Housing Policy in America: Taking Stock
Green, Richard K., Mortgage Banking
After more than 100 years of American housing policy, it is fair to ask a fundamental question: Has it been a profound success, or an abject failure? The answer, of course, depends much on one's ideology, but a case could be made that it has been both.
Among its successes are a housing stock now at its highest quality level ever, declining overcrowding and secondary market that has made mortgages as liquid as Treasury securities. Among its failures are persistent homelessness, low-income people paying an increasing fraction of their incomes on rent and increasing impediments to young families becoming homeowners.
How we have come to this mixed state of affairs, and how we might proceed from here, is the topic for discussion.
The Homestead Act of 1862 is as good a place as any to begin our story. The act not only provided its beneficiaries a deep subsidy (free land in the unsettled West in exchange for a promise to live on it and farm it), it also began an important pattern: the use of housing as an instrument to achieve national social and economic goals. The historian Frederick Jackson Turner noted that the West served as a "safety-valve" for the unrest arising from industrial working conditions and the crowded, unsafe tenements of the cities of the East.
The Homestead Act thus served two nonhousing-related national purposes--the settlement of the West and the relief of social pressures in the cities. That it also provided subsidized housing was an almost incidental, albeit still important, outcome.
While the Homestead Act did relieve some urban pressures, it was not quite as successful a program as our mythology might suggest. Western migration slowed down urban growth, but it did not stop the growth of cities and their associated problems. Social reformers, therefore, tried to change living conditions directly by improving housing and its related infrastructure.
Among the earliest of these efforts was the formation of the New York City Tenement Commission, whose recommendations spurred New York to pass legislation that outlined the bare statutory minimum of what constituted adequate housing. While the Tenement Act was not well enforced in its early years, it did serve as something of a model, and it began a history of local building and zoning codes that would improve substantially the quality of the American housing stock.
Unlike the Homestead Act, the New York City commission's reforms clearly had the primary purpose of improving housing conditions. Nevertheless, housing was still viewed as a means to a larger end: the reformers believed poor housing conditions caused moral degradation and slothfulness. While the improvement of housing was in and of itself a laudable goal, the reformers considered it an instrument for the "social improvement" of the masses.
The next step after reforming housing conditions involved the beginning of active government participation in building and financing houses. President Franklin Roosevelt's New Deal brought the federal government into a number of new areas. The Public Works Administration (PWA) financed slum clearance, low-cost housing and subsistence homesteads. These subsistence homesteads provided low-interest, long-term loans for the purpose of fostering, in the words of the 1933 National Industrial Recovery Act, "decentralization" of urban areas. The United States Housing Act of 1937 financed the construction and operation of housing by public housing authorities. This act and its amendments would ultimately be the impetus for the building of more than one million units.
New Deal housing finance programs included the establishment of the Federal Housing Administration (FHA) the Federal National Mortgage Association (Fannie Mae), the Federal Deposit Insurance Corporation (FDIC) and the Home Owners Loan Corporation. The Federal Home Loan Bank System was created in 1932, during the Hoover administration. These programs all contributed to a revolution in housing finance, by replacing short-term, high-interest-rate, balloon-payment mortgages with long-term, low-interest-rate, self-amortizing mortgages.
While several of the institutions created in the 1930s (especially Fannie Mae and the Federal Home Loan Bank System) have changed dramatically since that time, the programs of that decade clearly represented the birth of the modern American housing finance system and remain ubiquitous in one form or another to this day.
Once again, however the purpose of these programs was not only to provide housing but also to stimulate economic activity, provide jobs and stabilize the financial system. In fact, while the New Deal produced a number of innovative housing programs, the end of World War II and its aftermath was perhaps the first era in which the federal government began a policy of "housing for housing's sake."
Two new programs from this period stand out. First, the creation of the Veterans Administration (VA) loan guaranty program toward the end of the war allowed veterans to purchase houses with no money down. While the VA loan guaranty revolving fund has had some serious problems recently, the program helped increase the nation's homeownership rate and must be judged an overall success. Second, the explicit purpose of the amendments to the 1937 Housing Act was, in the words of the Urban Institute's Ray Struyk, "almost exclusively to assist poor households to live in adequate conditions."
