Meeting Our Nation’s Housing Challenges

Report of the Bipartisan Millennial Housing Commission

Appointed by the Congress of the United States

Submitted to the

Committee on Appropriations and

Subcommittee for VA, HUD and Independent Agencies

Committee on Financial Services and

Subcommittee on Housing and Community Opportunity

United States House of Representatives

Committee on Appropriations and

Subcommittee for VA, HUD and Independent Agencies

Committee on Banking, Housing and Urban Affairs and

Subcommittee on Housing and Transportation

United States Senate

Pursuant to Section 206(b) of Public Law 106-74, as Amended

Washington, D.C.: May 30, 2002
ii

The Millennial Housing Commission

In December of 2000, the Congress of the United States, pursuant to legislation introduced by

Representative James Walsh, established the bipartisan Millennial Housing Commission (MHC).

Commission members were appointed by the chairs and ranking minority members of the House

and Senate Appropriations Committees and Subcommittees for VA, HUD and Independent

Agencies; the Senate Banking, Housing and Urban Affairs Committee and its Housing and

Transportation Subcommittee; and the House Financial Services Committee and its Housing and

Community Opportunity Subcommittee. The Commission was charged with examining, analyzing,

and exploring:

“(1) the importance of housing, particularly affordable housing which includes housing for the

elderly, to the infrastructure of the United States;

“(2) the various possible methods for increasing the role of the private sector in providing affordable

housing in the United States, including the effectiveness and efficiency of such methods; and

“(3) whether the existing programs of the Department of Housing and Urban Development work in

conjunction with one another to provide better housing opportunities for families, neighborhoods,

and communities, and how such programs can be improved with respect to such purpose.”

(P.L. 106-74, Sec. 206(b))

Note: At the same time that it established the Millennial Housing Commission, Congress created the Commission on Affordable

Housing and Health Facility Needs for Seniors in the 21st Century. The Seniors Commission was established to report on the

housing and health needs for the next generation of seniors, and to offer policy and legislative recommendations for enhancing

services and increasing the available housing for this rapidly growing segment of our society. It is scheduled to deliver its report

by June 30, 2002. The Millennial Housing Commission deferred senior housing issues to the Seniors Commission.
iii

Co-Chairs

The Honorable Susan Molinari

President & CEO, The Washington Group

Richard Ravitch

Principal, Ravitch Rice & Co. LLC

Commissioners

Milroy A. Alexander

Executive Director, Colorado Housing and Finance Authority

Ophelia B. Basgal

Executive Director, Housing Authorities of Alameda County & Dublin, California

Catherine P. Bessant

Chief Marketing Officer and President, North Carolina, Bank of America Corporation

Thomas S. Bozzuto

President and Chief Executive Officer, The Bozzuto Group

Jeffrey S. Burum

Executive Director and CEO, National Housing Development Corporation

David Carley

Former President, Carley Capital Group and the Medical College of Wisconsin

Herbert F. Collins

Chairman, Collins & Company, LLC

Kent W. Colton

Senior Scholar, Joint Center for Housing Studies of Harvard University;

President, K. Colton LLC

Cushing N. Dolbeare

Housing Policy Consultant; Founder, National Low Income Housing Coalition

Daniel R. Fauske

CEO and Executive Director, Alaska Housing Finance Corporation

Renée Lewis Glover

Chief Executive Officer, The Housing Authority of the City of Atlanta, Georgia

Bart Harvey

Chairman and Chief Executive Officer, The Enterprise Foundation

Feather O. Houstoun

Secretary, Department of Public Welfare, Commonwealth of Pennsylvania

William H. Hudnut III

Senior Resident Fellow, Urban Land Institute

H. Lewis Kellom

Executive Director, Homes In Partnership, Inc.

Joseph B. Lynch

Senior Vice President, Conifer Realty, LLC; former Commissioner,

New York State Division of Housing and Community Renewal
iv

Sam R. Moseley

Attorney at Law

Dennis M. Penman

Executive Vice President, M.J. Peterson Real Estate, LLC

Robert Rector

Senior Research Fellow For Welfare and Family Issues,

The Heritage Foundation

David Stanley

Chairman, Preservation of Affordable Housing, Inc.
v

Letter from the Commission Co-Chairs

We have been honored to lead the Millennial Housing Commission during the past 17 months as we performed a

thorough re-examination of the federal role in meeting the nation’s housing challenges at Congress’ request.

The 22 commissioners appointed to this task were drawn from across the country and from across the spectrum of

housing ideologies and experience. We are particularly pleased, therefore, to have achieved concurrence among all

but one of the appointed members. The Commission included former elected officials; participants on previous

national commissions; housing researchers, builders, managers, and owners; planners and public administrators;

and leaders of community development organizations. Our findings and recommendations obviously reflect the

great diversity of philosophy and experience represented, but on one thing we all agree—we unequivocally care

about housing and some fundamental precepts.

First, housing matters. It represents the single largest expenditure for most American families and the single

largest source of wealth for most homeowners. The development of housing has a major impact on the national

economy and the economic growth and health of regions and communities. Housing is inextricably linked to access

to jobs and healthy communities and the social behavior of the families who occupy it. The failure to achieve

adequate housing leads to significant societal costs.

Second, there is simply not enough affordable housing. The inadequacy of supply increases dramatically as one

moves down the ladder of family earnings. The challenge is most acute for rental housing in high-cost areas, and

the most egregious problem is for the very poor.

We recognize that our country is engaged in a war that affects our vital interests, and that we have experienced a

serious economic downturn from which we are entering a tentative recovery. There is a serious public debate as to

which tax and spending policies will best support the sound fiscal management that our nation requires. Even

within this context, resources for affordable housing provide important economic, social, and societal benefits.

The inexorable growth in the numbers of families, of those working in service sectors, and of immigrants seeking to

take part in the American Dream—coupled with community opposition to high-density development, the

gentrification or abandonment and deterioration of an increasing percentage of our housing stock, and the

growing affordability gap between haves and have nots—require that the Government of the United States

seriously address the question of how our society can produce and preserve more housing for more American

families in a more rational, thoughtful, and efficient way in the decade ahead. As affordable housing production

is increased within the context of healthy, inclusive communities, the economy is strengthened, more families share

common American values, and economic opportunity is increased for many.

We are pleased to present the Millennial Housing Commission’s recommendations, which we hope will engage the

elected officials of our democracy to meet these challenges.

May 30, 2002
vi

Contents

The Millennial Housing Commission ii

Letter from the Co-Chairs v

Executive Summary 1

Why Housing Matters 7

America’s Housing Challenges 12

The Federal Role in Housing 22

Principal Recommendations to Congress 27

Supporting Recommendations 64

Endnotes 74

Appendices

1. Supporting Data 83

2. Assumptions Used in Analyzing the American Housing Survey 96

3. Description of Housing Programs 98

4. Acronyms Used in Report 114

5. Materials Available on CD-ROM and MHC Website 117

6. Acknowledgments 118
1

Executive Summary

Housing is most Americans’ largest expense. Decent and affordable housing has a demonstrable

impact on family stability and the life outcomes of children. Decent housing is an indispensable

building block of healthy neighborhoods, and thus shapes the quality of community life. In addition,

the housing sector provides a major stimulus to the nation’s economy, consistently generating more

than one-fifth of gross domestic product. Better housing can lead to better outcomes for individuals,

communities, and American society as a whole. In short, housing matters.

This is why the federal government has long sought to expand the country’s housing supply. Federal

support for housing has taken many forms over the years: grants; subsidies on mortgage debt; direct

payments to landlords on behalf of low-income citizens; the provision of liquidity and stability to the

housing finance system through Federal Housing Administration mortgage insurance; the creation

of the Federal Home Loan Banks, Fannie Mae, and Freddie Mac; and housing-related tax code

measures, such as mortgage interest and property tax deductions, accelerated depreciation, taxexempt mortgage financing, and Low Income Housing Tax Credits.

Federal support for the housing sector has been tremendously successful for most households.

America’s homeownership rate is a remarkable 67.8 percent. Direct federal assistance for rental

housing now reaches 4.8 million low- and moderate-income families who cannot afford housing in

the open market. The nation’s housing stock is the envy of the world. More than one million

additional affordable rentals are assisted through tax credits and block grants.

For many poor households, however, federal efforts have been less than successful. The most

significant housing challenge is affordability, growing in severity as family incomes move down the

ladder. In 1999, one in four—almost 28 million—American households reported spending more on

housing than the federal government considers affordable and appropriate (more than 30 percent

of income). Even working full time no longer guarantees escape from severe housing affordability

problems. In 1999, one in eight lower-income working families earning at least the full-time

equivalent of the minimum wage reported spending more than half their incomes on housing.

The gap between the available rental supply of units affordable to the poorest households and the

demand for them stood at 1.8 million in 1999. Because they could afford nothing better, 1.7 million

lower-income households lived in severely inadequate housing, placing their health and safety at risk.

Finally, despite the 1990s homeownership boom, black and Hispanic homeownership rates in 2001

lagged the homeownership rate of whites by almost 27 percentage points.

Federal support for the housing sector has been insufficient to cover growing needs, fill the gaps in

availability and affordability, preserve the nation’s investment in federally assisted housing, and

provide sufficient flexibility to craft local solutions to problems. For example, multifamily production

in the 1990s was approximately half of its level in each of the previous two decades. As a result of this

and the shift toward production of more expensive apartments, rentals affordable to low- and

moderate-income households fell by 9.5 percent between 1985 and 1999, further thinning the supply

of affordable housing. Federal efforts have often not provided sufficient cash flow and incentives to

insure proper physical maintenance or continued affordability when relatively short-term subsidy

arrangements expire. Many federal programs fail to reflect state-to-state variations in housing needs

and costs, and they fail to motivate proper planningplanning that relates housing to educational

and economic opportunities, as well as to transportation.

At the opening of the new millennium, the nation faces a widening gap between the demand for

affordable housing and the supply of it. The causes are varied—rising housing production costs in

relation to family incomes, inadequate public subsidies, restrictive zoning practices, adoption of local

regulations that discourage housing development, and loss of units from the supply of federally

subsidized housing. Rural areas and Native American lands present especially difficult environments

for affordable housing because of the higher costs of providing infrastructure and the dearth of wellpaying jobs. And despite civil-rights and fair housing guarantees, the housing shortage hits minorities

hardest of all.
2

America’s housing challenges cannot be described with statistics alone; they must be understood as a

quality-of-life issues as well. Fundamental to the American Dream is somewhere to call homea safe

and welcoming “anchor place” where families are raised and memories are formed. Furthermore,

housing must be viewed in the context of the community in which it is located. Improvements in

housing need to be linked to improvements in schools, community safety, transportation, and job

access.

Success in federal housing policy needs to be evaluated not just according to the number of housing

units produced but also in terms of whether the housing produced improves both communities and

individual lives. Federal housing assistance programs need to be reformed so that non-elderly, ablebodied people living in assisted housing have a personal responsibility, as do others, to contribute to

society as well as accept its help. It is time for America to put these quality-of-life considerations on a

par with cost considerations and make housing programs work to improve communities and

individual lives.

In light of its mandate from Congress, the Millennial Housing Commission sought answers to some

basic questions in seeking to address the nation’s housing challenges:

• What is the importance of housing, particularly affordable housing, to the nation’s infrastructure?

• Is the nation getting the housing outcomes it expects and desires for individuals, families, and

communities? Are there better ways to meet these needs?

• How can the nation increase private-sector involvement?

• Are existing housing programs living up to their potential? Which need reform or significant

restructuring?

• What are the critical unmet housing needs? Are new programs necessary to address these needs?

In the search for answers to these questions, the Commission held five public hearings, conducted

numerous focus group meetings, commissioned papers, and solicited input on policy positions and

program recommendations from a myriad of individuals and organizations. The consistent ideas

expressed in these various forums were:

• Affordability and lack of decent housing are a growing problem, particularly for low-income

families.

• Housing must be financially and physically sustainable for the long term.

• Housing issues are predominantly local issues, and programs must reflect the variations from state

to state and community to community.

• Housing exists in a broader community context, and programs must consider the relation and

impact of housing on education, economic opportunity, and transportation.

• Private-sector involvement in the production of affordable housing must be increased.

• Mixed-income housing is generally preferable to affordable housing that concentrates and isolates

poor families.

• Consistent enforcement of the nation’s fair housing laws is a vital part of making housing a part

of the ladder of economic opportunity.

• Congruence among existing housing programs is essential.
3

• Homeownership counseling is necessary to make homeownership programs work well for

low-income families.

These ideas are reflected in the Commission’s recommendations to Congress.

***

This is not a report about specific funding levels, nor does it lay out quantitative goals. Instead, this

report presents a new vision for the nation’s housing. The Millennial Housing Commission’s vision

can be stated quite simply:

to produce and preserve more sustainable, affordable housing in healthy communities to help American

families progress up the ladder of economic opportunity.

To achieve this goal, the Millennial Housing Commission recommends that the links between

housing and the community in which it is located be strengthened, that authority and responsibility

for making decisions about housing remain in the hands of state and local governments, that the

role of the private sector in producing affordable housing be enhanced, and that the goals of

sustainability and affordability be placed on equal footing so that continued affordability is no longer

the enemy of proper physical maintenance. All affordable housing needs to be designed, financed,

and managed to be sustainable over the long term. These policy principles underpin all of the

Commission’s recommendations to Congress. The recommendations made in this report also rest

upon the assumption that every part of the housing, real estate, mortgage, and community

development industries must operate without regard to race, color, national origin, gender,

disability, family status, or religion.

A summary of the Commission’s 13 principal recommendations follows. These recommendations are

divided into three categories: new tools, major reforms of existing programs, and streamlining of

existing programs. The policy principles of strengthening communities, devolving decision-making,

involving the private sector, and ensuring sustainability inform all of the recommendations. The

recommendations derive from nearly a century of experience. They represent lessons learned and a

reaffirmation of the importance of housing to the nation as a whole, its communities,

neighborhoods, families, and citizens.

New Tools

• Enact a new homeownership tax credit.

The Commission recommends a state-administered homeownership tax credit, modeled on the

successful Low Income Housing Tax Credit for rental housing. States would be able to use this

flexible credit, under a qualified allocation plan, for two purposes. In qualified census tracts,

where the cost to build or rehabilitate a unit will be greater than the appraised value of the

completed home, states may use the credit to offset the developer’s total development cost. A

credit used in this manner would thus serve a community development purpose in addition to

providing a new unit at a cost to the buyer that reflects local market conditions rather than the

otherwise prohibitively high cost of development. Or, states may allocate the credit to lenders who

in turn provide lower-cost mortgages to qualified buyers. In either form, the credit will extend the

benefits of homeownership to low-income households and the communities in which they choose

to live.

• Support preservation with a broad system of tools, beginning with exit tax relief.

The stock of affordable housing units is shrinking. Some properties are in attractive markets,

giving owners an economic incentive to opt out of federal programs in favor of market rents, and

many owners have done so. Other properties are poorly located and cannot command rents

adequate to finance needed repairs. In general, properties with lesser economic value are at risk of

deterioration and, ultimately, abandonment, unless they can be transferred to new owners. To
4

remove an impediment to transfer, the Commission recommends that Congress recognize and

authorize “preservation entities,” organizations that would acquire and own such properties and

commit to the preservation of existing affordability. The Commission further recommends that

Congress enact a preservation tax incentive to encourage sellers to transfer their properties to

such entities. Subject to state housing finance agency oversight, an owner who sells to a

preservation entity would be eligible for exit tax relief.

• Provide capital subsidies for the production of units for occupancy by extremely low-income

households.

This new tool would address the multiple problems of housing inadequacy that bear most heavily

on extremely low-income (ELI) households, most of whom report paying well over half their

incomes for housing costs. The most dramatic problem is the severe shortage of available units. No

production program currently serves these households, and a significant portion of existing units

that would be affordable to some of these families is occupied by higher-income households

spending less than 30 percent of their incomes on housing. The capital subsidy would be used to

produce new units and/or preserve existing units for ELI occupancy, eliminating debt on the

units—and thus removing the debt service component from the household’s monthly rental

payment. No more than 20 percent of the units in any one development would have ELI

occupancy restrictions. This program would thus result in more and better-quality units for ELI

households and a degree of deconcentration of poverty.

• Enact a new mixed-income, multifamily rental production program.

In most housing markets, an increase in the housing supply would be beneficial because it would

lower rents at all price levels. Scarcity begets higher rents. The Commission therefore

recommends a new multifamily production program with modest federal targeting requirements

that, because of its relative simplicity, would attract private capital to produce multifamily rental

housing. The essence of this recommendation is to take the limits off of states’ ability to issue taxexempt debt for specific housing and community development purposes. States may choose to

allocate the resource via an allocation plan in order to target production to specific areas, such as

those characterized by employment and other opportunities that would be particularly beneficial

to the low-income families residing in the rent-restricted units.

• Facilitate strategic community development by empowering state and local governments to blend

funding streams.

State and local leaders have trouble coordinating affordable housing activities with transportation,

economic development, employment, training, childcare, and educational activities, because

funding for such purposes is delivered through separate federal-to-state funding streams. To

facilitate the combined used of such funds in support of comprehensive neighborhood

redevelopment, the Commission recommends that Congress authorize governors to set aside up to

15 percent of federal block grant funds received. Funds could be combined and used for specific

projects developed with the support of local government(s). Funds would be used for the same

purposes as they were intended (e.g., job training, childcare, transportation, housing, social

services), but in support of comprehensive neighborhood redevelopment. Localities would

undertake a comprehensive planning process with meaningful public input to create a holistic

development strategy for a particular neighborhood. Projects selected would benefit from

consolidated review and decision-making. Governors would have limited authority to waive federal

regulations that interfere with the combined use of funds.

Major Reforms

• Transform the public housing program.

Public housing agencies (PHAs) are encumbered by federal regulations that undermine local

decision-making authority and make it difficult for PHAs to provide quality housing to low-income

families. For example, the centralized system of public housing fundingwherein funds flow to

PHAs as a whole and not to individual propertiesmakes it difficult for PHAs to finance needed

capital improvements through the private markets. Meanwhile, federal funding for such activities

has fallen short by approximately $20 billion to date. To transform the program, the MHC
5

recommends a gradual transition to a project-based approach, with subsidies flowing to specific

properties based on the rents that units would command after any needed renovation. This

transformation would enable PHAs to rehabilitate properties using funds borrowed in private

markets. If feasible, obsolete properties could be repositioned using the HOPE VI program. The

recommendation also addresses troubled agencies, the program’s overly complicated rent

structure, and the disproportionate regulatory burden on small PHAs.

• Revitalize and restructure the Federal Housing Administration within HUD.

Revitalizing and restructuring FHA is an urgent priority for congressional action. FHA’s

multifamily insurance is an indispensable tool for stimulating housing production, and its singlefamily insurance extends homeownership opportunities to low-income families and minorities.

FHA’s potential, however, is limited by its outmoded structure and confining statutes. The

Commission therefore recommends that Congress restructure FHA as a wholly owned government

corporation within HUD, governed by a board chaired by the HUD Secretary. Such a structure

would enable FHA to adapt its programs to evolving markets without relying on Congress to

legislate each change, and it could be accomplished with no substantial budget impact. It would

also enable FHA to invest in technology, leading to increased efficiency and reduced risk, and to

attract and compensate staff at competitive levels, securing the skills needed to manage its nearly

$500 billion mortgage insurance program. Equally important is that under such a restructuring

the FHA would remain with HUD and would be an effective force for the production and

preservation of affordable housing. The Commission also outlines recommendations intended to

provide FHA with more flexible multifamily and single-family operations. If Congress chooses not

to restructure FHA, the MHC recommends that its proposed improvements be implemented

within the current FHA organization.

• End chronic homelessness.

Homeless families and individuals generally fall into two categories: the transitionally homeless

and the chronically homeless. Transitionally homeless households need adequate housing, first

and foremost, while those who are chronically homeless confront health or substance abuse

problems in addition to extreme poverty. With its capital subsidy for units targeted exclusively to

extremely low-income households and its recommended improvements to public housing,

vouchers, and the HOME and Low Income Housing Tax Credit programs, the Commission

believes that the tools needed to end transitional homelessness will be available. For the

chronically homeless, permanent supportive housing, which combines housing with intensive

rehabilitative and other social services, is needed. The Commission recommends the elimination

of chronic homelessness over a 10-year period by the creation of additional units of permanent

supportive housing and the transfer of renewal funding for such units to HUD’s Housing

Certificate Fund.

• Over time, establish a work requirement linked to housing assistance.

As with other “means-tested programs,” a household qualifies for housing assistance based on its

income. Housing programs that set rents at a percentage of household income create a

disincentive to increase income through work or marriage and a powerful barrier to household

movement up the ladder of economic opportunity. The Commission recommends several

measures to move assisted families up and out of assisted housing units, over time, through a

combination of work requirements and supportive services, enabling them to increase their

incomes and freeing up the housing units for other, currently unassisted families. In addition, the

Commission recommends continued experimentation with and changes to the rent structure of

public and assisted housing to reduce the disincentives to work and marriage.

Streamlining of Existing Programs

• Expand and strengthen the housing choice voucher program.

The voucher program serves 1.6 million households and is for the most part highly successful. In

some markets, however, program administration and regulatory complexity create an effective

disincentive for private owners to accept voucher-holding tenants, especially when owners can

instead rent to unsubsidized tenants. The Commission recommends increased authority for local
6

program administrators to change payment standards in response to market conditions, and,

recognizing the versatility of the program, it proposes measures to match voucher holders with

services that complement efforts to embrace employment and other opportunities. Additional

recommendations strengthen and enforce the requirement that owners of housing produced with

federal assistance accept voucher-holding households—including extremely low-income

households, for whom the Commission recommends a special type of voucherin all cases subject

to a local cap to encourage deconcentration of poverty. Finally, the Commission asserts that the

voucher program is distinctly worthy of additional funding in substantial annual increments.

• Reform the HOME and Low Income Housing Tax Credit programs, and increase funding for HOME.

The HOME and Low Income Housing Tax Credit programs are both highly successful. Outdated

rules and regulations, however, inhibit their potential for production and preservation activities,

particularly those that would provide new or rehabilitated units affordable to the lowest-income

households. The Commission recommends elimination of these rules and of programmatic

complexities that burden project developers and owners. In the case of the tax credit, the

Commission recommends elimination of uncertainties that can spoil investor appetite. To support

the efforts of former welfare recipients, the Commission calls for a change to the tax code to allow

states to use Temporary Assistance to Needy Families (TANF) funds for one-time grants to tax

credit properties. The grants would be used to reduce the rents on particular units, which would

be occupied by working poor, including former welfare, households. In the case of the HOME

program, the Commission recommends substantially increased appropriations.

• Improve the Mortgage Revenue Bond program.

State housing finance agencies (HFAs) issue Mortgage Revenue Bonds (MRBs) and use the

proceeds to generate single-family mortgages. A statutory provision known as the “10-year rule”

limits HFA use of scheduled repayments and mortgage prepayments and has resulted in

substantial lost mortgage volume to date. This provision should be repealed immediately. In

addition, as long as income limits are enforced, the Commission recommends repeal of purchase

price limits, as well as restrictions that limit eligibility to first-time homebuyers and restrictions that

apply in some states and limit eligible Veterans. These measures combined will help to ensure that

HFAs maximize the public benefit associated with bond issuance in the interest of promoting

homeownership for low-income families.

• Revise federal budget laws that deter affordable housing production and preservation.

