K.O.R.E. Enterprises, LLC

1. K.O.R.E. Enterprises, LLC Evolution of the Market 5/6/08

2. Evolution of the Market • Roots of modern housing policy: • Modern housing policy begins with the Great Depression, when housing construction fell (95% over 5 years) and defaults rose dramatically (1/2 of all mortgages in technical default in 1933)* • Home Owners Loan Corporation created 1933 to refinance mortgages about to default and make loans * Kenneth T. Jackson, Crabgrass Frontiers. * Kenneth Jackson. Crabgrass Frontier, 1985.

3. Evolution of the Market • Roots of modern housing policy (cont.): • Federal Home Loan Bank system established • founded 1932 • privately-owned by private member institutions • comprised of Federal Home Loan Bank Board (FHLBB) and 12 regional Federal Home Loan Banks, as well as member banks • provides loans to member institutions through Federal Home Loan Bank advances

4. Evolution of the Market • 1930s -- New Deal: • FHA created through National Housing Act of 1934 to encourage home building through private channels • allowed much lower downpayments • lengthened terms of mortgages (lowering payments) • established standards for construction • interest rates fell due to decreased risk to lenders

5. Evolution of the Market • New Deal (continued): • Fannie Mae created 1938 • provided standardization and liquidity • eased transition of funds to newly developing areas of the country • 1940s -- Post-War: • Housing boom in the 1940s and suburbanization through the 1950s • The 1949 Housing Act stated the goal of federal housing policy to be provision of “a decent home and a suitable environment for every US family.”

6. Evolution of the Market • 1960s to early 1970s: • Great Society and urban renewal • Creation of HUD • Split of Fannie Mae and creation of Ginnie Mae • Creation of Freddie Mac

7. Evolution of the Market 1934 1938 1968 FHA (government corp.) FHA (part of HUD) Ginnie Mae (part of HUD) Fannie Mae Fannie Mae (GSE) Freddie Mac (GSE)

8. Evolution of the Market • Creation of Ginnie Mae: • Fannie Mae divided in 1968 to form Government National Mortgage Association (Ginnie Mae or GNMA) • Ginnie Mae became • primary secondary market for government-insured mortgages and part of HUD • Guarantees MBS backed by FHA- and VA-insured mortgages and issued by lenders • Backed by full faith and credit of U.S. government

9. Evolution of the Market • Creation of Fannie Mae: • Fannie Mae founded in 1938 to create a secondary market for mortgage loans • In 1968, Fannie Mae became federally chartered but privately held corporation (GSE) • In 1970, authorized to purchase conventional mortgages and in 1981, began issuing MBS • Today a major portfolio investor and issuer of MBS • Has provided liquidity to the market and established market for future commitments of loans

10. Evolution of the Market • Creation of Freddie Mac: • Freddie Mac formed in 1970 to create secondary market for mortgages originated by thrifts • Today both Fannie and Freddie compete to serve all mortgage originators • Issues MBS; not a major portfolio investor • In 1992, Office of Federal Housing Oversight (OFHEO) established to ensure capital adequacy and financial safety and soundness of Fannie Mae and Freddie Mac

11. Evolution of the Market • Fannie, Freddie, Ginnie enable transition of local markets to a national market: • Local banks and thrifts (savings and loans) historically have made most mortgage loans • Mortgages made were held in portfolio; little liquidity • Secondary market developed to provide liquidity to local sources of financing -- sources of funding come from capital markets • Local lenders can now sell mortgages and “recycle” funds to provide more mortgages • Result of standardized mortgages

12. Evolution of the Market • 1970s -- 1980s: • Late 1970s-mid-1980s: economic recession; high inflation; high interest rates • Homeownership rates for young households decline • Fannie Mae and Freddie Mac issue MBS • 1974: Rental Assistance Program (Section 8) established to assist qualifying, low-income renters in making monthly payments. • 1986: Low Income Housing Tax Credit established • 1987: Housing Voucher Program established to provide rent subsidies

13. Evolution of the Market • 1990s: • 1990 National Affordable Housing Act • Decentralization of government programs and funds to state and local level • Section 8 crisis • Future of HUD threatened • Focus on administrative reform and performance • HUD 2020 Management Plan • GSE Housing Mandates

14. Evolution of the Market 1950’s—Growth of Suburban America 1960’s-- Urban Renewal; Development of the Secondary Mortgage Market 1940’s — Housing Boom 1930’s—The New Deal 1942—National Housing Authority 1949—Housing Act 1934—Federal Housing Administration (FHA) 1937—Wagner-Steagall Housing Act 1962—HUD Created 1968—Fannie Mae and Ginnie Mae Created 1938—Federal National Mortgage Association (Fannie Mae)

15. Evolution of the Market 1970—Efforts to Establish a National Secondary Market Mid-1970’s—Mid-1980’s Economic Recession Mid-1980’s—Present Growing Diversity 1987—Housing Voucher Program 1968—Fannie Mae and Ginnie Mae Created 1990—The National Affordable Housing Act of 1990 1992: GSE Mandates 1974—Housing and Community Development Act

16. U.S. Housing Quality Source: Census, AHS

17. Two Low Income Housing Problems Source: Data from John Weicher, HUD Reports. Data comparability subject to verification.

