Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

See any cultural icons you’d like, honey?

 

For the global traveler taking advantage of the weak dollar to troll among the housing policy marketplaces of America, yesterday’s post listed four must-haves:

 

 

 

Beyond these staples, some discerning foreigners will seek the ‘might-fits’ —

 

Perhaps you would like a nice American export, my darling?

 

slightly more exotic inventions that, if handled with care, can produce exemplary leverage, but if misapplied, mis-planted, misinterpreted, or just plain misused, will result only in trouble.

 

 

Might-fit’s

 

1.         A Community Reinvestment Act.  Enacted in 1974, and given meaningful teeth in the late 1980’s, the Community Reinvestment Act has served as an ongoing spur to affordable housing and community development investment and lending by banks and financial institutions.  Its basic principle is simple: banks that operate in a market area are obligated to put capital back into the area, in three ways: lending, investing, and community service.

 

The original theory was that financial institutions, who were extracting money from communities through deposit-taking, were not giving it back to those communities because of racist red-lining.  While the urban conditions giving rise to the premise are long since disappeared, the idea that a bank must make a special effort to put finance into communities where it does business is fundamentally sensible.  Think of it as an in-kind user fee for the privilege of being a chartered and licensed bank in the US.

 

The CRA thus measures outcomes, not process, and gives wide scope for institutions to tackle financial requirements and to tailor their products and services to the customers’ needs.

 

Yes, sir, we can let out your investing patterns to fit your expanded market area

 

Small wonder, then, that a CRA, or something going by that moniker, is a commonly suggested prescription for other nations facing challenges of affordable housing and community development.

 

Why then does the CRA get only a qualified endorsement?  Two sets of reasons.

 

a.         The US CRA does not override normal credit decisions.   The regulators are themselves bankers – that is, the souls of prudence.  While the regulatory oversight process is transparent – stakeholders can comment and do, vociferously – it is handled by entities that understand a bank is not a charity, and has an obligation to apply sensible credit discretion. 

There was a time, early in CRA’s existence, when those selfsame bankers thought it was simply disguised charity.  Over the years and decades, however, the business of community lending has professionalized, and now CRA represents not a violation of normal credit standards, but simply a lowering of spread requirements on the risk curve.

 

Pretty risky

 

b.         The US version has its problems, which others should not import.  Our version is imperfect and could well be improved.

 

These criticism, though valid, do not invalidate the CRA’s intrinsic worth.  It could be tweaked – and before any nation takes up a CRA or CRA-like statute, they should be tweaked.

 

2.         Workforce housing initiatives.  On the face of it, workforce housing — about which I’ve posted many times, and usually favorably – sounds like a clearly beneficial intervention.  Communities need workers at all income levels: affordable housing is essential to modern cities.  Many workers, especially those in critical roles like police, fire, EMT’s – need to live close to where they work.  Still others – teachers, nurses – are lowly paid but vital, so if they have to spend a lot for housing, they will move somewhere else, and the locality will lose quality of life.

 

With all that going for it, what are the risks?

 

Pioneering initiatives are riskier than they a pier

 

Too many ‘key workers’.  Invariably, when cuts are threatened, it’s the front-line rescuers – police and firefighters – who are always trotted out as being those whom we will just have to cut.  But then, when the list is drawn up over professions that are critical, it broadens widely … and all too often, starts to include bureaucrats (a/k/a civil servants). 

 

Every one of us was essential

 

That’s bad on several counts. 

 

And I know counts!

 

It dilutes the political and policy appeal of ‘workforce housing.’  It creates obvious conflicts of interest (those who allocate the cookies being among those first in line to eat the cookies).

 

Overlooking the very poor.  Familiarity with the key workers in one’s town is one of the places where Americans pride themselves on crossing boundaries of economic class.

 

By Jove, I think she’s got it!

 

Workforce housing gives a community’s affluent the moral best of both worlds: we get to contribute our hard-earned tax dollars to those deserving folks, who can be our neighbors just like us (except, of course, that they’re living in housing that our taxes paid for, and never you forget that, son).  That’s fine – harnessing people’s desire to feel good about themselves is one of the great strategies for increasing funding on social-good projects – but it also allows those people to satisfy their charitable urges on the easiest and least expensive group to assist – the almost-like-us working poor. 

 

In pursuing workforce housing, therefore, it is very tempting to write off those below that level as either somebody else’s problem, or intrinsically unsolvable.  Communities that dive into workforce housing shouldn’t be excused from having to tackle the very poorest.

 

House the poorest, not just the workforce

 

Local mercantilism.  It’s likewise tempting, if we’re handing out this precious resource, to restrict it to only our townies – those who’ve lived here a long time.  Similarly, many a community decides that if it’s offering workforce housing, then by golly those who work for the locality must live in town.  So the City of Boston, for instance, requires its teachers and policemen to live in Boston.  This is faintly offensive (since it seems to restrict choice) and self-defeating (since it restricts a locality’s choice), but it’s all too common.