Budget laws inhibit the U.S. Department of Housing and Urban Development (HUD) from

entering into contracts requiring more than one year’s funding. As a consequence, HUD cannot

offer the owners of multifamily housing multiyear contracts for rental assistance, and owners

cannot obtain financing on the terms most advantageous for capital investment in the affordable

housing stock. As a practical matter, Congress has never failed to appropriate funding to renew

existing contracts for rental assistance. The Commission recommends, therefore, that funding for

rental assistance be moved to the “mandatory” category of federal expenditures, so that privatesector lenders will be willing to finance repairs. The MHC suggests alternate measures that would

have the same effect.

In addition to the principal recommendations described above, the Millennial Housing Commission

endorsed a number of supporting recommendations: increase funding for housing assistance in

rural areas; increase funding for Native American housing; establish Individual Homeownership

Development Accounts to help more low-income households buy homes; allow housing finance

agencies to earn arbitrage; exempt housing bond purchasers from the Alternative Minimum Tax;

undertake a study of Davis-Bacon Act requirements; address regulatory barriers that add to the cost

of housing production; streamline state planning requirements for community development

programs; expand the financing options for small multifamily properties; foster a secondary market

for development and construction lending; launch a demonstration project for comprehensive

community development; improve consumer education about home mortgage lending; improve the

access of manufactured home buyers to capital markets; affirm the importance of the Community

Reinvestment Act; and affirm the importance of the government-sponsored enterprises.
7

Why Housing Matters

Securing access to decent, affordable housing is fundamental to the American Dream. All Americans

want to live in good-quality homes they can afford without sacrificing other basic needs. All

Americans want to live in safe communities with ready access to job opportunities, good schools, and

amenities. All parents want their children to grow up with positive role models and peer influences

nearby. And the overwhelming majority of Americans want to purchase a home as a way to build

wealth.

The importance of helping more Americans satisfy these objectives cannot be overstated. Decent,

affordable, and accessible housing fosters self-sufficiency, brings stability to families and new vitality

to distressed communities, and supports overall economic growth. Very particularly, it improves life

outcomes for children. In the process, it reduces a host of costly social and economic problems that

place enormous strains on the nation’s education, public health, social service, law enforcement,

criminal justice, and welfare systems.

Housing very much matters—to the individual, to the family, to the neighborhood, and to the

nation.

Family Stability and Childhood Outcomes

Decent, affordable, and stable housing promotes family stability and creates a positive environment

for raising children.1

 Families lacking the means to pay for good-quality housing may have to make

frequent moves in search of appropriate accommodations. Two studies have found that disruptive

moves during childhood and adolescence have a strong negative impact on school performance.2

In addition, struggles to provide for daily needs also interfere with both school and job performance.

Although only a handful of studies have examined the impact of rental housing assistance on the

transition from welfare to work, the available research suggests the effect is positive. Two studies

point to a positive employment impact even in the absence of work supports such as childcare.3

 One

analysis conducted in Minnesota, comparing the unemployment rates and average earnings of

welfare-to-work recipients with and without rental assistance, found that the combination of housing

and job assistance resulted in much more favorable employment outcomes.4

 The evidence is

therefore mounting that stable, affordable rental housing plays an important role in helping families

find and hold jobs.

Other research suggests the stability that homeownership brings can have especially positive effects

on school success and social behavior.5

 All else equal, children of parents who own their homes and

live in neighborhoods with low turnover have a higher probability of completing high school.6

Teenaged daughters of homeowners are also less likely to become pregnant.7 Even after controlling

for parents’ age, income, and other influences, homeowners’ children have significantly higher math

and reading scores as well as significantly fewer behavioral problems and a better quality home

environment than renters’ children.8

The physical condition of housing makes a difference for families as well. Better-quality housing is

related to lower levels of psychological distress, which in turn reduce health care costs and improve

productivity.9

 In contrast, housing that exposes families to hazards such as lead paint can limit

lifelong educational and economic achievement.10 The presence of dust, molds, and roach allergens

in the home increases the incidence of asthma and allergies, while electrical problems, poor lighting,

and other system deficiencies increase the risk of illness, injuries, and even death.11
8

Neighborhood Quality and Access to Opportunity

The vast majority of Americans live in communities with good-quality schools and ready access to

jobs. But for millions of households, particularly those living in high-poverty urban or rural areas,

such opportunities are severely limited. Unemployment, crime, high-school dropout, and teenpregnancy rates are all significantly higher in these locations.12 The incidence of post-traumatic stress

disorder, depression, and anxiety among inner-city youth is also higher.13 These problems make it

especially difficult for local residents to find decent paying jobs and to improve their lives by saving

enough to invest in homeownership, higher education, and other wealth-enhancing measures.

As a result, neighborhood quality plays an important role in positive outcomes for families. Stable

housing in an unstable neighborhood does not necessarily allow for positive employment and child

education outcomes. Federal demonstration programs enabling the poor to move from distressed

city neighborhoods to lower-poverty communities underscore the potent impact of neighborhood

quality on family stability. Research from the Gautreaux and Moving to Opportunity demonstrations

indicates that relocating families to better neighborhoods can improve educational, mental health,

and behavioral outcomes.14 Evidence of the impact of these programs on employment, however, is

mixed.15

Neighborhood Revitalization

While relocating lower-income families is one way to support economic independence and individual

advancement, so too is the revitalization of distressed neighborhoods. Without strengthening

schools, providing access to services, and connecting residents to jobs, housing development by itself

cannot provide a platform for opportunity.

Both theory and empirical evidence suggest that when several owners fail to maintain their

properties, others nearby follow suit because their neighbors’ inaction undermines property values.

Rundown and abandoned properties can have a contagious effect that accelerates neighborhood

decline.16, 17

Replacing or upgrading distressed properties is therefore a precondition for neighborhood

revitalization. Indeed, public investment in housing often triggers private investment that ultimately

lifts property values.18 Although larger economic and social forces can undermine such efforts,19

recent comprehensive community development projects point to the potential for concentrated

public investment in mixed-income housing as a cornerstone for reclaiming neighborhoods.

Household Wealth

Homeownership not only insulates families from rising rents and home prices, but it also enables

them to build financial resources that can be tapped for other purposes. In 1998, 50 percent of the

average homeowner’s net worth was in home equity.20

By refinancing their mortgages, owners can reduce their monthly payments and/or take out

equity—freeing up cash for other spending and investment. In 2001, families saved $10 billion in

mortgage interest payments by refinancing their existing mortgage debt, for an average monthly

savings of $100 over the life of the loan.21 In addition, homeowners cashed out more than $100

billion in equity through refinancing, using the proceeds for debt consolidation, home

improvements, consumer purchases, investment, and other purposes that helped to stimulate the

economy.22

Capital gains on home sales also add liquidity to the economy and stimulate consumer spending. In

1999, the Federal Reserve Board estimated that the capital gains on an average home resale, net of

transaction costs, exceeded $25,000.23 With existing home sales running at well over 5 million
9

annually, realized capital gains now put an additional $125 billion per year into sellers’ bank

accounts or toward the purchase of trade-up homes.

Contribution to Economic Growth and Stability

Beyond its benefits to families and communities, housing is an engine of the national economy and

crucial to its strength. The residential housing stock itself represents more than one-third of the

nation’s tangible assets (Fig. 1). Just as important, the housing sector—including residential

investment, housing consumption, and related spending—consistently generates more than 20

percent of the nation’s gross domestic product (Fig. 2).

Figure 1

Housing Makes Up

More Than a Third

of the Nation’s

Tangible Assets

Source: Bureau of Economic Analysis, Survey of Current Business, September 2001.

Residential Structures

Non-Residential Structures

Government-Owned

Fixed Capital

Equipment

Consumer Durables

35%

9%

19%

15%

22%

In 2000, investment in home building and remodeling accounted for about 4 percent of GDP.

Housing consumption, in the form of payments by renters and equivalent payments by homeowners,

contributed nearly another 10 percent.24 And spending on utilities, furnishings, appliances, and

landscaping not otherwise captured amounted to more than 7 percent of GDP.

Housing production stimulates employment growth. In 2001, new residential construction was

associated with roughly 3.5 million jobs nationally and $166 billion in local income.25 The National

Association of Home Builders estimates that the construction of 100 single-family homes supports

about 250 full-time equivalent jobs and $11.6 million in wages.26 The families occupying these new

homes then bring an estimated $2.8 million in income and 65 jobs to the local economy.

Home building activity also adds significantly to federal, state, and local revenues. In 2001, home

building was the source of about $65 billion in combined taxes and fees. Once constructed, housing

continues to contribute to local government coffers through the property taxes—as well as the

income, sales, and excise taxes—that homeowners pay. Such taxes amount to nearly $500,000

annually per 100 single-family units constructed.27

In the last 20 years, the nation’s housing finance system has become a mainstay of the economy.

Once subject to frequent credit crunches, the system today serves as a critical stabilizing force,

relying on global capital markets rather than volatile local savings deposits. The system now manages

risk better, provides expanded access to mortgage credit, and ensures that financing is continuously

available even in the midst of international credit swings. As a result, U.S. citizens are some of the

best-housed people in the world.
10

 

Figure 2

Housing Consistently Conributes More Than a Fifth of GDP

1950

Note: Calculation includes use of gross residential investment, housing expenditures, and 

household operation expenditures, 1950-2000.

Source: Bureau of Economic Analysis, Personal Consumption Expenditures by Type, Gross 

and Net Investment by Type, October 2001.

0%

5%

10%

15%

20%

25%

30%

1960 1970 1980 1990 2000

Residential Investment, Consumption, and Related Spending

Residential Investment and Consumption

Residential Investment

Share of GDP

Not only does the nation’s housing finance system provide unparalleled access to mortgage credit,

but by doing so it also strengthens the overall economy. Without continuous access to mortgage

credit on favorable terms, the nation’s nearly $12 trillion investment in household real estate would

be vulnerable to depreciation28—with cascading effects on home equity, consumer confidence, and

the overall financial system (Fig. 3). Uninterrupted access to development and construction finance

also helps to prevent disruptive swings in building activity.
11

Figure 3

1980

Source: Federal Reserve, Federal Flow of Funds Data, Historical Data.

Both Home Equity and Household Mortgage Debt Stand at Record Levels

$2

$4

$6

$8

$10

$12

 Trillions $14

$0

1985 1990 1995 2000

Home Equity Mortgage Debt

For consumers, today’s narrower spreads between interest rates on mortgages and Treasury securities

have provided great savings. The introduction of automated underwriting has also led to lower

origination and servicing costs. These benefits largely derive from the evolution of strong secondary

markets. The federal government has developed a variety of mechanisms to ensure that Americans

have continuous access to affordable credit, including the creation of Fannie Mae and Freddie Mac,

mission-driven secondary-market companies dedicated to providing liquidity to mortgage markets

and contributing to meeting affordable housing needs.

The Federal Housing Administration (FHA) is also a central player, reaching many underserved

households that private lenders can not or do not reach. Together with Ginnie Mae, its secondarymarket agency for packaging and selling loans, FHA has been the innovator of many mortgage

products, insurance products, and mortgage-backed security designs that are now the mainstays of

the housing market. Finally, the Federal Home Loan Banks (FHLBanks), also mission-driven,

support residential lending through their members/shareholders.

The stabilizing force of the housing finance system was apparent in the most recent economic cycle.

When the economy softened in 2001, mortgage refinances and home sales helped to offset broader

economic weakness, and residential investment remained steady. Following the events of September

11, 2001, Fannie Mae and Freddie Mac kept capital flowing even when stock and bond markets shut

down.

To reiterate, housing does matter—in every aspect of society. For this reason, the Millennial Housing

Commission is convinced that investment in housing production, preservation, and assistance will

prove to be a cost-effective and life-enhancing investment in the future—and particularly for those

millions of households who are otherwise unable to obtain decent, affordable, and stable housing.
12

America’s Housing Challenges

Although the vast majority of Americans is exceptionally well housed, millions of families still have

serious housing problems. Affordability is the single greatest housing challenge facing the nation. In

1999, one in nine households reported spending more than half its income on housing, while

hundreds of thousands went homeless on any given night. Wide gaps also remain between the

homeownership rates of whites and minorities, even among those with comparable incomes. And

while greatly reduced from a few generations ago, housing quality problems also persist.

In an effort to reduce housing costs for lower-income households, the federal government has gone

from assisting fewer than 100,000 renters before the 1950s to providing direct assistance to nearly 5

million today. The government also assists more than one million additional rental units through tax

credits and block grants. Nevertheless, only about one in three households eligible for rental

assistance receives it.1

 In addition, hundreds of thousands of federally subsidized apartments are in

very poor physical condition, starved of cash flow to meet backlogged repairs so that they are at risk

of loss.2

 And one million privately owned apartments are under short-term federal subsidy contracts

that allow owners to exit the program and convert their properties to market rents when the

contracts expire.

The nation’s lowest-cost rentals, along with those affordable to low- and moderate-income renters,

are being lost at alarming rates. Preservation of the remaining affordable rental stock has thus taken

on a new sense of urgency, as has the need to stimulate production of new rental housing. Gaps

between the supply of and the demand for affordable rental housing are greatest for extremely lowincome households, but losses of housing affordable to low- and moderate-income households

underscore the need to stimulate rental production for all three income groups. Currently, however,

no federal program is dedicated to preserving or producing housing for extremely low- or moderateincome households.

Adding to affordability problems, house price increases since the 1980s have outstripped income

growth. Partly as a result of this, and partly as a result of the fact that many new homes are too

expensive for lower- and moderate-income Americans to buy, the number and share of homeowners

with housing affordability problems now stand at record levels. Moreover, these increases have

occurred despite significant reductions in mortgage interest rates.

The other most significant housing challenge facing the nation is the gap in homeownership rates

between whites and minorities, as well as between high- and low-income households. Not all

households that want to buy homes and are capable of managing the responsibilities of

homeownership have been able to do so. Homeownership has the potential to help families build

their assets and wealth, stabilize their housing costs and living arrangements, and gain greater

control over their home environments. A balanced housing policy must therefore make addressing

both the homeownership gaps and the rental affordability challenges urgent national priorities.

Definitions of Income Groups Used Throughout This Report

Extremely Low Income (ELI) = Below 30 percent of area median income (AMI)

Very Low Income (VLI) = 30.1 to 50 percent of AMI

Low Income (LI) = 50.1 to 80 percent of AMI

Lower Income Less than 80 percent of AMI

Moderate Income (MI) = 80.1 to 120 percent of AMI

High Income (HI) = Above 120 percent of AMI
13

Scope of the Affordability Challenge

Most federal programs measure affordability by the relationship of income to housing costs.

Spending 30 percent to 50 percent of income on housing is the generally accepted definition of a

moderate affordability problem; spending more than 50 percent is a considered a severe affordability

problem. In reality, however, spending more than 30 percent of income for many lower-income

households is a significant hardship that prevents them from meeting other basic needs or saving

and investing for the future.

Under these definitions, 13.4 million renter households and 14.5 million owner households have

housing affordability problems (Fig. 4). For cost-burdened renters, the struggle is to pay rent and

utilities; for cost-burdened owners, the problem is keeping up with property maintenance as well as

holding onto home equity.3

 Elderly and disabled owners, in particular, may be unable to perform the

upkeep necessary to keep their homes in good repair.

Figure 4

Renters

Source: HUD tabulations of the 1999 American Housing Survey prepared for the Millennial Housing Commission.

Many Owners as well as Renters Face Severe Affordability Problems

Severely Burdened

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Owners

25%

19%

56%

35%

47%

18%

69%

27%

3%

91%

7%

1%

98%

2%

50%

21%

29%

60%

24%

16%

71%

22%

7%

83%

95%

14%

3%

4%

1%

Moderately Burdened Not Burdened

ELI VLI LI MI HI

Percent

of

Households

ELI VLI LI MI HI

Households cannot afford housing for several reasons. In some cases, their incomes are too low to

cover even modest rental housing costs. In others, they live in high-cost markets where having even a

moderate income is insufficient to afford housing. In yet others, working families are unable to earn

enough wages to manage their housing costs and basic needs because of age, disability, or difficulty

finding full-time jobs.

In rare instances, families may choose to spend more than 30 percent of their incomes on housing

simply because they consider it a top priority. But the fact that the average American household in

1999 devoted only about 20 percent of income for housing suggests that spending more than 30

percent is bred of necessity, not choice.

Federal housing policymakers have responded to these affordability challenges in a variety of ways: by

producing additional units, by preserving existing low-cost units, and by assisting families in paying

their rents or mortgages. While the Commission endorses such a balanced program, it has also

concluded that more can and should be done to couple housing programs with measures to increase

employment opportunities for working families and expand affordable housing options in areas of

rapid job growth.
14

Measuring Affordability

Housing affordability is clearly a serious and growing national concern plaguing millions of Americans. Official estimates and those

used throughout this report, however, overstate the magnitude of the nation’s affordability problems, especially among lower-income

households.

There are two reasons for the overestimates. First, the American Housing Survey (AHS), which was used to produce the estimates,

undercounts income—perhaps by as much as $329 billion or more, or 14 percent of total money income.4 Second, the estimates are

based on housing costs as a share of pre-tax income. This leads to overstating the housing affordability problems among many of the

more than 19 million low-income families that take the earned income tax credit (EITC), many of whom have higher after-tax than pretax incomes. It is also worth noting that noncash benefits, such as food stamps, are not counted toward income in determining

eligibility for housing programs and therefore in estimating housing cost burdens.

Recent research suggests, however, that including the EITC has only a modest impact on estimates of “worst-case housing needs.”5

HUD defines households with worst-case housing needs as very low-income unassisted renters spending more than half their incomes

on housing or living in severely inadequate units. This research reveals that correcting for the EITC reduces the number of worst-case

needs in 1999 by only about 7 percent. 6

During the preparation of this report, the Commission roughly simulated the impact of income undercounts. In one simulation, the

Commission adjusted all incomes upward to account for the estimated 14 percent average understatement of income. This reduced

the number of worst case needs by 18 percent. In a second simulation, the Commission deleted every household reporting income of

$1,000 or less, a rent of less than $50, or a rent greater than income. After re-weighting the renters for these deletions, these very

aggressive adjustments reduce the number of “worst-case housing needs” by as much as 22 to 31 percent depending on the reweighting method used.7

 The true magnitude of worst-case needs, however, is likely much closer to official estimates than these

simulation results, because many of the deleted households were likely to have had severe cost burdens.

While further study of these issues and of the general approach to defining affordability8 are clearly warranted, there is little doubt that

housing affordability problems are widespread.

Household Income and Housing Affordability

Although concentrated among extremely low-income households, housing affordability problems

reach across all but the highest income groups.

Most of the nation’s very low-income households earn enough to cover utilities and other operating

costs for many units, but not enough to support the cost of new construction or of the major repair

or rehabilitation of distressed properties. With an ability to pay of about $675 for housing, lowincome households have enough income to rent a modest but adequate home in most markets and,

in some, to purchase an existing or new starter home with some effort and perhaps modest

assistance. Meanwhile, except in high-cost markets, moderate-income households at or above the

median income can generally find housing they can afford, although they often have only limited

choice of type and location. In high-cost markets and among those earning near the bottom of the

moderate-income range, many must spend more than they can readily afford or trade off

neighborhood quality to lower their housing costs. Among those with high incomes, housing

affordability problems are rare and choice of location is the broadest of all income groups.

The following table shows the monthly median housing costs for renters, owners, and then all

households across the income spectrum (Fig. 5). Costs are based on incomes as reported by

households.
15

Households Number

(Millions)

Share

(%)

Median 

Reported 

Income Affordable Actual

Cost as % 

of Income

Renters

Extremely Low Income

Very Low Income

Low Income

Moderate Income

High Income

All

Owners

Extremely Low Income

Very Low Income

Low Income

Moderate Income

High Income

All

All

Extremely Low Income

Very Low Income

Low Income

Moderate Income

High Income

All

8.5

6.2

7.3

6.6

5.3

34.0

25

18

21

19

16

100

6.4

7.1

10.7

14.3

30.3

68.8

9

10

16

21

44

100

14.9

13.3

18.0

20.9

35.6

102.7

15

13

18

20

35

100

$7,000

$17,000

$26,541

$40,000

$68,000

$24,400

$175

$425

$664

$1,000

$1,700

$610

$6,500

$15,613

$27,000

$41,200

$81,000

$45,400

$163

$390

$675

$1,030

$2,025

$1,135

$7,000

$16,000

$27,000

$40,050

$79,000

$36,000

$175

$400

$675

$1,001

$1,975

$900

$426

$509

$565

$643

$736

$560

$300

$324

$453

$633

$908

$617

$369

$426

$520

$637

$865

$585

58

35

25

19

12

25

50

25

21

17

13

17

54

31

23

18

13

19

Figure 5

Housing Costs Far Exceed Lower-Income Households’ Ability to Pay

Monthly Housing Costs

Source: HUD tabulations of the 1999 American Housing Survey prepared for the Millennial Housing Commission.

The Burden on Working Families

Working full-time does not guarantee immunity from acute housing affordability problems. Of the

11.3 million lower-income households with severe housing affordability problems in 1999, nearly

one-quarter had earnings at least equivalent to full-time work at the minimum wage ($10,712

annually). To meet the needs of employers, however, many jobs are seasonal, temporary, or part-time

so that not all employment-seekers are able to find year-round, full-time work. As a result, another 13

percent of low-income households with severe housing affordability problems were under-employed

but still earning at least half of the minimum wage equivalent.
16

Moreover, many families with earnings significantly higher than the full-time, minimum wage

equivalent also face moderate and severe housing affordability problems. Consider household heads

working in retail sales (with a median income of $15,940), licensed nursing ($27,850), or law

enforcement ($37,560).9

 Among the 11.8 million households with earnings between the median for

retail sales workers and the median for licensed nurses, fully 34 percent had moderate housing cost

burdens, and 10 percent had severe problems. Among the 11.4 million with earnings between the

medians for licensed nurses and law enforcement, 19 percent had moderate problems, and 5

percent had severe problems.

The Shrinking Rental Supply

Comparisons of renter households by income and the stock of units they can afford (at 30 percent of

income) show a critical shortage of affordable apartments for extremely low-income households.

National figures, however, mask wide variations in affordability both within and across metropolitan

areas. In addition, a substantial portion of the rental housing that is affordable to lower-income

households is old and located in neighborhoods with little access to jobs or adequate facilities and

services. Making matters worse, higher-income households outbid lower-income households for

rental units in an effort to limit their housing expenses, sharply reducing the number of affordable

units for others.10

Despite the limitations of national comparisons, though, the aggregate numbers do reveal quite

starkly the mismatch between the supply of and the demand for housing affordable to extremely lowincome households. Only 6.7 million units have costs in the range that the nation’s 8.5 million ELI

renter households can afford to pay (Fig. 6). In addition, most ELI households tend to have incomes

well below the top of the ELI income range, while most of the units, unless subsidized, have costs at

the upper end of the range. The key point, however, is that even if all the units in the range were

appropriately located, the right size, of good quality, and available, there would still be a shortage of

1.8 million units affordable to ELI households.

 

Figure 6

Source: HUD tabulations of the 1999 American Housing Survey prepared for the Millennial 

Housing Commission.

