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The California Housing Finance Agency, which makes low-interest loans to first-time homebuyers, is taking an unusually strict and costly stand against borrowers who rent out their homes, foreclosing on some even though they are current on their mortgage payments, state overseers say in a new report.

In a report released this morning, the California Senate Office of Oversight and Outcomes faults the California Housing Finance Agency for foreclosing on homeowners who move into larger homes, often renting out their first ones because they cannot sell them in the weak housing market.

Each foreclosure costs the agency more than $50,000 in uninsured losses, according to the report, "Good Deeds Punished: State-Run Mortgage Lender Forecloses on Californians Current on Their Loans."

The agency says it interprets federal law to prohibit renting, but the report found the policy is stricter than in most other states.

"It's the tax code that we're responding to," said Ken Giebel, the agency's director of marketing. "We do try to keep people in their homes, and we work with them if they have a hardship."

According to the report, the California Housing Finance Agency has foreclosed on at least 21 borrowers who were violating home-occupancy requirements. It said 49 more borrowers who rented out residences are delinquent and are "likely headed for foreclosure," and that 186 more are renting out their agency-financed homes without permission.

In response to the report, Senate President Pro Tem Darrell Steinberg, D-Sacramento, and Sen. Mark DeSaulnier, D-Concord, sent agency Executive Director Claudia Cappio a letter urging the agency to "revisit its owner-occupancy policy with an eye towards formulating a more flexible approach."

"Clearly, many of the borrowers described in the report did not set out to become landlords," the senators wrote. "Far from making money, these borrowers are accepting significant losses in an attempt to live up to their mortgage commitments."

Read the full report here.

Editor's note: Post updated at 2:25 p.m. to include Giebel's remarks and 2:48 to include Steinberg's remarks.


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