18. Current Housing Problems • Physically inadequate housing. • % of units without adequate plumbing, heat, etc., have been disappearing since the 1950s. • Affordability. • Typical rent burdens have been increasing, esp. for the poor. • Homelessness. • Best estimates, around 300,000 homeless nationwide. Is this a housing problem? An income problem? A public health problem? • Racial issues. • Segregation and discrimination. What are the causes? What are the cures?

19. Incidence of Housing Problems

20. Figure 4.16 Rent Burdens, Blacks and All Renters

21. Figure 4.19 Homeownership Rates, By Income and Race/Ethnicity Source: 1993 AHS

22. Figure 4.18 Discrimination in Housing Availability Source: Turner, Struyk & Yinger

23. Homeless Household Composition

24. Personal Problems of the Homeless Source: Burt & Cohen, P. 50

26. Housing Policy • Public policy has had a major role in shaping the housing market • Why might the public sector intervene in housing?

27. Housing Policy Objectives • Among the objectives that can be articulated are the following: • Ensuring a minimum level of housing quality • Increasing the supply of housing by stimulating new construction, maintenance, and improvement of existing stock • Stabilizing rents and asset prices • Stabilizing construction and business cycles • Maintaining incentives for savings and investment • Reducing crowding • Encouraging homeownership • Reducing racial and economic segregation; and • Fostering community development

28. Arguments for Housing Policy • Reasons for housing policy: • Economic • Historical • Political

29. Arguments for Housing Policy • Economic reasons for housing policy: • Large capital investment, difficult to finance • Supply inelastic in short run • Construction and business markets are cyclical • Correct market failures • Redistribute income • Housing is a public good with positive externalities

30. Arguments for Housing Policy • Historical reasons for housing policy: • Primary vehicle for household savings/ investment • Stability of banking system

31. Arguments for Housing Policy • Political reasons for housing policy: • Housing industry off-budget tool for social policy makers • Incentive for local politicians • Big business

32. Arguments Against National Housing Policy • Interference with the market through policy: • Will decrease efficiency • Allows people to occupy too much house • Takes resources from other investments (national savings) • Assumes housing makes better environments • Impedes market’s cyclicality, which is actually good • Subsidizes the wealthy

33. Key Players • Who makes housing policy? • Federal Government: Congress, Federal Reserve, Treasury (IRS), HUD (including FHA and Ginnie Mae) • State Government: State Legislatures, HFAs, DHCDs • Municipal Government: DCPs, Building Depts., ED Agencies, Local HFAs • GSEs: Fannie Mae, Freddie Mac • Private Sector: bankers, builders, realtors • Non-profit sector: advocates, associations

34. Housing Policy Instruments • The set of potential policy instruments for meeting policy objectives include the following: • Defining and enforcing property rights • Subsidy and direct public provision • Taxation • Finance • Regulation

35. Major Housing Programs • Public Housing • Section 8 New Construction/Rehabilitation • Section 8 Certificates • Housing Vouchers • Section 42 Low Income Housing Tax Credits • Many others, including state and local programs • Mortgage revenue bonds and block grants to state and local governments

36. Change in Selected Federal Housing Programs, 1985-96

37. 1985 Federal Housing Subsidies by Household Income Source:C. Dolbeare, in Urban Institute (1987).

38. Two Overarching Approaches to Housing Subsidy • Supply Side Subsidy: Subsidize the unit ("bricks and mortar" subsidies). • Public housing • Section 236 interest subsidies to landlords • Section 8 New Construction/Rehab • Section 42 LIHTC • Demand Side Programs: Subsidize the tenant. • Section 8 Existing Certificates • Housing Vouchers

39. Housing Subsidies • Housing Subsidies: Demand Side or Supply side • The largest debate in American housing policy since the 1930s has been the choice between supply-side and demand side subsidies. • That is, should we subsidize houses, or should we subsidize people? • From 1930s to the 1960s the federal government focused on subsidizing units. • Since 1970s there has been a shift to subsiding people. • Despite the shift to demand-side programs, supply-side programs do exist, ranging from those that maintain and manage existing stock of public housing to new supply-side program such as the Section 42 Tax Credit Program.

40. Housing Subsidies: Supply Side • Supply-Side Policy: Public Housing • Public housing is publicly constructed and publicly owned and is rented to tenants at highly subsidized rates • About 1.5 million US households live in public housing, or less than 2 percent of the population • Compared with Europe’s, • US public housing is much more targeted to low-income households. • Currently only households with incomes below 50 percent of the area median are eligible. • Virtually all public housing tenants are poor. • Public housing tenants are not ethnically representative of the US population. • Slightly more than 50 percent of public housing tenants are black, and 12 percent are Hispanic.