The Affordability Squeeze from the Supply-Demand Gap Primarily Affects 

Extremely Low-Income Households

6.2 12.1

7.3

6.6 14.2

3.0

5.3

1.1

Millions of

Households

Millions 

of Units

8.5 6.7

Over 120%

80-120%

50-80%

30-50%

Under 30%

Income as a 

Share of AMI
17

The pressures on the affordable rental stock will only increase as the number of households headed

by persons under age 25 and over age 65 gradually rises over the next 10 years, and then sharply

thereafter. Since both groups tend to have relatively low incomes, their growing numbers will add

even more to the demand for affordable rental housing.

No single tool or approach can solve the related problems of housing affordability and lack of

supply. Where the stock of affordable rentals is adequate and available, vouchers can effectively assist

families with incomes too low to pay the costs of providing and operating rental housing. But

vouchers alone will not be enough in housing markets where the supply is inadequate or to provide

housing opportunities in areas with fast-growing employment. Addressing this problem will require

concerted efforts both to expand the supply of rental housing and to preserve the existing stock of

subsidized and unsubsidized low-cost housing.

In the course of its deliberations, the Millennial Housing Commission considered the level of

production that might be needed to make a substantial impact on the gap between the number of

ELI households and the supply of affordable housing available to them. The addition of 150,000

units annually would make substantial progress toward meeting the housing needs of ELI

households, but it would take annual production of more than 250,000 units for more than 20 years

to close the gap.11

Affordability and Supply Trends

Given the favorable economic conditions of the 1990s, it is perhaps surprising that housing

affordability problems stand at record levels for owners and near-record levels for renters. One might

have expected that unusually strong income gains among low-income households, coupled with

unusually slow growth in rents, would have led to a sharp reduction in the number of renters with

severe affordability problems, but it did not. Similarly, one might have expected that the

combination of rising incomes, markedly lower mortgage interest rates, and strong mortgage

refinancings would have reduced the number of owners with severe housing affordability problems,

but it did not.

The number of ELI renters with severe problems edged slightly higher between 1985 and 1999,

although the share with these problems was flat. Among VLI renters, the share fell as many families

made the move to homeownership, but the absolute number with severe problems remained flat.

Meanwhile, both the number and share of ELI homeowners with severe housing affordability

problems rose sharply as house price increases outdistanced income growth and the supply of homes

available for sale shifted toward the high end.

Changes in the supply of affordable rental housing are more complicated to interpret. There are two

ways of looking at these trends. One is to consider what happened to the number of units renting at

inflation-adjusted rent levels in each local market. This approach shows significant losses of the

lowest-cost stock between 1985 and 1999.

The alternative approach considers how many affordable rental units were lost or gained over the

period by adjusting income limits for both general price inflation and real income growth. This

calculation takes into account how rising incomes redefine the rents considered affordable at each

income level. Put another way, it accounts for the fact that, as incomes rise, rents affordable to each

income class also rise. This approach thus gives a clearer picture of which rentals are truly affordable

(using the 30-percent-of-income standard) to households with incomes at the upper limit of each

income category at each point in time.

Use of this method reveals that the number of units affordable to households in the extremely lowand very low-income ranges increased as a result of rising incomes. But the number of units

affordable to those with incomes between 60 percent and 120 percent of area medians fell sharply

(Fig. 7).
18

Figure 7

Note: HUD income limits are adjusted for inflation and real income growth for both 1985 and 1999. 

Source: Appendix 1, Table 2.

Affordability Pressures Are Mounting as the Moderate-Income Rental Supply Plummets

30-50%

of AMI

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Extremely

Low

Under 30%

of AMI

Very Low Low Moderate High

50-60%

of AMI

60-80%

of AMI

80-100%

of AMI

100-120%

of AMI

Over 120%

of AMI

Change in

Affordable

Units

1985-99,

Millions

It would be incorrect to conclude from this analysis that there is no need to add directly to the stock

of rentals affordable to ELI households. After adjusting for income growth, the supply of units

affordable to such households is actually growing, but the existing gap between the number of ELI

renter households and units in their affordable range reinforces the need for production. Even more

important, a closer look at the rentals that are affordable and available to ELI households reveals that

the supply remained dead flat despite the growth in number of units affordable to them. Apparently,

the drop in the number of affordable rentals in the middle-income ranges led to increasing numbers

of other renters occupying units affordable to ELI households.

This result underscores the importance of producing many more units for working families with

incomes between 60 percent and 120 percent of area medians. These units are disappearing at an

alarming pace. As a result, a potentially important source of rentals that might later become available

to lower affordable ranges is being lost.

In addition, rental housing production has tilted toward units affordable only to the upper reaches

of the income distribution. In 2000, only 13 percent of all completed two-bedroom apartments were

affordable to renters earning the median income in that year. Only about one-third of completed

two-bedroom apartments rented for less than $750.12 This largely reflects the fact that the private

sector cannot produce apartments in most areas that are affordable to households with incomes

under 70 percent of area median (and sometimes even higher) without a subsidy.13

It is clear that the nation’s housing affordability problems have not retreated, even under the

unusually favorable conditions of the 1990s and current levels of government aid. The federal

government must therefore expand the resources and tools available to stimulate production of units

both for extremely low-income households, where the greatest needs exist, and at the low- and

moderate-income levels, where losses of affordable units are increasing the pressures on working

families.
19

Constraints on Production and Preservation

Several factors deter developers from producing affordable housing, particularly affordable

multifamily housing. These obstacles include a lack of appropriate financing and the imposition

of development controls. High development costs, reflecting stricter standards of construction

and constraints on land supply, also play a role.

Inadequate financing for housing development. Builders of multifamily rental housing want financing

with certain characteristics (such as early interest-rate lock-in, long amortization periods, and nonrecourse development and construction financing) to limit their risk and enhance project

feasibility.14 Developments involving government subsidies entail added risks—appropriations risk

(that the flow of necessary subsidies will be interrupted), operating risk (that restrictions on rents

and rent increases will be too great to cover operating cost increases), and contract risk (that

government will fail to honor original contractual agreements). FHA is the major insurer of capital

on the terms that multifamily developers need and want, but limitations on credit subsidies and

costs, as well as on processing capacity, constrain FHA’s ability to support multifamily housing

production.

The lack of a secondary market for development and construction loans also inhibits lending for

both single-family and multifamily housing. Lenders hold these loans in portfolio, which means that

costs are pegged to local markets. As a result, the loans carry interest rates with large spreads over

comparable Treasury securities and are subject to credit crunches when concerns about credit

quality drive lenders out of the market. These disruptions add to development costs. Small

multifamily properties (containing 5 to 49 units), in particular, lack access to efficient secondary

markets. These small properties accounted for 37 percent of all rentals in 1999 and are most often

located in cities.15 The limited availability of financing is significant for lower-income renters because

these older, smaller properties are frequently more affordable than other structure types.16

Development controls. Zoning rules that sharply restrict or preclude development of multifamily and

manufactured housing in some jurisdictions—as well as factors that add to land, construction, and

infrastructure costs—also deter affordable housing development. For example, the capitalization

into land values of superior job accessibility, public services, or other amenities places the cost of

housing out of reach for lower-income families.

In addition, many communities impose impact fees and exactions on developments to cover the

marginal costs of providing infrastructure and public services to new residential developments. 17

Other communities choose to lower public infrastructure costs by zoning for residential lots large

enough to provide safely for private wells and septic systems, and by exacting land for parks, roads,

and community facilities. At the same time, local electorates can resort to the ballot box to control

the pace and direction of residential development. Although guided by other important public

policy objectives, all these actions add costs18 and raise barriers to both market-rate and low-income

rental housing production.

Impediments to preservation. Complementing the importance of additional multifamily production is

the necessity of preserving the existing stock of affordable housing. In 1995, nearly one-quarter of

privately owned, federally assisted housing units were the unintended victims of programs that

grossly under-budgeted for operations, maintenance, and renovations.19 In addition, HUD set rent

increases rather than allowing the market to do so and built in disincentives (such as limits on

profits) for owners to maintain their properties.20 For public housing, the culprits were policies that

limited initial construction quality, local policies that funneled public housing to distressed markets,

and, most importantly, insufficient appropriations for operating costs and modernization. Fixing the

problems of these publicly and privately owned distressed properties will take additional federal

investment, since the properties lack the cash flow to address their own problems.

Impediments to preservation include federal tax policies that leave many owners with liabilities upon

sale that exceed the property’s value after paying off the mortgage, and codes that are oriented

toward new construction and thus deter moderate rehabilitation. Also important is the inadequacy of

government subsidies necessary to cover the gap between what poor tenants can pay and the cost of

operating rental housing.
20

Persistent Homeownership Gaps

While most Americans aspire to homeownership, many face formidable barriers to achieving their

goal. These obstacles include the high cost of housing generally, the costs specifically associated with

buying a home, the underwriting standards applied by mortgage lenders, and the cost and

availability of mortgage credit.

Owning a home provides many unique benefits and is an important step up the ladder of economic

opportunity. Ownership creates greater security of tenure, greater control over one’s own home

environment, and opportunities to build equity while locking in current costs with fixed-rate loans.

Homeownership also helps stabilize communities by increasing the number of resident property

owners who care about the daily quality of neighborhood life. Helping those willing and able to own

homes to overcome the obstacles thus remains a significant national priority.

After a period of stagnation in the 1980s, evident progress was made in reaching out to low-income

and minority homebuyers in the 1990s. Between 1994 and 2000, the number of lower-income

homeowners increased by about 2.5 million, African-American owners by about 1.2 million, and

Hispanic owners by about 1.2 million.21

Because the largest single constraint on lower-income borrowers is lack of savings,22 the dramatic

reductions in downpayment requirements opened the doors to homebuying for many. In 1990, only

3 percent of all loans were made with downpayments of 5 percent or less. By 2000, that share had

risen to 16 percent.23

Introduction of new risk management tools enabled lenders to relax underwriting standards and

extend credit to low-downpayment borrowers. These tools also revealed that credit could be

extended at higher housing-debt-to-income ratios than originally thought, provided borrowers have

strong credit histories as measured by commercially available credit scores. Furthermore, the

expanded use of automated underwriting systems lowered housing finance charges and removed

individual discretion (and bias) from loan approvals. Finally, heightened regulatory pressures on

Fannie Mae, Freddie Mac, banks, and thrifts to boost their purchases of loans to lower-income

borrowers led to expanded marketing and outreach.

Even with all of these innovations, though, the homeownership rates of low-income families and

minorities still lag those of higher-income families and non-Hispanic whites by large margins. As

of 1999, the gap between black and white homeownership rates stood at 27.2 percentage points, the

gap between Hispanic and white homeownership rates at 28.6, and the gap between lower-income

(defined as under 80 percent of AMI) and high-income (defined as greater than 120 percent of

AMI) rates at 32.3 percentage points (Fig. 8).24 A slim majority of lower-income households owns

homes.
21

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Differences in the average incomes and ages between minorities and whites explain some, but not

all, of these gaps. Even if minorities owned at the same rate that whites of comparable ages and

incomes do, the minority homeownership rate overall would still fall more than about 12 percentage

points below that of whites.25

Lagging minority homeownership rates are a serious concern for the future. Minority households are

expected to account for fully two-thirds of household growth over the coming decade. Improving the

ability of such households to make the transition to homeownership will be an especially important

test of the nation’s capacity to create economic opportunity for minorities and immigrants and to

build strong, stable communities.
22

The Federal Role in Housing

The federal government currently employs a range of programs, tools, and agencies in its efforts to

address the nation’s housing and community development challenges. These programs are

described briefly below, with more detail presented in Appendix 3 of this report. The history of

government involvement in the housing sector provides useful background and context for the

Millennial Housing Commission’s recommendations to Congress.

Historical Overview

The federal government first intervened in the housing market during the 1930s in an attempt to

restore liquidity and stability to the financial system and to generate construction jobs. Creation of

the Federal Home Loan Bank System and the Federal Housing Administration (FHA) was not

intended to assist the poor, but rather to aid lending institutions and help lift the U.S. economy out

of the Depression.

In 1937, the U.S. Housing Act created the public housing program, authorizing local housing

authorities to build units financed through long-term bonds to serve poor families. In 1938, the

federal government chartered the first government-sponsored enterprise (GSE), which marked

the beginning of a secondary mortgage market.

After World War II, the urgent housing shortage faced by returning service men and women spurred

creation of Veterans Administration guarantees on mortgage loans and increased FHA activity in

insuring home mortgages. The Housing Act of 1949, enacted with strong bipartisan support,

established the goal of “a decent home and a suitable living environment for every American family.”

The act also created the Urban Renewal (then called Urban Redevelopment) program, intended to

improve communities by giving grants to localities to eliminate slums and blight by substantially

reducing land acquisition costs. In addition, the act authorized funding for another 810,000 units of

public housing, and took a first step toward addressing the housing needs of rural Americans by

authorizing the U.S. Department of Agriculture to make loans and extend related assistance to lowincome farmers.

During the 1950s, communities used Urban Renewal to fund demolition and redevelopment. The

Housing Act of 1954 instituted a “workable program” requirement under which localities had to

submit a plan for redevelopment—the first example of comprehensive planning being required for

federal funding, a standard that continues to this day. The 1950s also saw development of a special

program for nonprofit owners to provide housing for elderly or handicapped tenants, as well as

continued growth in federal involvement in housing finance as the FHA became more active in

insuring multifamily mortgages.

During the 1960s, the FHA introduced a wave of new housing finance programs to subsidize

production of multifamily housing for low- and moderate-income families. Below-market interest

rate loans and direct subsidies of various sorts, along with new tax write-offs, were added to spur

private sector participation. While limiting owners’ returns over the life of the program, the

programs allowed owners to convert the properties to market rate rentals after 20 years. This

program structure turned out to have perverse effects: at the end of the 20 years, the government

lost the best-run and most attractive properties in good locations, and was left with the poorly located

and managed properties that did not command high enough rents to cover the costs of capital

preservation.

In 1965, the U.S. Department of Housing and Community Development (HUD) was created as a

cabinet-level department charged with overseeing the nation’s housing and community development

programs. The 1960s also marked the launch of a new approach—the ability of public housing

authorities to rent privately owned units for their tenants. This precursor to housing certificates and

vouchers enabled low-income families to rent privately owned units.
23

By 1969, some of public housing’s poorest tenants were paying as much as three-fourths of their

incomes for rent, and payments equal to one-half of gross income were common.1

 A series of

amendments then eliminated PHAs’ ability to set minimum rent levels and instead capped rents at

25 percent of tenant income. Congress addressed the resulting loss in PHA operating income in

1970 by introducing subsidies intended to cover the shortfall between rental income and operating

expenses. Later, in the Omnibus Budget Reconciliation Act of 1981, Congress raised the minimum

rents on public housing from 25 percent to 30 percent of income in an attempt to boost PHA

income. In addition, HUD issued regulations pursuant to previously enacted legislation giving

preference to families with severe housing problems.

The Housing and Community Development Act of 1974 brought about two major changes in

housing programs. First, it consolidated seven categorical grant programs to localities into the

Community Development Block Grant (CDBG) program, which continues to fund a broad array of

community development initiatives. This program provided for local flexibility in how best to engage

in community development, but required submission to HUD of a formal planning tool called the

“Housing Assistance Plan.” Second, the 1974 act amended the U.S. Housing Act of 1937 to create the

Section 8 program, under which the subsidy covered the difference between a fixed portion of

tenant income and the “fair market rent” for the unit, as defined by HUD. The program was

primarily used by, but not limited to, the private sector. Section 8 was designed to give localities the

flexibility to use the funds for new construction, substantial rehabilitation, or tenant-based assistance

for occupancy of existing rental units. Long-term (20- to 40-year) subsidy contracts for Section 8 new

construction and moderate rehabilitation facilitated the private financing of such developments.

In the early 1980s, additional tax incentives made development of affordable rental housing even

more profitable. The Tax Reform Act of 1986 then repealed accelerated depreciation and use of

depreciation deductions to offset other ordinary income, precipitating a sharp drop in multifamily

production. In addition, the act placed a cap for the first time on state authority to issue tax-exempt

bonds for multifamily housing and imposed income limits on eligible households. At the same time,

though, the act created the Low Income Housing Tax Credit (LIHTC) program, providing privatesector incentives for the development of rental housing for lower-income households. The

McKinney-Vento Homeless Assistance Act of 1987 marked the first federal legislation to address

homelessness by providing funding for shelters and supportive housing.

With the 1990s came introduction of the HOME Investment Partnerships (HOME) program, a block

grant used by state and local governments to address affordable housing needs. Based on a series of

targeting standards, data on housing needs, and activities identified in a Comprehensive Housing

Affordability Strategy (later merged into what is now the Consolidated Plan, or ConPlan), recipient

jurisdictions could develop their own programs and activities to meet affordable rental or

homeownership housing needs. The 1990s also marked the establishment of separate allocations for

elderly and handicapped persons, the introduction of funding for the revitalization of severely

distressed public housing (HOPE VI), and block grants for Native American housing.

Programs Active Today

Today, the LIHTC and HOME programs support multifamily rental housing production. The

federal government also promotes multifamily rental production by permitting issuance of taxexempt bonds, through FHA mortgage insurance products, and, in rural areas, through direct and

guaranteed loans provided through the Rural Housing Service (RHS)formerly the Farmers Home

Administrationof the U.S. Department of Agriculture.

Public housing is still a major source of affordable units for low-income households. The existence of

large, generally high-rise, urban public housing developmentsmany of which are now being

replaced by mixed-income developments under the HOPE VI programhas generally obscured the

fact that most public housing is in smaller developments that do not share the problems generally

associated with the high-rise, high-density units.

All told, the federal government subsidizes nearly 1.3 million publicly owned housing units and just

over 1.9 million privately owned units. In addition, the federal housing choice voucher program
24

provides rental subsidies to nearly 1.6 million lower-income households, enabling them to rent

apartments from private landlords who are willing to accept voucher-holding tenants.

On the homeownership side, the federal government reduces costs to owners through mortgage

interest and real estate tax deductions, tax-exempt bond financed mortgages for low-income firsttime homebuyers, FHA and RHS mortgage insurance for low-downpayment loans with liberal

underwriting, Veterans Administration loan guarantees, and RHS below-market interest rate loans to

low-income rural homebuyers. The government also supports homeownership through mortgage

market interventions via the GSEs—the Federal Home Loan Mortgage Corporation (Freddie Mac),

the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Bank

Systemall of which help to leverage and maintain a steady flow of mortgage funds to primarymarket lenders.

Some of the same tools used to stimulate housing production and preservation are used to foster

community development. State credit agencies (usually state housing finance agencies), which

administer the LIHTC, typically award points in competitive applications to projects that support

broader community development goals. Additional tools include the Community Development

Block Grant (CDBG), which may be used for neighborhood redevelopment, economic development,

and community services, and HOPE VI grants for the comprehensive redevelopment of public

housing.

The following figures provide a snapshot of current federal spending on housing.

In 2001, tax incentives totaling $121.2 billion made up the majority of federal housing support. The

Joint Committee on Taxation estimates the FY 2001 value of the mortgage interest deduction alone

at $64.5 billion, benefiting 32.1 million taxpayers.2

 By comparison, direct spending on housing

assistance totals $34.9 billion (Fig. 9).

Figure 9

Rising Tax Expenditures Far Outweigh Direct Spending on Housing Assistance

1976

Tax Expenditures

20

40

60

80

100

120

140

0

1980 1985 1990 1995 2000 2005

Assisted Housing 

Budget Authority

Assisted Housing 

Outlays

Billions 

of Constant 

2001 Dollars
25

Almost all direct federal spending is targeted at renters (Fig. 10). Today, the stock of directly

subsidized rental housing receives a combination of project-based and tenant-based assistance.

Federal resources are spent both on producing new affordable housing and on paying for the

maintenance of housing built under programs that have since been discontinued.

Figure 10

Direct Assistance

Primarily Targets Renters

and Rental Housing

Source: Appendix 1, Table 3.

Tenant-Based Rental

(1.581 million units)

Private Project-Based Rental 

(1.965 million units)

Public Housing

(1.274 million units)

Homeowner Assistance

(591 thousand units)

The inventory of privately owned subsidized properties consists of units produced under a variety of

programs (Fig. 11). Today, however, none of these programs still produces new units except for the

elderly (Section 202) and disabled housing programs (Section 811), which provide capital grants

and rental assistance for housing built by nonprofit sponsors, and the Section 515 program, which

produces housing in rural areas.

Figure 11

The Inventory of

Privately Owned

Subsidized Properties

Totals Just Under

 Two Million Units

Source: Appendix 1, Table 3. Note: “Other” includes Section 221(d)(3) BMIR, Rent Supplement, Section 8 PD, 

and remaining Section 8 LMSA units. Units are adjusted to account for overlap among units using more than one program.

Section 8 New Construction/

Substantial Rehabilitation 

(851,000 units)

Elderly and Disabled Housing 

(83,000 units)

Section 236 Rental Program

(60,000 units)

RHS Direct Loans 

(410,000)

Other 

(158,000 units)

Section 236 Rental Program

with Section 8 (403,000 units)
26

Lessons Learned

In developing new policy options, the Millennial Housing Commission looked to the lessons of

history as well as to the testimony and ideas submitted during the course of its deliberations. The

Commission sought to model its recommendations on measures that have worked well and to avoid

the repetition of past mistakes—many of which were the unintended consequence of program

implementation rather than of program design.

The lessons learned from the 70-year history of federal housing programs are many and varied.

Those most influential in helping the Millennial Housing Commission craft its recommendations

include:

1. Affordable housing developments cannot be isolated from the broader community in which they are located,

and must provide access to decent schools, job opportunities, and transportation.

2. Decisions about the location and management of affordable housing are best made by state or local

governments, rather than the federal government.

3. The private sector needs the proper incentives to be an effective partner in the federal government’s efforts to

address the nation’s housing challenges.

4. When resources are limited, there are difficult tradeoffs between making rents affordable to the poorest

tenants and ensuring that enough income flows into a property to cover the repairs necessary to sustain the

structure’s useful life.

The Commission’s recommended new programs and suggested reforms for current programs

incorporate all of these important lessons.
27

Principal Recommendations to Congress: A Framework for Change

The Millennial Housing Commission’s vision can be stated quite simply:

to produce and preserve more sustainable, affordable housing in healthy communities to help American

families progress up the ladder of economic opportunity.

The Commission’s principal recommendations to Congress for achieving this vision are divided into

three categories: new tools, major reforms of existing programs, and streamlining of existing

programs. The four policy principles of strengthening communities, devolving decision-making,

involving the private sector, and ensuring sustainability inform all of the recommendations. The

Commissioners believe that these principles will make housing programs work more effectively to

attain the goal of more affordable housing in healthy communities, building on what works now to

meet bold housing goals tomorrow.

1. Strengthen communities.

The Millennial Housing Commission believes housing policy must foster healthy neighborhoods that

form larger communities and function well for residents of all incomes. Housing is, however, only

one part of the equation. Good schools, job opportunities, and public safety are also essential to

creating healthy communities.

Distressed inner cites, declining inner-ring suburbs, and booming suburban areas can all benefit

from affordable housing that is part of a broader community development plan. In inner cities, safe

and well-maintained housing anchors communities, often attracting businesses and additional

economic development. In declining, inner-ring neighborhoods, the addition of affordable and

appealing housing units can slow—or even reverse—population losses. In high-growth suburban

areas, the presence of affordable housing contributes to community by enabling key workers—such

as teachers, firefighters, and police—to live near their jobs. Affordable housing also expands the

pool of labor to fill lower-wage service jobs, reduces individual commuting times and overall traffic

congestion, and allows workers to spend their wages locally.

