Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Yesterday we explored the first three phases: Conceptualization, Enactment, and Chaos.  Now the program starts maturing.

 

You’re more successful if you’re Mature

 

4.         Codification.  After a program has been running for a while — measured by time, number of properties, or range of circumstances — the rule-writers take over.  This is regulation and administrative guidance, as opposed to statute.

 

(In the US, it’s common to pass a technical corrections bill in the legislative session following a major initiative, fixing all the typographical errors, mislabeled cross-references, contradictions, and simple oversights that are unseen in the flurry of final drafting but become all too painful when the program is actually implemented.)

 

What, you think something’s inconsistent here?

 

In a laminar political environment, where the administration and legislature are of the same political persuasion, reg-writing is easier but lengthier, for the statutes pass when Congress and President are of one mind tend to be simpler, goal-oriented, and content to give the executive branch broad leeway to interpret the statute.  In a turbulent environment, where the compromise has been painstakingly negotiated word by word, the statute-writers have often left little for the administrators to regulate, and the result tend to be turgid, disjointed, and small-minded statutes.

 

Standardization does wonders for program volume (up!), processing times (down!), and often processing costs (down!) … but at the same time, flexibility withers if not entirely fading away.  (A future post will address how a bureaucracy ages — trust me, it’s not pretty.)

 

I’ve got a lot of experience running the program

 

Codification can last a long time — some programs, like Section 8 vouchers, have been in extended and largely successful codification for almost two decades, but is more commonly followed by …

 

5.         Scandal.  Because housing programs are complex and jargon-laden, the public at large tends to glaze over with tales of corporate shenanigans, but the dear public sits up straight at the galvanizing anecdote. 

 

Who here wants to read about corporate shenanigans?

 

It’s instructive that, in the ongoing Fannie Mae scandals, what really fires up the public is not the massive systemic risk — as described in Greenspan’s last testament — of turbocharging the balance sheet, nor even whether the GSEs are underserving or un-deserving?, but rather the apparently more venal actions of maximizing executive bonuses by gaming the bonus formula.  Personal gain always grabs headlines while policy is relegated to obscure housing blogs.

 

The scandals breed Congressional hearings — there are few things a Representative or Senator loves more than thundering from the dais while some poor witness squirms and stammers under the klieg lights.  Whether these produce any convictions is secondary — it’s great political theater while Representative Fulminate demonstrates his outrage.

 

Housing programs are especially vulnerable to scandal-by-microcosm — what long-time housing advocate and former HUD Deputy Assistant Secretary Helen Dunlap called “rats, roaches and bad plumbing.”  Point a video camera at a rotting ceiling, interview a sobbing resident, cue the anchor intoning that spokesmen for the department promised to do better, and your scandal story is made.

 

We’re bringing you a scandal so lurid you’ll watch us five times a week

 

·         The 1950s’ Section 608 new-production program — fifty years later, it still seems to me to have been a nice, well-designed little vehicle — collapsed amid allegations of excessive developer profit wholly permissible under the program, and indeed a likely consequence of the incentives.  As Time magazine wrote in 1954,

 

The President’s indignation was fixed on rackets that have been well known for years. They grew out of two much-abused FHA regulations. The first, known as Section 608, provided FHA insurance for as much as 90% of mortgages on rental housing projects. It was designed to break, and did break, the back of the postwar housing emergency by deliberately encouraging bankers to be generous in their loans to builders. Section 608 lapsed in 1950 — but not before many unscrupulous builders had taken advantage of its bountiful provisions.

Often a builder could get a high mort gage under Section 608 and then build for much less than the face value of his loan. Then he could sell his new property, with the new owner assuming obligation for the full mortgage, and pocket the loan savings. The windfalls were breathtaking.

One firm got $24 million in loans for an apartment project. It did the job for $20 million and pocketed the difference.

 

Note that language of outrage — rackets! For finding cost savings and giving the government apartments at the price the government wanted to pay.

 

·         In the mid-Sixties, Pruitt-Igoe’s spectacular failure was a story that wrote itself, and shut off virtually all new public housing production.  (Actually, Pruitt-Igoe is a more legitimate case, for as public housing production was shut off, the pure-public development model was also superseded by something better — the Public-private partnership model.)

·         The early-1980s’ resyndication died amid tax-shelter tales — big corporations paying zero tax, urban legends of master lithograph deals — and the Tax Reform Act of 1986 that bequeathed to us both the passive loss rules — boo! — and the Low Income Housing Tax Credit — cheers!

·         Section 8 Moderate Rehab, not an intrinsically awful program, was so discredited by the $300,000 James Watt phone call that even today, Mod Rehab properties are ineligible for LIHTC’s.

·         Even LIHPRHA — admittedly, an extremely detailed program that came out of a highly contentious political environment — would have had a few more years’ funding (and today, it looks cheap at the price) — had it not been for a 1994 series of expose-oriented articles written by a young reporter (who’s since gone on to fame and fortune and now rues his naiveté).

 

Scandal is not inevitable.  The LIHTC has been ticking merrily away for over two decades, and as long the program avoids a major meltdown, it’s probably safe.  (Partly this is because the LIHTC is a superior vehicle to many previous programs, with serendipitous checks and balances.  Partly it’s the clever political equity distribution of letting the states spend Federal money, and sprinkling properties into every Congressional district.  Partly it’s the industry’s enormous shared interest in keeping failures — of which there are quite a few — quiet.)

 

What insolvent LIHTC syndicator?  I don’t know any insolvent LIHTC syndicators.

 

Nevertheless, no program is ever perfectly safe.  Whenever government is putting out a lot of capital, in a complicated arena like housing finance, if the knives come out for you, it’s always possible to make something look awful even if it in fact isn’t awful.

 

Once scandal hits, however, a program is usually headed for –

 

6.         Shutdown.  Some programs are just killed outright — the 1985 and 1986 Tax Reform Acts were mainly about killing off real and perceived excesses.  Some are zero-funded into submission (as the Administration has been trying to do with HOPE VI even in the absence of a scandal).  Some are regulated into complete inutility.  A few ‘lucky’ programs naturally sunset before scandal catches up with them (Mark to market is an example).

 

We’re putting the money in a safe place

 

Shutdown always has a few last lucky closers, who get in before the grandfathering date becomes effective, or before the money runs out, or who have helpful elected friends who give them a special dispensation.

 

Earmarks?  What earmarks?

 

Postscript.  After shutdown, I now realize, there are two post-program phases:

 

·         Draconian reform.  So Mod Rehab begat DHUDRA, the Department of Housing and Urban Development Reform Act, and the runaway tax shelters begat the passive loss rules and the Alternative Minimum Tax.  DHUDRA is mercifully extinct but the AMT threatens to engulf all tax policy.

·         Total amnesia.  Everybody forgets all the previous lessons, and the program passes out of consciousness, its lessons lost unless obsessive bloggers bring it back to light.

 

 

 

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