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Audit: State housing board lacks financial expertise

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The agency responsible for financing affordable housing in California is lacking board members with "critical areas of knowledge and expertise," according to a report by state auditors [PDF].

The report indicates that inexperience with complex financial transactions likely contributed to the California Housing Finance Agency's loss of $335 million over a two-year period ending June 2010. Much of the loss was due to board decisions to use variable-rate bonds, interest-rate swap agreements and risky mortgage products, according to the auditors.

Despite the agency's financial troubles, "major housing programs and the fund (used) to pay operating expenses should remain solvent under most foreseeable circumstances," wrote State Auditor Elaine Howle in a letter to legislators that accompanied the report.

The 14-member board that governs the housing finance agency is responsible for authorizing the agency's sale of debt and approving major contracts. The composition of the board is determined by state law as follows:

  • Executive director of the agency (non-voting member)
  • Director of the Department of Finance (non-voting member)
  • Director of the Governor's Office of Planning and Research (non-voting member)
  • State treasurer
  • Secretary of the Business, Transportation and Housing Agency
  • Director of the Department of Housing and Community Development
  • Two legislative appointees
  • Four gubernatorial appointees who are either elected housing officials, public representatives of some sort, or experts in areas such as real estate banking, residential construction and low-income rental management
  • Two residents of agency-financed housing or people who work with these individuals, appointed by the governor
  • One resident of a rural or non-metropolitan area, appointed by the governor

The auditors noted in the report that while the state statutes are detailed in their descriptions of who is permitted to be a board member, they do not "require the inclusion on the board of individuals with knowledge of complex financial matters such as the issuance of bonds, interest-rate swaps and financial risk management."

The report includes a summary of an interview with the agency's executive director, L. Steven Spears, who confirms the auditors' analysis:

CalHFA’s executive director stated that, based on his experience with the board, he could see value in having more than one board member who has specific experience with and knowledge of overall strategies associated with the management of financial institutions, including various forms of risk management.

The executive director acknowledged that appointing powers sometimes use the 'public member' positions to appoint persons with this expertise, but stated that the CalHFA board has not consistently had representation by someone with this experience or knowledge among its appointed members.

With regard to the financial risk associated with the issuance of bonds, the executive director stated that he appreciates the contributions of the state treasurer (or his or her delegate) to CalHFA’s board, but does not feel that it is sufficient to have the state treasurer be the only one on the board with bond-financing experience.

The executive director explained that, to have real discussion, or even debate, about complex financial strategies, a group requires more than one person with a depth of knowledge or experience in this area; otherwise, too much deference can be given to the one person possessing the knowledge or experience.

The auditors recommended in the report that the state laws be modified to require the presence of board directors with specific knowledge of topics like bonds and related financial instruments as well as risk management.

 

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