California lawmakers are exploring a groundbreaking policy approach that could reshape how affordable housing is financed and built — by stepping into the construction insurance space to support factory-built housing projects.
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The proposal, led by Assemblymembers Buffy Wicks and Juan Carrillo, is part of a broader legislative package designed to accelerate housing production through innovation. At the center of the effort is Assembly Bill 2166, which would position the state as a backstop insurer for developers and lenders hesitant to embrace factory-based construction.
Factory-built housing — where units are manufactured off-site and assembled on location — has long been viewed as a promising solution to rising construction costs and labor shortages. Supporters argue it can deliver projects faster, more safely and at a lower overall cost. However, despite years of optimism, the model has struggled to scale due to persistent financial and regulatory barriers.
“This is the first time I have seen something like this be suggested, drafted and potentially implemented by a state for housing,” said Tyler Pullen, a researcher at the Terner Center for Housing Innovation at UC Berkeley.
One of the primary barriers facing factory-built housing is access to surety bonds — a critical financial tool that protects developers and lenders if a contractor or subcontractor fails to complete their work. Without bonding, many projects cannot move forward.
“A bonded project is one that ‘puts the developers and the lenders at ease,’” said Michael Merle, business development director at Autovol. “If any portion of the project fails, they are not going to be holding the bag.”
However, many factory-based builders — particularly newer entrants — struggle to secure these bonds due to limited track records. This creates what policymakers describe as a “self-reinforcing cycle,” where lack of experience prevents bonding, and lack of bonding prevents gaining experience.
The proposed legislation would intervene at this chokepoint. By acting as a reinsurer, the state would cover a portion of bond payouts in extreme cases, reducing risk for private insurers and encouraging them to provide coverage.
“This could be one of the highest impact things, but it has a lot of open questions,” Pullen said.
The concept is not entirely without precedent. Federal entities like Fannie Mae and Freddie Mac guarantee mortgages to stabilize lending markets, while the Small Business Administration backs surety bonds for small firms. However, applying a similar model to housing construction — particularly factory-built housing — would be a first for California.
At the heart of the issue is what industry stakeholders describe as a “construction doom loop.” Developers hesitate to work with factory builders due to perceived risks. Lenders demand bonding. Factories cannot secure bonding without a proven track record. As a result, projects stall before they begin.
Carrillo and Wicks’ proposal is designed to break that cycle.
By lowering the financial risk for insurers, the hope is that developers will feel more confident partnering with factory builders. Increased project flow would then allow these manufacturers to build experience, improve efficiency and reduce costs over time — ultimately delivering on the long-promised benefits of industrialized construction.
Jan Lindenthal-Cox, chief investment officer at the San Francisco Housing Accelerator Fund, called the idea “super innovative,” adding, “This is what’s needed if you really want to scale the industry.”
Still, not everyone is convinced the approach targets the right problem.
“Who are we incentivizing?” asked Ryan Cassidy, vice president of real estate at Mutual Housing California. “We’re incentivizing developers whose only go/no-go is whether the factory stays in business. To me, that’s a developer who is probably not very savvy.”
Cassidy and others argue that direct subsidies or increased funding for factory-built projects may be more effective than creating complex insurance mechanisms.
For contractors, developers and investors, the proposal signals a potential shift in how risk is allocated in housing construction — particularly in emerging building methods. If successful, it could open the door to a more predictable pipeline of factory-built projects, creating new opportunities across the construction supply chain.
At the same time, the proposal raises key questions around taxpayer exposure, program structure and long-term sustainability. Lawmakers must determine how much financial risk the state is willing to assume and under what conditions.
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The bill is expected to face scrutiny as it moves through committee hearings, with its first major review scheduled for late April.
Despite uncertainties, supporters emphasize that the program may only be needed temporarily — acting as a catalyst until the private market gains confidence in factory-built housing.
“The premise of the bill is that ‘the state can support the early adopters while the factory-built housing industry builds up its reputation,’” said Pullen. “This is a problem that could eventually be solved in the private market.”
For now, California’s experiment could become a closely watched model for other states grappling with housing shortages — and searching for new ways to bring down the cost of building at scale.
Originally reported by Ben Christopher in Cal Matters.
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