Financing Low Income Communities

7. Financing Production of Low- and Moderate-Income Housing

CHAPTER SEVEN FinancingProductionofLowandModerate -IncomeHousing RachelG.Bratt HOUSING IS a central component of community development. It is critical to neighborhood vitality, to family well-being, and, indeed, to the economy at large.1 Yet low- and moderate-income households continue to face considerable obstacles locating decent quality housing that they can afford.2 Consider the following statistics about the various housing challenges these groups encountered in 2003: • About 5.18 million unassisted renter households with incomes below 50 percent of area median income paid more than half their income for housing or lived in severely substandard housing. This group, according to HUD, had “worst case housing needs” (2005, 1). • Nearly 70 percent of those in the bottom quartile of the income distribution paid more than 30 percent of their income for housing; the number of those in this income category who paid more than 50 percent for housing increased by 1.5 million from 2000 to 2003, raising the share with such affordability problems to 44 percent (Joint Center for Housing Studies 2005, 24–25). • There were only 44 units of housing affordable and available for every 100 renters with incomes below 30 percent of area median income and 184 FinancingLow-IncomeCommunities onlythree-fourthsarephysicallyadequate(HUD2005,41).Thistranslates into a national shortage of about 5 million units (HUD 2003). • Over the course of a given year, some 2.5 to 3.5 million people are homeless (Joint Center for Housing Studies 2004, 4). Public intervention to assist low- and moderate-income households cover theirhousingcostshasattempted,invariousways,toreducetheextentofthese problems.3 Such intervention has been necessary because housing is expensive to build and maintain, and without public assistance, it is not profitable for theprivatesectortoprovidehousingaffordabletotheselower-incomegroups. Acknowledging the economic obstacles to low-income housing production, a report reflecting on the 1990s stated: “The fact that shortages of affordable housing worsened so much during a decade of strong economic growth makes it clear that economic growth alone cannot answer America’s low income housing problems” (Nelson, Treskon, and Pelletiere 2004, 1). Using a framework based on the three essential components of the housing finance process—raising equity; securing debt financing; and, in the case of lower income households, creating mechanisms to maintain the long-term affordability of the units—this chapter discusses how public, private, and nonprofit-oriented programs have attempted to fulfill these three requirements for both traditional homeownership units and multifamily rental dwellings. It provides answers to three questions concerning affordable housing finance:4 Is finance the key issue in housing production for low-income households? Should homeownership for low-income households be encouraged ? What is needed to stimulate the production of rental housing affordable to low-income households? This inquiry is timely. There is an enduring bipartisan commitment to expand homeownership opportunities for lower-income, particularly nonwhite households (see HUD 2002d). Finance is obviously a cornerstone of any such discussion. There also appears to be a relatively new consensus that a renewed commitment to supply-side programs to encourage multifamily housing production is required. The debate about whether public subsidies for the production of this housing are needed has, for the most part, been put to rest.5 Although housing vouchers are acknowledged to be a good policy response under some market conditions, they cannot meet the needs of all households in all market conditions. One recent report noted that: “production subsidies are relatively better used in some circumstances than in others” (Khadduri, Burnett and Rodda 2003, 1). Further, “the types of places and people that have low success using vouchers may be reasonable targets for the use of production subsidies (such as) for households with five or more people; for single, non-elderly, non-disabled households; in tight housing markets; and in jurisdictions that do not have laws barring discrimination on the basis of source of income” (29). FinancingLow-andModerate-IncomeHousing 185 Since the 1930s, the federal government as well as the nonprofit and private sectors, have developed an array of programs with a variety of distinct objectivesrelatedtopromotinghomeownershipforlow-andmoderate-income households. The system is far from simple, but compared with multifamily rental housing finance programs, it is, as the saying goes, a breeze. The story of federal involvement with rental housing is a few years shorter than its efforts to promote homeownership. Since 1937, when the public housing program was created, the way in which multifamily rental housing affordable to low- and moderate-income households is financed has gone throughmultipledistinctstagesandhascreatedalayered,convolutedprocess...