41. Housing Subsidies: Supply Side • Supply-Side Policy: Public Housing • Federal government budget outlays for public housing included • $3.1 billion for operating subsidies (to cover the gap between rent collected from tenants and the cost of operating the project) and • $3.8 billion for capital expenditures (for repair, upgrading, and demolition) • Since the Nixon and Carter administrations, government has been shifting money away from public housing to other programs. • No new units have come on line since the early 1980s except those that were already in the pipeline. • Yet the existing stock of public housing is too big to be ignored.

42. Housing Subsidies: Supply Side • Supply-Side Policy: Public Housing • Current controversies include • how much government should spend rehabilitating these units, • the role of tenant management, and • whether the units can and should be sold to tenants. • Public housing is more expensive than private housing for two reasons: • the private sector can build new low-income housing more efficiently than the public sector. • there is plentiful supply of low-quality housing, so even the least costly new housing cost more than new housing.

43. Housing Subsidies: Supply Side • Supply-Side Policy: Public Housing • Current controversies include • how much government should spend rehabilitating these units, • the role of tenant management, and • whether the units can and should be sold to tenants. • Public housing is more expensive than private housing for two reasons: • the private sector can build new low-income housing more efficiently than the public sector. • there is plentiful supply of low-quality housing, so even the least costly new housing cost more than new housing.

44. Housing Subsidies: Supply Side • Living Conditions in Public Housing • Public housing projects suffer from a number of problems, • including high rates of drug abuse and crime. • The crime rates in housing projects are relatively high for three reasons. • First, the residents of the projects are relatively poor and crime rates are higher among the poor. • Second, many of the units in the projects have been abandoned by the city and have been taken over by drug abusers and gangs. • Third, the physical layout of the typical projects—a cluster of high-rise buildings—may contribute to crime.

45. Housing Subsidies: Supply Side • The Market Effects of Public Housing • In the short run, the supply of housing from the private sector is perfectly inelastic. • Consequently, all housing consumers gain from public housing program: • some household occupy subsidized public housing, and • others pay lower prices for private housing. • In the intermediate or long-run, the supply curve is positively sloped. • The decrease in price of housing caused by public housing decreases the profitability of private dwellings, • so fewer low-quality dwellings are supplied.

46. Housing Subsidies: Supply Side • The Market Effects of Public Housing • The supply response takes two forms: • More retirement: • more low quality dwellings arte retired from the housing market. The retired dwellings are either converted to another use or abandoned. • Slower downward filtering. • As the price of low-quality housing decreases relative to the price of medium-quality housing, landlords hold their dwellings in the medium-quality submarket for a longer period of time

47. Housing Subsidies: Supply Side • Supply-Side Policy: Subsidies for Private Housing • One alternative to public housing is a system of subsidies to encourage the private sector to build and maintain low-income housing. • There are two subsidy programs for the rental housing: Section 236 and Section 8-Project based. • Under both programs, • the government pays property owner the difference between the household’s contribution to rent and the “fair market rent” • In most cases the household’s contribution is 30 percent of its income.

48. Housing Subsidies: Supply Side • Supply-Side Policy: Subsidies for Private Housing • The fair market rent is determined by the cost of building and managing the property (Section 236) or the prevailing rent in the area (Section 8). • Under these two subsidy programs, the federal government sign long-term contracts to provide annual payments to property owners. • Under the contracts, the owner was guaranteed the fair market rent on all units occupied by eligible households. • Together these programs accommodate about 1.8 million households. • In recent years, no new contracts have been signed, but the government continues to pay property owners under the terms of old contracts. In addition, many contracts have been renewed.

49. Housing Subsidies: Supply Side • Supply-Side Policy: Subsidies for Private Housing • Section 8 has substantial supply-side elements to the extent that program rents exceed fair market rents. • The physical quality standards, tenant’s inability to pay more than FMR, and the disincentive for tenants to shop for units below the FMR mean that tenant benefits per dollar of program expenditure are smaller than they could be. • Still, most housing economists consider the program more efficient than public housing and new construction programs .

50. Low Income Housing Tax Credits • 0.50 in investable LIHTC (after TRA 86) aims to provide incentives for private sector production of low income housing. $$$ from tax code, administered by states, bypasses HUD. • Present value tax credit of 70% of the cost of new construction or 30% of the cost of acquisition of existing low income housing, in return for limits on rents charged. Credits allocated over a ten year period. • Either 20 percent of available rental units must be rented to households with income less than 50 percent of the county median income (adjusted for family size), or 40 percent of the units must be set aside for households with income less than 60 percent of the county median income. • The maximum gross rent, including utilities, paid by households in qualifying units may not exceed 30 percent of maximum qualifying income. Unit must be maintained as low income unit for 15-30 years. • Very high cost program. Roughly $resources for every $1.00 of tax credit.