ADU Construction Financing: Opportunities to Expand Access for Homeowners

- Well again, while not a panacea, certainly it can be an important ingredient in relieving this problem of having insufficient numbers of housing units in the United States. So with that, I'd like to begin by thanking and introducing two institutions without which our work wouldn't have been possible. Wells Fargo and KP Community Health. And we have representatives from each of them who are going to open up our discussion by saying a few words. So let me get begin by bringing on Amy Anderson from Wells Fargo, housing affordability, philanthropy to discuss about why she, or why Wells Fargo made the generous decision to help finance this work that my friends at Berkeley and I have been doing over the last year. So Amy.

- Thanks, Richard, really appreciate the opportunity to join the webinar this morning. Wells Fargo is really proud to support the work, the Turner Center for Housing Innovation, and specifically this report. The Wells Fargo Foundation is really eager to advance efforts to help with the production of accessory dwelling units. We really see it accessory dwelling units as an important way, as you mentioned to grow the supply of housing and to do it in a way that really gently inserts those units into single family neighborhoods, which is important because single family owned land really makes up a disproportionately large area of zone land, there's a lot of opportunity there. And of course it's a means to build wealth, particularly for moderate income and moderate wealth homeowners. You know, what we've seen is that as these land use regulatory changes have taken place here in California and increasingly in other states and communities across the country, really financing has emerged as one of the top barriers to that production. So this report really does a wonderful job of focusing, not just on financing that barrier, but a critical aspect of ADU financing, which is how to change those federal agency programs that can really play a central role in unleashing more private lending financing. I just also wanna highlight that I really like the way that this report digs deep into the details of these programs, which I think is really critical work to do when you're interested in making regulatory changes or statutory changes. And essentially it leaves us with a great roadmap for how to make changes. So really wanna thank the USC Lusk Center and Turner Center for this both enlightening and practical report. So I look forward to the conversation this morning.

- Thank you, Amy, for those comments, and thank you for remembering to mention Lusk at the end of your comments. Let me bring on Rachel Myers, who has the economic opportunity portfolio within Kaiser Permanente Community Health. Rachel, thanks again for your contribution to making this happen and for being here today.

- Absolutely. And thanks for the opportunity to welcome folks and to express our gratitude for this really important work as well. I think we're a funny participant in housing conversations, or at least we have been historically, I think more and more the connections between health and stable healthy, safe housing, affordable housing are becoming more and more known. At Kaiser Permanente, we really understand that housing is essential to a person's health. And so we're supporting Everest to end homelessness and advanced health equity and expand access to affordable housing by making impact investments through other types of partnerships like this one. In addition, sorta to Amy's comments we also understand that upstream of housing stability is, financial security and economic opportunity, and in many cases, lower income, lack of intergenerational family, wealth are perpetuating housing instability for certain populations. And so we see ADU at their best can be a really multifaceted solution. As Amy mentioned, and you Richard, increasing affordable housing stock and dense residential neighborhoods is a critical piece of the puzzle, but there is this potential to create revenue streams for low income homeowners too. And so we see those as drivers of health in our communities. And we also just understand that there's plenty more to learn and policy and practice changes to be made, to realize this potential and in particular to kind of examine the potential and the barriers of ADU being activated in a meaningful way for low income communities of color, homeowners of color in particular. And so we're just really grateful to have partnered with Turner center and USC Lusk Center to examine these questions in really thoughtful and meaningful ways to help us as a healthcare organization and an organization that's active in housing and also investor in the housing space to learn more and to share more with the field. So thank you so much and really looking forward to the conversation today.

- Thank you very much. And again, thanks to Kaiser for its support. And then with that, I'd like to now turn it over to Erika Poethig, we're thrilled to have someone from the White House, who is actually the person in the White House with respect to matters of housing join us today. One thing I can't help, but mention is that when it comes to understanding the role of zoning and impeding the ability of people to land in neighborhoods of opportunity, I think the Biden administration has done more, shown more understanding of what an important both social and economic phenomenon this has been and has been very constructive in trying to develop programs in order to overcome these very long standing barriers to making housing available in places where people need to have it. So I'm especially thrilled, Erika has had a wonderful career, MacArthur Foundation at the Urban Institute, and now at the White House. Erika, thank you very much for being with us this morning.

