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Federal Housing Policy

The Federal Government wields a great deal of influence over New York’s housing markets. Below are brief summaries of some of the diverse policies and programs it utilizes to exert that influence. While each of these tools sparks its own set of controversies, a few fundamental questions about federal housing policy run throughout all of the debates: Should federal aid be directed at urban or rural areas? Should policies focus on homeownership or rental housing? Should funding be place-based (providing support for physical developments or communities) or people-based (providing support to individuals seeking affordable housing through vouchers or other means)? Among place-based strategies, should aid be allocated to the developers who build the housing or the local governments who administer and subsidize the programs?

Section 8 –
The U.S. Department of Housing and Urban Development (HUD) oversees the Section 8 Housing Choice voucher program, which is administered by 2,500 Public Housing Agencies (PHAs) throughout the country. Created under the Housing and Community Development Act of 1974, with funding subject to annual appropriation by Congress, the Section 8 program seeks to provide additional choice to those receiving public housing benefits and to de-concentrate the incidence of public housing. As such, it provides a voucher—usable in any residence meeting program quality standards—that subsidizes the portion of market-rate rent above 30% of the recipient’s income (30% being the traditionally accepted standard for affordable rent). The program currently provides over 115,000 vouchers for subsidized housing to residents of New York City, the bulk of which are distributed by the New York City Housing Authority (which operates the largest Section 8 program in the nation). The New York City Department of Housing Preservation and Development and the New York State Division of Housing and Community Renewal also provide a limited number of vouchers to city residents.

From 2003 to 2006, Congress and HUD made a series of controversial changes to the Section 8 funding model, which left many large PHAs unable to issue new vouchers or cope with declines in tenant incomes and increased utility costs. As a result, program rolls shrunk by 150,000 vouchers between 2004 and 2006. Appropriations were increased in 2007 and again in 2008 in response to repeated budget shortfalls, but PHAs and tenant organizations maintain that funding remains inadequate and anticipate continued declines in the number of program participants. The proposed Section 8 Voucher Reform Act, (H.R. 1851), passed by the House and under committee review in the Senate, would address these concerns by mandating annual funding renewal for all existing vouchers plus an additional 20,000 vouchers each year for five years.

Program critics, on the other hand, contend that costs must be contained further and advocate sweeping changes to the program’s administrative structure and eligibility requirements. On the eligibility side, reformers call for revising or eliminating income targeting requirements. Currently, one must earn 50% or less of the area median income (AMI) to qualify for the program, and 75% of all vouchers must go to those earning 30% or less of the AMI. This directs aid towards those with the lowest incomes, but it also raises the cost of each voucher (because the difference between market rate rent and 30% of the recipient’s income is larger, requiring greater subsidy). Critics argue that higher income limits should be set in order for the program to either serve more families with the existing budget or serve the same number of families at a lower cost (since targeting higher income recipients would result in a reduced per-voucher expenditure). Other proposals include raising the tenant contribution cap above 30% of income and instituting time limits on program participation.

In addition to cost concerns, the Section 8 program has come under fire for failing to disperse the concentrated and intractable poverty that many saw as the legacy of traditional public housing. Recent studies have shown that voucher holders tend to cluster in certain geographic areas, either due to the refusal of landlords in other areas to accept Section 8 vouchers or because of the location preferences of voucher holders themselves. In March 2008, the New York City Council attempted to eliminate the former problem by passing a law that bans landlords from discriminating against Section 8 participants. The council overrode a veto from Mayor Bloomberg, who claimed the law would unfairly compel private owners to participate in a voluntary public program.

Federal Housing Administration –
The Federal Housing Administration (FHA) was established in the 1930s to provide insurance to protect lenders from borrowers that default on their mortgages. The goal was to allow more mortgages to be issued than the private market might otherwise make available if the federal government did not share the financial risk. From the time of its formation through the 1960s, FHA loan guarantee activity was concentrated in areas outside of the center cities and deliberately excluded areas whose residents were not white, a practice known as red-lining. Lawmakers sought to curtail this discrimination through the Fair Housing Act of 1968, which prohibits racial discrimination in the sale or rent of housing, and the Community Reinvestment Act of 1977, which requires financial institutions to submit to periodic review of the fairness of their lending practices.