 

3.         Soft debt.  One of my personal favorites, soft debt is capital that is provided with flexible repayment terms.  It has numerous merits, as Sherlock, Holmes recognized:

 

“Soft debt, Holmes?  What on earth do you mean?”

 

The great detective smiled.  “Debt that is not hard,” he said cryptically.

 

Watson chafed at the straight lines he was being given

 

As Holmes defined it, soft debt had these features:

 

 

 

Its great benefit is that it can create up-front affordability and security of tenure, two of the six benefits of homeownership, while allowing government to recoup a portion of its capital through later appreciation. 

 

Why then isn’t it universally used?

 

Spanning the globe, with financing you don’t have to repay unless you have the cash

 

It requires capable state or local administering agencies.  National-level experience with soft debt is not so good, because the further away the lender is from the borrower, the more it looks like grant by another name.  Soft debt thus tends to follow after state housing finance agencies are created, not before.

 

Like workforce housing, it can be captured by local officials enjoying their conflicts of interest.

 

Yes, we’re bureaucrats, and yes, we deserve workforce housing

 

4.         Soft equity via investment tax credit.  Soft equity takes soft debt one step further.  As Sherlock Holmes put it:

 

“I have previously elucidated the utility of soft debt. Soft equity is a further refinement. By employing Wiggins and his friends, I transfer risk to them, an example of the benefits of soft equity. I shall now explain, excerpting from an excellent monograph on the subject in a South African context (link in .pdf).”

 

“The least a fictional character can do is compliment his author.”

 

I’ve spent a lot of time thinking about and describing why housing tax credits work, listing their essential features, their design variables, and their preconditions:

 

Because of their unique features and design variables, investment tax credits are intellectually appealing. 

 

Yes, I drool over their advantages

 

Before introducing them, a country needs to assess whether it has the essential preconditions for success:

 

Preconditions for successful introduction

 

                As the most sophisticated form of money, soft equity requires the most complex and well developed ecosystem to reach its full potential.

 

 

If soft debt has its risks and preconditions, soft equity’s are even greater.  Thus, for it to work effectively, you need not only state housing agencies but also soft debt already in place, and being used.  It’s an acquired taste, one I wish the UK would acquire. 

 

5.         Tax Increment Financing and similar ring-fenced revenue streams.  Another variant of local resources, using principles not dissimilar from those deployed in inclusionary zoning (see Part 1 of this post), TIF essentially pledges a stream of future revenues, and simply diverts them from other worthy causes (like elected or appointed officials’ salaries) to use-it-or-lose-it affordable housing.  As I explained a while back:

 

Because affordable housing always costs money, developers of all stripes rapidly cotton on to any financing source, so it will be no surprise that they make heavy use of Housing Set-Aside Funds (HSAF), a byproduct of Tax Increment Financing (TIF, rhymes with biff), where it eventually becomes soft debt to close the cost-value gap and enable affordable housing to be built (or bought and preserved) in communities that otherwise would never do so, especially those with booming economies. 

 

The estimable quarterly Land Lines, a free publication of the Lincoln Institute of Land Policy, contains a great primer, by Richard F. Dye and David F. Merriman, explaining TIF’s mechanics:

 

The basic rules of the game are illustrated in Figure 1. The top panel shows a land area view of a hypothetical municipality. The area on the western border is designated a TIF district and its assessed value is measured. The lower panel of Figure 1 shows the base-year property values in the TIF (B) and the non-TIF (N) areas. At a later point in time, assessed property values have grown to include the increment (I) in the TIF district and growth (G) in the non-TIF area of the municipality.

 

Incremental revenues (I) are ring-fenced for redeployment in economic development\

 

  

Tax increment financing carves out the increment (I) and reserves it for the exclusive use of the economic development authority [Or affordable housing. — Ed.], while the base-year assessed value (B) stays in the local government tax base.

 

What’s not so good, or why should it be adopted only with caution?  It depends on strong local capacity, both administrative (the locality’s governmnent) and politically (the locality has to want to create affordable housing).  It thus tends to follow after inclusionary zoning, and particularly in high-growth urban environments like America’s blue cities.

 

What’s good about it?  It creates localized subsidy dedicated solely to housing.  Hey, it’s money, and because affordable housing always costs money, more money is good.

 

“Blogging is more or less bunk.”

 

“Any color you want so long as it’s green”           – Henry Ford, developer, explaining what type of money he needs

 

 Filling up with the might-fit’s.  By now our foreign visitor’s valise may be bulging with all manner of American gewgaws just ready to show off to the local parliament. 

 

I want to go home and take my American policies with me

 

But America is vast, and we have by no means exhausted its housing-policy critters and delights.  With all these purchases and acquisitions, what’s not to buy?

 

Don’t buy any policy that will chase you down the road

 

[Continued tomorrow in Part 3.]

 

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