- Richard, it's so delightful to be with you and also colleagues from the Turner Center, Ben and David, thank you all very much for the invitation to join you today. And also thank you for the terrific collaboration that were produced the report that I had a chance to review. Amy noted it's a real contribution to these conversations, but also to the policy development process that I'm engaged in at the federal level, so thank you. So I've been asked to give you some very brief overview remarks, providing some context for president Biden's housing supply agenda and highlight some of our actions that we hope will boost ADU construction. You have a number of other speakers on the call today who are gonna go into a lot more detail, but I wanted to provide some context so you understand how we're viewing these policies in the Biden, Harris administration. First, let me step back and acknowledge that our economy is in a period of transition from what has been the fastest economic recovery in history to one that can be stable and steady growth that works for working families. When president Biden took office, our economy was in crisis and the pandemic was outta control, but thanks to the American rescue plan, unemployment is near historic lows. The vast majority of Americans are vaccinated. Household financial wellbeing has reached an all time high last year and the number of Americans relying on government unemployment benefits has dropped by more than 90%. And new businesses are being created at record rates. Now the American economy has recovered faster than other major economies, but we face some of the same global challenges like inflation that they do, but we do so from a position of strength. The president's plan to address inflation and transition to a stable, steady growth is focused on three areas. One is giving the federal reserve the space it needs to get inflation under control. The second is lowering some of the most important costs that families faced in boosting our economy's potential. And the third is reducing the federal deficit. The administration's action plan to ease the burden of housing costs and boost housing supply is a portfolio of actions to address one of the largest items in a typical family's budget and one of the largest drivers of inflation in our economy. The housing supply shortfall is deep and longstanding. As Richard who's contributed so much to research on this matter can say much more than I can, but it largely results from the underbuilding in the decade following the great recession. Fewer new homes were built in the decade following the 2008, 09 financial crisis than any decade since the 1960s. Estimates do vary, and I know the report used a different estimate, but the us needs at least 1.5 million more homes. This textbook mismatch between supply and demand has meant skyrocketing rents and home ownership becoming increasingly out of reach. The action plan includes legislative solutions to boost housing supply that the administration has already proposed and continues to advocate for. And some of which have also received bipartisan support. But the centerpiece of the action plan are new housing supply related administrative actions that federal agencies are taking already and will take in the year ahead. We strongly believe in the legislative proposals we put forward last year and earlier this year, but we look for every single tool the administration has to address the housing supply challenges we face, and we put them on the list. These combined legislative and executive actions, along with the current momentum in the market and state and local reforms will close the housing supply shortfall in five years, we believe. The five strategies we developed to boost supply are zoning and land use reform, piloting new financing models, expanding and improving existing financing for multifamily development, ensuring that the government own supply flows to owner occupants and nonprofit organizations rather than large investors and addressing the supply chain challenges by convening with industry to understand what's impeding the market from working efficiently. For today, I'm just gonna dig into two of the strategies that bear most on ADU construction and financing. First of all, thank you, Richard for the shout out to the zoning and land use reform strategies, the administration has pursued. We pursued a legislative agenda that's still very important to us, but because we haven't seen action on that agenda, we also are looking to actions we can take within the administration to really support incentivize zoning reform at the state and local level. So just a note of context, the economist at Glazer has found that housing supply constraints like exclusionary zoning laws prevent workers from living in areas with economic opportunities, but high housing costs. Now this has an impact on the us GDP because it impedes the labor mobility of some of our most important metropolitan regions like those in California that produce so much of the us GDP. So it has an effect on the economy. In order to eliminate needless barriers to housing production, the action plan includes new steps to leverage existing federal funding to encourage state and local reform. Specifically, the administration will reward jurisdiction, state and local that have reform zoning and land use policies with higher scores in certain federal grant processes. Now we've done this for $6 billion already and will continue to do so going forward. This includes attaching those incentives to some of the flexible infrastructure funding as part of the bipartisan infrastructure law in addition to the economic development administration's grant processes. Some of those opportunities are already on the street and localities and states are already responding to them. We've asked resources from Congress to provide more incentives to jurisdictions to take these steps. And this is one area that we hope will have a lot of and does have a lot of bipartisan agreement and we're still hopeful that that agenda moves forward. So that zoning and land use reform fundamental is noted already by other speakers. The second area, and for this audience, perhaps the most salient is a set of new pilots and financing to fill some of the credit gaps for some parts of the market where credit has been hired harder to access including accessory drilling units, two to four unit properties and manufactured and modular housing. So research by Lori Goodman and colleagues of the Urban Institute have estimated that we could add 4.7 million new units to the housing supply over the next 10 years by improving financing for accessory dwelling units, manufactured and modular housing and preserving the existing homes at risk of obsolescence. Now financing for these types as the report really points out has the potential to boost supply to markets throughout the country, which is a key reason why the administration also continues to advocate for the neighborhood homes tax credit, which would help to produce we think 500,000 homes. Specifically, the action plan has a commitment by Fannie Mae FHFA and FHA to work with lenders to pilot and scale renovation and construction financing for accessory dwelling units. And to evaluate the credit performance of those loans in order to identify opportunities to improve the features of the existing federal loan programs, the report makes number of these recommendations. So the step number one is to begin to pilot that those kinds of reforms and study the credit performance and before making sort of wider scale changes. This work is underway already, and you'll hear, I think a little bit more from the enterprises perspective. This commitment builds on a white house convening we held earlier this year to boost attention to ADUs as a promising solution to our housing supply challenge and highlight the way state and local coalitions have created the momentum for policy change. We were so excited to see the interest and enthusiasm it sparked within and outside circles of folks that are involved in ADU construction. Just let me end by saying, I'm so glad you're convening this conversation today and working through the issues that will make it easier to finance and build ADUs. We stand ready to partner and to learn and to see this promising approach take hold, not only in California, but across the US. So thank you Richard for hosting the event today and inviting me to address, to be a participants.

- Thank you very much, Erika. And I have to give a shout out to Berkeley economist, Enrico Meredy who studied the impact of zoning on GDP. And he estimated that GDP is more than 10% lower than it would be in the presence of sensible zoning. And is often the case, graduate students tried to replicate the work and at doing so found a mistake. And the mistake was that his estimate was a lower bound estimate of the impact of GDP. So this really matters to economic prosperity that we figured this stuff out. And so much of what you said about what the administration wants to do lines up with some of the recommendations in our report, so very happy to hear that. So thank you so much. With that, let me turn it over to Diane Slemmer, who is a single family, affordable lending manager at Freddie Mac. And it's great to have her, I am actually a Freddie alum, I was there about 20 years ago. And Freddy has made some changes recently that are very positive changes. So Diane, thanks for being here and we look forward to hearing what Freddy has been doing lately.