People should have the choice to settle in healthy, sustainable communities in any location. To make

that possible, the federal government must take the lead in offering states and localities the tools and

incentives to encourage development not only of affordable housing, but also of thriving mixedincome communities.

2. Devolve decision-making to states and local governments, but within a framework of federal

standards and performance objectives.

While all three levels of government are important players in the housing delivery system, the

Commission believes that states—working closely with localities—can best address certain key

challenges. It is a major thrust of the MHC’s recommendations that Congress pay special attention to

assigning appropriate roles and responsibilities to each level of government.

• Federal role. The federal government should set overall affordable housing goals, establish

performance measures, and provide the resources to address urgent housing needs. It should also

ensure those resources are fairly and effectively delivered. To do so, HUD must establish broad

performance requirements for delivery of housing assistance in both entitlement programs (such

as HOME and CDBG) and competitive programs (such as homeless assistance and HOPE VI).

While specifying acceptable outcomes, HUD should not be involved unnecessarily in procedural

requirements, other than those necessary to assure the objectives of programs are met.
28

• State role. Housing needs do not exist in a vacuum, but rather in the broader context of job and

commercial development, smart growth initiatives, health care delivery challenges, and other

community development issues that require statewide leadership, planning, and administration.

States should therefore administer and allocate a portion of the funds because they can coordinate

housing resources with the other federal funding streams they already manage, and they can carry

out strategies that extend across jurisdictions. States may wish to delegate some of these functions

to local governments, as some already do.

• Local role. While it is the states’ job to address regional issues and provide necessary resources,

local governments are in the best position to assess and address specific affordable housing needs.

Local governments have a key role to play in neighborhood revitalization, with affordable housing

one of their most effective tools. The MHC recommends that federal programs that provide funds

directly to localities (such as HOME and CDBG) be simplified so that they can be combined more

easily. Local jurisdictions should also be involved in state plans to target any new federal initiatives

for housing and community development.

3. Provide the private sector with effective incentives to help produce and preserve affordable housing.

Congress charged the Commission with enhancing the role of the private sector. The MHC took this

mandate seriously. Effective delivery of affordable housing relies on enabling the public sector, forprofit businesses, and nonprofit organizations to do what each does best. Indeed, one of the most

cost-effective ways to produce more affordable units is to attract the capital and skills of the private

sector to this activity.

For-profit businesses perform all the activities—land acquisition, design, finance, construction, and

property management—necessary to produce new affordable units. With the proper incentives and

sufficient public subsidies, all that private access to capital, efficiency, and entrepreneurial talent can

be brought to bear on the affordable housing shortage. Competition and market incentives can also

play a valuable role in making service delivery efficient and in reducing costs to consumers.

4. Design programs to sustain the stock of affordable housing over the long term.

Federal investment in the affordable inventory must be carefully protected. Ensuring the adequate

maintenance and long-term viability of both the new and existing affordable housing stock should

therefore be one of the most important priorities of U.S. housing policy.

Allowing buildings to fall into disrepair is much more costly in the long run than planning and

funding regular maintenance and replacement. Deferred maintenance adds to capital costs over

time—each dollar spent on maintenance now is worth many more dollars spent on major

renovations later. Housing programs must ensure that resources are available to keep affordable

housing in good shape over the long term.

All property, whether affordable or not, requires ongoing repairs and capital improvements.

Roofing, boilers, and other major systems have limited useful lives. It is a housing policy failure when

money is not budgeted to replace major systems in buildings financed and subsidized by the federal

government.

Ensuring the long-term sustainability of new affordable units requires a recognition that more

durable materials cost more and that sufficient reserves need to be included in the underwriting. At

the same time, owners must receive a return on capital that provides sufficient incentive to keep

their properties in good repair.

The Commission’s principal recommendations are presented below.
29

New Tools

The Commission proposes several new tools, all of which would be administered by states working with localities.

The tools are targeted to unmet need and involve private-sector incentives as appropriate.

Allocate a flexible new tax credit to stimulate production of affordable properties

suitable for homeownership.

The federal tax code provides the largest and most often-cited incentive for families to become

homeowners—the deductibility of mortgage interest payments and real estate taxes from federal

income taxes. For higher-income taxpayers who itemize their deductions, this provision reduces

annual tax liabilities and thereby increases disposable income. Most homeowners also benefit from

the capital gains exclusion when they sell their principal residences.

Low-income homeowners, however, enjoy few of these tax-related benefits. Because they have smaller

mortgages and lower-value properties, these homeowners do not have itemized deductions that

exceed the standard deduction. In fact, about 90 percent of the total benefits of the mortgage

interest deduction accrue to homeowners with more than $40,000 in income.1

To help lift low-income and minority homeownership rates, the MHC recommends creation of a new

homeownership tax credit, to be allocated to state housing finance agencies. HFAs would have the

flexibility to use the credit to build supply in tighter markets, to stimulate demand where markets are

relatively weak, or both.

Promoting Production and Preservation

The state HFA (or a local agency if a state decides to delegate) could choose to use the credit to

promote production or rehabilitation of homes in eligible census tracts where

production/rehabilitation costs exceed the market value of the properties. Developers would

compete for the tax credits and could sell them to investors. Proceeds would cover the difference

between the cost of production and the fair market value of the property, up to 50 percent of total

development costs. (In most cases, considerably less than 50 percent would be necessary.) Scrutiny of

total development costs would be an important element of this program, as would careful appraisals

where no comparable sales exist. The Commission views this as an important community

development tool.

Achieving Affordability

The state HFA could also choose to use the credit to achieve affordability for low-income

homebuyers by tackling the primary barriers to homebuying: insufficient income to support monthly

payments and insufficient savings to cover downpayment and closing costs. While the availability of

low-downpayment first mortgages has increased, closing costs are still a major hurdle to

homeownership. In addition, low-downpayment mortgages do not eliminate income constraints,

because borrowers typically pay higher interest rates and mortgage insurance on their larger loan

balances.

States could use the new homeownership tax credit to address both income and wealth constraints

by auctioning off credits to lenders in return for commitments to reduce borrowing costs,

downpayment requirements, or both. Lendersincluding financial institutions, community

development corporations, and community development financial institutionswould bid for the

credits from state housing finance agencies. Qualified lenders would underwrite loans within clear

guidelines for minimum and maximum ratios, as well as for home purchase price and prepayment

expectations.
30

The credit would be applied against the borrower’s mortgage in the form of prepaid points, belowmarket interest rates, or other subsidized mortgage terms. Borrowers could apply points toward

downpayment or closing costs, or buy down the interest rate to reduce monthly outlays.

Only first-time buyers with incomes below 80 percent of area median would be eligible. Congress

may wish to encourage states to adopt a requirement that such buyers take homeownership training

courses in order to qualify for single-family housing assisted with this credit. Recent research shows

that such counseling has a demonstrable impact on loan performance.2

Buyers would be prohibited from prepaying the tax-credit loans for five years except in the case of a

sale, and loans would not be assumable. Buyers of the production credit would be required to sell to

qualified owner-occupant buyers if the unit were sold within five years of project completion.

Recapture provisions, such as those currently used in the HOME program, would apply.

The advantage of the homeownership tax credit over direct subsidy programs is that it devolves

authority to states and relies on private-sector partners to deliver allocated resources. No matter how

agencies choose to use the credit, however, the Commission believes it will be a valuable community

development resource that enhances the overall stability of neighborhoods.

While a homeownership tax credit is an important additional incentive to create more affordable

housing, details of a new credit must be carefully crafted to avoid any adverse impact on the existing

Low Income Housing Tax Credit for rental housing.

Enact exit tax relief to encourage preservation.

This is a two-part recommendation that first explains the importance of preservation generally, and then outlines

a critical new tool to promote the immediate preservation of at-risk properties.

The Case for Preservation

Broadly speaking, privately owned, multifamily rental units available to low-income families fall into

two categories: (1) federally assisted units, in which an owner receives some sort of public, projectbased subsidy in exchange for a contractual obligation to maintain affordability for low-income

renters, and (2) conventionally financed units, which may be available to low-income renters in some

markets but where the owner is without a contractual obligation to maintain affordable rents. Many

of the low-income families who occupy conventionally financed units pay more than 50 percent of

their incomes in rent.

In 1999, the federally assisted inventory provided one in ten rental units affordable to low-income

renter households. For a variety of reasons, units are being lost from both inventories. As part of its

strategy to address this crisis, the nation needs to preserve the federally assisted properties and to

draw privately held, conventionally financed multifamily units into the long-term affordable stock,

where possible.

Losses from the federally assisted inventory. The federally assisted stock generally consists of two types of

units: those financed, beginning in the 1960s, with federally subsidized, 40-year mortgages; and those

financed, beginning in the 1970s, through Housing Assistance Payment (HAP) contracts between

owners and HUD. The HAP contract guaranteed owners a contract rent amount to make up the

difference between tenant payments and the fair market rent. In both cases, owners were required to

rent to eligible, low-income households for the period of time spelled out in the terms of the

federally subsidized financing or contract.

Owners of units financed with mortgage subsidies were permitted, after 20 years, to prepay the

remainder of their subsidized mortgages and end their obligation to maintain rents affordable to

low-income households. For properties financed through HAP contracts, some contract periods have

expired and some remain in effect. When HAP contracts expire, owners can either “opt out” of the
31

program, taking their properties to higher, unregulated market rents, or they can choose to remain

in the program. Owners then have the opportunity to enter into multiyear contracts that are,

however, subject to annual appropriations.

In the early 1990s, substantial numbers of federally assisted units became vulnerable to prepayment

or opt out in the midst of a strong real estate market. This confluence of circumstances brought

about the most pressing crisis in the history of federal involvement in affordable housing. Where

local markets supported an economic decision to do so and as their federal contracts expired, many

private owners of assisted properties exercised their right to prepay their subsidized mortgage notes

or opt out of their HAP contracts. As a result, many units were lost from the rent-restricted inventory.

The Commission notes that many of the properties eligible to leave the rent-restricted stock that

were in a position to profit by exiting have already done so. Some properties that remain in the

affordable inventory but are legally eligible to leave it will do so, as well. The owners of some

properties that are economically marginal may prefer instead to transfer ownership to a new,

mission-driven owner. In general, properties with lesser economic value are at risk of deterioration,

and ultimately abandonment, unless they can be transferred to such entities.

For most of the federally assisted project-based inventory, the affordable use restrictions on the

properties will eventually expire.3

 A portion of these properties are at risk of loss from the restricted

stock because of local market conditions. For example, strong markets may increase the likelihood of

opt out, while weak markets can contribute to further property deterioration. The Commission’s

proposed preservation tax incentive, described below, is intended to reduce the number of projectbased units lost from the affordable stock by giving current owners an incentive to transfer

ownership to new owners who commit to the long-term preservation of affordability.

Losses from the conventionally financed inventory. The conventional inventory is also a large source of

affordable housing for low-income families. In fact, in 1999 more than 60 percent of units affordable

to extremely low-income households and nearly 87 percent of units affordable to very low-income

households were unassisted.4

 The loss of this stock has potentially dramatic consequences for such

households. In tight housing markets and/or gentrifying areas, the risk of escalating unaffordability

is real, since owners can increase rents as local market conditions warrant. The Commission cites the

risk of rent escalation within the conventionally financed inventory as a compelling reason both to

preserve as many privately held units as possible and to recognize the preservation of affordable

housing as a critical public policy goal.

Preservation as a critical public policy goal. To avoid a repeat of the current preservation crisis, it is

critical that the nation adopt a preservation philosophy to guide its housing policy going forward.

Every newly produced building ultimately reaches the end of its useful life. Federal housing policy

must anticipate and plan for this eventuality.

Moving forward into this new paradigm will require several changes to existing federal programs and

standards, each aimed at embedding the following principles, among others, into the federal system:

• A new underwriting standard for long-term sustainability. All federal programs should embrace a new

norm whereby rehabilitated buildings are underwritten to provide 30 years of affordability and

newly constructed buildings are underwritten to provide 50 years of affordability. There must be

one underwriting standard for each type of building that reflects its respective affordability period.

This is a change from the existing system, in which two separate underwriting standards—one for

financing and one for affordability restrictions—are in place.

The best way to ensure a property’s long-term physical and financial health is to maintain adequate

reserves for replacement. The new underwriting standard must reflect a property’s long-term

capital needs. The Commission recommends that Congress undertake an analysis of the

impediments to establishing and maintaining adequate replacement reserves, including the tax

implications.
32

• Efficient use of federal resources, including built-in encouragement of private leverage of public capital. The

federal system should encourage the use of mixed-income models, the pooling and leveraging of

assets, and the creation of economies of scale to reward practitioners who help build efficiencies

into the system. There should be built-in rewards and incentives for the quick and efficient use of

capital to encourage preservation practitioners to compete favorably with market-rate, privatesector interests.

• Recognition of the unique nature and needs of entities committed to expanding the universe of affordable

units through preservation. The current system forces preservation under an umbrella of affordable

housing programs that are geared toward new production. Entities dedicated to preserving

currently affordable units and acquiring and then preserving conventionally financed properties

must be expressly recognized in U.S. housing policy and programs. The Commission recommends

that such “preservation entities” be provided with the tools and resources they need to carry out

their unique mission.

• Recognition of the broader benefits of preservation. U.S. housing policy must recognize that

preservation is cheaper than new construction, that the rehabilitation and preservation of units

returns the units to low-income families faster than new construction can provide such units, and

that maintaining and renovating existing units combats blight and contributes to healthy

communities.

The Case for Immediate Preservation via a Preservation Tax Incentive

While these principles must be woven into the overall system for long-term success, the need to

preserve at-risk units is immediate and pressing. Because time is of the essence, any proposed tools or

approaches that can quickly and efficiently preserve housing should receive heightened attention,

support, and funding from the federal government. It is therefore critical that tools such as the

proposed preservation tax incentive (PTI) be adopted and enacted as quickly as possible. The PTI

would grant exit tax relief to multifamily owners who sell to a preservation entity.

For all of the reasons stated above, it is critical that all multifamily owners be eligible for exit tax

relief. Since residents of federally assisted properties enjoy true affordability (paying no more than

30 percent of income in rent), federally assisted properties should receive highest priority for

preservation using this proposed new tool.

Before 1986, the tax code included incentives to encourage limited partner investors to provide

equity to multifamily developers in exchange for current tax savings (against then higher marginal

rates). Investors were permitted to deduct from taxable income their share of the losses of the

project partnership, including, importantly, depreciation expenses (a noncash item)—thereby

reducing current income taxes payable. In later years of the partnership, when mortgage

amortization exceeded depreciation expenses, the amount of that excess amortization would

become taxable as ordinary income (so-called “phantom income”). The code essentially provided

for a deferral of tax, and the value of that deferral constituted the investor’s economic return.

Changes in the tax code in 1986 eliminated the ability of most investors to deduct losses generated

by their properties from otherwise taxable income. When mortgage amortization began to exceed

depreciation expenses (after 10 or 15 years) and properties still generated taxable phantom

incometypically in amounts greater than cash flowpre-1986 investors were deprived of their

expected economic return. Investors found themselves with no deferral of tax, and the tax on

phantom income in the later years of a partnership remained. Clearly, investor economic interest

in such properties was substantially diminished and, as a consequence, necessary maintenance was

in many cases reduced or eliminated. Properties with such a history are most likely to benefit from

a preservation tax incentive.

Even if an investor is no longer interested in owning a property (from which s/he has gained no

significant economic benefit since 1986 and will gain none in the future), the investor is discouraged

from transferring the property, because s/he will typically have a negative tax basis (the amount by

which accumulated depreciation exceeds mortgage amortization) and be subject to a tax on that

negative basis (the “exit tax”).
33

As an urgent first step in the nation’s movement toward a preservation philosophy, described earlier,

the Commission recommends that states be given the authority to allocate exit tax relief, via a

preservation tax incentive, to stimulate the transfer of properties to preservation entities. Such relief

would offset the investor’s negative tax basis in the property, thereby eliminating a significant barrier

to transfer.

Because current owners have options to eliminate or reduce their tax liabilities by holding and, in

some cases refinancing, their properties, it is unclear how much tax revenue would be foregone with

enactment of such relief. What is clear is that absent such relief, properties and tenants will continue

to suffer the consequences of maintenance disincentives, and spillover effects will occur in some

neighborhoods.

The MHC expects states to use this new tool to address identified need by encouraging private-sector

owners of properties to transfer ownership to preservation entities. In the implementation of the

recommendation, the Commission envisions different roles for different levels of government, as

described below.

Implementation of the Preservation Tax Incentive

Federal role. The Commission recommends that Congress:

1. Specify the minimum required elements of transactions eligible for PTI. For example, Congress

may wish to require that the transaction be governed by a “long-term affordable housing use

agreement” that specifies ongoing affordability for a certain term. The Commission suggests a

minimum use agreement of 30 years and the following affordability requirements:

• For assisted properties: The new owner (a preservation entity) must maintain existing federal

subsidies. When the affordability period for the existing federal subsidy expires, the new owner

may not opt out, must renew at least 50 percent of the federally subsidized units, and must also

rent at least 20 percent of the units to households earning no more than 50 percent of AMI or

40 percent of the units to households earning no more than 60 percent of AMI.

• For unassisted properties: The new owner (a preservation entity) must make at least 20 percent

of units affordable at 50 percent of AMI or 40 percent affordable to households earning 60

percent of AMI.

These minimums will ensure that tax credit and tax-exempt bond financed projects will be eligible

for relief. They will bring dependable, long-term affordability and a measure of income-mixing to

newly preserved buildings.

2. Establish penalties for noncompliance. The Commission suggests the penalty for nonprofits be

loss of tax-exempt status; for-profits should pay a tax penalty.

3. Establish broad affordability parameters for newly affordable, preserved units. For example,

Congress may wish to specify that a minimum percentage of newly affordable units be targeted to

extremely low-income households.

4. Establish general, minimum threshold criteria for an entity to qualify as a preservation entity for

purposes of exit tax relief transactions.

5. Clarify that use restrictions, affordability levels, and subsidies can be assumed by other qualified

entities.

State role. As described below, states would determine which properties/owners are eligible for a

preservation tax incentive. They would also establish specific criteria that define a “preservation

entity” and a “preservation transaction”:
34

• Criteria for eligible properties/sellers. The following types of properties would be eligible for

relief: assisted properties with negative tax equity (i.e., properties that, if sold at fair market

value, would generate net sales proceeds [over and above debt] insufficient to cover the owners’

capital gains tax liabilities), positive-tax-equity assisted properties, negative-tax-equity unassisted

properties, and unassisted properties with positive tax equity.

• Criteria for qualifying as a preservation entity. The state may, for example, require a

preservation entity to demonstrate its previous commitment to affordable housing as well as the

organizational and financial capability necessary for long-term, successful management of a

mixed-income project. Furthermore, the state should require an entity seeking “preservation

entity” status to demonstrate its independence from the seller or its affiliates.

• Criteria for preservation transactions. Such transactions will comply with any and all federal

requirements and must meet additional state criteria, if applicable. In order to be eligible for

exit tax relief under the PTI, the proposed transaction must be certified as economically viable.

That is, the state must determine that the property, under the proposed underwriting, is capable

of sustaining itself as affordable and structurally sound for the minimum period of 30 years.

States will also perform other functions. Specifically, they will:

1. Develop and maintain a list of qualified preservation entities.

2. Issue approval letters to sellers and purchasers who have proposed eligible transactions. The

letters will set forth conditions that the transaction (as closed) must meet in order to maintain

eligibility for relief.

3. Be responsible for assuring owner compliance with program requirements.

The Commission acknowledges that this recommendation proposes a tax credit limited only by the

aggregate negative tax basis of preservable affordable properties. In the event that Congress chooses

to apply a different limit to the amount of credit made available, the Commission recommends two

options:

• Extend eligibility first to HUD- and USDA-assisted properties, then to unassisted properties where

housing choice vouchers are readily accepted, and then to other unassisted properties; or

• Cap the resource and allocate it to state housing finance agencies, allowing them the discretion to

allocate relief to both assisted and unassisted properties, as needs warrant.

Illustrative Sample Mechanisms

A seller would establish entitlement to relief by working with the purchaser and the state HFA to have the state HFA approve the

eligibility of the proposed transaction. The HFA’s letter of approval would set forth the conditions to be met at the closing. After the

transaction closed, the seller would certify to the HFA that the transaction closed in accordance with the conditions set forth in the

HFA’s approval letter. The seller would attach the HFA’s approval letter and the seller’s post-closing certification to the seller’s

federal income tax return as documentation of the seller’s entitlement to exclude the gain due to the seller’s negative capital

account from federal taxable income. Tax would be paid on any consideration received over and above the mortgage amount.
35

Provide capital subsidies for the production of units for occupancy by extremely

low-income households.

The most serious housing problem in America is the mismatch between the number of extremely

low-income renter households and the number of units available to them with acceptable quality and

affordable rents. This is a problem in absolute terms, with 6.4 million ELI households living in

housing that is not affordable. And it is a problem in terms of severity, in that ELI households make

up only 25 percent of renters but 76 percent of renter households with severe housing affordability

problems. The median ELI household reported paying 54 percent of its income for housing in 1999.

Despite persistent and growing need, it has been more than 20 years since there was an active federal

housing production program designed to serve extremely low-income households, other than a

relatively small effort to replace housing demolished or otherwise lost from the subsidized inventory.

The primary barrier to producing new housing for these families is that the production and

operating costs of units for extremely low-income households require rents that exceed the level that

they can pay.

To meet the 30-percent-of-income standard, subsidies have to be high enough to cover both capital

and operating costs. Thus, even though the need is generally acknowledged, the costs are formidable

and require multiyear federal expenditures. Although existing programs (especially Section 8

vouchers, Section 202, and Section 811) provide useful vehicles for addressing ELI housing needs,

their funding levels are sufficient to do little more than maintain the status quo. As a consequence,

several sources of subsidy are often required to serve such households.

The Commission recommends that Congress address the housing needs of extremely low-income

households, as presented in the section on America’s housing challenges, through a 100 percent

capital subsidy for construction, rehabilitation, or acquisition of units earmarked for extremely lowincome households. This new tool would be a substantial state-allocated capital source that would

eliminate the need for debt on units, which would be located primarily in mixed-income

developments or neighborhoods. Rents on the units would cover operating expenses, including an

adequate reserve. The Commission recommends that states work with localities to specify in a state

allocation plan how this new capital subsidy tool would be used to address areas of greatest need for

additional ELI production in conjunction with other production resources.

The goal of this program is to increase significantly the number of good-quality rental units for ELI

households, particularly the number of units located in low-poverty neighborhoods and accessible to

employment. Under this proposal, rent levels would cover operating costs—including vacancy losses

and adequate replacement reserves—with a reasonable margin for sustainability.

The MHC recognizes that, without additional assistance from other programs or sources, rents would

exceed the 30-percent-of-income standard of affordability. Nevertheless, rents would still be lower

than what ELI households typically payand for far better housing. As proposed, the program

would only serve ELI households willing and able to pay more than 30 percent of their incomes for

rent, as the overwhelming majority now does. Vouchers or other assistance would, however, be

necessary to enable the very lowest-income households to pay even rents that cover only operating

costs.

