SPECIAL FOCUS >>RETHINKING FEDERAL HOUSING POLICY

Industry Suggests Ideas for Change

AFFORDABLE HOUSING FINANCE • MARCH 2008

Roundtable Participants

• Laura Archuleta, president, Jamboree Housing Corp.
• Richard Baron, chairman and CEO, McCormack Baron Salazar
• Michael Bodaken, president, National Housing Trust
• James Buckley, president, Citizens Housing Corp.
• Charles L. Edson, Washington, D.C., attorney and housing policy expert
• Carol Galante, president and CEO, BRIDGE Housing Corp.
• Bart Harvey, former chairman, Enterprise Community Partners, Inc.
• Jeffrey Lubell, executive director, Center for Housing Policy
• Alexander Roberts, executive director and CEO, Community Housing Innovations, Inc.
• Patrick Sheridan, senior vice president of housing development, Volunteers of America
• David Smith, CEO, Recap Advisors

Q: How do you assess the results for housing of the first year of the 110th Congress? Which of the pending housing bills that have come out of the House Financial Services Committee have a high probability of enactment in 2008?

Charles L. Edson: The House passed a lot of bills. The Senate did not even pass water. With Sen. [Christopher] Dodd (chairman of the Senate Banking Committee) back in action (after dropping out of the presidential race), we can hope for action on government-sponsored enterprise and Federal Housing Administration reform and a housing trust fund. But passage of any legislation is iffy at best.

Patrick Sheridan: I was very encouraged by the attention affordable housing received by the committee last year. Unfortunately, there wasn’t corresponding action in the Senate. The most likely bill to get enacted in 2008 is the tax credit modernization bill.

David Smith: Discouraging, because very little got enacted, and I am not confident of anything being enacted in 2008, with the presidential hoopla.

Q: How can the housing industry get national politicians, including the presidential candidates, to pay more attention to the affordable housing shortage?

Laura Archuleta: There’s no question in anyone’s mind that there’s a housing shortage, and that the need is extreme for low-income families and seniors. Where perspectives differ among political parties is how to work to solve the problem. The housing industry needs to consistently publicize its successes and do a better job of explaining why a specific approach or solution worked. It’s about advocacy through example.

Michael Bodaken: Housing should be placed squarely in the context of sustainable, healthy, diverse communities. Communities without affordable housing for their service workers, police, teachers, and elderly are less likely to be sustainable over time. For communities to be “home to everyone,” housing must be provided to service workers, police, teachers, the elderly, the disabled, in short, all of us.

Carol Galante: By broadening the conversation to include both businesses (housing the workforce as an issue) and connecting the housing shortage to other issues (health and the environment as examples).

Jeffrey Lubell: Housing is a major issue for many Americans, but it doesn’t translate into political action. First, most Americans can’t relate to our existing set of housing programs; they’re for “other” people, not for them. Second, when politicians do hear about housing issues, they hear many different messages, rather than one clear one. Third, the nation’s housing challenges are very complex and often seem intractable. To change this dynamic and elevate housing as a national priority, the housing industry should work to get on the same page behind a broadly inclusive housing policy designed to ensure that all Americans have access to decent and affordable homes.

Alexander Roberts: Affordable housing should be linked to comprehensive land-use reform under the umbrella of “smart growth.” By linking sustainable development principles, such as greater density in the downtowns, increased mass transit, walkable communities, affordable housing, and energy efficiency, many interests join forces to advance a common goal.

Sheridan: I suggest the linkage between working families living in stable homes and voting needs to be promoted. We are already seeing record turnouts at the primaries. That would suggest that middle- and lower-income voters who may be occupants of affordable housing are voting this year versus past years. The ability to find affordable housing should continue to be a hot button during this election, although the subprime fiasco and declining home prices may take some pressure off the issue.

Smith: Focus on the middle class, particularly workforce housing.

Q: After 21 years, the low-income housing tax credit (LIHTC) has survived many political challenges. What are the three most important things Congress and the next president can do to make it more effective and to better target this limited resource?

Richard Baron: I would increase the amount going to states and give them more authority to offer increases in basis for certain projects … make it more effective in financing mixed-income communities, which would serve people earning up to 100 percent of the area median income (AMI), but which would also have to serve very low income people.

Bodaken: Index the credit, eliminate the 10-year rule, and eliminate the prohibition of using tax credits on the refinancing of Sec. 8 mod-rehab properties.

James Buckley: Despite the great success of the tax credit program, production of low-income housing in the most impacted areas has become a patchwork of multiple sources piled on top of each other in order to bring housing costs down to the neediest households. Each part of this financing mix has its own rules and its own compliance regime, making operation of properties serving very low income people complicated and time-consuming.