- Thank you, Richard Ben and David. I'm going to share my screen and go through some recent updates from Freddy Mac to our bulletin and our guide, so let's get started. So why is the market right for ADU? In 2018 Freddie Mac published research that estimated the housing supply shortage at 2.5 million units. This was obviously pre pandemic and so our analyst updated the report in 2021 using the 2020 census data. The new figure estimated this shortage to be 3.8 million units, we are trending in the wrong direction. And so we believe that we need to take some creative solutions to provide individuals and families with affordable options for home ownership. But also ADUs do provide independent housing within the properties, existing footprint. This makes it an affordable option without the need to purchase additional land and due to the smaller size of ADU construction costs. And it's lower than other alternatives. Homeowners also have an option to use funds from the rent that they receive from the mortgage payment to use it for upkeep on their existing home or for use on their mortgage payment. And this is a great way to preserve home ownership in challenging economic times. And then a popular solution for multi-generational households is that ADUs offer independent living space for parents, adult children, or family members as a more affordable option to supporting a separate living situation. So let me review the recent updates to our ADU policy. Our previous policy allowed ADU on a one unit property and it allowed rental income on a one unit primary residence when there was a live-in aid or with the use of our home possible mortgage program. The new policy supports ADU on one, two and three unit properties. ADUs on a two and three unit properties must be legally permissible by their jurisdiction. But also the rental income generated from an ADU on a one unit primary residence may be used to qualify the borrower in on a more generous or widespread opportunity instead of our previous policy which allowed it with just the live-in aid or the home possible mortgage. And I'll go over some more details regarding those qualifications on some of the next slides. But if we're using the rental income from the ADU on the subject, one unit primary residence, we do require a full appraisal. We do need some documentation and information supplied by the appraiser. So an appraisal waiver is not a available for that if we need to use that rental income. I also wanted to mention that our choice renovation product offering does allow to pay off the short term financing that may be used to either develop an ADU or to renovate an ADU as the no cash out option. And this allows for higher opportunities with a loan to value options and perhaps some better pricing opportunities. And so what do we consider an ADU? An ADU can be part of the main home, such as a converted basement or an addition or above garage unit. It can be a detached structure that is built on the properties main lot as well. But the ADU must have a kitchen. It must have a separate entrance. It must contribute less in value to the property than the primary dwelling unit. So the ADU cannot be more valuable than the primary dwelling unit in terms of appraised value contributions. It must include a bathroom and it must be independent of the primary dwelling unit. In other words, you can't enter into the ADU from the primary dwelling unit and it must be subordinate in living area or the square footage must be smaller in size, in square footage. And then how do we qualify to use the rental income for a borrower? I think it's important to note that the majority of the income comes from the borrowers qualifying income. We would use 30% of the rental income for the income calculations. So if the rent income exceeds 30% of the borrowers monthly income, we will only use 30% toward those income calculations. And then we do require that the appraiser give us some additional information on the appraisal that he used a comp on the appraisal report that is a rental comp and that one of the comparables also has an ADU. And then the appraiser also has to comment on the zoning and land use requirements for that property. The documentation that we require for use of the income from the ADU is on a purchase we would require a lease and we would use the rent comps on the appraisal, for a refinance we would use the lease, the rental analysis from the appraisal, or if that ADU had been rented for a period of time and the income's reported on the federal tax return, we will use the federal tax return for that qualifying income. And then if we're using that income, we do require landlord education, either one qualifying borrower that they, on a purchase transaction that they take landlord education, or that they have previous property management experience. And then the demand for ADU is rising. And we see that as an enterprise that, and we are working to work with our lender partners to promote ADUs as a resource for homeowners and home buyers, as well as an opportunity for lenders within their business models. We do support ADUs as a opportunity to provide affordable option for borrowers that are looking for ADU as part of a solution to our nation's housing supply. This expanded policy does apply to all 30 Mac products, so it's not specific to a purchase or refinance it, it does apply to all of our products. And then just to recap the expanding policy by expanding the policy on the property type that allows ADUs and allowing the use of rental income in a greater capacity is opening up opportunities for homeowners, whether they add an ADU to their property, or they can now qualify for financing on a home with an ADU. This will effectively assist our nation's housing supply. So I thank you for the opportunity to review these recent updates from Freddie Mac.

- Thank you very much, Diane. And thank you for explaining so clearly how Freddie has changed. And before we move on to panel, I think what I'm gonna do, because it relates to things that both Erika and Diane just said is show you the, looking for where to pull it up and the share screen thing here. Here we go, I think this is it. Yeah, you should be seeing something called summary of recommendations. Can I confirm that you're actually seeing that. Somebody say yes. Great, okay, and now I've moved it. If you wanna read the report, which is available on both the Turner Center and Lusk Center websites, and you wanna cheat, just go to page 18, you'll get the summary of recommendations. To Erika's point one of the thing to the point out that made me very happy is we just need to understand better. Whether ADU loans are safer, less safe, about as safe as normal single family loans, so we can price them properly, underwrite them properly and so on. And so we need to have research done, which means that you're following places that have ADUs on them, looking at their loan performance, vis-a-vis others. And in particular, we need to think about if you have an unbuilt ADU, think about how do you count prospective income, which is something we do in multifamily housing, other context all the time. But currently, if you want to build an ADU and it's being underwritten, you're not permitted to account income that's not already in place. And I think that's a really big limitation on the ability of people to get ADU financing. We have a number of recommendations on appraisal that we've listed here. I'm not gonna go into them now. Again, amending guidelines to allow ADUs on two properties. We saw some of that from Freddie, and that was great, but also allow up to three ADUs is allowed by local zoning on a property. One of the barriers is if there's a manufactured home on the property, it limits the size of the loan that can be made in order to do an ADU. And we think that that's something that could be revisited. And again, sort of this is my opening was one of my opening points agency should state the requirements for rental renovation loan originates servicing to realize efficiencies for lenders, borrowers and contractors. And agencies should also explore why denial rates are so much higher on renovation loans than on other products. We found that denial rates are as high as 45%. And of course on purchase money mortgages, for example, rejection rates or denial rates are much, much lower than that. So clearly our first two speakers touched on some things that happened to be in our recommendations, which makes us feel that maybe we were sort of going up the right tree and looking at things and to discuss this further is my colleague and friend from Berkeley Ben Metcalf, who is now going to leave a panel of people who are really expert at doing ADUs for the remainder of the time then we'll open it up to the audience for general Q&A. And do keep these questions coming, I'm gonna ask Ben to start the panel, but then we will start interrupting with some of the questions from the audience. So Ben, please take it away.

- Thank you, Rich. It has been a pleasure to get to work with you over the last year on this project. And I really appreciate your vision and leadership in helping us with the project forward. I also wanna just thank our sponsors, Amy and Rachel, as well as acknowledge Erika in particular for all the great stuff she has been doing at the White House and for kicking us off so capably. I wanna have our panel come online if you guys can turn your videos on. We have three individuals with us today who we are hoping will give some realtime feedback and gut check on what we've been hearing earlier in the session today, as well as respond to some of what they've read in the report as well. There is clearly a lot of hype out there on the ADU side. I think, you know, obviously the fact that this has become ADUs and particularly ADU financing, even more particularly on the hit list for the White House should mean something. But you guys are really on the ground and in the trenches trying to actually make stuff happen. And so wanna spend a little bit of time with you all thinking about kind of what actually has to happen for us to be successful at going from a concept to deployment. The three individuals we have with us are folks that we've been turning to throughout our research as a source of ideas and feedback. And they continue to do that in their professional capacity as well as in the various associations which they participate in. Meredith Stowers is here with us with Cross Country Mortgage. She has focused, she has built a specialty on ADU financing in particular and has spent a lot of time talking to a lot of different people in the capital space, as well as folks on the ground to try and make this happen. Susan Brown with Umpqua Bank is also another lender who has built a huge portfolio of ADU work, sometimes against all odds of finding financing solutions for really good product that needs to happen. And meeting homeowners where they are in the face of a capital market that's not as robust as we would like. And then, Samar Jha who's with AARP, American Association Retire Persons, he is with the government affairs office, and he has been working directly in an advocacy role on this ADU issue which obviously has been a priority for AARP and its membership, but has a good sort of gut check for us as well. I think on the relationship of the financing piece to the other broader agenda on the policy front than we have. I wanna start the panel off panel off by just having you guys and particularly Meredith and Susan, you two react to what we heard from Diane. There has been a big push since the start of this administration to really make these renovation home loans deliver in a way that they really haven't been to date. Arguably Freddie Mac is the first of the various federal agencies that has sort of stepped up to the plate and put something out there in terms of changes that would seem at least to be suggestive of moving in the direction that we argued for in our report and seem at least to be responsive to some of the concerns and critiques that we've had out there. The question to you both is have they done it, are the floodgates gonna open? Are you gonna start pushing dozens of loans up to Freddy now by the end of end of next week? Or is this more of a first step? Maybe I'll start with you Meredith and then go to you to Susan, tell me what you see in here that feels encouraging and where you think there's still work to be done on the Freddy Freddy sign?