With a capital resource dedicated specifically to production of extremely low-income units, states

could choose to apply the funds directly to mixed-income developments or in conjunction with

financing through other resources, including the rent-restricted units financed with tax-exempt

bonds or the Low Income Housing Tax Credit. States could also allocate the capital subsidy to local

jurisdictions, including housing authorities, to supplement HOME funds and other resources. To

enable states to apply the subsidy to meet a variety of situations and ELI needs, eligible uses should

include new construction, preservation, and acquisition with or without rehabilitation.
36

Specifics of the proposed program include:

• Administration. The state credit agency, usually the state HFA (or a local agency if the state decides

to delegate this authority), would allocate the subsidy—probably in combination with other

available subsidies, although this would not be a requirement. It would also provide oversight,

assuring that the proposed development meets an identified need for ELI housing and that it

observes targeting and fair housing requirements.

• Mechanism. The program would provide additional capital funding for the units to be designated

for ELI occupancy so that they would have no debt service costs, with rents reduced accordingly.

• Income mixing. The program would generally target 20 percent of units in new developments for

ELI occupancy, although the state credit agency would have flexibility to determine the

appropriate share on a property-by-property basis. State credit agencies could also allocate funds

for preservation and acquisition with or without rehabilitation in mixed-income neighborhoods or

as part of a revitalization plan.

• Rent level and affordability. Minimum rents would be consistent with sustainability, assuming zero

debt service. The developer would propose sustainable ELI rents, which the state credit agency

would approve. The originally approved rents would be adjusted annually based on an inflation

index.5

 Since sustainable rents for the units would normally exceed the 30-percent-of-income

standard for extremely low-income households, owners/developers and state credit agencies might

pursue additional subsidies (such as thrifty production vouchers,6 real estate tax abatements,

HOME grants, or foundation grants) to reduce rents to more affordable levels. In addition, the

units can and should be actively marketed to housing choice voucher holders.

• Occupancy. Only extremely low-income households could occupy the housing unless available units

outnumbered applicants. In that case, the remaining units would be available to households at or

below a designated income level up to 40 percent of AMI.

• Neighborhood standards. Low-poverty neighborhoods might be defined as all census tracts except

Qualified Census Tracts, or as those with a poverty rate below, say, 20 percent. The standards for

inner-city areas could differ from those for suburban or rural areas. State credit agencies could

have limited flexibility to approve extremely low-income units in developments outside low-poverty

census tracts, particularly in gentrifying neighborhoods or those with active revitalization programs

under way.

Attract private capital to the production of mixed-income, multifamily rental housing.

The MHC recommends that the limits be taken off states’ ability to issue tax-exempt debt for specific

multifamily properties, with the condition that eligible properties must restrict rents on at least 20

percent of the units to levels affordable to families with incomes below 80 percent of AMI. The

Commission believes that access to credit, at the lowest feasible interest rate, is critical to the

production of more housing. In addition, the 20-percent requirement will achieve a degree of

affordability without impairing the developer’s willingness to participate and will ensure that the

program helps to offset the decline in rentals affordable to low- and moderate-income working

families (Fig. 12).

The Commission also recommends that states have the flexibility to place rent restrictions on more

than 20 percent of the units and to apply deeper targeting to the rent-restricted units, or both. This

program is viewed by the Commission as both a production and a community development tool.
37

Figure 12

Lower-Income Renters in Many Areas Cannot Afford Newly Constructed Apartments

30%

60%

90%

120%

150%

New York City Rural Colorado Philadelphia, PA Orange County, CA Baltimore, MD Atlanta, GA Omaha, NE

0%

Share of AMI 

Needed to Afford 

Typical New, 

Two-Bedroom Unit

In addition, the following federal targeting requirements should apply to use of the tax-exempt

resource:

• Owners may not discriminate against applicants holding housing choice vouchers, subject to statespecified limits on the percentage of voucher holders per property in order to ensure that lowincome households are not concentrated in any one development.7

• At least half of the low-income units should be available to ELI households through capital grants,

project-based vouchers allocated by a public housing agency, or housing choice vouchers. At the

option of the state agency or the relevant PHA, project-based thrifty production vouchers or other

available operating subsidies might be combined with the capital subsidy to reduce rents, perhaps

to 30 percent of income. State agencies should be permitted to issue this type of debt even if none

of the subsidies intended to assist ELI households is available.

This tax-exempt bond authority should be in addition to the existing volume cap, which, with its

companion tax credits and deeper income targeting, would remain unchanged.

The Commission recommends that Congress require states to develop parameters and criteria for

the allocation of this resource, similar to the Qualified Allocation Plan (QAP) required under the

Low Income Housing Tax Credit program. This suggestion relates to the Commission’s vision of the

tax-exempt resource not only as a tool to stimulate the production of rental housing affordable to

low- and moderate-income working families, but also as a tool for community development.

Specifically, Congress may wish to require states to identify areas where multifamily housing is

needed to serve a broader community development effort and where the financing tool is necessary

to achieve that purpose. The Commission recognizes that states may need funding for market studies

or other analyses essential to identifying places where new multifamily housing would support

broader community development goals. States may wish to delegate authority to localities in some

instances.

States would also identify developers eligible for tax-exempt bond financing. Beyond private forprofit and nonprofit developers, eligible applicants might include governmental entities within a

state’s jurisdiction (e.g., cities, counties, preservation entities, public housing authorities, regional

entities, tribally designated housing entities) or private developers working in partnership with a

governmental entity.
38

Facilitate strategic community development.

Strategic community development requires coordination of housing development with economic

development, school improvement, employment and training, childcare, social services,

transportation, and other initiatives to maximize the benefits of each. It also requires a combination

of federal support, state leadership, and local innovation. Private-sector investments that work with

public sector investments are key to assuring the reinforcement and alignment of neighborhood

revitalization objectives.

Unfortunately, the many silos of categorical programs create almost insurmountable barriers to

execution of comprehensive local programs. Federal funding flows to different jurisdictions, on

different timetables, with unique planning, performance standards, eligibility determinations, and

procurement requirements. Often these requirements are not only incompatible, but they also

discourage comprehensive strategies altogether because of the time and energy required.

Funding childcare, employment and training, and enhanced transportation in connection with a

housing development may involve four of five agencies with completely separate administrative

structures derived from the federal authorizing statutes. The delays and barriers in assembling the

desired set of resources drive up costs and discourage private-sector investment in the projects.

Private investors gain confidence from well-executed, on-time performance. Such a standard is

almost impossible to achieve when navigating the labyrinth of program requirements one at a time.

When state and local leadership overcome these unnecessary barriers, however, the results speak to

the value of facilitating such approaches. Comprehensive community initiatives around the

country—including Bethel New Life in Chicago, Community Building in Partnership in Baltimore,

and the Dudley Street Neighborhood Initiative in Boston—confirm the enhanced return when

public investments reinforce each other and attract private-sector investment.

The Commission believes that state and local leadership should have the tools to respond in a highly

coordinated fashion to locally unique, comprehensive development proposals. The goal is prompt,

consolidated review that crosses program boundaries, and streamlined administration so that private

and public energies are not drained by conflicting, overlapping, and duplicate demands for

information.

The Commission recommends creation of a new, more potent community development tool that

builds on the lessons of successful projects while unifying funding and regulations. This proposal

would allow state governors to reserve up to 15 percent of their federal block grant funds (including

TANF, CDBG, HOME, Workforce Investment Act (WIA) funds, Social Services Block Grants, Child

Care Block Grants, and transportation funding) to support comprehensive redevelopment projects

sponsored by local governments, including consortia of local governments in rural areas.

Localities wanting to undertake such projects would apply to the state for funding through programs

already administered at the state level. A consolidated program review and decision/award process

for all identified programs would follow. The locality could also earmark 15 percent of the funds it

receives directly from the federal government for these initiatives. Indeed, one of the factors a

governor should consider in approving a request is whether the locality is willing to use its own funds

to support the undertaking.

The application for consolidated funding would include a comprehensive plan approved by the

appropriate local officials. The plan should include census data on the neighborhood, annual

milestones and quantifiable results, description of the public participation process that produced the

plan, and evidence supporting the need for a comprehensive approach. This plan would suffice for

the federal planning requirements for funding streams such as HOME, CDBG, and WIA. The locality

would prepare annual reports for the governor describing project progress and also supply an

independent third-party evaluation. All documents would be available to the public.

Governors would have limited waiver authority to facilitate the blended use of funds within the

general purposes and intent of each program. For example, in lieu of compliance with four or five

income-targeting requirements, an application might suggest a uniform eligibility standard. A

broader definition of eligible uses for one program might be proposed to fill funding gaps in the
39

comprehensive plan. Basic federal standards such as civil rights could not be waived, but reporting

requirements might be consolidated into a single report. Unless the responsible federal agency

objected within 30 days of receiving the request, the waiver would go into effect.

The Commission notes that the Bush Administration’s proposal for reauthorization of welfare

contains a proposal for “superwaivers” that differs from this recommendation in several respects.

First, the MHC’s proposal is intended to apply only to block grant funds where states and local

governments already have substantial flexibility, and the total amount subject to the waivers is limited

to 15 percent of each block grant. Second, use of the funds would have to be consistent with

purposes of the respective block grant programs. And third, waivers would be limited to

comprehensive, geographically defined, neighborhood-based projects sponsored by local

governments, so that state governments would act only in collaboration with a local initiative.
40

Major Reforms to Existing Programs

Several housing programs are in need of major reform. In particular, public housing and the Federal Housing

Administration require significant reconfiguration to align these programs with their stated missions. In addition, the

elimination of homelessness is within the nation’s reach; the Commission’s recommendations are meant to make this

goal a reality. Finally, the MHC draws lessons from some of the successes to date of welfare reform, recommending the

elimination of rules that can create disincentives to work.

Transform and revitalize the public housing program.

Public housing currently serves 1.3 million of the nation’s lowest-income families and elderly and

disabled persons. Over time, however, the program has become highly regulated and rulebound—often serving as a laboratory for a wide, and sometimes contradictory, variety of social and

philosophical ideas emanating from well-intentioned laws that have created more problems than

they have solved.

The public housing authorities (PHAs) that administer the program find it increasingly difficult to

meet their basic mandate while complying with the maze of regulations. The complexity and cost of

compliance not only undermine the effectiveness of the best agencies, but also provide a convenient

excuse for the operational failures of the least competent ones. Very small (usually rural) PHAs are

particularly burdened, because they must abide by the same statutory and regulatory requirements as

large, complex urban agencies but without the means—or the need—to do so.

The public housing program can better serve its customers and communities. Today, some

public housing developments isolate residents8

—typically the poorest and most vulnerable

families—depriving them of real housing choices and economic, educational, and other social

opportunities. In addition, many units are of substandard quality. Meanwhile, program costs

continue to grow even without considering the more than $20 billion backlog of capital needs

(Fig. 13).9

 

Figure 13

Per

Unit

Needs

Under 250

Large Public Housing Authorities Face the Greatest Modernization Costs

$5,000

$10,000

$15,000

$20,000

$25,000

Number of Units Under Management

250 - 1,249 1,250 - 6,600 Over 6,600

0

The need for significant reform of the public housing program is clear. For large urban housing

authorities, the HOPE VI program has made significant progress in revitalizing distressed public

housing and surrounding neighborhoods. While the Millennial Housing Commission affirms the
41

importance of retaining and revitalizing the existing public housing portfolio, it recommends an

entirely different approach—one that more closely resembles private real estate market practices—

to achieve that objective.

The MHC’s recommendations should not be confused with proposals to convert the stock of public

housing to tenant-based assistance. The Commission affirms the importance of maintaining a

permanent inventory of housing for people with extremely low incomes that is well managed and

sustainable over time. Making more effective use of the resources already available to the program

and improving the existing stock of public housing for current residents are key goals of this

recommendation.

1. Apply private real estate principles.

Over time, public housing’s physical inventory and population would shift to the project-based

Section 8 model. This entails converting operating and capital funding to a long-term Section 8-

type contract10 linked to each public housing property11 rather than to a PHA, as is currently done.

The contract would provide reliable funding to cover operating costs including asset and property

management costs, debt service on loans for capital costs, replacement reserves, and debt service

insurance. Subsidy levels would be based on each property’s market rent. To be eligible for such a

contract, the PHA would pledge to retain some specified income targets for the property.

The conversion could be voluntary at first, with a period of 7 to 10 years for completion. In this

case, HUD would have to provide some oversight for PHAs that choose not to convert some or all

of their stock during the transition period. If the requirement is mandatory, PHAs unable to make

the change would need an alternative ownership model.

Conversion of public housing would follow a “mark to market” process similar to that which the

project-based Section 8 inventory has gone through in recent years. To capture the market value

of the properties and to implement an orderly transition, it is imperative that a market study and

market-based physical and financial assessment be conducted for each property in a PHA’s

portfolio to determine the feasibility of the conversion approach. The steps to ensure a thoughtful

and orderly transition are:

• Assess the capital, operating, and asset and property management needs of each property12 in

the public housing inventory to determine the best debt and reserve structure. The first

properties to convert would be those in the best condition and locations.

• Set up each property as an individually owned entity, with its assets outside the public housing

Annual Contributions Contract (ACC) between the PHA and HUD. While the entity could be a

subsidiary nonprofit corporation of the public housing authority, its assets would have to be

freestanding to facilitate debt financing of capital improvements.

• Establish clear and widely accepted standards for redesign, unit and site amenities, and

physical condition so that the properties are attractive to the full range of eligible families.

Such standards would serve to reduce the concentration of the very poorest families in public

housing.

• Upon turnover, permit PHAs to admit a percentage of market-rate tenants13 to properties

where income-mixing is feasible. Use of tenant-based subsidies in areas with inadequate supply,

or project-based subsidies for units in other locations (to replace the former deeply subsidized

public housing units), will also help to retain affordable housing for extremely low-income

families.14

• Replace the Annual Contributions Contract with a Housing Assistance Payment (HAP)

contract as each property moves to the project-based assistance model. This immediately

reduces the regulatory burden of the PHA and HUD oversight requirements. Properties that

cannot or choose not to seek project-based assistance would move to a housing choice vouchertype HAP contract. HUD’s public housing oversight structure would ultimately be eliminated.
42

• Use a Section 8 administrator to avoid conflict of interest if the PHA is the owner/manager,

sets rent levels, and performs housing quality inspections. Such arrangements already exist in

many jurisdictions.

• Involve the residents in future planning about the project. Neither public housing nor other

rental housing is truly viable if residents and managers are unaware of or unwilling to consider

each others’ desires, opinions, and goals. Successful conversion of the public housing stock

requires the involvement and support of residents in the planning process as well as in carrying

out the transition. Throughout this process, input and participation from public housing

residents and other important stakeholders should be actively sought and considered. Residents

should have access to the training and technical assistance necessary to make their involvement

informed and productive.

2. Provide for an orderly transition at severely distressed properties.

A more comprehensive approach is recommended for severely distressed properties in order to

preserve the housing and neighborhood, as well as to restore dignity to current residents. A

severely distressed property generally has multiple physical and social problems. The physical

problems include age (some properties are more than 50 years old), inadequate or failing

infrastructure, extremely small and inadequate rooms, and other design deficiencies.

Compounding the physical deterioration of these severely distressed properties is the social

pathology characteristic of high-poverty neighborhoods that is often manifested by poor school

performance, low education levels, high crime rates, high unemployment rates, and longer

average tenancy.15 Given the blighting effect of these large, severely distressed properties, most of

the neighborhoods in which they are located have suffered from decades of disinvestment.

The HOPE VI program must be maintained as both a preservation and production tool. In

addressing severely distressed properties, HOPE VI must be the first money in, because the private

sector does not have the resources to address the predevelopment costs to acquire a buildable site.

Under current regulations, HOPE VI funding pays only for public housing-related costs (including

the relocation, demolition, site remediation, and construction costs for public housing-assisted

apartments) and leverages non-public housing funds to pay for the non-public housing costs. The

latter costs make up the larger share of development budgets.

As previously discussed, each property in a PHA’s portfolio would undergo a complete marketbased assessment to determine the feasibility of the proposed conversion. If such an assessment

reveals that the property is severely distressed but has a viable location and warrants private

investment, then a HOPE VI revitalization, mixed-income approach would be considered feasible.

As the property is revitalized and the multifamily component is completed, the property would be

moved to a project-based voucher contract. If a property is not well located, not viable, and should

be demolished, a local market assessment must be done to determine what housing resources are

available to the families who must be relocated.

3. Allow debt financing of capital needs.

To complete the transition to this new public housing model, capital improvements16 would be

financed through private tax-exempt loans secured by a mortgage and backed by FHA mortgage

insurance. No additional guarantees should be necessary for the majority of public housing

properties, whose market rents would fully support the debt service to bring the property to

acceptable quality standards. Likely lenders would include FHA multifamily lenders and, in some

states, housing finance agencies.

Properties that potentially have sustainable rents17 but do not initially meet quality standards

would have a limited time to rehabilitate or replace inadequate units. During the planning and

rehabilitation period, rents could be pegged to what the units would command after renovation.

Additional credit enhancements or other HUD guarantees would be necessary in that, by

definition, the property’s condition will require financing that exceeds its market value.
43

If a PHA decides not to replace or rehabilitate a property, rents would be based on market value,

and replacement reserves would continue to accrue. While some public housing properties need

no new capital investment, others are in such poor condition or are so poorly located that they do

not warrant additional investment. These properties are good candidates for demolition and

replacement with vouchers or hard units, depending on input from community stakeholders,

including public housing residents, as well as analysis of local markets and housing conditions.

A debt financing strategy has several merits. The long-term costs of this capital improvement

approach would likely be lower than the current approach. An added benefit is that improvements

can occur quickly, before properties deteriorate further. Finally, debt financing provides another

level of operational oversight from lenders, thus substituting standard real estate practice for HUD

oversight and regulations.

Debt financing is not, however, appropriate in all cases. For small properties, the ratio of

transaction costs to overall debt makes this type of financing impractical. A more suitable

approach for these properties would be to use existing capital grant programs or to front-load

direct grants.

For properties whose capital needs require rents substantially above market-based levels or Section

8 fair market rents, the alternatives include:

• Using the HOPE VI program to revitalize properties that are well located but in poor condition

or otherwise obsolete, and

• Granting PHAs full access to all housing development vehicles including debt financing and tax

credits, as well as new loan and grant programs.

While these alternative approaches may add to the already tight competition for tax credits, the

ability to compete successfully depends on the credibility of the PHA and its partners as asset and

construction managers. Over time, such competition would help integrate public housing into the

rest of the affordable housing delivery system and subject PHAs to the same degree of privatesector discipline as owners of tax credit properties. This suggests that Congress should consider an

increase in the allocation of the Low Income Housing Tax Credit so that this resource can be used

to revitalize the public housing stock without diminishing its availability for other uses.

Finally, the Commission suggests that Congress direct HUD through FHA to work with the private

sector and bond-rating agencies to structure a guarantee based on the proposed Section 8 projectbased appropriations. Such a guarantee would enable PHAs to leverage private-sector investment

for constructing or rehabilitating units affordable to voucher holders and located in mixedincome developments.

4. Simplify the rating of PHAs.

HUD has used various systems to assess PHA competence that often focus on process compliance

rather than on outcomes. At the same time, the evaluation systems have become pointlessly

complex in an effort to prevent PHAs from “gaming the system.” HUD needs to simplify the system

to identify objectively those with determinable competence or incompetence. Such a system must:

• Relate to the quality of housing that residents experience and be simple enough to enable

PHAs or other administrators to judge how they are doing. The limited successes of HUD’s

public housing assessment systems (such as the Public Housing Management Assessment

Program and the Public Housing Assessment System) provide enough insight to design an

approach that accurately gauges the quality of both housing and its management, while

allowing significant input from residents and industry professionals.

• Prevent PHAs that do not meet minimum standards from converting to the proposed projectbased program. If such a PHA owns some properties that do meet standards, those properties
44

could be converted under some form of ownership that provides opportunities for resident

participation and does not give the PHA complete control.

• Require agencies with competency problems to accept alternative management. Many troubled

PHAs have been fixed by other PHAs acting as administrators. If no qualified administrators

can be contracted, however, alternative management would be either provided by the state or

procured competitively from the public, nonprofit, or for-profit sectors. Agencies with multiple

problems that cannot be resolved through alternative management would have to report to an

administrative or judicial receiver.

5. Test new rent-setting approaches.

Setting public housing rents has always been a balancing act among simplicity, accuracy, and

equity. Today, emphasis has shifted too far toward hair-splitting issues of equity, with a predictable

increase in the difficulty of achieving accuracy. This highly complex system is onerous for

administrators, residents, and applicants alike.

The MHC recommends that Congress consider funding a research demonstration of alternative

rent models. Rigorous research is necessary to ensure that public housing residents who are

elderly or disabled (44 percent of the PHA tenant population18) are not forced to pay too high

rents in the name of simplicity.

In addition, the rent structure should incorporate incentives for residents to seek economic

opportunities. One approach would be to establish an income threshold below which residents are

subject to full verification and pay a simplified income-based rent. Families with incomes above the

threshold would pay a higher fixed rent based on their unit size and subject to annual adjustment.

Such an approach creates real economic incentives for families in the upper-income tier, while still

not burdening those with the lowest incomes.

Another approach would set rents at 30 percent of income for the first year and then “step up” the

level every year thereafter. This again creates an incentive to seek economic opportunity, but gives

families a full year to access services and achieve some stability.

6. Exempt small PHAs from unnecessary and burdensome reporting requirements.

Small PHAs must abide by most of the same statutory and regulatory requirements developed for

large PHAs. The MHC recommends that PHAs with fewer than 250 units have a simplified

contract that establishes basic standards for physical conditions and operations, but strictly limits

paperwork and reporting. In this way, small PHAs can appropriately focus their staff and financial

resources on property management. Even under these simplified requirements, however, some

PHAs that are geographically isolated or face high staff turnover will need ongoing, reliable

technical assistance.

Revitalize and restructure the Federal Housing Administration within HUD.

Revitalizing and restructuring the Federal Housing Administration is an urgent priority. FHA

multifamily insurance is an indispensable tool for stimulating housing production, and FHA singlefamily insurance is vital for expanding homeownership among low-income families and minorities.

In FY 2001, FHA endorsed more than $100 billion in mortgage insurance under its single-family and

multifamily programs, and injected about $4 billion into the federal budget.19 Indeed, unlike most

federal programs and agencies, FHA is a moneymaker.

The potential of FHA to support the production and preservation of affordable housing is

hampered, however, by its structure and the prescriptive statutes under which it operates. For

example, although federal regulators of financial institutions are permitted to pay salaries above
45

normal federal pay scales in recognition of the special skills demanded by sophisticated financial

market operations, FHA’s hiring authority is limited by statute and congressional appropriations.

FHA’s dependence on the appropriations process (instead of its own “earnings”), together with

competition for funds within HUD, has led to under-investment in productivity-enhancing

technologies that not only makes it difficult for FHA to work efficiently with its industry partners, but

also increases operational risk (i.e., risk of managerial shortcomings).

The statutes and regulations dramatically increase the time necessary to develop and implement new

products, keeping FHA from being fully responsive to the evolving marketplace. The nature of the

political process often leads to highly specific—and sometimes contradictory—changes to programs,

further curbing flexible implementation.

1. Restructure FHA as a wholly owned government corporation within HUD.

A corporate structure would give FHA maximum flexibility to adapt its programs to the evolving

finance market without relying on Congress to legislate each change. This could be accomplished

with no substantial budget impact.

Specifically, the Commission recommends that FHA and Ginnie Mae be combined into a single

entity, based on the model laid out in the Government Corporation Control Act (GCCA).20 The

following structure would enhance FHA’s unique ability to support production and preservation

of affordable housing.