Edson: Pass the series of mainly technical corrections forwarded by the National Council of State Housing Agencies (NCSHA) and other concerned groups.

Galante: 1. Fix the credit amounts at 4 percent and 9 percent; 2. Make it easier to do mixed income; and 3. reform the complicated and detailed tenant compliance aspects of the program, which are very costly and inefficient for little benefit.

Sheridan: Pass the tax credit modernization bill, which fine-tunes many of the problems we currently experience; and increase the tax credit to 9 percent for the preservation/acquisition price of Sec. 515 Rural Housing Service projects. These deals are so thin as it is, any increase in basis or rate would preserve more projects.

Smith: Streamline it. You could do the whole program in four pages of the Internal Revenue Code, with everything else in regulations: Repeal recapture bonding and the 10-year rule; and enact a tax credit specifically and exclusively for legacy public housing. As I discussed in my three-part series on public housing (The Ghost of Christmas Yet to Come, The Gordian Knot, and The Essential Housing Authority), that would stimulate privatization, which is essential.

Q: The political deck seems stacked in favor of homeownership at the cost of renewed federal assistance for rental housing development. In view of the collapse of the subprime market, how can the industry get federal leaders to dedicate more resources to benefit lowincome renters?

Archuleta: The collapse of the subprime market is causing renewed focus on rental housing because families coming out of homes they can no longer afford will need a place to live. This creates an additional demand for rental housing.

Bodaken: The subprime mortgage catastrophe is a direct result of “one size fits all” thinking. Homeownership is indispensable to America’s housing policy. But it is not sufficient. As more and more Americans rent and homeownership rates inevitably decline, federal and state leaders need to better balance resource allocation for affordable rental housing.

Edson: While shoveling snow in the winter and mowing the lawn in the summer, I have always thought that efforts to get very low income folks into homeownership are designed to make the poor suffer like the middle class. Hopefully the subprime crisis will make it clear that it is a mistake to prescribe homeownership for all—lest the American dream turn into the American nightmare.

Sheridan: The story needs to be repeated that successful housing policy includes both homeownership and rental housing, in an appropriate balance. The misguided notion that everyone should be a homeowner resulted in the subprime market meltdown. The truth of the matter is that as young families form they most often need rental housing before they build up equity for a home. On the other end of the spectrum, ignoring the housing needs of seniors casts a blind eye to that fact that almost 50 percent of all renters in government-assisted housing are seniors who have moved out of homeownership.

Smith: We in the industry have become prisoners of our own sectoral and tenure divisions. We ought to be proposing rent-to-own programs, shared ownership, privatizing public housing into nonprofit ownership via United Kingdom-style stock transfer, and other innovations that bridge across tenures. We also ought to see both income and tenure as continua. You may be extremely low income today, in which case you need income subsidy, secured tenure, and help to improve your lot. When you move up to very low income, you may need the same things. By the time you reach the LIHTC income cap, you’re likely to be able to move to market rental, and in some cases into first-time homeownership. Meanwhile, properties developed as one tenure (for example, LIHTC rental) can attract residents, who in turn over time become a community, and eventually they can motivate a change in tenure (for example, to limited-equity co-operative or another ownership form). Change of tenure can thus parallel change in income status. We do very little of this in the United States, and because of that, people and properties tend to be pigeonholed and lose their social and economic mobility.

Q: What are the top three things you would ask the next president and Congress to do to make existing federal programs more effective to expand the supply of affordable housing or the affordability of existing housing?

Baron: One way or another, low-income families need a rent subsidy. More money for existing housing vouchers is one possible answer.

Lubell: Establish a national housing policy that addresses the full range of critical housing issues facing Americans, including: the growing housing and services needs of the elderly; the housing needs of persons affected by disasters; the risk of foreclosure faced by today’s homeowners; the increasing housing challenges facing working families; the environmental and livability challenges posed by sprawl and poorly coordinated housing and transportation policies; the need to improve the energy efficiency of residential housing without compromising housing affordability; and the housing challenges of veterans, people with a disability, the poor, and the homeless.

Edson: Reduce as much federal regulation as possible. The tax credit teaches that wholesale federal government regulation is not needed if significant penalties are imposed for violating the rules.