- So thank you, I'm honored to be on there because I'm an on the ground loan officer slugging it out in this market. Last year, I just looked at my CRM, I talked to more than 752 homeowners plus dozens and dozens of events with 300 to 500 people a piece. So we have a unique opportunity where the cost of building is less than the cost of buying. It's about $325 per square foot compared to 800 to a thousand dollars per square foot. We're one of the largest lenders of ADUs up and down the state. But interestingly, my office is about 10 minutes north of the border in Sunny San Diego. My clients are not rich. I serve all of California, but I mostly serve families, immigrant families. And it's interesting how I've suddenly realized that our housing policies have tended toward a unique vision of family where we oust out the kids outta the house at 21 and tell 'em to go buy a house. In fact, most families, brown families, especially are used to family compounds. You look at the sweet Disney movie in Canto, and that is basically a giant single family house with a bunch of... And that is the norm for most people around the world. And there's no doubt that this creates greater financial resilience among multiple generations, but Ben, as you said yesterday, if we don't address this financing more quickly, it will kill this trend. Freddy, in my view, God bless 'em, it's awesome, but it's a baby step because we have to get them built first, right? How do we finance the building and construction? What's interesting is we've, mortgage group has also worked with the top builders like KB Homes and Lenar and stuff. And they have like a survey system called Alliant. And what they found is that 62% of homeowners will not refer KB Homes or Lenar if my financing isn't a flawless process, if they get scared in the process, they feel lack of communication KB Homes is the one who suffers. And what I found working with my contractors is that one in 10 clients will ghost a contractor if they find that financing is remotely a challenge, and it is. The most important thing any policymaker can do, especially FHFA in the white house is treat ADUs as gross living area the same as a family house, the same as a duplex or rental units, and allow us to factor in gross living space and rental income. And to that end, why aren't we allowed to factor in border income? If we have a family with adult kids, we have eight adult kids, or sorry, six adult kids, why can't we factor in their rental income when we're counting in that kind of thing. And other questions that on the ground, a lender like me has to ask why don't you allow multiple ADUs, particularly on a family property? Why can't we add, California's allowing two units on a duplex, which a lot of families really like, especially as their kids grow older, why can't we do that? Especially for owner occupied homes. FHA and VA legislative agenda. Why can't we build detached ADU, we've got like 300,000 veterans here in San Diego, it makes sense to build detached ADU on their properties. We also need to eliminate random obstacles to ADU, the renovation loan process is extremely manual. We're literally have several staff members we have to hire to add, enter data from PDFs and all that. And then, why not have the HUD consultants have a direct access to the online portal and they can adjust that so we're not manually reentering everything. That could save $20,000 in loan costs. What about a renovation second mortgage just for ADUs? And how about eliminating random rules? I just got a renovation loan declined because the ADU was a hundred square feet larger than the 900 square foot primary home, really? And we even ran it at the chain and it got declined is an exception. And that brings a larger thing during this beta testing period with ADUs, we need a greater dialogue, allow more exceptions, monitor which issues need to be addressed. The bottom line is, do you want more housing or not? Because all these rules, including property management educational requirements, when the renters are a family is just one more reason for a family not to build an ADU. So I hope that they will take many more steps very quickly before we kill this housing trend.

- Right, thank you, Meredith. Susan, over to you, I guess, how about a scale of one to 10, how far do you think Freddie Mac has gotten and why?

- I'm happy to comment on that, Ben first I wanna correct the record, I am not with Umpqua Bank, I am the founder and CEO of Core SGB in my prior affiliation was with Umpqua Bank and I spend time now helping financial institutions launch construction loan programs, and I do research and development on housing finance. So just so that we're not misrepresenting who I-

- [Ben] Thank you, sorry about that.

- Absolutely, no problem, it's a new development for me too. I am extremely pleased to see the forward movement with Freddie Mac. I know they've spent a lot of time, a lot of conversations and deliberations to move forward and to piggyback off of what Richard said earlier, we really need to study and understand what the risk is associated with these changes that we make. We've got an entire flow of capital coming from across the globe that feeds into the money we use to finance loans in the United States. And if we can't create a security that investors will ultimately buy that flow of capital stops. So I applaud this movement so far, it's revolutionary, it's hard to imagine that it is, but they're the only agency right now who has taken these really bold steps. So I don't wanna rate it on a scale of 1-10, but I want to applaud loudly the progress. We've got a ways to go and Meredith touched on many of those things that we need to do, but to answer your question directly, thank you, Freddie Mack, awesome step forward and we can't wait for the next step.

- I wanna also just maybe Samar turn to you for a second to take a up a level here. We heard from Erika about this very ambitious agenda that the White House has on zoning reforms, but also specifically on financing and trying to some financing pilots across a range of particular domains that have been identified. Can you just talk a little bit about from where you sit, like where does the White House have real leverage? Where do you think having this kind of very high level committed leadership can really be most helpful for us at this point going forward, specifically as it relates to ADUs.

