Affordable Housing: Small Solutions to Big Problems

This issue of ACCESS PRESS is devoting the majority of our space to the complex problem of affordable housing.  A relatively small part of the coverage is directed specifically to the disabled community, since the problem exists for all people with low incomes.  The article on page 7 does illustrate the other major limitation to housing independence for those with disabilities, which is lack of support for those who live independently.


A GOOD START

A place to call home is fundamental to everyone, and lack of affordable housing affects the whole community.  Long range planning is remarkably absent at the national and state levels.  The original Housing Finance legislation in 1947 was perhaps the last real effort to expand homeownership.  The FHA was a success, providing a huge number of people the opportunity to own their homes, and in a long period of inflation, providing an asset which appreciated as the loan balance was diminishing.  Improvement loans were available on reasonable terms under another FHA program.  Homes acquired and improved under these programs provided collateral for educational and business loans, and ultimately retirement nest eggs for their owners.  FHA programs in the sixties and seventies provided incentives for investors to create low cost apartment rentals.


DIMINISHING IN INFLUENCE

Unfortunately, a series of events, all negative, have combined to change the emphasis and the operational guidelines of the FHA.  Incentives to construct affordable apartments were discontinued in the early years of the Reagan Administration and no substitute plan was put in place.  Existing buildings were financed with twenty year agreements, allowing owners to raise rents to market rates at the end of that term.  Funds for new developments were sparse and allocated by a shamefully corrupt administration, apparently for the benefit of certain politicians and their friends.

Meanwhile, the S&L s used their new found freedom from regulation to sponsor risky new developments, often with FHA approval, yielding huge profits to developers and brokers.  The end result — huge losses for taxpayers and no benefit to the public.


AND NOW -”THE GAP”

Construction costs of new housing of all kinds, single family or apartment complex, determine possible rental prices.  In 1991 it is not possible to construct rental units which are affordable by at least a third of our individuals and families.  This condition, called “The Gap” is not going to be overcome in the foreseeable future.  “The Gap” can only be closed by lowering costs of construction or raising the income of the lower third of the wage earners.  Costs continue to rise, even though the rate of increase has slowed in recent years.  The prospect of higher wages in general for the future looks bleak, as many U S.  wage earners now compete with workers all over the world for better manufacturing jobs.  New job creation is mainly in the lowest wage area, basically about $5.00 hourly.


SUBSIDIES ARE A NECESSITY

One thing is certain.  Future development of low cost housing, in any form, needs some sort of subsidy.  This means allocating part of the cost to the general public in some manner, under long range plans which recognize there is no quick fix to the problem.  Previous plans, and the current Low Income Tax Credit plan, have attracted investment in the traditional manner.  That is, by making it profitable for wealthy investors to put up the necessary capital.  reaping an attractive reward with little risk.  This plan is a direct subsidy and it works, but a large part of the subsidy is to wealthy investors, not the building project.


NOT EVERYONE CAN PARTICIPATE

Low Income Tax Credits are a good illustration, and since they are currently the only game in town, deserve better understanding by the public.

Large scale developments of affordable housing in recent years, some of which are described in articles on page 7, have used non­profit developers.  These developers can create the tax credits, and as non taxpayers have no need to use them.  The tax credits thus become a saleable commodity, usually passed to investors at about 50% of face value.  The buyer must take the credits over a ten year term, but usually pay + for them over a period of years, realizing a handsome profit from the transaction.

Roughly, the credits are based on 100% of acquisition and construction costs.  less land value and some other administrative items.  but the proceeds of the sale may still generate 30% or more of the total investment.  Non-profit developers may also use very low-cost loans from municipalities, and even some grants from other interested agencies and organizations.  Such an amalgam of planning and funding makes affordable housing units possible.  Agencies capable of handling such projects need knowledgeable staff people and adequate financing for their operations.

