Forget the incremental approach to affordable housing. With a new Congress and a new president scheduled to take office next January, advocates tell AFFORDABLE HOUSING FINANCE there’s no point in tinkering around the edges anymore. They are calling for a complete rethinking of federal housing policy and how federal resources should be used.

“We need radical new thinking,” said Richard Baron, chairman and CEO of McCormack Baron Salazar and a 2007 inductee into AFFORDABLE HOUSING FINANCE’s Affordable Housing Hall of Fame.

He and others cited enormous problems with low-wage workers’ ability to find affordable housing and the impact of rising foreclosures on failed homeowners and the neighborhoods where real estate markets are not strong enough to rebound from concentrations of foreclosed properties.

While federal government officials and the presidential candidates are talking about policy responses to rising foreclosures, industry leaders say they are responding in an inadequate and piecemeal fashion. They say the responses are just short-term fixes that do not deal with the nation’s housing problems in a comprehensive way that will yield long-term improvements.

Several experts criticized the government response for continuing to focus on homeownership at a time when the pitfalls of promoting ownership to moderate-income families are obvious. They said the responses so far fail to recognize the need to enact policies to encourage production of more affordable rental housing.

“While the subprime crisis is getting so much attention now, people still seem unable or unwilling to focus on the broader crisis in affordable housing,” said Deborah VanAmerongen, commissioner of the New York State Division of Housing and Community Renewal (DHCR). “The federal government has abandoned its commitment to addressing the housing needs of the nation, and that lack of investment has had a devastating effect throughout the country.”

Few would disagree about the need for a more aggressive and proactive federal approach to affordable housing, but as usual, the industry faces internal conflicts and political challenges to making progress.

A long-standing but controversial goal of legendary housing advocate Cushing Dolbeare was to curtail the income tax deduction for interest on home mortgage loans. That idea has a new champion in Bart Harvey, former Enterprise chairman.

He is making speeches calling for limiting the home mortgage deduction and putting the resulting federal tax revenue toward affordable housing programs.

“We need to modify the mortgage interest deduction and related tax savings to more equitably allocate those scarce resources. We should phase out of those mortgage interest benefits above $500,000 and have a Republican and Democratic agreement that the savings, which are literally tens of billions of dollars, would go into four different affordable housing initiatives,” Harvey said.

Without any new taxes and without hurting our homeownership rates, Congress could take the recommendation from President George Bush’s bipartisan panel on tax reform that we modify the mortgage interest deduction and more evenly share it, he added.

“It makes no sense to keep subsidizing larger, more expensive, less green housing when millions of people need assistance with basic shelter,” said Harvey.

Harvey knows that the home building and home sales industries would oppose any limits on the deduction, but he thinks change might be possible given the current crisis in housing—especially if home builders were offered a trade-off, such as a new tax credit for construction of homes for first-time buyers.

Reducing the revenue loss from the mortgage interest deduction is also advocated by Shaun Donovan, commissioner of New York City’s Department of Housing Preservation & Development, because it is the only way to generate federal funds in sufficient amounts to address low-income housing needs.

One of Harvey’s proposals is to use new revenue from curtailing the mortgage interest deduction to set up systems for the orderly intake of foreclosed properties in a way that would help stabilize affected neighborhoods. Strong federal intervention is needed so “we don’t destroy all we’ve built over 20 years,” he said.

In cities like Cleveland, he said large numbers of homes are being abandoned and will have to be demolished, and the aftermath is far-reaching on other homeowners who have not lost their homes. It has “a huge corrosive effect,” Harvey said.

Another possible impact of rising foreclosures is the return of “redlining” in some areas, said Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies. Redlining was the term used to describe the refusal by banks to make loans to any property in certain low-income or minority neighborhoods.

Along with the Brookings Institution, the Joint Center has released a collection of papers intended to help policymakers see the value of rental housing. It is called Revisiting Rental Housing Policy: Policies, Programs and Priorities.

The papers are “a reaction to the demonization of rental housing over time,” Retsinas said. They describe the results of research showing that rental housing helps revitalize neighborhoods and provides “a platform for access to jobs and services.” He said the papers help “make the case for rental housing.”

Another prominent theme among experts consulted by AFFORDABLE HOUSING FINANCE was the need for new policies that recognize the bigger picture of urban development issues.