- Yeah, thank you so much. And thank you for first for inviting me on this panel. Before I do that, I just wanna comment on the Freddie Mac's effort on ADU's, there was one comment I had, it's an amazing thing that Fred Mac's doing, there's annual report I read, I know in your report you had recommendations on appraisal there. One more thing you may want to add is that when they say that one of the appraisal requirements is that if you're putting rental income as a qualification, then you have to show one comparable sale with ADUs that is rented, or at least one comparable rental ADU. We may want to recommend Freddie Mac, that they should be flexibility on that because you're talking about ADUs which may not be available everywhere. So if you're going into a market where ADUs aren't there to doing a comparable ADU rented space is may not be possible. So some sort of flexibility on that employee requirement would be nice. But going back to the question on Erika's remarks and the White House efforts on housing supplies, I think first of all, I have three things to talk about. First of all, the fact that they're acknowledging that there is a housing supply shortage. The fact that they're talking about there's affordable housing issues happening across the country and ADU is part of the solution, not the solution. When I do talk to people, they keep on saying ADU is not gonna solve affordable housing, but it has to be part of the solution. So that's the fact that it's been acknowledged as one part of it. Second, you talked about financing models. I think it is really important that is coming from the top that we need financing models and financing pallets. Because again, I think in a prep, we were talking about the chicken next situation. But the thing is if you have this kind of financing model, advancing pallets available and ready, then at the local level, when all these local and state level, when all these legislative changes happen, they can see that there's already a financing model available for people, for homeowners to use and so that the production can go up. So that's a huge thing to happen that the Biden administration is doing. And the third one that Erika talked about is incentives to the local government. So the fact that if they are willing to do zoning reforms and they will be federal grants available, I think that's a huge incentive for local governments. Lots of times that I have seen in my advocacy work is that when we talk to local governments, they don't have the capacity in terms of personnel or in terms of the budget to do these zoning reforms. And the fact that now they can see that at the federal level there is budget available for them to these zoning reforms, they can work on revising their zoning laws, I think that'll help in the ADU production definitely.

- I think you raised a really good point, I just wanna underscore there is definitely a risk. Other places around the country mobilized to do the hard work of reforming their zoning in the context of single family homes to allow ADUs that having done this political work as elected, having put their next they then see very little uptake from actual homeowners in terms of doing this if financing isn't there. And I think there's been some sort of, well, hey, we gotta wait till the zoning catches up and then we can figure out the financing, but I think what you're getting at is absolutely not, we need to sort of dual track both these things and work on them at the same time. You also-

- One example-

- Yeah.

- One example I can actually give you on that, I'm sorry to interrupt you. One big example is happening in New York. So New York state introduced the ADU legislation and was going through it hasn't passed yet, but the governor introduced some funding for ADUs to be up to court that 85 million funding available. So now you're seeing that again, chicken-egg arguments there financing is coming first, and then they will probably pass an a legislation, which basically is trying to say that we'll get the infrastructure ready for you all to use it once the ad legislation is passed. Good example of how you can go both ways.

- You also raised another question, which I wanted to get to in any case. So let's go to it right now, which is this appraisal issue, because it has felt to us like a real Achilles heel, like we could have all this amazing sort of reform and policy change by Fannie, Freddy and FHA, but like if the appraisal industry isn't there. If this is saying, hey, we'll only finance this if we can get an appraisal, but in practice, appraisers are showing up and not finding comps, where they are finding comps, but comping them very low, then all this doesn't do anything. And I think how do we solve for this? I mean, first of all, I guess, how do we train our appraisers they know what to look for? And what do we tell appraisers when they show up in a community and can't find any legal permitted ADUs in the sort of immediate market area? There have to be solutions to that, Meredith-

- Yeah, this has been a massive issue. And we're the only bank out there, I've seen an average appraiser, give a three bedroom, 1200 square foot ADU a $0 value. And that's ridiculous, right? But that's because FHFA's guidelines to appraiser are very funny. It specifically says they can look at the marketability of an ADU. In other words, if you put this house property on the market, would it be more valuable to home buyers? Well, of course, but most a appraisers don't go talk to real estate agents and find out just how much, but specifically they're not allowed to factor in rental income or treat the space as gross living area, the way you would a duplex. A clear change in those guidelines would solve every problem. In the meantime, we bank partnered up with the appraisal Institute and is training as much as we can, our appraisal panels, but still an issue, even with a classic rate in term refinance. So there's no point in getting, if you build an AU and you do Freddy's refinance out of that helock, you're still not gonna get the value. So you can't refinance because they're not accommodating the value of the ADU. Kind of pointless.

- And Ben, I'd like to add some commentary to that as well. In Portland, where we've had an extended history of creating ADUs now, we have an appraiser, who's done some really in depth analysis of contributory value of the ADUs that are in our marketplace. And there's a team of about four appraisers on the west coast who are really teed up and prepared to conduct a regionwide study that would demonstrate what those contributory values are. I think the other piece of that is helping appraisers understand that there are multiple ways to get to an opinion of value where you're extrapolating data or you're overlaying data to help demonstrate what those values are. And so if there's an opportunity for academia and the professionals to come together to really help demonstrate for properties that do exist what those values are, and then to the greater point, training the appraisers in the geographies about how those effects in their regions specifically, we'd like to see that study come to fruition. I think there's a lot of valuable information, but appraisers just simply don't have the tools and it's not a property tech that they're accustomed to just yet.

- I have just a couple more questions for the panel, and then I'm gonna start taking questions from the audience. So please, if you haven't yet drop your questions into the Q&A box and we'll see if we can get to them with the time we have. I think I wanna go to something, this came up in the appraiser, when you talk about the appraisers Meredith, I think you mentioned it also at the top. One of the things that we heard a lot from in our conversations in our interviews as we put this report together was a little confusion around like what an ADU actually is. You think that it's actually anything different than a second unit of another. So we would talk to people, they'd be like, well, we've been doing ADUs all along we just call them duplexes or, oh gosh, we do two ADUs, we call them triple deckers or a three flat, we've been doing that for our century. You guys are showing up as if there is something new, but in fact, we've been getting these things financed all along. Is that part of, it's an opportunity sort of to talk about this as a new thing, 'cause it mobilizes political energy, but it also, I think makes maybe causes our regulators, causes appraisers to sort of think they need to think, maybe think about this as if it were new, but in fact, potentially they have a large body of data to already work work from. Does, does that make sense to you? I mean, are there substantive differences here in what an ADU is relative to a two flight or a triple Decker or should we be more aggressively thinking about this is all as one body of work.