Sheridan: More deep tenant subsidy, either project-based Sec. 8 or vouchers or U.S. Department of Agriculture (USDA) Sec. 521 Rental Assistance needs to be provided from federal sources. I would suggest that in normal times, sufficient sources of capital exist to construct rental housing. The missing resource is the deep tenant subsidies needed to reach the low-income and very low income households for whom 30 percent of income is less than the operating cost of the typical LIHTC project. (For tax credit projects specifically), provide funds to assist in filling financing gaps and increase tax credit authority to states so that more credits are available to fund more projects.

Smith: Provide a general supremacy statute. For instance, anything specified in the LIHTC statute overrides anything to the contrary in a Department of Housing and Urban Development (HUD) program. It would simplify using HUD loans at a single stroke.

Q: What are the top three new federal programs the next president should propose to expand the supply of affordable housing or the affordability of existing housing?

Baron: Create a national development bank for major projects. It could provide a federal guarantee for debt instruments to be used for major regional redevelopment projects and repaid with increased tax revenue.

Bart Harvey: Use revenue from curtailed home mortgage interest deduction for: 1. Homeownership counseling for the subprime issue and a government-backed effort to take in foreclosed properties in an orderly way in those states and cities most impacted; 2. a new homeownership tax credit; 3. expansion of the LIHTC and expansion of credible modifications advanced by NCSHA; and 4. creating a fund for inclusionary zoning that would be allocated by state agencies to projects that encouraged and matched localities’ efforts to deliver fair and equitable inclusionary zoning for developers.

Sheridan: A deep tenant subsidy program that is project-based that can be used with LIHTC or state programs without other HUD or USDA involvement; a preservation program for HUD, USDA, and LIHTC projects that would give preservation buyers resources such as grants or soft loans they need to compete with the market-rate buyers; and an expanded program of grants for construction, per diem or operating subsidies, and supportive service dollars to truly provide for the homeless.

Edson: Outside of the housing trust fund (now pending in Congress), we don’t need new programs. Let’s adequately fund and administer what we have now.

Q: What are the three most important policy initiatives needed to preserve the existing stock of affordable housing?

Bodaken: At the federal level, fully appropriate, on a 12-month basis, funding for renewals of all project-based Sec. 8 contracts; enact the omnibus preservation bills to be introduced by Rep. Barney Frank (D-Mass.) and Sen. Chuck Schumer (D-N.Y.) in the spring of 2008.

Galante: Create a tax incentive for existing owners to sell to entities that will preserve long-term affordability. We can’t afford to keep recreating affordability. We are now redoing and rebuying tax credit deals.

Smith: Fund soft capital resources to facilitate sale to mission-oriented entities (nonprofit and for-profit). A national-level exemption from real estate taxes for permanently preserving affordable housing would be a useful tool.

Q: What are the top three new federal housing-related tax law changes the new president should suggest?

Baron: Create a new tax incentive to encourage foundations to get more involved.

Bodaken: Eliminate the exit or recapture tax on investors of existing affordable, federally subsidized rental housing.

Sheridan: Exit tax relief to reduce the burden on owners agreeing to sell to preservation entities; increase the tax credit rate from 4 percent to 9 percent for the acquisition portion of a preservation project; and modify the method for setting tax credit project rents to rely on the Consumer Price Index rather than the area median income (AMI).

Q: What can the federal leadership do to reduce the cost burdens imposed by our patchwork of local land-use regulation and the accompanying lack of local support for affordable housing development?

Archuleta: I don’t think there’s any way local government will give up local control—that’s something it holds close to its heart and is at its very reason for existence. On a federal level, we need to encourage and financially incentivize local governments to do the right thing by zoning land and appropriating local resources for the production of affordable housing.

Buckley: Put together a program that would reward smart, compact development at a local level (rather than try to be a super-regulator). (It could) provide infrastructure dollars to a metropolitan area if they use it in ways that will encourage denser, transit-oriented development that provides more affordable housing options for low- and middle-income folks. This is being done on a smaller scale in the housing bond money approved by California voters last year.

Edson: The feds have been trying to encourage reduction of local restrictions for 40 years to no avail. The only practical way is to deny HUD funding to communities with unreasonable or excessive restrictions. Don’t hold your breath.

Lubell: Regulatory and other barriers to development that prevent the market from responding efficiently to increases in demand in strong markets have driven up housing prices significantly, contributing greatly to shortages of homes affordable to working families. The federal government should provide financial incentives to encourage states and localities to expand opportunities for new development and rehabilitation of older homes, including increased density around current or planned transit stops, provided that a share of new housing in those areas is affordable to families with a range of incomes. The federal government should also educate states and localities on policies that can help to boost supply, rather than constrict it. HUD’s Regulatory Barriers Clearinghouse is a step in the right direction, but it is a very small operation. The federal government should be investing much more in this effort.