In recent years, FHA’s share in the mortgage market declined significantly, as home prices in many urban centers exceeded its guarantee limits and borrowers turned to more flexible (often adjustable rate) loans with smaller or no required down payments and low introductory rates. The Hope for Homeowners Program, established as part of the Housing and Economic Recovery Act of 2008, seeks to broaden the reach of the FHA by allowing an estimated 400,000 homeowners at risk of default to refinance into more affordable and stable federally backed mortgages. Under the voluntary Hope for Homeowners program, the lender agrees to reduce the mortgage to 90% or less of the home’s current value in exchange for federal insurance on the new loan. Homeowners must be paying at least 31% of their income in mortgage payments to participate, and are required to share with the FHA any future profits from a sale of the house.

Government-Sponsored Enterprises –
Government-sponsored enterprises (GSEs) are private businesses that were originally chartered by the federal government to make certain types of publicly beneficial credit—agricultural, educational, and home-buying loans—more readily available. The housing-focused GSEs include the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac in particular play a large role in the U.S. mortgage industry, though they do not themselves issue any mortgages. Instead, they buy mortgages from the original lenders, freeing up capital that the lenders can then use to make additional loans. Together, the two companies guarantee over half of the country’s existing mortgages.

While Fannie and Freddie traditionally received no federal funding and did not have the explicit financial backing of the government, it was widely assumed that government would step in to prevent major default on the part of the companies. Critics long argued that GSEs unfairly benefited from this implied guarantee—enjoying the perceived security of a government organization without the accompanying public oversight—and called for increased regulation. Those calls gained significant traction in summer 2008 amid concern that Fannie and Freddie were not sufficiently capitalized to absorb losses from a growing number of defaults. In July, Congress passed the Housing and Economic Recovery Act of 2008, which established a new regulator, the Federal Housing Finance Agency, for the companies, created a national affordable housing trust fund financed by a portion of their revenues, and authorized the Treasury to initiate a government rescue if the pair seemed at risk of collapse.

Less than two months later, with the companies’ stock prices plunging to under $10 a share, Treasury Secretary Henry Paulson utilized his new power, placing Fannie and Freddie under a government conservatorship, dismissing their CEOs and transferring management power to the FHFA. The ultimate cost and duration of the intervention is unclear (the government has currently pledged up to $200 billion in aid), as is the future shape of the companies. Will they become fully public agencies, fully private corporations, or maintain a hybrid status? Will they be encouraged to expand or reduce their investment portfolios? With Washington sharply divided on the issue, these questions are unlikely to be answered before the next presidential administration takes office.

Low Income Housing Tax Credit –
Created by the Tax Reform Act of 1986, the Low Income Housing Tax Credit (LIHTC) is intended to encourage the development of affordable multi-family housing for low-income tenants. Developers of qualifying real estate projects (either new construction or renovated property) can apply to their state’s housing financing agency for these 10-year, dollar-for-dollar tax credits and then sell the credits to investors to raise start-up capital. In exchange, developers agree to meet one of two possible occupancy thresholds: either at least 20% of the units must be rented to tenants making up to 50% of the area median income or at least 40% of the units must be rented to tenants making up to 60% of the AMI. Rents for the affordable units are capped at 30% of the maximum eligible income for the unit (though these caps can be raised via interaction with other subsidy programs such as Section 8). Finally, though the tax credits only last for 10 years, the LIHTC program requires that the units remain affordable for at least 30 years.

Proponents of LIHTC point to its high productivity (according to HUD, an average of 100,000 units were placed into service each year between 1995 and 2005 as a result of the program) and ability to spur affordable development outside of the inner city (a 2004 Brookings report found that 42% of LIHTC units are sited in suburban neighborhoods, as opposed to 24% of housing generated by other federal programs). Critics, however, question what they see as lax program oversight. Unlike other federal housing subsidies, LIHTC is administered by the Internal Revenue Service rather than HUD, and a great deal of leeway is given to individual state finance agencies in determining where projects are built and who can utilize them (a state, for example, can choose to target their credits toward the elderly or mentally ill). Critics also contend that LIHTC units remain unaffordable to the neediest tenants, citing the fact that the maximum legal LIHTC rents in many metropolitan exceed the fair market rent covered by a Section 8 voucher.