During the 25 years after the war, public housing construction exploded. While Chart 1 (Chart 1 omitted) shows that public housing construction never has been a large percentage of national housing construction, it did reach a measurable and sustained level for some time. It is also fair to say that in the minds of many, this period was characterized by the construction of public housing "mega-blocks" in Chicago, St. Louis, Detroit, Baltimore and other cities. Although mega-blocks were always a small part of overall public housing construction, some public housing authorities (especially Chicago's) were inspired by the work of architect LeCorbusier. "Modernists" saw numbingly uniform blocks as a mechanism for revitalizing their cities. Those projects made up of skyscrapers were supposed to dominate their neighborhoods, which were (correctly) perceived as decaying and dying.
The only problem with the block designs was that no one bothered to ask potential tenants whether the blocks might be desirable places to live. We now find it obvious that such projects were disastrous; flaws were inherent in their design. The design of these housing projects went beyond putting low-income people in dehumanizing conditions--they did worse: by their very mass, they stood as powerful testimony to an ill-conceived, poorly executed housing policy and, as such, tainted all government involvement, good and bad, in the production of low-income housing.
The Pruitt-Igo project in St. Louis was perhaps the most infamous of the public housing blocks and helped bring on the near-death of public housing construction in this country. This $30-million project was such a catastrophe that it was physically destroyed after only 15 years. (The well-known film showing its demolition actually makes it an especially compelling symbol of what can go wrong when government gets involved in housing construction).
However, while the federal government had some problems constructing decent, low-income rental housing after the war, it did much better at financing owner-occupied housing, particularly for the burgeoning suburban middle-class. Like the VA, FHA became an exceptionally popular program. Both programs, however, because they guaranteed or insured mortgages that went into default, subsequently helped bring about the birth of the secondary mortgage market.
Looking for liquidity
In 1948, Fannie Mae purchased some VA loans, and afterward, the secondary mortgage market developed in fits and starts until 1970, when GNMA took the step of issuing its first mortgage-backed security (MBS), consisting of pools of FHA and VA loans. After 1970, the secondary mortgage market exploded. Freddie Mac was born and, along with Fannie Mae, created the uniform lending standards required to turn packages of conventional mortgages into liquid securities. From 1970 to 1980, the percentage of all mortgages that were securitized rose from next-to-nothing to nearly 20 percent
This is not to say the secondary mortgage market was wholly a success. Some market dealers in the early 1970s perpetrated frauds by using funds held for forward-delivery commitments for speculation. Nevertheless, the sheer increase in the volume of secondary market activity is evidence enough that the popularity of the secondary market grew rapidly.
The contrast between the two types of government housing programs--large construction and financing--was stark. On the one hand, when government involved itself in the actual building of public housing, it seemed only adept at producing catastrophes. While this view of the government's track record in this area is perhaps a bit (and only a bit) unfair--considering that smaller scale federal construction programs manifestly improved housing conditions for many--it was hard to ignore such enormous failures as Chicago's 4,415-unit Robert Taylor Homes--perhaps the prototypical "superhousing" project. Besides containing drab, cell-block-like units, the Robert Taylor Homes also had become a nest of crime. On the other hand, when the government created insurance programs and secondary markets to grease the wheels of the housing market, it produced rousing (and until the early 1980s, almost uniform) successes.
Under the circumstances, it is not difficult to understand a change in the nation's attitude toward housing policy by the late 1970s. Congress and the administration no longer seemed interested in allowing the government to construct housing. The perception was that, to the extent the government could help provide housing, it was only to the extent that it could lubricate markets to work more smoothly.
So it came to be that, in the words of the University of California at Berkeley's professor of city and regional planning, Michael Teitz, economists achieved dominance over housing advocates in the national debate over housing. Thus the Reagan administration encountered little opposition in the dismantling of a variety of HUD construction programs and was successful in shifting the bulk of housing-assistance money from construction to rental assistance. This shift was evidenced in the form of Section 8 certificates, a program started with the 1974 Housing and Community Development Act.