Roberts: The Office of Fair Housing and Equal Opportunity must be emboldened to challenge exclusionary zoning on the grounds of disparate impact on minorities. The most segregated communities are now in the liberal Northeast because of “snob zoning.” The next president should propose laws that encourage smart growth, of which affordable housing is a key component, and (they should) penalize communities that refuse to allow multifamily housing in their zoning.

Sheridan: There needs to be a federal incentive—or if that fails, a disincentive—to local, county, and state governments that “penalize” affordable housing by layering on impact fees, property taxes, and other costs that increase the cost and rents at affordable housing projects.

Q: Does the federal budget deficit mandate slow or no growth in federal housing subsidies for the foreseeable future, no matter who controls Congress? What does that mean for housing policy?

Bodaken: The next Congress will face a tsunami of federal entitlements that will indisputably constrain the ability of the federal government to significantly expand federal housing subsidies. Congress should consider a set of matching grants to states and localities that allocate their own limited resources to preserving or producing affordable rental housing.

Edson: Yes. No matter who wins the presidency, there will not be much more money for housing.

Sheridan: Unfortunately, this is a very real problem. With entitlement programs and defense eating up more of the budget every year, there is less flexibility available in discretionary programs. Housing policy will likely suffer until defense spending decreases or the looming shortfalls in Social Security are addressed.

Smith: Mandate? No. Make it very likely, yes. Housing policy is increasingly being driven bottom-up, from local, municipal, and regional government. That will continue.

Q: What can the affordable housing community learn from welfare reform and Medicare reform?

Edson: Welfare reform was essential to preserve the program. Don’t think that housing is in such dire straits.

Roberts: In the mid-1990s when welfare reform was debated, many on the left predicted it would increase homelessness. Just the opposite occurred. Any aid to the poor must be evaluated on whether it encourages or discourages personal responsibility. The Earned Income Tax Credit is successful because it reduces poverty while encouraging work. Welfare-to-Work Sec. 8 vouchers were a flop because they did not increase work because able-bodied recipients received the benefit whether they worked or not.

Smith: Get in front of change, be dynamic, don’t have static views and a bunker mentality. Find ways to couple housing assistance with incentives to work and a family support system that makes it possible for people to work. Reduce or eliminate the “dependency trap” of means-tested assistance.

Q: Several experts have said current housing programs would get much more support if they served a continuum of needs from the very low income to moderate-income working persons; and required some form of self-help and self-sufficiency from recipients of housing assistance so they eventually could give up federal aid. What’s your view?

Edson: I think both would be a good idea, but it’s politically difficult to raise income limits.

Galante: I absolutely agree that not only would housing programs get more support if they served a continuum, they would be more effective as a community and neighborhood building tool.

Sheridan: I agree that if federal programs were designed to be flexible enough to reach a full continuum, they would receive more support. I disagree with requirements to force residents to participate in self-help programs or self-sufficiency. There is much need for such programs in affordable housing, and they should be available, but not required. As to implementing a continuum of federal support, I would suggest that a new federal program is needed to replace many of the older HUD and USDA programs, the new program using a variety of assistance, from grants to loan guarantees to tax benefits, each of which could be blended to provide assistance to owners trying to reach targeted income groups.

Roberts: I agree, and the Earned Income Tax Credit for able-bodied recipients should be expanded and perhaps replace some housing programs for ablebodied recipients. Our nonprofit administers a county program in which homeless heads of household are required to work in order to receive a Sec. 8-like housing subsidy. It has been very successful.

Smith: Yes, a continuum is helpful. Otherwise housing just looks like welfare in disguise—and besides, it’s better policy to have multiple tools for multiple income bands. We should provide matching funds or something analogous for states and localities that are targeting 60 percent to 90 percent of the AMI in workforce housing. For extremely low income residents, show a linkage between receipt of assistance and moving toward self-sufficiency.

Another great resource for information on what state and local governments can do to address housing needs is Our Communities, Our Homes, a book co-authored by Jack Kemp, Kent Colton, Nicolas Retsinas, and Henry Cisneros. The book outlines a comprehensive approach to housing policy and lists a wide range of resources for further details and examples of state and local efforts in each policy area.

It is published by Harvard University’s Joint Center for Housing Studies, www.jchs.harvard.edu.

Kemp and Cisneros are former secretaries of the Department of Housing and Urban Development (HUD). Retsinas is a former HUD assistant secretary and now heads the Joint Center. Colton was the CEO of the National Association of Home Builders from 1984 to 1999.