Federal Housing Policy That Mobilizes Resources and Reduces Barriers

Two weeks ago, we wrote about how the federal government can take steps to treat the housing crisis like the crisis it is. We know the government has the capability to lead in a crisis, as evidenced by recent responses to COVID-19 and the climate crisis. We proposed that the first key step for the government to take is to lead and focus the nation, appointing empowered White House leadership to begin taking organizational, administrative, and legislative action.

Today, we want to dive deeper into two additional themes we laid out: mobilize federal capital and assets and reduce barriers and eliminate complexity. Both themes have momentum at the local, state, and even federal levels, with room for even grander vision. They entail a combination of “blocking and tackling” – clarifications, amendments, and building on what works – and bold new approaches to addressing structural housing challenges.

Mobilize Federal Capital and Assets

The federal government is the largest allocator of capital and the largest landowner in our economy. There is no shortage of capital available to address crises, as recently demonstrated by the nearly $800 million Inflation Reduction Act dedicated to combating climate change and the innovation and deployment of clean energy technologies. The government must increase funding for existing programs that work and those that have worked in the past but have been recently underfunded. However, existing programs have had a narrow focus, and new programs will be needed to deliver the scale of units and the range of affordability that the American people need. There has also been more discussion of late of putting vast federal assets – land, existing buildings, and more – to work to address the housing shortage. Any serious housing crisis effort must involve reevaluating and expanding existing federal resources as well as introducing new efforts. In addition, each federal dollar can and should be leveraged to increase the flow of private, philanthropic,?state, and local capital sources. States and cities are raising funding for housing via bond issuances, housing referenda, trust funds, tax incentives and abatements, and new programs; the federal government should be a partner in helping them use their local resources – and leverage private and philanthropic resources – in effective ways.

An effective place to start examining federal resource allocation is understanding which existing programs could inspire expanded and more effective funding. We suggest that the federal government pursue the government-sponsored entities’ (Fannie Mae and Freddie Mac) creating a secondary market for construction financing, echoing their effect on the stabilized lending market. We recommend the GSEs provide liquidity for mezzanine lending for construction projects, blending down the overall cost of financing housing development, a step which will be especially important to counterbalance challenging economic cycles, when housing starts have historically collapsed. Additionally, we see potential to authorize counter-cyclical rate decreases for construction loans during periods of low housing supply. The federal government can create this lower-cost financing by authorizing USDA and HUD to offer certain loans such as HUD 221(d)4 and USDA 515 loans at rates below Treasury rates during low-supply periods (based on pre-defined economic indicators).?

Likewise, it is too difficult for developers to find funding for “missing middle” multifamily projects between 5 and 49 units — the sort of projects that land use advocates have been so successful in passing. We believe the Federal Home Loan Banks could do more to incentivize the issuing of mortgages for these sorts of projects, and that Community Development Finance Institution (CDFI) risk sharing could also play a role here.

The federal government is the holder of a significant quantity of underutilized assets. We recommend authorizing emergency no-cost disposition of some of these assets –?starting with the General Services Administration (GSA)?and the United States Postal Service (USPS) but expanding to all agencies with surplus property –?to local jurisdictions for development into affordable housing. GSA does currently authorize disposition to eligible public entities, but the allowed uses are too narrow, and the process is too burdensome, resulting in limited use to date. We propose streamlining the process with low or no costs depending on planned affordability levels.

Other existing programs can also be oriented towards more affordable housing. The federal government needs to support new financial models to acquire and preserve unsubsidized affordable housing, also called naturally occurring affordable housing. The federal government could provide funding to local governments to create and expand mixed-income housing developments, either through direct appropriations or through a tax credit. Opportunity Zones, a program from the 2017 tax bill with mixed results, could be extended specifically for workforce and affordable housing. The LIHTC “basis boost” for Difficult Development Areas and rural areas could be increased from 30% to 50%, accounting for increased costs.?

In addition to expanding and streamlining these programs, an ambitious proposal would be for the IRS to establish a renter tax credit. Currently, the tax code significantly favors homeownership with little direct support for renters, despite renter incomes skewing lower than those of homeowners. Renters who pay more than 30% of their income on rent, up to the fair market rent in their neighborhood, should be able to claim their incremental rent as a tax credit.

Reduce Barriers and Eliminate Complexity

Many of the factors imposing barriers on production and driving up costs of all kinds of housing, especially affordable housing, are self-inflicted. At the local level, zoning decisions, building codes, and permitting processes have created hurdles to the production of housing at scale. At the federal level, tools and programs meant to spark housing production have grown overly complex and cumbersome, driving up costs and lengthening timelines. During times of crisis, the federal government has historically taken steps to unclog, fast-track, and waive some requirements to respond to worsening conditions. It is imperative that the same lens is applied to housing.

A first key effort is to continue incentivizing building and zoning codes for the 21st century. The existing Pathways to Removing Obstacles for Housing Program (PRO Housing) has shown initial promise, with significant demand from cities and other eligible entities. The federal government should incentivize regulatory reform including modernized building codes, promoting the adoption of new building materials and construction methods, and loosening zoning restrictions. This push can come through expansion of incentives (carrots) like PRO Housing as well as forcing mechanisms (sticks) such as tying eligibility for competitive federal funding to reforms and measurable outcomes. Examples of the latter are evident in the Federal Transit Administration’s Capital Investment Grants Program, which has successfully advanced land use and other local regulatory reform efforts by tying them to eligibility for critical funding for large transit projects.

We also recommend streamlining and modernizing HUD’s existing programs and creating new building codes. HUD programs in need of tweaking include FHA 203(K)’s limitations to “structures” instead of “residences” preventing ADU funding, FHA’s multifamily mortgage limits based on out-of-date studies which do not take into account recent increases in construction and financing costs, and the HOME Investment Partnerships Program’s cumbersome requirements for income verification,?among many others. HUD should simplify the inspection process for the Housing Choice Voucher Program, reducing the burden on landlords, which reduces their participation in the program. HUD can also lead ambitious new initiatives, such as creating a national performance-based building code for single-family and multifamily modular housing, similar to what exists for manufactured housing.

We further observe complexity in key legislation that, if eliminated, could unlock funds and resources to combat the housing crisis and align key federal funding programs towards housing production. The Bipartisan Infrastructure Law’s TIFIA and RRIF loans include transit-oriented development, but because they were not designed with housing in mind,?their terms are restrictive, their programs are cumbersome, and they do not interact well with existing housing funding streams. The Inflation Reduction Act’s expanded loan authority can be used for housing, but the Department of Energy’s Loan Program Office’s loans often have minimum requirements that make them too large for housing projects. Small statutory corrections can help direct these huge resources towards the housing problem.

Other initiatives include adjusting federal historic tax credits to allow for converting underutilized office buildings into apartments, creating a government-sponsored entity market for manufactured home mortgages, and streamlining income verification for Low Income Housing Tax Credit-funded units.

Building on What Works and Adding Bold New Approaches

The federal government has more capital and more assets than we think – some of which can be deployed with no budgetary impact. Reacting to the crisis means orienting these resources towards housing production and access. Likewise, previous economic crises have stressed the importance of getting out of our own way. Identifying where our existing systems have unnecessary barriers and complexity is an important step towards solving the crisis. We welcome your suggestions as we continue to work towards more specific recommendations for how the federal government can meet the moment and treat the housing crisis like the crisis it is.

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Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Ben Preis is the Director of the National Housing Crisis Task Force and a Senior Research Fellow at the Nowak Lab. Michael Saadine is a Senior Advisor to the Nowak Lab and Managing Partner at Invisible Group, an interdisciplinary real estate investment platform.