The administration had a far more difficult time, however, in its attempt to get the government out of the housing finance business. Efforts to privatize FHA, and to break up Fannie Mae into small pieces and make it entirely private, encountered strong opposition. Undoubtedly, part of the reason Congress could successfully oppose efforts to privatize FHA and Fannie Mae was because theirs were deemed to be successful programs. Interestingly, one of the reasons they were deemed successful was because they provided benefits to people other than housing consumers: bond dealers, mortgage bankers, savings and loans, real estate agents and others. The programs--had and continue to have--a broad constituency beyond the low-to moderate-income housing consumer. (This is also why the mortgage revenue bond program, which uses tax-free bond money to subsidize mortgages, continues to survive, albeit somewhat tenuously because it requires annual reauthorization by Congress in times of severe budget constraints).
One could even argue that by the mid-1980s, the nation (or the administration and Congress, anyway) lost sight of whom housing programs were supposed to benefit. HUD consequently lost its sense of purpose and, in the process, ignored or participated in a series of scandals and hopelessly mismanaged its finance programs.
The history of American housing policy helps explain a lot about the paradoxes we see in assessing America's housing position today. For example, the development of the secondary mortgage market has clearly increased the liquidity of mortgages, lowered mortgage interest rates some and substantially reduced the likelihood of the kind of credit crunches we have at times seen in the mortgage markets of the past. On the other hand, secondary market agency guidelines seem to restrict the flexibility of financial institutions in granting "problem mortgages" for properties in the inner cities and for people who have accumulated little wealth. While Fannie Mae and Freddie Mac have used pilot programs to investigate making their guidelines more flexible, getting mortgage capital into core urban areas seems to remain a problem.
An even more important contradiction arises from the fact that building codes and land-use regulations have become increasingly more restrictive. While it is no doubt true that these restrictions have improved the quality of the nation's housing stock, they have also served to push up the cost of the lowest cost housing.
No one can argue with the fact that the lowest quality housing stock nationally is far better today than it was at the end of World War II. The proportion of housing classified as substandard has fallen from more than one-third in 1950 to less than 3 percent today. However, the fact that the lowest quality housing is better than it was 40 years ago is of little comfort to the low-income family who cannot afford it. Chart 2 (Chart 2 omitted) demonstrates how very low-income families are living in better quality housing--and how they are paying more for it.
While a commission appointed by HUD Secretary Jack Kemp has blamed restrictive land use and building codes as leading culprits behind the affordability crisis facing those at the lowest end of the income scale, it would be overly simplistic to blame these codes alone.
At least two important nonhousing-related phenomena have made the lowest cost housing less affordable. First, when the Federal Reserve Board in the late 1970s made a decision to focus on controlling inflation, rather than on stimulating growth and employment, it changed the monetary regime from concentrating largely on stabilizing interest rates to concentrating on money-supply growth. This change arguably contributed to a rise in real (i.e., inflation-adjusted) interest rates; a rise that has stuck with us ever since.
The increase in the cost of capital (which the Tax Reform Act of 1986 compounded) meant that investors in multifamily properties needed to charge higher rents in order to earn adequate returns. It also meant that many properties at the low-rent end of the housing spectrum became money losers. Owners of these properties often had no choice but to remove these units from the housing stock.
The second phenomenon that contributed to the housing crisis was the nation's ever-widening income distribution, especially among households headed by young adults. William Apgar of Harvard's Joint Center for Housing Studies has tabulated income data from The American Housing Survey published by the Census Bureau. Apgar's tabulation shows that the real incomes of those in the lowest quartile of households headed by those under the age of 25 decreased from nearly $11,000 in 1974 to $7,000 in 1989 (1989 dollars), a decline of more than 35 percent.
To some extent, then, the nation doesn't have a housing affordability problem so much as it has an "income insufficiency" problem at the bottom of the income distribution scale. Clearly, falling incomes among young, low-income renters have made rental housing less affordable. They have also made homeownership less accessible and have contributed at least in part to a falling homeownership rate nationally (see Chart 3) (Chart 3 omitted). When rents rise relative to income, accumulating a down payment becomes more difficult, and the goal of owning a home of one's own becomes more distant.
To the extent current housing policy can be summarized, it is in the form of the current National Affordable Housing Act. The act contains several basic components, of which four stand out.