• Powers and mission. The new corporation would continue to issue insurance backed by the full

faith and credit of the federal government, including credit enhancement and related functions

such as asset management and disposition. Legislation should specify broad parameters for the

insurance authorities, including creation of three separate insurance funds for single-family

housing, multifamily housing, and health care facilities. Each should have its own statutory

mortgage limits that focus FHA’s mission on affordability. Within these parameters, however,

FHA should have freedom to create or alter specific insurance programs without direction from

Congress. FHA’s mission must also be focused through its accountability to Congress and the

Secretary’s role (see below) in coordinating the corporation’s activities with the rest of HUD.

• Governance. The corporation should be run by a Chief Executive Officer appointed by the

President and reporting to the Secretary of HUD. The CEO’s term could run for the duration of

the current administration, or for a specific number of years that overlap administrations (like

the terms of most banking regulators). The recommended structure is a board chaired and

appointed by the Secretary of HUD; an alternative structure could be an advisory board

appointed by the Secretary.

• Oversight. Like other government corporations, the new FHA corporation should be subject to

regular financial and other reporting requirements, including an annual audit. In addition, an

annual actuarial review should be conducted to set credit subsidy rates for the three funds, for

use in the President’s annual budget. Regulation of FHA’s safety and soundness, particularly the

adequacy of its reserves, could be the responsibility of either the Office of Federal Housing

Enterprise Oversight or the Office of Management Budget.

• Hiring and procurement. FHA should have greater flexibility to pay employees according to the

same standards as the federal banking regulatory agencies, including exempting workers from

certain competitive and other requirements. The corporation itself should be exempt from the

Federal Property and Administrative Services Act, so that it can quickly procure needed goods,

contractors, and other services.

• Funding. A restructured FHA would not require additional funding because it should continue

to take in more than it spends. Each year, as part of the annual budget process, the corporation

should report the expected level of “earnings” to be retained for funding FHA operations and

reserves. Earnings estimates would be based primarily on the actuarial review of the

corporation’s programs. The balance could either remain within FHA or be available for other

government purposes.
46

With this new structure, FHA could invest in technology to improve its efficiency and reduce its

risk, thereby creating production and ownership opportunities that would otherwise not exist. A

corporate structure would also serve to attract staff with the requisite skills and experience to

manage FHA’s nearly $500 billion mortgage insurance program. Equally important, however, FHA

would remain an integral part of HUD and as such, an effective force for the production and

preservation of affordable housing.

2. Provide for more flexible multifamily operations.

Statutory reforms are needed to grant FHA a sufficient degree of flexibility to improve its

multifamily operations (Fig. 14). Although the Commission recommends the following changes

be made as part of a restructured FHA, they would by themselves improve FHA’s support of

multifamily housing. At minimum, Congress should pass statutes that:

• Combine all multifamily programs in the General Insurance and Special Risk Insurance

(GI/SRI) Fund into a single program for purposes of determining credit subsidy allocations. As

currently structured, any individual insurance program that does not break even requires an

appropriation of credit subsidy from Congress, even if other programs within the fund generate

excess earnings. When the subsidy runs out, these programs must shut down for the remainder

of the fiscal year unless Congress makes an emergency appropriation. A single appropriation of

credit subsidy for all programs in the GI/SRI fund would eliminate this problem. Enabling FHA

to manage its multifamily programs as a single fund would allow it to set premiums and target

loan volumes for each program in such a way that the fund as a whole requires no appropriation

of budget authority.

 

Figure 14

The Number of FHA-Insured Multifamily Units Continued to Fall in the 1990s

1970s

Source: U.S. Department of Housing and Urban Development, Office of Multi-Family Housing, April 2001.

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1980s 1990s

0

• Permit FHA to vary the terms or other aspects of its multifamily insurance programs. Today,

program specifics are spelled out in statutes that require congressional legislation to change.

Broader authorities should replace many of these details. In crafting such legislation, Congress

can look to its own FHA multifamily risk-sharing legislation, which gives FHA the flexibility to

react to market changes and other conditions much more rapidly.

• Grant FHA broad authority to pursue pool insurance and offer adjustable-rate insurance

products. This authority would allow FHA to respond much more quickly and effectively to

market changes, for example by offering short-term or adjustable-rate mortgages when interest

rates favor short-term financing.
47

• Index multifamily mortgage limits to a construction cost index and give FHA greater flexibility

to increase limits in high-cost areas. Even with the recent 25 percent increase, current FHA

mortgage limits are too low to produce new housing in high-cost areas. At present, FHA can use

the maximum limit adjustment in only two states. FHA should be allowed to apply this

adjustment to other areas it designates as high cost.

• Allow FHA to insure construction-only loans, including a tailored interim-loan product to

cover the costs of acquiring and renovating properties. Such a program would help preservation

entities purchase and rehabilitate at-risk affordable housing. The program could offer either

risk-sharing or full insurance and should start as a demonstration focused initially on federally

assisted properties.

• Build on the success of the 221(d)(4) rental production program (FHA’s multifamily mortgage

insurance program for for-profit developers) by removing outdated features limiting its

effectiveness.21

Congress should also urge FHA to:

• Use its existing multifamily risk-sharing authority to offer pool insurance to housing finance

agencies and government-sponsored enterprises, especially for financing the preservation of small

properties.

• Consider risk-sharing partnerships with private lenders, but only after carefully establishing strict

criteria for participation such as capital and reserve requirements and lending track record.

3. Provide for more flexible single-family operations.

FHA lacks risk-sharing authority for its single-family programs, freedom to introduce new products

and insure pools of single-family loans, and authority to set high-cost area limits without specific

acts of Congress. Again, the Commission strongly believes that the best way to strengthen FHA’s

single-family programs is to restructure the agency as a whole. At minimum, though, the following

reforms would make FHA a more responsive, flexible, and capable partner for lenders and other

private-sector players.

Figure 15

FHA Is Critical to Minority and Low-Income Homebuyers

Source: Home Mortgage Disclosure Act, Community Reinvestment Act data, 2000.

5%

10%

15%

20%

25%

30%

35%

40%

0%

Minority White Lower Income Moderate/High Income

FHA Share

of Home

Purchase

Loans

in 2000

• Expressly authorize FHA to initiate single-family risk-sharing demonstration programs under

terms and with partners it sees fit. Present statutes grant FHA some authority to share risk with
48

partners on single-family loans, but on very narrow terms. FHA should have broader authority to

choose its partners, loss position, and types of credit enhancements (including reinsurance as well

as insurance or reinsurance on pooled loans).22

While FHA can absorb risk better, potential partners may have superior risk assessment and

management systems. Others may be able to provide access to new products and delivery systems

targeting communities with underserved borrowers that FHA does not yet reach, such as the

subprime mortgage market.23 Congress should establish one FHA risk-sharing program for credit

subsidy purposes and allow it to operate both programs that break even and programs that do not

within this authority, provided it achieves an overall target.

• Authorize FHA to set its own standard for selecting business partners. At present, FHA approves

lenders, but not appraisers, under congressionally mandated standards. FHA’s inability to select

appraisers and other business partners on its own terms severely handicaps its capacity to manage

risk and, by extension, the risk to communities from liquidating inventories of defaulted loans.

• Expressly authorize FHA to introduce new products, such as pool insurance products, without

requiring Congress to pass a new statute for each. This would offer the same benefits on the singlefamily side as those described for the multifamily side.

• Urge FHA to use sophisticated private-sector techniques to prevent mortgage defaults and, when

defaults are unavoidable, reduce their cost. While FHA has made progress in loss mitigation and

property disposition in recent years, potential partners have demonstrated far greater success in

these areas. In 1998, Congress gave FHA authority to take assignment of loans for purposes of

transferring them to partners who would manage loss mitigation, foreclosure, and property

disposition. The authority also allows FHA to take an equity interest in a joint venture partnership,

so that FHA can share in the returns generated from more efficient and effective operations. The

Commission recommends that FHA implement this existing authority for defaulted loan sales to

joint ventures.

This recommendation is not to suggest that FHA should simply sell its entire inventory of

foreclosed homes for the highest price. That approach has had—and would continue to

have—devastating impacts on low-income people and communities. The merits of bulk sales and

accelerated claim procedures for dealing with dispersed FHA-owned homes in stable

neighborhoods often do not apply in low-income communities with high concentrations of vacant,

dilapidated properties. In fact, Congress created special initiatives within FHA such as the “Asset

Control Area” program in part to help communities combat the problems caused by bulk sales of

FHA-owned homes to investors with little or no regard for the homes’ habitability, the well-being

of homebuyers, or the stability of the neighborhood. These initiatives should continue.

• Expand FHA’s home improvement lending activities by reforming its Title I program to attract

more lenders and better manage risks. Financial and other risks associated with the quality of

construction and its impact on property values, combined with the relatively high fixed transaction

costs of small loans and of monitoring construction progress, have reduced the number of lenders

willing to administer home improvement loans. Scarce capital for these typically high loan-to-value

loans also limits the availability of these products.

FHA should take decisive steps to stimulate home improvement lending by raising Title I loan

limits from $25,000 to $50,000, and reducing the administrative hurdles to loan origination. Title I

insurance should also be full-faith-and-credit instead of conditional, which now allows FHA to

force lenders to buy back a loan even after a claim is paid. A stronger FHA role in the market

would help establish effective third-party oversight and underwriting rules others could emulate. It

could also prompt Ginnie Mae to re-enter this market.24

• Expand FHA’s small investor lending activities by reforming its Section 203(k) program for

acquiring and rehabilitating two- to four-unit properties. The program’s design and management

contain many restrictions and carry low loan limits, making the program generally difficult to use.

Few lenders will process or originate these loans, in part because they have higher administrative

costs than non-FHA loans. By revising and streamlining these programs, FHA could provide a

competitive product that would limit any opportunities for predatory lending by others.
49

End chronic homelessness in 10 years by building additional units

of supportive housing.

While the accuracy of homeless counts is controversial, the best current estimate is that at least

800,000 people are homeless on any given night, and that between 2.3 million and 3.5 million

people experience homelessness over the course of a given year.25

About three-quarters of the homeless are single adults living alone, and about 15 percent are

households with children. Indeed, nearly 200,000 children are homeless on a given day.26 In addition

to those living on the streets or in shelters, an unknown number are doubled up temporarily with

friends or relatives. A study of nine metropolitan areas found that between 2 percent and 10 percent

of all poor families are homeless each year.27

The homeless can be divided into two broad groups. Up to one-third are the “chronically homeless”

who experience frequent or long-term episodes of homelessness. This population—primarily single

adults, although including a small percentage of families as well—generally suffer health or

substance abuse problems in addition to extreme poverty.

Many of these individuals live in the homeless system, cycling from shelters to the streets to jails and

hospitals—often at enormous cost. A recent study of New York City’s homeless system found that the

public cost to care for a homeless, mentally ill person was roughly equivalent to the cost of housing

that same person.28 The chronically homeless require “permanent supportive housing” to escape

homelessness and reduce the enormous burden on public care systems.

The “transitionally homeless,” in contrast, are households whose predominant need is rapid access to

affordable housing. Overall, the transitionally homeless have more in common with the “housed

poor” than with the chronically homeless. In fact, many of the needs of the transitionally homeless

can be met by increasing the affordable housing supply for extremely low-income families, as well as

by policies promoting employment and self-sufficiency.

The MHC strongly endorses a program to end chronic homelessness within 10 years through

provision of additional supportive housing. Best estimates put the number of chronically homeless

people near 200,000 and the number of appropriate units near 50,000. This shortfall calls for

another 150,000 units of suitable housing over the next 10 years, along with continued funding for

the 50,000 or so existing units.

The tools to achieve this goal are already in place. For the last three fiscal years, 30 percent of HUD

McKinney-Vento Homeless Assistance funding has been set aside for permanent housing through

the Shelter Plus Care, Supportive Housing, and Single Room Occupancy programs. The Commission

recommends that this set-aside be made permanent as a way to ensure the addition of 15,000

incremental units of permanent supportive housing each year.

A related recommendation is to transfer renewal funding for expiring rent and operating subsidies

for permanent supportive housing (initially funded under McKinney-Vento) to HUD’s Housing

Certificate Fund. This would treat HUD-supported housing for the homeless similarly to other HUDsubsidized housing, freeing current year McKinney-Vento appropriations for investment in

incremental permanent supportive housing units and other initiatives for the homeless.

Together, these two initiatives would serve to end chronic homelessness within 10 years. Policies

recommended elsewhere in this report would also greatly reduce transitional homelessness. Moving

these populations out of shelters and jails and off the streets is in the best interests not only of

housing policymakers but of all Americans.

The Millennial Housing Commission recognizes, however, that providing extra domicile space alone

cannot address the fundamental needs of either the transitionally or chronically homeless. Overall, a

successful policy to solve homelessness must:
50

• Provide sufficient public and private funding for a full continuum of interventions targeted to

various homeless sub-populations, ranging from street outreach and emergency shelters to

permanent affordable and supportive housing; and

• Infuse this continuum of interventions with the high expectations, incentives, and supports

needed to encourage homeless households to participate in treatment programs (to address their

physical and mental health, substance abuse, and other personal conditions), work productively

within the legal labor force, and otherwise engage in constructive behavior.

In this regard, future policymaking on homelessness should draw on the lessons of welfare reform.

The nation’s experience with the TANF program, enacted by the Personal Responsibility and Work

Opportunities Act of 1996, has demonstrated conclusively that a system of narrow, unconditional

public assistance is less effective in promoting self-sufficiency than one that artfully wields both

sanctions and a broad array of supports. Moreover, the successful welfare reform experiment has,

from its inception and throughout its implementation, recognized that a one-sized approach does

not fit all target populations. Accordingly, the Commission recommends a broad spectrum of

interventions in keeping with the paradigm shift that has occurred in the field of welfare policy.

Over time, link housing assistance with work requirements.

The Commission believes that more should be done to link housing assistance with economic

opportunity, self-sufficiency, and personal responsibility.

The MHC recommends that federal housing assistance programs encourage and facilitate expanded

economic opportunity, recognizing that working-age families living in assisted housing, like other

able-bodied people, have an obligation to contribute to society as well as accept its help. Thus, MHC

supports provision of the necessary services and supports to enable these families to find

employment that will enable them to become self-sufficient and, when such services are available,

directly or through non-housing agencies, to accompany them with realistic work requirements. The

Millennial Housing Commission thus recommends that, over time, the housing assistance system

require residents who are not elderly or disabled to work as a condition of receiving aid.

This recommendation is modeled on the reform of the Aid to Families with Dependent Children

program, which brought about work requirements coupled with access to support services (such as

childcare, education and training programs, and transportation) (Fig. 16a). This approach helps

recipients get and keep jobs, plus provides financial incentives (including more generous income

disregards that allow them to keep more of their earnings, and specialized savings accounts exempt

from resource limitations) that make work pay.
51

 

Figure 16a

1993

Source: Department of Health and Human Services, Administration for Children and Families, April 2002.

Welfare Caseloads Have Dropped Sharply Since Welfare Reform

Millions

1994 1997 2000 2001

0

2

4

6

8

10

12

14

16

1995 1996 1998 1999

Since enactment of welfare reform and creation of Temporary Assistance for Needy Families, many

states have made substantial changes to the provision of family assistance. The TANF law encouraged

states to link assistance with work requirements. The combination of federal welfare reform, state

flexibility in implementation, and economic expansion has led to a dramatic decrease in the number

of AFDC/TANF-assisted households and a simultaneous increase in the percentage of TANF-assisted

single mothers participating in the work force (Fig. 16b).

There is evidence that combining incentives to work with job-promoting services for welfare

recipients is more effective for those who also receive housing assistance than for other welfare

families.29 This may be because subsidized housing provides the stability that people need to find and

hold jobs, allows families to devote more of their earnings to work-related expenses such as

childcare, and/or helps families move to areas with better job opportunities.

Welfare reform was the culmination of 15 years of experimentation with efforts to promote

employment and self-sufficiency. Over time, welfare agencies developed expertise in social work to

help families become self-sufficient. It will therefore take time and adequate funding to develop an

analogous system for residents of assisted housing who are not already covered by the welfare

program requirements.
52

Figure 16b

Employment Among Single Mothers with Children Has Skyrocketed

80%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Single Women with No Children

Single Women with Children Under 18

Married Women with Children Under 18

Married Women with No Children

78%

76%

74%

72%

70%

68%

66%

64%

62%

60%

Labor Force

Participation Rate

Some housing authorities have already instituted changes that help to counter the disincentives to

work for assisted families. While not directly requiring work, many PHAs now disregard increased

earnings in setting rents; support work requirements under state and federal welfare policy, with

exceptions for elderly and disabled households; set rents at levels only households with earnings can

afford; and give preference to working families in their admissions policies.

The Millennial Housing Commission recommends that Congress support continued

experimentation with, and evaluation of, such policies. Experimentation with stepped and flat rents

should be encouraged. In the short term, the most important job of public housing authorities is to

manage their real estate properly. Over time, however, PHAs should build on the concept of linking

housing assistance to work requirements.

Nevertheless, Congress should impose these requirements only if it supplies adequate funding for

services to help recipients get and keep jobs, and for income disregards that allow residents to keep

more of the money they earn. Furthermore, Congress should facilitate partnerships between PHAs

and welfare agencies so that PHAs need not expand their missions to provide services that are

already provided by other agencies.
53

Streamlining of Existing Programs

Several housing programs work well but would benefit from minor modifications. The recommendations presented

below affirm the basic strengths of these programs and suggest ways in which they can be improved.

Expand and strengthen the housing choice voucher program to improve the access

of extremely low-income households to the private housing stock.

Since the 1970s, the housing voucher program has effectively assisted millions of low-income

renters—particularly extremely low-income households who are most likely to have severe

affordability problems and/or live in inadequate housing. The voucher program now serves 1.6

million households, including several special-needs populations such as persons with physical or

mental illness and families making the transition from welfare to work. In certain circumstances,

vouchers can also be used for mortgage payments to help families become homeowners.

Because the program is flexible, cost-effective, and successful in its mission, the MHC believes

housing vouchers should continue to be the linchpin of a national policy providing very low-income

renters access to the privately owned housing stock.

The MHC recommends appropriation of additional funds for substantial annual increments of

vouchers to address the housing problems of extremely low- and very low-income families who

lack access to other housing assistance. The MHC also supports expanded use of vouchers for

homeownership to help low-income families build assets. Finally, the MHC recommends specific

refinements that would increase the program’s efficiency and effectiveness.

1. Improve utilization and success rates.30

HUD needs to diagnose the reasons for the limited success of the voucher program at some PHAs

and offer targeted technical assistance.31 Voucher units should be reallocated from low-utilization

PHAs to entities serving the same geographic area and households. Where reallocation is not

feasible, the PHA could be required to contract with another entity to administer the unused

vouchers. In all cases, households on the original PHA’s waiting list should have priority for the

unused vouchers.

HUD could also make two simple administrative changes that would improve the voucher system

in tight rental markets: (1) expand the resources devoted to rent surveys so that published Fair

Market Rents do not lag actual rents, and (2) quickly approve exception payment standards when

census data demonstrate that average area rents are at the level of the exception sought (with

some appropriate upper limit).

2. Increase landlord participation.

HUD and PHAs should develop consensus standards for shortening the inspection and lease

approval process and for providing better service to landlords. These standards should be based

on a review of PHA performance, feedback from both landlords and voucher holders, and review

of all standards that affect landlord participation, such as lease approvals, inspections, and voucher

transfer payments.

The MHC also recommends that HUD provide technical assistance to PHAs for improving

landlord participation, disseminate best practices information to program administrators,

experiment with giving PHAs greater flexibility in applying the Housing Quality Standards (HQS)

to attract owners to the program, and change the cap on the family rent contribution for newly

rented voucher units to 40 percent of gross (rather than adjusted) income.32
54

3. Link vouchers to housing production programs.

The MHC recommends that HUD strengthen and enforce the requirement that owners of

housing produced under federally funded programs accept households with vouchers. This is in

an effort to enable extremely low-income families to live in rental housing produced with other

subsidy sources that would otherwise be unaffordable.33 In the interests of promoting mixedincome housing, however, the MHC also recommends that owners of developments of 50 or more

units be able to limit the share of voucher households to 20 percent or 30 percent, subject to local

market conditions.

Extremely low-income households would receive special vouchers for units produced under capital

subsidy programs such as the LIHTC, HOME, CDBG, and the new mixed-income, multifamily

rental production program proposed elsewhere in this report. Payment standards for units served

by these “thrifty production vouchers” would equal the operating cost, rather than being based on

the Fair Market Rent. These vouchers could be targeted to places where the tenant-based voucher

program has had little success, or where there is a severe shortage of rental units at or below the

program Fair Market Rent. In addition, state and local housing plans would be required to take

into account voucher success rates and barriers to voucher use when determining the use of

HOME and CDBG funds. These funds could be used for voucher program enhancements, such

as assistance with searches or security deposits.

PHAs should be allowed to designate a portion of available housing vouchers for “first use” in a

particular housing project. This would supplement the current system of project-based vouchers,

but not guarantee the owner a specific number of voucher holders over time. These designated

vouchers should be allowed only in neighborhoods with access to jobs and decent schools, or as

part of a comprehensive revitalization project that addresses these other aspects of neighborhood

quality.

4. Link vouchers to work opportunity and self-sufficiency initiatives.

While the current voucher program provides incentives for tenants to move to neighborhoods

with better opportunities and good schools, it does not make mobility a primary goal. But housing

vouchers can play a larger role in helping welfare-dependent families and marginally employed

workers improve their job stability and earnings potential. Indeed, vouchers are more effective

than any other kind of housing assistance in improving recipients’ opportunities for employment,

savings, and long-term self-sufficiency (Fig. 17).
55

Figure 17

Housing Choice Vouchers Help Recipients Move to Lower Poverty Areas

Low Poverty Area Medium Poverty Area High Poverty Area

0%

20%

40%

60%

80%

100%

Public Housing Project-Based Assistance Certificates and Vouchers All Rental Units

The ability of the voucher program to help families become more self-sufficient may depend in

part on its ability to assist families in moving to neighborhoods with access to good jobs and good

schools. As the Moving to Opportunity (MTO) demonstration34 has shown, however, effective

mobility counseling is expensive. In addition, the goal of mobility competes with other program

objectives such as maximizing the number of households served, minimizing the dependency of

households on public subsidies, and ensuring the full utilization of program funding.

Another way for the voucher program to help families move toward self-sufficiency is to build in

opportunities for employment and savings. Among the current HUD programs aimed at

increasing employment and income among voucher holders, the Family Self-Sufficiency (FSS)

program35 has shown particular promise.

5. Link vouchers to non-housing programs.

HUD should allow other agencies to compete for special allocations of vouchers for certain

populations, but require that PHAs (or regional consortia of PHAs) perform key operations such

as housing inspections, rent-setting, and payments to landlords. HUD should monitor

performance of these functions as part of the PHA’s overall voucher program.

Housing vouchers can also work effectively with other types of assistance programs for specialneeds populations. In particular, as states expand community-based housing options, they are

likely to look increasingly to vouchers to provide permanent housing supports for persons with

disabilities. This will require establishing stronger partnerships between PHAs and other providers

of supportive services, and permitting state agencies and nonprofits to administer special-purpose

vouchers.
56

6. Allow for the flexible use of Section 8 project-based units.

In addition to expanding tenant-based housing choice vouchers, the Commission proposes certain

improvements to the project-based Section 8 program. More than 800,000 units of project-based

Section 8 units are still in the federally assisted stock. While most are in good condition, some are

obsolete, deteriorating, and located in areas where assisted housing is highly concentrated. Others

are at risk of opt out from their Section 8 contracts.