- You know, well said, well articulated Ben, housing is housing. If it's someplace you can live, that's heated with a bathroom, maybe a kitchenette, can we please just count it as gross living area, and not just for rental income on an ADU or a duplex, but also for border income. You know, I just don't think we should punish people because they don't fit into a very narrow policy view. And I think that we are in an experimental time where we need to be working through these issues. I wish California had said rental income instead of ADUs, but it was politically expedient to talk about granny flats because who wants to turn down a granny flat? So unfortunately we need to support those efforts with adjusting the financing terminology.

- And Ben directly to your point, a duplex what the fine difference between a duplex and an ADU? And I think when you're looking from a tax assessor standpoint, an accessory use of a property adds a different amount of value that can be taxed. So we have to look at both sides of that equation as to what we're ending up with. But in the end if an ADU is required to be a complete living space with all of those features, the bathroom, the living area, the kitchen that is by all definitions a duplex, triplex, fourplex, if there's four of them on a property. And I'd like to see us get a little more homogenous in the way that we describe these and maybe look at it as how many units are allowed on a property. In Oregon, for example, where we have our new legislation that went into effect to be able to subdivide those single family lots, we're dealing with that right now. We're now up to four units can be on a property that used to accommodate just one. So I think maybe taking away such a bright line in the definitions and broadening it more to number of units might be more helpful as we continue these conversations.

- Calling an ADU may be meaningful politically at the local level, and we shouldn't deprive locals of doing that, but it may be on these kinds of conversations we can generalize a little bit more.

- Ben, one.

- Yeah, go ahead.

- Just to add on the thing, I'm sorry again, you talked about how it, this ADUs have existed since long time and I'll give you an example of one of the famous person who ever lived in the ADU is Fonzi. Fonzi lived in the ADU, so it's been there since that. ADU is nothing new, they have been added in properties all the time. It's just that now people are realizing it and now it's being regulated and they're trying to like put it up to court, or even you will see the next step would be to how it's gonna be taxed. That taxing thing will also come up. So yeah, the fact that the more regulations are happening, it's important to understand that if you have the financing models ready for these ADUs, it'll be easier to implement the legislation. It'll be easier for the production to happen.

- Sorry for interrupt, I have to follow up on some Samar's comment on funds, 'cause Milwaukee was once one of the dense cities in America and it was a duplex in ADU city and almost all of Milwaukee is now illegal nonconforming use. So if the house burns down, you can't replace it with the number of units that were being produced before on that very lot. And so we have to repair a lot of damage that's been done since places like Milwaukee were initially developed in a very nice kind of way.

- Richard, I think actually now is a good time to maybe bring in a couple of questions from the audience and I can read them out loud, but we can also give participants an opportunity to come on video and ask them themselves, I believe. I see Elizabeth Boyd had a pretty basic question here, which might be helpful to ask, which is just, how does this affect the ordinary person and are these changes that Freddy is proposing relevant, no matter the lender? In other words, are are they building a template? Elizabeth, are you available to come a video?

- I've made her allowed to talk anyway. Elizabeth.

- [Elizabeth] Yeah, hi. No, this is great. And we've been working, we're actually gonna be, guess I'll introduce, Elizabeth Boyd I'm a senior planner with the city of Sacramento and we've been working on our accessory dwelling unit program, we should have a website up. And one of the things that I've been thinking about is how do we expand the information in our neighborhoods and really have working sessions with our community based organizations that engage with lower middle income homeowners and like looking at these financing things, it's great. Like I actually built a ADU myself and I try to say like, how do you do it? And there's so much confusion. And I just would love to hear a little bit more about like, I don't actually know as a normal human being when I hear Freddie Mac talking about like, here's what we are looking at. I don't know how they relate to Umpqua which is where I actually got my first loan from to do the ADU. I don't actually know how, like does that mean Umpqua will now look at something differently? I mean, I did a construction loan with looking at the final value as the way to finance. And a lot of people don't even know that that exists even that, but like looking at rental is just a whole nother thing.

- If I can recommend, I think that city of LA worked with some private groups and the Casita coalition has really led the way as an industry organization in hosting these events. We just hosted something in Oakland and it does go over the soup to nuts of this and then introduces you to some really good contractors. As a bank it's really important to me that I have, I surround myself with a group of high quality curated contractors that my bank has vetted and I know and trust. And Casita Coalition is working on that list overall. So we'd be happy to put that forward. There is a ton of education and to be honest, the lending systems and the reason why a lot of lenders don't do these loans is because the truth is I am best friends with these clients for like three years. And part of that is just getting over the angst of doing it. So it's a long term process.

- So I see Diane wants to contribute here. So Diane, please.

- Jump in.

- Jump in.

- Okay, thanks. Well, I wanted to just briefly explain the difference between primary mortgage market and the secondary mortgage market. So Freddie Mac, we purchase loans from the primary mortgage market, and if the lender, if it fits within their risk profile, these are loans that we will purchase from them. So it would be Elizabeth, just for an example, creating a relationship with a lender. And if they're able to accept that risk profile, we will buy the loans if they need that specific criteria. So just to kind of summarize, will it be an opportunity for every lender? It may or may not and it may or may not be a lender that currently is a seller servicer for us, but it is an opportunity and those are our guidelines, assuming that the loan qualifies per those guidelines. So primary and secondary market is the key to understanding then.

- Great, thanks Diane, Samar you wanna add to this?

- Yeah, just wanted to ask Elizabeth if I'm not wrong, are you also saying that lots of times, these homeowners still need to understand how, what ADUs are and how it's gonna benefit them? And because that's a different stage, that's like a precursor before you start even thinking about financing.

- [Elizabeth] Yeah, no, I it's actually, they're very interested, but it's like, how do you come up with the money? People are starting to understand the idea of it, but it's just, how do I even afford to build something like that?

- Yeah, I mean, obviously this financing available from the banks, but as far as I know California has this, the California Housing Finance Agency has this grant for homeowners they can get up to like $25,000.

- Actually, it's actually $40,000 now.

- It's $40,000, so here you go for billing an ADU. So I think that's, that's amazing approach me for any homeowner to use that money towards billing an ADU. So those are the grants that, there's this local governments are doing a lot. I think I shared a list with my panelists earlier this morning or last night that there was a list of a, grants available in different cities, at state the city officials are doing it. So you may wanna check with what's happening at the state level and see if there's grants available for homeowners.