In terms of proposed funding, the largest component of the act is the Home Investment Partnership program (HOME). HOME consolidates a number of programs from the past and seeks to use the funds from those programs to match state and local funding for imaginative, well-organized housing programs.
The second-largest component in terms of proposed funding is the rental-assistance program. The act contains an important innovation because it would allow tenants rental-assistance certificates to shop around for housing, rather than be confined to choosing from a small number of units. This would allow program participants to come closer to becoming full-fledged participants in the housing markets, and it might help stimulate the supply of affordable housing. More important, it would help low-income people scatter throughout housing markets, rather than concentrate in certain areas.
The third, and perhaps most famous portion of the legislation, is HUD Secretary Jack Kemp's Home Ownership for People Everywhere (HOPE) program. HOPE proposes to assist tenants in owning and managing what are now public housing authority units; it also calls for helping low-income families to buy HUD-assisted units and units HUD now owns as a result of foreclosed FHA mortgages. All low-income housing sold under HOPE would be replaced. While the program is conceptually ambitious, it has so far been modestly funded.
The fourth component, while not involving significant funding, might nonetheless come to be very important. For state and local governments to receive HUD assistance, they would be required to develop five-year comprehensive housing strategies. Very often, housing policies are put together piecemeal, and specific programs can sometimes work at cross-purposes with each other. Requiring states to put together an actual strategy might go some way toward reducing this problem.
Beyond the provisions of the National Affordable Housing Act just listed, key reforms of the FHA program contained in the act will have an enormous impact on the way housing will be financed, and, therefore, on housing policy in the years to come.
These reforms were a response by the Bush administration to stop what it perceived as hemorrhaging in the FHA mortgage insurance funds. After 45 years of virtually uninterrupted success in insuring single-family home mortgages, regional recessions in the 1980s brought on a series of foreclosures that began draining the Mutual Mortgage Insurance Fund (MMIF), which covers the insurance claims arising under the single-family mortgage insurance program. At the same time, poor management by HUD of the FHA multifamily insurance programs put those programs reserve funds in the red.
As a result, FHA withdrew completely from the investment housing finance market. The FHA also made its down-payment and closing-cost requirements for its single-family program more stringent and raised the cost of its single-family mortgage insurance premiums. These last changes will doubtless diminish FHA's role in the single-family housing market. How much so remains to be seen.
The history of American housing policy leaves us several political realities we must deal with in the future. First, the public has a widespread perception that government housing-construction programs do not work. Second, to the extent housing programs have been popular, it has often been because they have helped achieve non-housing-related goals, such as relieving urban pressures, stimulating the economy and stabilizing the financial system; and developed constituents beyond housing recipients. Third, while its history has not been entirely smooth, over the long term, the government has generally performed well in facilitating the market's ability to finance single-family housing.
The first of these realities helps to explain a fundamental limitation of American housing policy. Unlike food, housing is not an entitlement for Americans: one can be eligible for housing assistance and still not receive it. As a result, the United States has more than three million poor renters who live in housing that is either substandard or not affordable, and yet receive no housing assistance.
The possibility of housing becoming an entitlement in the near future is not particularly strong. Beyond the fact that the nation is now in a fiscal crisis at virtually all levels of government, it appears, to this author, that the public doesn't trust the idea of programs whose whole purpose is to provide housing. To cite one example, in Wisconsin (generally ranked as among the more "liberal" states in the country), voters last spring overwhelmingly turned down a proposed state constitutional amendment that would have allowed state funding of low-to moderate-income housing.
Given this constraint, housing programs in the near future must, to a large extent, make do with resources that are already available. This is why the National Affordable Housing Act's requirement that states and local units of government develop housing stratagies is so important. At each level of government, policy coherence will help get as much housing-value added as possible out of each dollar of housing resources.
One particular aspect of the HOPE program that is appealing is that it proposes to use resources--public housing authority units and FHA real-state owned units--already in existence and improve upon them. The imaginative nature of the HOPE program and many of the ideas surrounding it--"empowerment" and "self-sufficiency"--also contribute to its appeal.