“Part of the problem is that you can’t look at rental housing for lower-income individuals in isolation. There is a dire need to create and improve mixed-income and mixed-use communities,” said Carol Galante, president and CEO of BRIDGE Housing Corp. in San Francisco.

She called for efforts to help neighborhoods have better schools and better access to health care, retail services, and job centers. She suggested bringing back a version of the old Urban Development Action Grant program, which provided flexible dollars for the neighborhood efforts needed.

That could help what she called the 21st-century challenge of “channeling where new growth occurs (into existing urbanized areas) and what types of homes and apartments are created (greener, denser, and serving a range of incomes).”

Baron echoed the call for a comprehensive approach, pointing out that large-scale redevelopments require too many different sources of funding or approval. He suggested creating a federal development bank to guarantee debt to finance major projects with repayment to come from increased tax revenue.

One of the areas of clear agreement is the need to make preservation of the existing stock of affordable housing a top policy priority.

Many sources blasted the current administration for failing to address this need.

“The federal government has not only failed to put forward funding to assist in these efforts—and in some cases, such as HOPE VI, has consistently proposed cuts or elimination—it also has not adopted laws or regulations to assist these private efforts, such as needed changes in the tax credit program to make it work better with transactions such as Sec. 236 decouplings or Sec. 202 refinancings,” said VanAmerongen of the New York DHCR.

“Preservation of existing affordable housing is critical, and that should be a top priority of any administration,” said Harvey.

A key preservation issue is how to deal with aging public housing.

There is strong support in Congress to reauthorize the HOPE VI program with substantial funding and new requirements for such things as green building. But several public housing officials told AFFORDABLE HOUSING FINANCE the program has become far too cumbersome and complex, adding so many layers beyond the provision of decent shelter that many housing authorities cannot hope to apply, let alone complete projects in a timely or economic way.

In New York City, half the residents of public housing are now earning income above the poverty level, and Donovan thinks that’s a goal all public housing agencies (PHAs) should strive toward. He advocates scrapping today’s heavily regulated system of HUD subsidies to PHAs. He believes it would cut administrative costs and delays and give PHAs powerful incentives to improve management to provide funding by way of Sec. 8 rent subsidies.

(Congress has ordered HUD to deregulate public housing, but the agency has made very little progress doing so.)

Political battles loom

In this election year as in those past, housing leaders still struggle to put their issues higher on the political radar. This time, however, there is far more optimism that they might succeed.

“The good news is the bad news,” said Retsinas. The subprime mortgage mess and its “contagion effect” is very bad, but it creates an opportunity for policy change, he explained. The challenge is to use it as a way to enact a forward-looking housing policy, rather than reacting with policies that “just look out the rear window.”

“This gives us an opportunity to say we should not be obsessed with homeownership … that we can meet shelter needs with rental housing,” he added.

Several industry leaders feel the best chance to win a higher political priority for housing is to emphasize the economic benefits of providing housing affordable to working people. “We have been beating the drum about helping the poor, but it’s starting to fall on deaf ears,” said R. Lee Harris, president and chief operating officer of Cohen-Esrey Real Estate Services, LLC. The industry has failed to adequately promote the economic benefits of affordable housing development, he added. “You can absolutely prove the benefits of housing for the workforce.”

AFFORDABLE HOUSING FINANCE’s sources are placing their hopes on 2009 and the next president and Congress that takes office that January. But they are cautiously optimistic that 2008 might bring a few steps forward as the 110th Congress completes its second year.

There is plenty of housing legislation on our legislators’ plates. In 2007, under the leadership of Rep. Barney Frank (D-Mass.), the House Financial Services Committee cranked out 35 bills that had some provisions on housing, including a bill to create a national housing trust fund, a new affordable housing funding requirement for the government-sponsored enterprises and a bill to revamp the Federal Housing Administration programs. The Senate completed action on none of the bills that cleared the House in 2007.

In response to AFFORDABLE HOUSING FINANCE’s questions, Frank said he is dedicated to the task of helping Americans obtain affordable homes, and that “homeownership is a subset of this, but not the entirety of it.”

On the following pages, AFFORDABLE HOUSING FINANCE presents a range of comments from industry leaders on the state of federal housing policy and what the next president should do.