- Thanks Elizabeth for the question. I wanna segue actually, to a comment that Michael Banner put in the Q&A, 'cause I think it flows nicely from this. In our report, our research, we focus on renovation home loans, because those are the products that are backed by the federal agencies, which do most of the originations. We were interested in the homeowner space, not the investor space, but clearly there is a larger capital market out there. And a fair question to ask is, how much room to run are we gonna get, even with these changes through the renovation loan product, given it is somewhat clunky at the end of the day? Michael, give us a sense of what you're thinking here and what your perspective on this question is.

- [Michael] Thanks for taking my question. I've got a lot of experience in secondary markets and creating them for community development, finance type loans. And one of the things that I've come to realize is over time sometimes these interventions with public agencies cause more problems and confusion sometimes, and it takes decades for people to understand them. And I always think that private markets, private individuals talking to a contractor, talking to a homeowner, always seem to be a much more relevant solution, and how to we work on creating that market is one I would question.

- Well, I mean, if I could give a stab at it, there is such a market and it's sort of like a hard money loan market and that's the problem. So it's an expensive market. And so for people who are at the margin, it's really not very useful because the interest rate is sufficiently high, that it doesn't help with the affordability of the remainder of the house. And so what allows is-

- [Michael] Richard?

- Yeah.

- [Michael] Richard, I would say that there are hard money lenders out there, but I think there's a whole other world of people who have credit and they're credit worthy. They even may have equity in the homes, but going through this complete maras of this stuff is a disincentive for them. And to the extent that you can find ways to have capital align in a way that's... You know, is there trade offs? Do I wanna have the most expensive money and no questions asked or do I wanna have a reasonable amount of questions asked and pay a reasonable amount for it? Or do I want to have the cheapest money available and I can't get it because it's too confusing? So I think that's the continuum that I see. And I think there should be some solution.

- Well, yeah, I Meredith, Susan have some thoughts on this, so please.

- Yeah, I agree. What the good news about high inflation is that we do have more of the capital markets coming into the market. So we've really pivoted away from renovation loans toward home equity lines of credit, both for homeowners and investors. And we have some, the cheapest money out there, ironically is for investors. The interest only options are which I would call medium term loans are on the rise, to get us through this inflationary period to build until we get the other side. But it does beg a great question like could Fannie, Freddy, FHA do an ADU construction second mortgage that they would buy that's specific to ADUs? And is a low cost, maybe works with construction oversight which we're getting better and better at. It is a great point.

- I will echo Meredith this comment about the second mortgage being, in my view with rates going the way they are that's gonna need to be an essential element in this going forward. I oversaw 10,000 construction loans and have a fondness for control in the process, and Michael, to your point, yes, it can be very complicated, but when you have a homeowner with a half completed project, or you have a builder who absconds with funds, those are real risks associated with adding a major renovation to a property. And so I think as we begin to think about these solutions, balancing the interest of ease with making sure that we don't end up with properties in a half portioned completed status is gonna be really important. And I think if the agencies do have an appetite for looking at that secondary financing, we know that there was a market for it prior to the 2008 great recession. And I think the reason for the giant losses during that period were some, two broad underwriting guidelines where if we just put controls into place to mitigate those risks, I think it could be a well-established well flowing capital market that should be explored.

- I think there are fair concerns from a consumer protection standpoint about these investor backed efforts, including some equity sharing models that could potentially compromise the value of the main structure, even as individuals take funds. I mean, I think it's a trade off between, in some cases it may be a trade off between supply and wealth building for the owner occupant. In other cases, it may be an issue about just balancing yeah, consumer protection with liquidity. These are tough answers, and there's not, there's not gonna be any one right solution here. We have good really interesting question here from somebody who's asking, not about homeowners, but about smaller community organizations, maybe in the context of multifamily, small multifamily properties. I don't, I'm not gonna-

- Yeah, Palin and I'm afraid I would butcher your last name and I'm sorry about that, but I've given you to ask your question.

- [Pollen] Hi, can you hear me?

- Yes.

- [Pollen] Okay, great, it's Pollen by the way.

- Butchered your first name too, yeah, okay.

- [Pollen] So I work for Beacon Housing and we're a small faith based organization based in LA, and we have multifamilies, and also smaller multi families and we do affordable housing, but one of the issues that we have faced, and we know a lot of other organizations have faced such as churches, you know, many churches own homes, single family homes, or smaller like duplexes or triplexes, and one of the issues that they have found is that they would like to expand their ability to offer affordable housing, you know, maybe to low income families in the community, but they can't access financing. As a nonprofit it's very difficult to get loans. And then also from the churches, it's also very difficult for them to access these kinds of financing, and so these projects. Sort of get stalled because they have this vision, but they can't get the financing. And as you were saying before, once the process becomes difficult, then it's a disincentive then people don't go on with the project, right? And so are there programs that are available? And if not, maybe this is something that could be made available as well for community based organizations to add more ADUs.

- I can give an example of one, which I know, I don't think it's a government based project, but it's a project based, which is a coalition of non-profits. I think it's called the Backyard Homes Project in LA, where they specifically give money to homeowners who are renting the ADUs as affordable housing. I think they give a construction loan up to a certain amount for building an ADU. So I think that they are examples of such products which cater to ADUs, which to be used as affordable housing. That's one example that I know of.

- [Pollen] Yeah, that's great. We work a lot in the city of Pasadena, and the city of Pasadena has actually launched a pilot program also to help homeowners create housing, and then there's certain conditions, but essentially if the renters are section eight, then you know, they get a very low interest loan. I believe it's a 1%. And that money came out of the city's purse. But that is only for individual homeowners again, because we tried to apply for it and they said, you guys are an organization, so you don't qualify. I just wanna raise that up because I think that there are a lot of organizations that could benefit from greater access to financing in terms of pursuing ADUs.

