into projects in areas where housing isn’t a major problem,” Baldwin said.

“I am an executive of the largest housing finance agency in the nation,” Baldwin said. “If it’s not me who helps solve this problem, then who? Is it going to come from Idaho? Leadership and innovation have got to come from us.” Baldwin said he lacks support from other board members to make a difference.

The chairman of the housing finance agency’s board, Glendale-based real estate developer Sebastiano Sterpa, is much more enthusiastic about the agency’s performance under Hodge.

“Karney’s done a super job,” he said. “He has transformed an agency that was floundering around. . . . The amazing thing is (when he took the job) he didn’t know anything about the agency or the intricacies of capital markets.”

Sterpa, a past president of the California Assn. of Realtors, has had direct financial ties with the agency’s director. Financial disclosure statements show that Hodge invested in a real estate partnership put together by Sterpa. Hodge reported putting more than $10,000 into the deal; Sterpa put in more than $100,000.

Hodge said that joining in an investment with the chairman of his board did not represent a conflict of interest. “It’s just a syndicate he (Sterpa) put together to buy a building,” Hodge said. “I didn’t even give it a second thought. He was looking for investors. It has nothing to do with housing.”

Since it was created in 1975 “to meet the housing needs of persons and families of low or moderate income,” the California Housing Finance Agency has become one of the state’s largest real estate lenders. It has more than $3 billion in bonds outstanding--money it uses to finance mortgages for individual homeowners and apartment developments.

Because earnings on the agency’s bonds are exempt from state and federal taxes, bond purchasers are willing to accept lower-than-market interest rates on their investment. The reduced rates are passed along to qualified developers and first-time home buyers. Current California Housing Finance Agency mortgages charge about 8.3%--as much as 2% below conventional rates.

First-time home buyers can earn up to the median household income for their counties--or 115% of median income if there are three or more in the family. The loan can be used toward a sales price up to 90% of the county average. In Los Angeles County, a couple earning up to $47,800 is eligible to purchase a new house or condominium for up to $172,700 under the agency’s loan program.

The agency has always relied on fees charged to lenders and interest earnings on its unspent bond funds to hire its staff and meet its ongoing expenses. Because of that, both Hodge and Sterpa like to talk about what the California Housing Finance Agency “is doing without government assistance.”

In fact, the agency depends heavily on the tax-exempt nature of its bonds to make its programs work. The nonpartisan legislative analyst has estimated that every $1 billion in tax-exempt bonds costs the federal government as much as $25 million and the state as much as $8 million in lost taxes each year.

In its early years, the housing finance agency maintained a balance between financing apartments and individual mortgages--between mostly low-income renters and generally more affluent first-time home buyers.

But that has changed dramatically, in part because of changes in federal rent subsidy programs and federal tax law. Hodge and others say that the withdrawal of federal subsidies and changes in the tax laws discouraging investment have left the agency with little flexibility to respond to the housing crisis in California.

In the last nine months, the agency financed 4,402 home purchases and just 211 apartments. Only 99 of those homes--and none of the apartments--were in Los Angeles County, the state’s most populous county.

The legislative analyst’s office has identified another trend in current housing finance agency programs: 42% of those who took advantage of the agency’s first-time home buyer program last year had income levels above the official state definition of “moderate income.” In Los Angeles that means an annual income of more than $41,050 for a family of three. Only 11% of the loans went to low-income households.

Responding to concern that home ownership is increasingly beyond the reach of middle-class Californians, Deukmejian has asked the Legislature to add $1 billion to the agency’s existing first-time home buyer program and to create a $1-billion program for households with even higher income levels.

The new program, which would require a $20-million-a-year subsidy paid directly by state taxpayers, would make mortgages available to individuals and families with incomes substantially higher than median income in many high-cost counties. To be eligible for state-subsidized mortgages, the home buyers could have annual incomes up to 35% of the average sales price for houses in their areas.

In Marin and San Mateo counties, for example, the program would allow a family of three earning up to $83,699 a year to qualify for a state-subsidized mortgage on a house or condominium purchase up to $239,140.

Housing finance agency board member Baldwin complained that Deukmejian’s plan--like the agency’s existing first-time home buyers program--would help “a lot of yuppies.”

Said Gary Squier, former director of the Los Angeles Housing Authority and now a housing consultant: “The crisis is in multifamily rental housing. But the political expression of housing needs is in home ownership.”

In Los Angeles, for example, the city housing authority has a list of 93,000 people waiting for 3,500 subsidized rental units expected to open up this year.

More than most offices of state government, the California Housing Finance Agency is independent of the governor and the Legislature. It is not even subject to the usual budgetary review. And more than most agencies, the housing finance agency bears the stamp of the man that Deukmejian appointed to run it, Karney Hodge.

“Before Karney, the management aspects of the agency were out of control,” said a staff member who asked that he not be identified. But he and other employees complain that Hodge has emphasized fiscal strength and control at the expense of innovation in helping low-income Californians.

Hodge at 62 is a hardy, gregarious man. All but the most bitter of the agency’s critics describe him as likable, even charming, and uncannily adept politically.

He is a man too energetic to be content with running his family’s clothing business in Fresno, where he was a community dynamo. But he and Ken Maddy leave no doubt it was Hodge’s longtime association with Maddy--dating back to Maddy’s work in the Hodge store when he was a college student--that got Hodge his current job.

“I was the first major officeholder who came out for Deukmejian early on (in 1982),” Maddy explained. “So I had input into the whole process of structuring (the Deukmejian) team, and so I suggested to Karney to come up here.”

Some outsiders contend that without Hodge at the helm of the agency and without Maddy’s support, Deukmejian might have ignored the agency and housing issues generally throughout his two terms as governor.

“Without Karney, the agency would have withered and died, “ said one developer, who recalled that as a state senator, Deukmejian had strongly opposed legislation establishing the agency.

But there is a strong sense among those who follow the activity of the low-profile agency that it might have done better.

Hendricks said he has “a gut feeling” that the agency should be doing more for the poor. “If you ask the question should there be more, the answer is yes.”