The housing policy innovation inversion

March 23, 2007 | Affordable Housing, HUD, LIHTC, Policy

For the first time in nearly twenty years, affordable housing is rapidly rising on the political agenda.  And why?  Because for twenty years we’ve been living through a housing policy inversion, in which the normal idea flow is reversed — and the consequences are unbelievably profound, obscuring the critical trends until just recently.



Policy ideas used to be clear, now they’re foggy


Given the existence of a multi-level government — Federal, state, and local — ideas and policy can flow either of two ways:


·         Top down.  From higher levels of government (e.g. national) to lower (e.g. local).

·         Bottom up.  From lower levels of government up to the national.



Which way is government policy?


The top-down era: 1937 through 1985.  From 1937 through 1986, affordable housing policy in the United States was driven top down: it originated with the Federal government, and for most of that time, with an individual: the (Democratic) President of the United States.  Indeed, the history of housing policy advances is written by legislation that bears an unmistakable Presidential stamp:


1934.  Roosevelt.  Establishment of the Rural Rehabilitation Division, the predecessor to the Farmers Home Administration, direct hard debt for rural housing

1937.  Roosevelt.  National Housing Act, creation of public housing.

1949.  Truman.  National Housing Act, establishment of the goal of ‘a decent home for every American family’.

1965.  Johnson.  Establishment of HUD as a Cabinet branch.




1968.  Johnson.  National Housing Act, expansion of FHA mortgage insurance lending programs (Section 221(d)(3) and Section 236) and rent supplement, the precursor to Section 8 as a deep income subsidy.


Between 1968 and 1985, however, for many complicated reasons, HUD lost its mojo.



Don’t worry, HUD baby, we’ll get your mojo back!


HUD went into an extended hiring freeze, so the inflow of bright new thinkers dwindled.  Staff cutbacks tended to select out the innovators, or successive waves of administrators wittingly or otherwise counseled them out.  HUD funding shrank, programs disappeared, the inventory suffered.  It was, in short, not a happy place to be.  The nadir came in 1985 and 1986,



Unsafe at any subsidy, Ralph?


when a series of scandals regarding favoritism, grant rigging, and outright patronage in the award of HUD Moderate Rehab funding led to hearings, several high-profile convictions or plea bargains, and a comprehensive distaste for all things HUD caused Congress to enact, among other penances, the Department of Housing and Urban Development Reform Act (DHUDRA).



Things fall apart; the centre cannot hold.” — W. B. Yeats, former HUD Inspector General


In the midst of all this policy wreckage, Congress decided to severely curtail, not to same eliminate, anything that smacked of tax shelter.  The result was the Tax Reform Act of 1986, which as a sop to affordable housing created one new program — the Low Income Housing Tax Credit.


And from that tiny acorn …



One day, I’ll be a whole multi-billion dollar industry


The bottom-up era: 1986 through 2007, and counting.  Starting in 1986, housing policy reversed polarity: instead of ideas flowing down from the national government, slowly but persistently they flowed up.



Ever since 1986, we’ve been experiencing a flow reversal


Some of us [Like you?  Apologizing for missing it? — Ed.] thought that the Low Income Housing Tax Credit was, if not a blip, just another Federal housing program.  Yet out of that allocation — today, $6 billion a year of tax expenditure value and counting — was wrought a whole series of changes:


1977.  Community Reinvestment Act enacted.  Motivates financial institutions to reinvest.  (In this CRA’s thirtieth year, I expect to have much more to say about it in upcoming posts.)

1985.  Caps on tax-exempt bond volume.

1986.  Low Income Housing Tax Credit.  Creates a source of soft equity that meets the CRA investment test.  Allocated by the states, not the Federal government. 

1996.  HUD exits from preservation, instead allowing properties to go market, and protecting residents with enhanced vouchers.

1997.  Mark-to-Market (or M2M).  Reduces expiring Section 8 contracts to market, allows a one-time debt restructuring amnesty (complete with favorable tax treatment). 


I’ve cited the era as beginning in 1986, because that was the sea change, the event that in retrospect is the dividing line, but as the foregoing listing suggests, the conditions were building up before then.  Mark-to-Market, however, was the inversion’s thunderstorm. 


Cats and dogs

Wasn’t HUD going to take care of this?


Up until 1997, HUD properties were a Federal problem.  Yet here was HUD proposing not to preserve them, but rather to let the properties go market.


I remember testifying before the Senate Housing Subcommittee as it was exploring what mark-to-market might entail, and hearing my fellow panelists tell Congress, almost with fingers wagging, that this was a Federal problem and they were darned if they were going to use any of their state money — that is, LIHTC’s and other block grants like HOME and CDBG — to solve it. 



There is no way we’re taking this on


Only a few years later, the states were scrambling to implement renewed affordability programs of one sort or another. 


Just as HUD lost its mojo for many interdependent and self-reinforcing reasons, at the same time the states’ fortunes were rising, through a combination of HOME and CDBG, volume cap bonds, LIHTCs, their role underwriting mark-to-market transactions, and state-level preservation schemes.


HUD goes this way



States go that way


The bottom-up inversion hasn’t stopped at the state level.  As we’ve seen with my posts on zoning as destiny, workforce housing *is* affordable housing, inclusionary zoning, today’s affordability gap, there’s continuing pressure and innovation at the local level, even as this brings localities into conflict with their higher unit of government — the state.  Localities, not states, are seeking to stipulate how rich is poor?, what kind of workforce housing to create, and for whom.


I think this inversion is the reason that affordable housing is only now emerging as a policy issue; it’s taken nearly twenty years for the diversity of grass-roots stories to penetrate the policy fog that has been blanketing the decision-makers high on Mount Olympus Capitol Hill.



Okay, all lobbyists out!  We have housing policy to make.


I’ve previously posted on a dozen of affordable housing’s fifty-year trends: this policy inversion makes it a baker’s dozen.


Will the rising local political pressure push housing affordability back on the national agenda? 



Bubble, bubble, housing trouble

Workers groan as prices double


With Democrats controlling both houses of Congress, at least for the time being, it seems fairly likely.