- So one thing, and I'd like to ask this one, actually all three of our panelists, but I wanna come back to the consumer protection issue because it is the case that if you don't know what you're doing, you really can be taken advantage buy a contractor. In fact, even if you do know what you're doing. Anyone who's been through a kitchen renovation, I actually don't think I was screwed by my contractor at all, I think he was really good, but we have an old house, and once he started opening walls, there was just all this stuff that... So, we said it would take two months, it took six, blah, blah, blah, and that was an honest guy. So do you think there could be an opportunity to set up some sort of way for contractors to get certified so that if a lender saw that they were doing the renovation, the process becomes more straightforward as opposed to sort of a fly by night? And I see, we have a couple of people in the audience who built a large number of ADUs. And it seems to me that could help with the process a lot that you have people who've revealed expertise, and as a result, your access to financing gets easier if you use somebody like that.

- If I can address that, I absolutely agree. There's two components to this, one, if they can automate the HUD consultant portal and automate this portion of their desktop underwriting software for, LPDU LPUS, then all that data, when we vet these contractors, that data could be within a national database. So every bank they're not having to get vetted every time they go to a different bank, and conversely. And then the second part of that is I gotta give a shout out, I think it was FHFA, I do not know this part of policy or anything, but I think they required the HUD consultants, they have a quota on HUD consultants as I was told by my favorite HUD consultants. And then they forced a bunch of these HUD consultants, many of whom had retired and got 'em re-certified. And so now we've got some fresh blood and an opportunity to bring on some really educational, positive customer serving. And that's something that we're looking to help some of these nonprofits create within the HUD consulting agencies. So yes, there are experts on contractors, but they also understand there commitment to the homeowner. I'm not sure how to do to get more young blood trained, educated, like nobody quite knows how to do that, but that is something where FHA could really play a role and Susan you might know more on that stuff.

- Yeah, with lenders who do construction lending and do their own vetting of the builders, there's generally some type of a protocol that you go through looking at experience doing a moderate type of financial background check to make sure that bills are being paid on time. The builder is an essential piece and the success of any project. And I'm thinking about kind of this wholesale registration process. There's companies out there right now that say, hey, we can help you match up with a builder, we vetted them. So there are clearly models for that already. I think, as we look at the capacity of any particular builder, one of the things you look at is how many projects do they have going on? What kind of access to capital do the builders have so that they can pay for their subs and suppliers. But I think having some record or ability to vet through either through the home builders associations, or other avenues that could do that vetting there's models there today that we could potentially leverage off of.

- Great. Samar please.

- No, I don't wanna delay, but it's, I think there are a lot of certification programs that are coming up for builders and constructors. So I think if they can have a certification specifically for builders who actually work on ADUs, it'll be nice for at least the homeowners to have that with check whether they have the certification or not. And that will be really, really important for consumer protection.

- Great question, Richard, really interesting answers from you all. We are a little bit past time, and I think we've gotten many of the questions now that have been answered. If not verbally, then you'll see a typed response in the answered box. So I wanna take it back to our panel for your reach of your sort of closing thoughts. First of all, is there anything we haven't talked about yet, particularly in the renovation space that you think needs to be lifted up? You know, what is in your mind is there one big thing that you really wanna make sure we don't we all walk away from realizing still work has to get done? Or something else that you feel needs to be lifted up before we go. Maybe I can start, Susan, can I start with you? Would you be willing to kick us off and then Samar and then Meredith for parting words?

- Sure. Yeah, I've just got one quick new thread to put in there. Sorry to introduce this at the very last minute, but I am also thinking about language that's being put into some of the zoning regulations and how that language is going to fit and adopt with the agency requirements for deans. So I think there needs to be a little bit of forward thinking and preemption perhaps in that space. In the renovation space I just wanna quickly say there has been a lot of conversation about third parties monitoring and overseeing construction. And I think that there are lots of opportunities for us to look at those consolidated ways to monitor construction process and disperse funds, but the flip side of that is that we need to make sure that those processes don't slow down the flow of money back to the builder. It's essential that we get them paid quickly so that projects can continue. So if we adopt some of those models, again, that are out there in the space, but finding a way to create accountabilities so that things continue to run quickly and smoothly is important.

- From my perspective, from a legislative perspective, I would say that I think it's important to revisit legislations which have passed on ADUs and see there reasons why production is not happening and maybe cause the legislation has restrictive governance in it. So to revisit that, Rhode Island just recently did that, they actually passed a legislation where they opened up liberalized, the ADU legislation, which is a great example of going back and revisiting the legislation, seeing why the production is not happening, which will eventually help in developing financing models because they'll be more production happening. This is the chicken and egg situation again, but again, I think legislative efforts are really important to make sure that our production happens.

- I wanna do a quick shout out to California Housing Finance Authority Sheriff Chaves on the call. They have really been working hard to do a $40,000 grant within certain constrictions. And they've been super collaborative. And I'm really excited to, I wanna say, I should give 'em a shout out and say, thank you. I wanna bring it back to the most important thing Federal policy makers can do treat ADUs as gross living area like duplexes so we can factor in rental income and even border income and allow multiple ADUs, especially on owner occupied homes. Those two things single handedly would dramatically change the lending landscape. I hope that a ADU second construction loan will be on the table and some of the other things, but if you just treat ADUs like gross living area, it would solve a ton of problems.

- Well said, well closed Meredith, smart Susan, thank you for your really interesting comments today. Thank you as well for all the great work you've doing out there in the field right now, trying to make sense of a very difficult landscape in ways that are gonna be very helpful to a lot of families and to our country more broadly. We're gonna close now, but I do wanna let folks know that there will be a recording made of this webinar that will be available up on the Lusk Turner Center websites. I encourage you also to stay tuned, to sign up on both of our organizations, emailing lists and follow us on social media. The Turner Center will be putting out another ADU related publication later this summer, specifically looking at some of the challenges that we see for homeowners who are either persons of color or lower income and having particularly difficulty accessing a capital and the capacity of this work. Stay tune for more work for both of our organizations, please follow us, thank you for joining us today.

- And if I could just, so Diane, I've had a number of people ask if your slides are available, are they available?

- They are not available, but I would, you know, recommend that you could find all of that information in our guide. And there's the bulletin posted on our website with the update that happened in early June. And then I would also mention for our future updates, we did publish our equitable housing plan, which list a number of items that we're working on for future updates. So all of that is available on our website or links to it.

- So thank you. And Ben, if you don't mind, I'd just like to give to the broad audience here, a shoutout to Marilyn Ellis, who is always so key for the Lusk Center and getting things organized. So Marilyn, thank you for all the work that you do every day for us. And I think that's it, thanks to the audience and thanks to all the presenters for a wonderful conversation.