Unfortunately, the treatment of project-based Section 8 units is rather inflexible. Current HUD

policy does not appear to allow the transfer of subsidies from deteriorated properties to other

locations to create replacement housing. Although the Mark-to-Market program can help

rehabilitate properties that are in relatively good condition, it makes better economic sense to

demolish and replace some obsolete or poorly located properties.

It would be a better use of federal funds if, with local government support, some or all of the

project-based Section 8 and other subsidies could be transferred to other locations as part of

mixed-income housing developments. All companion use and affordability restrictions would also

be transferred to the new properties. The ability to transfer subsidies would thus help preserve

existing affordable housing now at risk of loss.

This flexibility would also provide new preservation options for property owners who are

considering opting out of their contracts. Owners would have the opportunity to do a partial optout, converting some but not all units to market rate. This partial conversion would foster incomemixing in the housing development by attracting residents with higher incomes. Other properties

assisted by shallow subsidy programs (such as LIHTC and HOME) could use the transferred

subsidies to serve some very low-income renters.

HUD currently has authority to transfer project-based Section 8 contracts to other developments.

There do, however, appear to be statutory issues involved in transferring existing contracts to new

construction projects intended to replace obsolete units, and in transferring companion use

restrictions to other buildings under Mark-to-Market transactions. The Commission therefore

recommends that the administrators of these project-based contracts be permitted and

encouraged to allow transfer of assisted units to aid in the preservation of affordable units in highquality properties and to improve income diversity. It also recommends that Congress remove any

statutory obstacles to using transferred project-based Section 8 subsidies for replacement housing.

These recommendations are in keeping with the Commission’s emphasis on devolving greater

responsibility to state and local entities and providing greater program flexibility to increase the

public benefit.

Improve the HOME Investment Partnerships and Low Income Housing Tax Credit

programs to work better individually and in combination, and increase funding

for HOME.

As the MHC heard time and again in testimony, housing programs must be flexible enough in

implementation to enable local actors to tailor federal resources to local needs. Two modern

housing production programs—the Low Income Housing Tax Credit and the HOME Investment

Partnerships Program—are, to a large degree, highly successful precisely because they were designed

with flexibility in mind.

The LIHTC was enacted in the Tax Reform Act of 1986. The program provides housing developers

with a source of equity—generated by private-sector investors—that enables them to achieve

affordable rents on new or rehabilitated rental units. Without such equity, rents would have to be

significantly higher to cover the cost of amortizing debt.

The LIHTC is administered by state credit agencies (usually state housing finance agencies). Federal

program guidelines are spelled out in the Internal Revenue Code (IRC). Through the IRC, the

federal government defines tenant income and rent restrictions, generally describes the Qualified

Allocation Plan (QAP) process that credit agencies must use in awarding credits to projects that
57

propose to serve such tenants, outlines the eligible project costs for which the credit may be used,

explains how investor benefits relate to eligible project costs, and lays out compliance requirements

for investors.

Credits are allocated annually to state credit agencies on a per capita basis. The agencies then award

credits to individual developers via the state-developed QAP, which identifies statewide housing

needs and lays out the agency’s ranking factors given those needs. Allocators have enormous

flexibility in designing their QAPs. In effect, through its QAP requirement, the federal government

mandates that state credit agencies define the public benefit to be achieved through the use of the

tax credit, which is essentially a public subsidy.

Developers who compete successfully for a credit allocation then sell their credits to private-sector

investors, with proceeds of the sale providing project equity. Investors derive economic return as

long as the property remains in compliance for the required period of time. The statute requires a

15-year initial compliance period and mandates an extended-use agreement under which properties

must continue to serve low-income tenants for an additional 15 years, but with a contingency clause

that allows for conversion to market rate under certain conditions.36

Enacted in the National Affordable Housing Act of 1990, HOME is a federal block grant program

administered by the U.S. Department of Housing and Urban Development. Grants are allocated

annually, by formula, to states, localities, and consortia of local governments. The federal

government determines the allocation formula, sets overall program objectives and eligibility

requirements for applicants and beneficiaries, and defines eligible and ineligible uses of the funds.

Beyond that, HOME fund beneficiaries have great flexibility to determine how best to use the funds

to meet local needs.

In addition to expanding the supply of affordable—particularly rental—housing for low- and very

low-income families, one of the stated national objectives of the HOME program is to “strengthen

the ability of state and local governments to design and implement strategies for achieving adequate

supplies of decent, affordable housing.”37 Funds can also be used for capacity-building assistance to

beneficiaries, and to strengthen partnerships between beneficiaries and the private sector.

Both LIHTC and HOME have helped to build the capacity of state and local jurisdictions to engage

in housing development (Fig. 18). The LIHTC in particular has imposed private-sector discipline on

state credit agencies and developers who benefit from tax credit equity, because private-sector

investors in LIHTC-funded projects face severe tax penalties should the projects fail to comply with

IRC requirements. State credit agencies are required to monitor projects’ physical condition and

compliance with federal tenant and rent restrictions, so private-sector investors demand effective

public oversight of the projects, otherwise they risk losing the economic benefit of having invested.

Indeed, a uniquely clever element of the LIHTC program is that private-sector investors are

compelled—by the potential for economic loss—to assure that the public objectives of the program

are met.
58

Figure 18

Number of 

Units Committed

Homebuyer 

Acquisition/ 

Rehabilitation

Source: U.S. Department of Housing and Urban Development, Community Planning and Development, 

HOME program data as of February 28, 2002.

HOME Provides Flexible Funding for a Variety of State and Local Housing Initiatives

0

40,000

80,000

120,000

160,000

200,000

Rental 

Acquisition/ 

Rehabilitation

Homeowner 

Rehabilitation

Rental: New 

Construction

Tenant-Based 

Rental

Assistance

Homebuyer: New 

Construction

The LIHTC and HOME programs represent a true and strong paradigm shift away from some of the

less effective federal policies and programs of the past. States and cities—not the federal

government—now determine how to use most housing resources. The LIHTC, in particular, builds

on lessons learned about providing incentives for private-sector involvement in housing. LIHTC’s

program design eliminates many of the perverse incentives that resulted in costly long-term

problems with the privately owned, subsidized stock. Congress has recognized the success of both

programs by recently increasing the per capita tax credit allocation from $1.25 to $1.75 and pegging

the credit to inflation beginning in 2003. In fiscal year 2002, Congress funded the HOME program at

its highest level ever.

The Commission’s recommended improvements to the LIHTC and HOME programs are meant to

eliminate outdated requirements and thereby provide even greater flexibility for states and localities

to respond to local production and preservation needs. After proposing several improvements to

each program, the MHC provides a third set of recommendations that would make the LIHTC and

HOME programs work better both together and with other programs.

1. Improve the Low Income Housing Tax Credit Program.

• Allow sponsors of tax credit properties in low-income rural areas to set rent caps based on

statewide median income. This recommendation is intended to facilitate use of the tax credit in

rural areas where the median income is too low relative to construction costs to stimulate

multifamily housing production. The proposed change would allow states to extend eligibility,

where appropriate, to developments whose rents are affordable based on statewide (rather than

countywide) median incomes. Additional subsidies will be necessary to make an appropriate

portion of the units available to extremely low-income families.

• Remove impediments to the use of tax credits for preservation. Repealing IRC §42(d)(2)(B)(ii)

would make it easier to transfer desirable tax credit properties to preservation entities. This “anti-
59

churning” provision precludes a property from receiving an allocation of acquisition tax credits if

it has changed hands within 10 years. The 10-year rule was put into place to prevent owners from

selling or transferring properties in order to gain tax benefits. Because Congress has since

eliminated or restricted these tax benefits, the 10-year rule is now obsolete.

• Remove the prohibition against combining LIHTC with assistance under the §8(e)(2) moderate

rehabilitation program. IRC §42(c)(2)(B) precludes a moderate rehabilitation property from

receiving an allocation of tax credits. This prohibition was imposed because of concerns about

inappropriate awards of assistance in the early 1980s. The overriding concern today, however, is

the need to preserve affordable housing for long-term affordable housing use. Repeal of this

provision would support this goal.

• Clarify what project costs can be included in eligible basis. Ambiguity about what costs may and

may not be included in eligible basis is a fundamental problem in the development and

financing of tax credit properties. Five Technical Advice Memoranda issued by the Internal

Revenue Service (IRS) in late 2000 in response to confusion over the eligibility of particular costs

resulted in IRS positions contrary to common industry practice. The Commission recommends

that Congress provide needed clarity on this issue.

2. Improve the HOME Investment Partnerships Program.

• Given the widely recognized success of the HOME program, enact a substantial increase in

HOME funding for both states and local jurisdictions. In addition, the Commission

recommends raising HOME’s minimum state funding level from $3 million to $5 million, with

the increase in the minimum funding level coming from the overall state portion of the

substantial increase recommended above. This minimum funding level increase would affect

allocations to 12 states.

• Allow the use of HOME funds to capitalize a long-term project reserve account. Under current

regulations, HOME funds may be used to capitalize an initial operating deficit reserve to meet

any shortfall during project rent-up. Long-term reserves, in contrast, are the only cost for which

a developer must secure private debt, which complicates the process of financing HOME

projects. The Commission recommends that Participating Jurisdictions (PJs) be given the

option to use HOME funds for long-term project reserves.

• Permit Participating Jurisdictions to use HOME funds to refinance certain low-income

housing mortgages, regardless of whether refinancing is done in conjunction with

rehabilitation. Certain subsidized rental properties in jeopardy of lossincluding tax credit and

rural multifamily projectscould be preserved if the PJs were able to use HOME for

refinancing. The Commission recommends that PJs be permitted to do so.

• When rental housing is financed with both HOME and CDBG funds, HOME rules should

govern. When HOME and CDBG funds are used for the same housing initiative, the sponsor

must comply with conflicting rules. The Commission suggests remedying this by letting HOME

rules govern the use of both resources.

• Improve lead hazard evaluation and control by incorporating lead safety into general housing

rehabilitation activities. First, the Commission recommends repeal of the language in Title 10

(1992 legislation on lead-based paint regulations) that triggers full abatement of lead-based

paint when $25,000 in HOME and/or CDBG funds are used for rehabilitation. Evolving

knowledge about lead hazards suggests that a specific abatement trigger unnecessarily increases

rehabilitation costs and discourages cities from using block grant funds for preservation. HUD

requirements for lead-safe work practices by contractors with basic training in lead safety,

followed by clearance testing, offer a better, performance-based standard for most federally

funded rehabilitation projects.

Second, the Commission recommends that requirements for lead hazard evaluation and control

apply to properties built before 1960, rather than before 1978. Properties built before 1960 are

not only more likely to contain lead-based paint, but also to contain paint with higher
60

concentrations of lead that covers more surfaces. In most cases, following lead-safe work

practices and relying on real estate disclosure and clearance testing are sufficient in

post-1960 properties.

3. Eliminate barriers to combining the LIHTC with HOME and other programs.

• Make both new construction and substantial rehabilitation expenditures eligible for the 9

percent tax credit, even when the development is federally assisted. Under current law,

developments that use loans funded out of appropriations are, with some exceptions, eligible

only for 4 percent credits. This provision was enacted in 1986 and intended to prevent oversubsidization of projects. Beginning in 1990, however, housing credit allocation agencies were

required to perform a financial feasibility analysis to determine the amount of credit needed per

project in light of other sources. This requirement, along with the allocating agencies’ desire to

make the credit available as widely as possible, ensures that projects receive no more credit than

necessary. The Commission recommends that allocating agencies be permitted to match 9

percent credits with such projects as necessary to provide deeper subsidies than possible using

only 4 percent credits.

• Allow a “basis boost” for tax credit developments in high-poverty, high-cost areas, even when

they also receive HOME assistance. This recommendation would eliminate a barrier to using

the credit for new development or substantial rehabilitation in high-poverty areas where

development costs are high relative to AMI. To encourage use of the tax credit in such areas,

current law provides for a “basis boost” of up to 30 percent for tax credit properties. The statute,

however, makes developments using HOME funding ineligible, effectively discouraging use of

the tax credit. It should therefore be eliminated.

• Delegate subsidy-layering reviews for tax credit properties to state allocating agencies.

Section 102(d) of the Department of Housing and Urban Development Reform Act of 1989

requires the Secretary to certify that HUD assistance to any housing project is no more than

necessary to make the project feasible, taking into account other forms of assistance. Section 911

of the Housing and Community Development Act of 1992 specifies that this requirement for

projects receiving HUD assistance and tax credits can be satisfied by certification from the

housing credit agency to the HUD Secretary, within certain guidelines. IRC §42(m)(2) also

requires allocating agencies to assure that the amount of credit allocated to a project is no more

than is needed. The Commission therefore recommends repeal of §102(d) and §911, as well as

delegation of the subsidy-layering review to state allocating agencies. Congress may wish to direct

these agencies to certify to the HUD Secretary that subsidy use meets agreed-upon guidelines.

• Allow states to use Temporary Assistance to Needy Families (TANF) funds for one-time

grants to existing tax credit properties without reducing the properties’ eligible basis, as long as

owners agree to reduce rents for eligible families for an agreed-upon period. IRC §42(d)(5)(A)

reduces the eligible basis of a LIHTC building by the amount of any federal funding, thus

effectively preventing states from using TANF funds to reduce the debt service and operating

costs of such properties. The Commission believes that allowing states the option to make onetime grants from TANF funds in return for deeper targeting and longer periods of affordability

would provide important support for former welfare recipients.

Expand states’ ability to use the Mortgage Revenue Bond program.

Subject to various restrictions, state housing finance agencies typically use the proceeds from

Mortgage Revenue Bond (MRB) issues to generate additional mortgages. Initially, HFAs could use all

the payments from MRB-financed mortgages to issue new mortgages. In 1988, however, HFAs were

required to use principal payments received after 10 years from bond issuance to pay off the bonds.

This now-obsolete requirement was enacted when the MRB program faced an imminent sunset.
61

The mortgage volume lost due to the 10-year rule has been significant. Losses over the last four years

have totaled nearly 109,000 mortgages. Through 2005, the 10-year rule is expected to result in

additional lost mortgage volume of about $2 billion to $3 billion—or upwards of 27,000

mortgages—annually (Fig. 19).38

Figure 19

Source: National Council of State Housing Agencies, 2001 Projections of 10-Year Rule Impact.

Repeal of the Ten-Year Rule Would Increase Low- and Moderate-Income 

Homeownership Substantially

Mortgages

Foregone

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2002 2003 2004 2005

MRBs also have limited ability to finance home improvement loans, with the $15,000 maximum

unchanged since the MRB law was first passed. This restriction prevents MRBs from being used for

high loan-to-value home improvement and acquisition/rehabilitation loans.

The Commission recommends repeal of the Mortgage Revenue Bond program’s 10-year rule, which

would increase the resources available to states for homeownership. This measure would allow states

to issue more mortgages without additional appropriations, enabling more families to buy homes

through below-market-rate loans. Repeal would also reduce pressure on the private activity bond cap

by drawing “recycled” mortgage funds into the pot of housing finance resources available to assist

low-income households.

A second, complementary recommendation relates to a restriction on “prepayment refundings” that

repeal of the 10-year rule would exacerbate. HFAs currently have 18 months to issue mortgages

funded from MRB proceeds. If mortgages are prepaid within 10 years of issuance, HFAs can either

issue “refunding bonds” to redeem bonds whose mortgages have been prepaid or use the funds to

issue new mortgages. HFAs have only six months, however, to issue new mortgages using prepayment

funds.

HFAs seek to provide mortgage funds efficiently by timing their bond issues with movements in

interest rates and seasonal changes in demand, while minimizing issuing costs from having too many

small issues too frequently. It is inefficient for an agency to borrow money that will be spent within

six months. The 18-month exception for original issuance recognizes this reality. The Commission

recommends that the same exception be applied to mortgages financed out of prepayment funds.
62

The Commission also makes the following recommendations to address issues related to other

restrictions on MRBs.

1. Given enforcement of income limits, remove the limits on the purchase prices of homes financed.

Purchase price limits were enacted when the program had no income limits. Currently,

underwriting standards combined with income limits in effect amount to appropriate purchase

price limits.

2. Given enforcement of income limits, repeal the first-time homebuyer eligibility requirement so

that low-income owners who need to sell and relocate to take advantage of employment or other

opportunities can still benefit from the program. The Commission recommends that Congress

consider permitting states to adopt rules beyond the current recapture provision to ensure that

repeal of the first-time homebuyer eligibility requirement does not result in windfalls to sellers of

properties financed under the program that have appreciated significantly.

3. For states that issue Veterans Mortgage Bonds, remove restrictions limiting eligibility to Veterans

who were “on active duty before January 1, 1977, and applied for financing within 30 years of

being on active duty.”

4. Increase the limits on MRB home improvement loans to the FHA Title I loan level.

Revise federal budget laws that deter affordable housing production and

preservation.

Budget laws inhibit HUD—as well as other government departments and agencies—from entering

into contracts requiring more than one year’s funding. In the case of Housing Assistance Payment

(HAP) contracts, this restriction has led to the introduction of language in multiyear contacts that

subjects HUD’s payment obligation under the agreement “to the availability of sufficient

appropriations.”

This language, known as the “HAP condition,” essentially transfers the appropriations risk to owners

and lenders. This added uncertainty about payment encourages owners either to remove their

properties from the affordable stock or to defer needed maintenance and repair. Lenders

predictably protect themselves against this risk by avoiding such properties, requiring reserves,

and/or making smaller loans at higher rates with more stringent terms.

The HAP condition thus discourages private-sector investment in affordable housing, but without in

any way reducing federal expenditures or obligations. Appropriations for housing assistance under

Section 8 have never been—and are unlikely ever to be—decreased. Even if the HAP condition were

exercised, the government would still be obliged to provide resources to manage the transition from

project- to tenant-based subsidies. Thus, while the HAP condition is largely meaningless, neither

owners nor lenders view it as such.

The Commission recommends that Congress make a serious effort to address the issues raised by the

HAP condition in order to preserve the existing stock of government-assisted affordable housing.

The Commission believes that the best policy would move project-based Section 8 HAP contract

funding from the discretionary part of the budget (where program funds are subject to annual

appropriations) to the mandatory category (where programs are run using permanent spending

authorities that do not require annual congressional action). Congress could establish the authority

with appropriate budgetary controls that could limit the total amount of funding available and the

terms of the new contracts using this authority, for example, while at the same time adding extra

assurances that the subsidies will continue to support tenant rent payments over a longer period of

time. This change would serve to attract more private-sector capital to affordable housing and follow

Congress’s practice of funding all of these contracts every year.

This proposal is sound from a budgetary standpoint since both the Congressional Budget Office and

the Office of Management and Budget include the entire cost of project-based funding in the federal

budget baseline each year. The effect of this proposal on the long-term budget situation would be
63

neutral relative to this baseline. This mandatory baseline will never grow faster than already

anticipated in the budget and would be designed to preserve the same number of units under an

existing contract. If an owner opts out or HUD fails to renew the contract, funding for replacement

units would come out of the mandatory account.

Alternatively, Congress could take other steps to shift the Section 8 renewal appropriations risk away

from property owners, lenders, and tenants and toward the federal government. For example, the

federal government could at little cost offer indemnities or sell some form of insurance that would

add an incentive to lenders/owners to minimize the appropriations risk in their pricing.
64

Supporting Recommendations

The Commission presents the following supporting recommendations.

Increase funding for housing assistance in rural areas.

By definition, rural areas are both remote and lightly populated. Many small town and farming

communities were bypassed in the recent good economic times. As a result, poverty rates,

unemployment rates, and the incidence of housing problems are at levels approaching those of the

nation’s big cities.

But rural housing needs are harder to serve than most urban needs, and are often neglected by

major federal housing production programs such as HOME, CDBG, and the Low Income Housing

Tax Credit. As a result, the Rural Housing Service (RHS) programs of the U.S. Department of

Agriculture have been the primary source of rural housing assistance since 1949.

In addition to underfunding, rural areas face unique housing challenges. In particular,

homeownership is the predominant tenure in rural areas, and there are far more owners than

renters with affordability problems. Moreover, housing vouchers often do not work because there is

not enough supply from which to choose.

In recent years, federal spending on rural housing programs has been dramatically reduced. As a

result, few new housing units have been added in the poorer, more remote rural areas that the

Department of Agriculture has historically served. There is substantial demand and need for rural

housing assistance, and backlogs for loans are at historic highs. The Commission believes that federal

rural housing programs are an important element of the nation’s housing finance and delivery

system, and that Congress and the Administration should therefore increase appropriations for lowincome housing in rural America.

Specifically, the Commission recommends that Congress provide adequate funding for core RHS

housing programs, including Section 515 rental housing, Section 521 rental assistance and housing

assistance for farm workers, Section 502 homeownership loans and guarantees, and others. It should

also ensure that rural areas receive their fair share of resources from other federal production

programs based on objective measures of proportionate housing need. States need to pay special

attention to the needs of rural areas as they allocate funding through these programs.

Increase funding for Native American and Native Hawaiian housing.

The housing and finance needs of native peoples are urgent. According to the latest census data, the

poverty rate among the nation’s 2.5 million Native Americans in 2000 was more than twice the

national average.1

 Forty percent live in overcrowded or physically inadequate housing.2 Current

estimates point to the immediate unmet need for 220,000 affordable housing units, plus related

infrastructure.3

 The nation’s 399,000 Native Hawaiians and other Pacific Islanders have serious

housing needs, as well.

While housing programs serving these populations are properly targeted to their unique needs,

funding levels have been consistently inadequate. The Commission recommends that Congress

increase funding for the Native American Housing Assistance and Self-Determination Act

(NAHASDA) block grant, and makes the following specific recommendations:

1. Increase funding for capacity-building, technical assistance and training, and the creation of

Community Development Financial Institutions (or similar lending institutions) on reservations.

Support for housing development is allocated through the NAHASDA block grant rather than

through predetermined programs and plans. As a result, tribes need training and technical

assistance to understand how best to use this and other resources. In addition, there is a critical

need for institutions on Native American reservations to manage the financing for housing

construction, rehabilitation, and home improvement loans.4
65

2. Fund the Land Title Commission to examine mortgage-lending practices and provide additional

funds to the Interior Department to accelerate the mortgage lending process. Land issues in

Indian Country are extremely complex. Approximately three-quarters of all Indian land is held in

trust by the U.S. Government on the tribes’ behalf. The Commission urges Congress to provide

funding for the Land Title Report Commission to analyze and improve the current system for

maintaining ownership records and title documents, as well as for issuing certified title status

reports.

3. Increase funding for housing-related infrastructure needs through Indian Health Services and the

Rural Utility Service. Many tribal communities lack the basic infrastructure necessary for economic

and community development. Seventy-three percent of all tribal water treatment facilities are

considered inadequate,5

 and fewer than 50 percent of homes on reservations are connected to a

public sewer.6

 More funds are needed to eliminate these health and safety hazards.

4. Increase funding for the newly enacted Native Hawaiian Housing Assistance Program. Nearly half

of all Native Hawaiians experience problems of housing affordability, overcrowding, and structural

inadequacy. There are approximately 20,000 families currently on a waiting list for a lease on a

spot on a Hawaiian Home Land.7

 There is a serious lack of access to capital on such lands, as there

is in much of Indian Country on the mainland.