But while HOPE could well make an important contribution toward solving the nation's housing ills, it should not be looked upon as a panacea. In the first place, some of the units HOPE seeks to convert to tenant management and ownership are so badly designed that they will never be a true source of decent housing--in any form. In the second place, HOPE, as it is now constituted, has a serious flaw: new owners of units are legislatively precluded from gaining any benefits from appreciation. One of the most important benefits arising from owner-occupancy is the accumulation of wealth; in its current form, HOPE stands to prevent this from happening. Finally, not all low-income people have either the background or the inclination to become homeowners or managers and would be best served by affordable rental housing.
Very often, in fact, the housing policy debate starts with the assumption that rental housing is inherently inferior to owner-occupied housing. A variety of surveys have shown that the nation has an almost messianic belief in the value of owner-occupied housing. For many low-income people, and particularly for many of the homeless, however, homeownership in any form is not an immediately practical response to their housing needs.
In light of the need for rental-housing assistance, the provision of the National Affordable Housing Act that amends past housing acts to allow for more "flexible" rental-assistance certificates is encouraging. A movement toward a more-flexible arrangement could accomplish two goals. First, after giving potential tenants more market power, they should be able to find housing at a given level of quality, (e.g., a two bedroom home) at a lower cost. This serves the purpose of allowing scarce resources to stretch farther. Second, when low-income families can live anywhere, they can scatter throughout a community and can thus alleviate the problems that seem endemic to areas with high concentrations of low-income housing.
For such a program to work, however, landlords must accept the notion of taking rental-assistance certificates. But, landlords must first be convinced that accepting rental certificates does not also mean taking on onerous regulatory requirements--which is still the reality. Landlords must also be convinced that tenants with rental certificates are as desirable as any other tenant. Pilot programs teaching tenants how to care for their homes have had some success in achieving this goal. Given the high levels of multifamily housing vacancies in some American cities, now would seem to be an optimal time to strengthen rental-certificate programs in certain areas.
While the nation's current housing stock can help solve some of its housing ills, more low-cost housing still needs to be constructed in some areas. Given that direct subsidies for doing so will be small and rare in the future, it will be important to use local, state and national housing finance entities to leverage the few funds that are available.
To give one example, Fannie Mae and Freddie Mac could use state housing authorities as underwriters for funding multifamily mortgages and, as such, become a conduit for funding multifamily housing. State housing authorities can use surplus funds generated from mortgage revenue bonds to offset underwriting costs. This would get capital to the multifamily and special-needs markets efficiently and at low cost. With the cost of long-term capital so high, every basis point counts.
This is also why the elimination of any regulation that does not meet a benefit/cost test and the streamlining of the regulations that remain are so important. As burdensome regulations drive up both soft costs and operating costs, they push up the minimum rent investors require to meet their obligations and earn an adequate return--or they drive investors out of the market altogether.
One final point, made necessary by a just-released Urban Institute study. Our nation will always come up short in attempting to alleviate housing problems if housing discrimination remains widespread. The Urban Institute study suggests that we still have a lot more housing discrimination than we might like to think. If people cannot choose where they wish to live, "mismatches" between households and houses will remain with us forever.
During the next several years, the administration of housing programs may be just as important as the housing programs themselves. Not only must we get the maximum benefit possible out of each scarce housing dollar, we must also have housing programs that are completely free of waste and corruption, so that they become above suspicion.
In the long run, the only way we will assure that everyone is adequately housed is to make housing an entitlement. But, until the reputation (and the nation's fiscal condition) of government housing programs improves dramatically, that is just not going to happen.
Richard K. Green is assistnat professor of real estate and urban land economics at the University of Wisconsin-Madison. He also chaired the Wisconsin Housing Policy Task Force, a panel appointed to streamline the state's housing policy apparatus. The author would like to thank Stephen Malpezzi for his valuable assistance.…
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Publication information: Article title: Housing Policy in America: Taking Stock. Contributors: Green, Richard K. - Author. Magazine title: Mortgage Banking. Volume: 52. Issue: 1 Publication date: October 1991. Page number: 14+. © 2009 Mortgage Bankers Association of America. Provided by ProQuest LLC. All Rights Reserved.
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