Locally, two examples are the Twin Cities Housing Development Corporation, based in St.  Paul, and the Community Housing Trust, based in Minneapolis.  Both agencies have helped to create and/or renovate hundreds of affordable housing units in the past few years, and both continue to manage hundreds of such units.   OTHER PROMISING APPROACHES  Smaller agencies, such as the Southside Neighborhood Housing Association described on page #, are serving the needs of their communities, usually with funding from bigger entities, such as MCDA or MHFA grants by foundations, etc.  Normally their funding sources are limited, and normally their missions are restricted to two areas.  One is the provision of affordable homes, the other a general rehabilitation of the neighborhood.  The latter mission can become very complicated, and is sometimes beyond the range of smaller organizations.  These agencies are very close to the communities served, and may be the best solution to the problem of “delivering” the needed services.

Project Pride in Living, also described in more detail in the article below, is a fine example of a small enterprise which has expanded to meet new challenges as they arose.  They are providing jobs, creating low cost housing, and most recently providing an apartment management plan which incorporates a “social service” staff capable of handling tenancy problems common in low income housing programs.  These include a lack of basic housekeeping skills as well as abusive behavior, chemical dependency, etc.  Business school training in apartment management is usually confined to financial matters and assumes typical tenancy by experienced renters.  Project Pride in Living has found that many low income renters need more help while they acquire this experience.  and in particular may need some help with personal problems.  Their staff is ready for these problems and plans for the extra supervision.


INDIVIDUALS HAVE FEWER CHOICES

Recently, the FHA announced their intention to toughen up their lending policies.  Assured assumptions by future owners are out, mortgage insurance is higher priced and more “upfront” cash will be required.  The vast majority of real estate mortgages are now made by brokers for the secondary market, which imposes strict inflexible guidelines on the originator of the loan, and higher costs.  Very few lenders carry any loans in their own portfolios and most will not bend basic down payment requirements for potential investors in rental property, which eliminates many sellers from carrying second mortgages.  All of these factors make it tougher for individuals to help in the rehabilitation of older properties and declining neighborhoods.  The S&L scandal and the new worries about commercial banks have the lenders running scared, with the regulators becoming oppressive (if still not very efficient).  Our own survey found few local lenders who are willing to offer more flexible plans.


TIME FOR CHANGE

This depressing scenario indicates that we are overdue in making our long range plans.  Washington and the state legislatures must set aside traditional approaches to the problem and set up a new kind of housing agency The mission should revert to a simple goal; providing a mechanism for financing new affordable housing, rehabilitating old housing both for current owners and for prospective new owners, and increasing energy efficiency in all residential buildings. 

We must recognize that efforts to achieve some of these goals by giving unusual rewards to developers and/or lenders are not working in this new era.  Subsidies will be necessary, but they must be chosen carefully and monitored as to their efficacy constantly.  A subsidy for individuals, similar to the section 8 program, seems much more cost effective.

If we re sign ourselves to the concept that such a program will require constant funding and agree that the cost must be born by taxpayers, these mechanisms become available.  Other countries, notably Canada, have already demonstrated one such solution, which is the funding of the non-profit community developers.

Such funding might well go to some of the large scale organizations for larger projects, with “sub-contracts” given to neighborhood groups for local rehab projects or creative home ownership plans.

Banks and S&L s should be forced into compliance with Community Re investment Act standards, a concept originally introduced in the 1970’s and largely ignored under the Reagan-Bush administration.  The theory behind CRA is very simple; banks and S&Ls have exclusive franchises in certain areas and in return should agree to utilize local deposits for the benefit of local borrowers.  Many local bankers instead invested money in risky S&L deposits.  The S&L’s made loans anywhere (Midwest Federal’s famous Florida Jockey Club as an example).  The city of Minneapolis in 1990 surprised the local banks by asking for a commitment to community lending as a reward for their deposits which is a step in this direction.  How it is enforced remains to be seen.

Solutions, therefore, are in the hands of the voters.  As in the case of Universal Health Care, models exist, and new legislation must be introduced committing the country to solving the problem.  Nothing else will do.

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