5. Develop a demonstration program for the provision of housing for tribal college students and

faculty. There are 32 tribal colleges today, most of which are located in isolated areas where

housing is in short supply. The American Indian population has become increasingly younger,

and college education that is obtainable is critical for improving the self-sufficiency of future

generations. Tribal colleges receive little or no funding from state governments.

6. Broaden the ability of tribes to issue tax-exempt private activity bonds for housing. Current law

effectively prohibits a borrower in a tax-exempt issuance from relying on future federal financial

assistance (e.g., guaranteed payments) to repay the loan. While various exemptions from this

prohibition do exist, none is for programs tailored to Indian tribes. Under current law, tribes can

issue tax-exempt bonds for rental units owned by the tribe and leased to tribal members, but not

for single-family or multifamily units owned by qualified residents. In addition, tribes cannot issue

tax-exempt bonds for rental housing owned by a partnership in which the tribe is a member.

Establish Individual Homeownership Development Accounts to help more low-income

households buy homes.

An estimated 3.6 million renters are unable to buy homes because they cannot cover the cash outlays

needed for downpayment and closing costs.8

 Individual Homeownership Development Accounts

(IHDAs) are an innovative way to help low-income families save money for this purpose.

In partnership with the financial industry, an IHDA program would help make homeownership

possible for more families. Similar to 401(k)s, these accounts would offer matching funds from

private and public sources for each dollar saved. Participants would also receive valuable financial

education and counseling. To encourage households to open IHDAs, it might be useful to provide

incentives to employers, financial institutions, nonprofits, foundations, and family members to match

up to $2,500 in annual IHDA savings.9

 Tax deductions for these matching funds would create

additional incentives to participate in the program.

In this spirit, the Commission recommends that the 401(k) and IRA statutes be amended to allow

financial institutions to monitor IHDA deposits for Community Reinvestment Act credit. This will

encourage institutions to participate in asset-building for account holders in a cost-efficient way since

the basic administrative structure is already in place. IHDA program monitors would be responsible

for tracking deposits and their use for up to five years, ensuring that families who either violate

program terms or do not use their funds pay taxes on a portion of the accrued value.
66

Allow housing finance agencies to earn arbitrage.

Arbitrage is the “the nearly simultaneous purchase and sale of securities or foreign exchange in

different markets in order to profit from price discrepancies.”10 The federal government restricts the

amount of arbitrage a housing finance agency can earn on “purpose” and “nonpurpose” investments

of Mortgage Revenue Bond (MRB) proceeds. In the case of MRBs, purpose investments are

mortgages and nonpurpose investments are everything else. Earnings on purpose investments are

limited to 1.125 percent above the interest rate paid to bondholders; earnings on nonpurpose

investments that exceed the interest rate paid to bondholders must be rebated to the Treasury.

Compliance with these restrictions is costly for state HFAs, and removing or relaxing them would

result in negligible federal revenue losses. The current limit on the spread between the bond rate

and the mortgage rate on housing bonds was imposed 20 years ago, when conventional rates were

relatively high compared with MRB rates. Since then, the spread has narrowed considerably because

mortgage market innovations have in effect set an upper limit on tax-exempt bond mortgage rates.

This translates into limited potential for arbitrage earnings. In addition, the rebate requirement has

discouraged HFAs from making nonpurpose investments that yield arbitrage.

The Commission therefore recommends that Congress repeal or liberalize federal restrictions on

housing agencies’ ability to earn arbitrage on mortgage bond proceeds. This measure would increase

the amount of federal assistance available to support low-income housing without additional annual

appropriations. Indeed, removing the restrictions entirely would allow resources now spent on

compliance to be devoted instead to housing.

To limit any potential federal revenue loss, Congress could set a maximum arbitrage rate (as it

already does in the case of mortgages made from bond proceeds), or limit the period during which

unlimited arbitrage can be earned on nonpurpose investments.

Exempt housing bond purchasers from the Alternative Minimum Tax.

Congress created the Alternative Minimum Tax (AMT) to ensure that all taxpayers pay a minimum

amount of tax. For constitutional reasons, Congress did not impose the AMT on bonds issued to

finance local government facilities, but it did impose it on the interest earnings on otherwise taxexempt housing bonds.

This circumstance not only keeps many investors out of the housing bond market, but it also raises

the cost of financing for affordable housing. For example, in early 2002, interest rates on state-issued

housing bonds exempt from the AMT were 15 to 35 basis points lower than those subject to AMT.11

For the federal government, the cost of eliminating this burden would be insignificant. Because few

investors who own housing bonds are subject to the AMT, the federal government collects little

income from the tax.

The Commission recommends that housing bond purchasers be exempt from the Alternative

Minimum Tax.
67

Undertake a study of the Davis-Bacon Act requirements.

Enacted during the Depression, the Davis-Bacon Act was intended to protect the wages of

construction workers. The act requires builders on all federally funded or assisted projects to pay

at least the local “prevailing wage” on any construction contracts valued at more than $2,000. The

prevailing wage is calculated as either the wage that a majority of workers in that craft receive or,

lacking a majority, a weighted average of all the wages paid in that craft in the locality.

Evidence presented to the MHC suggests that wage levels set under this procedure are higher than

actual wages paid. Clearly, this appears to be a serious issue in at least some parts of the country and

for certain types of construction systems. The Commission is concerned about any requirements that

raise the cost of housing. At the same time, however, it is aware that Davis-Bacon effectively increases

incomes for construction workers, thus enhancing their economic opportunity.

Given the competing viewpoints, the Commission recommends that Congress undertake a study of

the Davis-Bacon requirements and make improvements in such areas as the accuracy of the wage

data, the applicability threshold, and the reporting requirements.

Address regulatory barriers that either add to the cost of or effectively discourage

housing production.

However well intended, regulations may either increase the cost of housing production (making

units less affordable) or effectively discourage production. The Commission recommends that

Congress consider three approaches for addressing the effects of such regulations.

One approach to removing such barriers, already passed by the U.S. House of Representatives (H.R.

3899), is to require all federal agencies to include a housing impact analysis as part of the rulemaking process. The housing impact statement would serve to focus consistent attention on the

question of how proposed rules and regulations might affect home prices.

Each housing impact analysis would include: (1) a description of the reasons why action is being

considered; (2) a succinct statement of the objectives of, and legal basis for, the rule or regulation;

(3) a description of and, where feasible, an estimate of the effects that the rule or regulation would

have on the cost or supply of housing or land; and (4) identification, to the extent possible, of all

relevant federal rules that may duplicate, overlap, or conflict with the proposed rule or regulation.

H.R. 3899 also reauthorized grants, originally included in the Housing and Community

Development Act of 1992, that would serve as incentives for states and localities to develop strategies

for removing regulatory barriers. It also required communities to demonstrate a “good faith effort”

to remove barriers when they submit their Consolidated Plans to HUD for HOME and CDBG

funding. Finally, H.R. 3899 proposed establishment of a clearinghouse within HUD to collect and

disseminate information on regulatory barriers and their effects on the availability of affordable

housing.

A second approach would be to establish a demonstration program to provide planning grants to

localities committed to combining land-use regulations into a comprehensive “balanced growth

code” that has “workforce housing affordability” as a key ingredient. The grants would go to

jurisdictions that already demonstrate leadership in this area, with “lessons learned” ultimately

applied more broadly.

Finally, the Commission recommends that the federal government create funding incentives for

localities to incorporate accessible housing standards already mandated under federal law into their

local building codes.
68

Streamline state planning requirements for community development programs.

Federal planning requirements for the various funding streams used for housing and community

development are narrow and prescriptive, and are often an exercise in paperwork. The Millennial

Housing Commission recommends that Congress encourage states to develop plans that establish

basic principles such as the importance of sustainability, define housing needs and target areas, list

priorities (such as mixed-income development or accessibility for the disabled), outline a menu of

resources, and request project proposals that offer solutions.

Planning requirements should be flexible enough to allow states to consider transportation, smart

growth, and economic needs in setting priorities. Some combination of citizen participation and

review, public disclosure, and public hearings is fundamental to this process. State and local fair

housing enforcement agencies should also be involved from the start, with adequate funding to

make this possible. All allocation decisions should derive from the plan.

The Commission further recommends that states that successfully develop a comprehensive strategic

plan should be able to request a waiver of standard program planning requirements. To be eligible

for such a waiver, however, the strategic plan would have to detail how the state would address the set

of needs and priorities of the particular funding agency.

Expand the financing options for small multifamily properties.

While the secondary market for large multifamily properties (defined as properties with 50 or more

units) is developing rapidly, the same is not true for small multifamily properties (with 5 to 49 units).

Some of the factors contributing to this lag are limited understanding among property owners about

financing options; lack of economies of scale in underwriting, servicing, and creating mortgagebacked securities; and the declining presence of thrift institutions—the traditional source of finance

for small multifamily properties.

This financing gap not only weighs against the production of smaller, usually urban, rental

properties, but it also hampers preservation of existing units. With more than one-third of all rental

structures falling within the small multifamily category, providing a strong secondary market for

these loans is an important way to preserve and expand the affordable supply. To address this gap,

the Commission recommends the following measures:

• Create an FHA small multifamily pool insurance program. Loans for small multifamily properties

can be unprofitable because of their perceived risks and the high costs of credit enhancement

relative to loan size. The Commission recommends the creation of FHA pool insurance for small

multifamily properties to facilitate loan pooling, diversify risk, and reduce credit enhancement

costs. Such a program would give local lenders an outlet for small multifamily loans at lower cost

than current FHA programs.

• Streamline FHA’s existing small multifamily whole loan insurance. Although FHA introduced its

Small Project Processing program in the 1990s to increase small multifamily lending, the program

has attracted little interest from lenders. The Federal Home Loan Bank (FHLB) of Boston has,

however, demonstrated that eliminating unnecessary and costly requirements would increase its

usage. FHA should work with the Boston FHLB to make these changes, and reach out to other

Federal Home Loan Banks to encourage local banks to originate FHA-insured small multifamily

loans.

• Encourage the government-sponsored enterprises and lenders to make loans for small multifamily

properties. HUD’s affordable housing goals already encourage Fannie Mae and Freddie Mac to

make small multifamily loans. The Federal Housing Finance Board may wish to consider similar

goals for the Federal Home Loan Banks, while state housing finance agencies could adopt their

own goals. The Commission recommends extending small multifamily financing goals to other

lenders as a way to direct energies into this market. Congress could also encourage the Federal
69

Home Loan Banks to support multifamily lending through initiatives to make advances on

favorable terms.

• Fund national data collection on multifamily lending and promote standardization of lending

practices. Relative to loan size, the costs of underwriting and servicing small multifamily loans,

as well as making securities out of small multifamily loan pools, are higher than those for large

multifamily loans. These high fixed costs could be reduced by improving and centralizing

information sources for appraisals, environmental reviews, and loan performance, and by

standardizing documents, bankruptcy rules, and title requirements.

The Commission recommends a national data collection effort to analyze the risks of multifamily

lending. While reducing the costs of all multifamily loans, this would especially benefit small

multifamily lending. The Multifamily Housing Institute has already made significant advances

toward this goal, but progress has stalled because of insufficient funding for startup and operating

costs, and because of the uncertain commitment from the government-sponsored enterprises to

supply data.

Foster a secondary market for development and construction lending.

One of the last major challenges for the housing finance system is to develop a robust secondary

market for development and construction loans. Without such a market, these loans will remain

unnecessarily expensive—adding to rents and home prices and preventing the production of new

housing in areas of high risk but great need.

Capital for housing development and construction comes primarily through equity of various types,

which is expensive. It also comes through commercial banks and thrifts that hold loans in their

portfolios rather than sell them into the secondary market. In fact, a recent survey shows that 97

percent of development loans, 91 percent of single-family construction loans, and 100 percent of

multifamily construction loans come from commercial banks and thrifts.12 As a result, the loans do

not benefit from the lower rates and liquidity provided by the secondary market. Moreover, during

credit crunches when concerns over credit quality drive lenders out of the market, production can

slow considerably and drive costs up even further.

To develop a secondary market for development and construction loans, the Commission

recommends that Congress:

• Encourage the Federal Home Loan Bank System to launch a pilot program establishing a “private”

secondary market for construction loans. The first step in creating an efficient secondary market

typically begins with development of a private program that tests the market’s potential on a

limited scale. The FHLBs could launch a demonstration program through which they would

purchase construction loans from member banks, thereby building data and standards that could

be applied by others. These loans could be held in portfolio or sold into the secondary market.

Over the longer term, the pilot program could include purchase of development loans, especially

for in-fill and urban redevelopment where lack of financing is a major constraint.

• Urge the Treasury Department to publish detailed guidance on the use of Financial Asset

Securitization Investment Trusts (FASITs). FASITs provide a vehicle for securitizing construction,

development, and other types of loans by allowing the same favorable tax and accounting

treatment that single-family mortgages receive through Real Estate Mortgage Investment Conduits

(REMICs). Greater access to the secondary market for development and construction loans

through FASITs would expand the capital available for housing. Lack of regulatory guidance from

the Treasury Department, however, has greatly limited the use of FASITs. The Commission

recommends that the Treasury Department quickly provide clear and appropriate guidance so the

intent of Congress in creating this mechanism can be realized.

• Permit FHA to issue construction-only insurance. The full-faith-and-credit of the federal

government is the most powerful credit enhancement available. By indemnifying investors against

losses from construction-only loans with pre-specified and less costly terms, FHA could attract

secondary-market investors. FHA already insures construction-to-permanent loans. As noted in the
70

Commission’s proposal to revitalize the Federal Housing Administration, FHA should offer both

individual and pooled construction-only products, working both alone and in tandem with risksharing partners to deliver them.

• Grant government-sponsored enterprises express authority to purchase construction-only loans. It

is unclear whether the GSEs can purchase construction-only loans. Their charters should therefore

be amended to give them explicit authority to do so.

• Require banking regulators to collect data, as well as publish sufficiently detailed reports on the

activity and performance of real estate loans. Loan activity and performance reports from banking

regulators should separate out results for commercial and residential real estate loans. The reports

should also provide detail on the three major types of loans—land acquisition, land development,

and construction—within these broad categories.

Launch a demonstration project for comprehensive community-based work.

Some neighborhood-based needs and initiatives fall outside the boundaries of traditional federal

anti-poverty programs. In addition, government cannot provide all of the funding needed for the

intensive community development required.

Private foundations have funded many demonstration projects that combine affordable housing

development, economic development, job training, childcare, and transportation projects to

improve all systems in a neighborhood at once. The Commission recommends combining the

interest and resources of these large philanthropies with funding from the federal government.

This new public-private partnership could be modeled on the National Community Development

Initiative (NCDI), a funding collaborative that includes the Department of Housing and Urban

Development, major foundations, banks, and insurance companies. NCDI directs funding to

community development corporations (CDCs). Three dollars of private foundation money are

matched by one dollar of HUD funding in a pool used to improve the community development

infrastructure in 23 selected cities. HUD participates equally with the private sector in funding

decisions.

Under the new partnership, the Departments of Health and Human Services, Housing and Urban

Development, Transportation, and Labor could participate in a pool that would also receive

contributions from major foundations. The three-to-one private-sector match would apply. The new

partnership would, however, funnel money to a broader set of community-based nonprofits focused

on affordable housing development, job training, health care, childcare, transportation, and other

appropriate community development activities.

A board composed of representatives of the private foundations and public agencies would make

funding decisions. Localities would apply to this board for funding.
71

Improve consumer education about home mortgage lending.

Many consumers enter the mortgage application and homebuying process without full knowledge

and understanding of how to obtain the best loan for their circumstances. Accurate comparisons of

loan terms, fees, and requirements can be difficult. Even with real estate disclosures and truth-inlending laws, consumers can fall prey to deals that put their homes at risk.

Recent research by Freddie Mac indicates that face-to-face pre-purchase education and counseling

reduces loan delinquencies by as much as 34 percent.13 The evidence suggests that counseled buyers

are not only less likely to end up with unfair loans, but they are also better prepared for the

responsibilities of homeownership. Federal support for homebuyer education and counseling is

crucial to the expansion of this practice. State and local governments, as well as the private sector,

will likely follow the lead established by HUD and other federal agencies. Stronger disclosure laws

and more vigorous enforcement of existing laws are also important.

In addition, increased competition in emerging mortgage markets could help to protect consumers.

Currently, borrowers with blemished credit histories can acquire loanstypically subprime

loansfrom finance companies only. Because alternative lenders are largely absent from markets

where these consumers are most concentrated, some 10 percent to 35 percent of subprime loan

borrowers were unaware that they could have qualified for prime loans.14 Without vigorous

competition and pricing standards in the subprime market, qualified borrowers are less likely to seek

out more favorable loans.

The Commission recommends that Congress enact regulatory changes to educate and protect

consumers in mortgage transactions, as well as assure that loans are made at fair and reasonable

credit costs. The MHC’s specific recommendations are:

1. Refocus HUD efforts to build the capacity of a delivery system for homebuyer education.

2. Revise and expand HUD funding for homebuyer counseling, and require disclosure of the

provider and cost of education on HUD-1 settlement documents.

3. Direct other federal programs to review opportunities for providing reasonable incentives to

consumers and industry for incorporating counseling and education into the homebuying

process.

4. Improve consumer protection regulations, such as the Real Estate Settlement Procedures Act and

the Truth in Lending Act, so that disclosures are easier to understand, more reliable, and timelier.

5. Encourage HUD to push for greater standardization in subprime emerging markets.

Finally, the Commission recommends that financial institutions design debt-consolidation or secondmortgage products to improve the ability of low-income homeowners to tap their equity. Nonprofit

organizations and local governments have used deeply subsidized mortgages as a way of promoting

homeownership among such households, who often struggle to manage consumer debt or need cash

for emergencies but are currently prohibited from refinancing. Borrower counseling should be a

condition of refinancing or issuance of a second mortgage.
72

Improve manufactured homebuyer and owner access to capital markets.

Manufactured housing plays an important role in meeting the nation’s affordable housing needs.

During the 1990s, manufactured housing placements accounted for one-quarter of all new housing

starts15 and, from 1997 to 1999, 72 percent of new units affordable to low-income homebuyers.16

The manufactured housing industry has evolved in the last decade to deliver a better-quality product

that saves as much as 25 percent of development costs.17 Indeed, recent innovations in design,

including multi-stories and attached garages, make manufactured housing a viable alternative for

urban in-fill developments.

Development of an appropriate financing system for manufactured housing has not kept pace with

these design and quality improvements. Until very recently, few lenders were willing to finance

manufactured homes as real estate, except where land was owned or a land lease was in place that

extended beyond the mortgage loan term. While this is now changing, lenders are still unwilling to

finance most manufactured housing on leased land with anything but costly personal property

installment loans. In addition, they are reluctant to finance purchase of an existing manufactured

home, especially if it has been moved from its original location.

These constraints make credit crunches—largely a thing of the past for buyers of other types of

housing—common in the manufactured housing market. They also reinforce the vulnerability of

households living in manufactured homes. Some states address the vulnerability issue by offering

tenants of leased-land communities first-refusal rights if the land is sold. Tenants in these states have

the right to create a collective bid for the estate within a set period of time. If their bid is reasonable,

they then have the option of purchasing the estate as a cooperative. In at least one state

(Washington), though, the supreme court struck down the state’s right-of-first-refusal law, asserting

that it interferes with an owner’s right to sell.

The Commission recommends that:

• Congress (a) affirm that Fannie Mae and Freddie Mac can purchase manufactured home loans

classified as personal property, (b) encourage support of a secondary market in such loans if they

are determined to be sound, and (c) establish performance goals for manufactured home loan

purchases.

• FHA’s Title I and II programs be promoted and loan limits be increased.

• Ginnie Mae approve more lenders as issuers/servicers, or instruct current issuers to make and

service loans for manufactured homes.

Affirm the importance of the Community Reinvestment Act.

The Community Reinvestment Act (CRA) obliges banks and thrifts to serve the credit needs of lowand moderate-income individuals and communities. Particularly in the last 10 years, CRA has

succeeded in encouraging banks and thrifts to better serve these markets. Lending to low- and

moderate-income borrowers surged in the 1990s in part because of the efforts of banks and thrifts to

comply with CRA. The Commission therefore:

• Affirms the importance and benefit of CRA to the goals of expanding homeownership, as well as

producing and preserving affordable housing.

• Acknowledges the need for periodic reassessment of the rules governing CRA compliance,

assignment of grades, and use of grades in approving, denying, or conditioning bank applications

for mergers and acquisition.
73

• Acknowledges the need for periodic reassessment of CRA’s coverage of mortgage lending activity

in light of shifts in the types of financial institutions that originate and supply the capital for

mortgage loans.

Affirm the importance of the government-sponsored enterprises.

By integrating the U.S. housing finance system with national and international capital markets, the

government-sponsored enterprises (GSEs)Fannie Mae, Freddie Mac, and the Federal Home Loan

Bankshave met their primary mission of bringing liquidity to mortgage markets. This has improved

mortgage pricing and helped to insulate borrowers from economic shocks. In addition, while other

capital suppliers faced with distressed local markets often restrict credit or abandon these markets,

the GSEs continue to supply mortgage credit, which helps to stabilize regional economies.

Due to the GSEs’ special nature, they broaden access to homeownership opportunities. At no direct

cost to the taxpayer, they lower the cost of mortgage credit for all low- and moderate-income

borrowers. For example, Fannie Mae and Freddie Mac use automated underwriting systems that

drive down transaction costs and expand the pool of accepted applicants. Through new products,

the GSEs have been able to increase their purchases of loans to low- and moderate-income

homebuyers, as well as to investors in rental properties that serve these families. Through

strengthened outreach efforts, they have increased mortgage originations in low-income, minority

neighborhoods.

As mission-driven GSEs, Fannie Mae and Freddie Mac have developed risk management methods

that provide secure underpinnings for $2.7 trillion of the $6.2 trillion in residential mortgage debt

that they guaranteed or held in portfolio at the end of 2001. Furthermore, working with their

partners—including mortgage insurers, lenders, loan origination and servicing companies, and

housing finance agencies—they help ensure that homebuyers, homeowners, and large multifamily

property investors have continuous access to mortgage credit.

The Federal Home Loan Banks also play an important role in achieving these housing goals.

Although they hold only 2 percent of outstanding mortgage debt,18 the FHLBs have about $450

billion in outstanding advances to their member banks and thrifts—almost all of which are

collateralized by whole mortgages.

In light of the demonstrated value of the GSEs, as well as their potential to help their partners

expand homeownership opportunities among immigrants, minorities, and low-income households,

the Commission:

• Affirms the ongoing importance of the GSEs to (a) manage the credit and interest-rate risk

inherent in mortgage lending, (b) assure the stability and liquidity of the mortgage finance system,

and (c) expand homeownership and rental housing opportunities.

• Supports the current regulatory system for Fannie Mae and Freddie Mac, and cautions against

modifications that would compromise the integrity of the secondary markets.

• Recommends that Congress and HUD support full, safe, and sound GSE activity in subprime,

manufactured housing, home improvement, small multifamily, and development and construction

lending. One specific impediment to the full participation of the FHLBs in such new initiatives

that should be removed is the restriction on creating subsidiary or affiliated corporations, either

on an individual or joint basis. This limitation has hampered the flexibility and efficiency of the

FHLBs, and it does not apply to the other GSEs.
74

Endnotes

Why Housing Matters (pages 7 to 11)

1. Rachel G. Bratt, “Housing and Family Well-Being,” Housing Studies 17:1 (2002): 13-26.

2. Robert Haveman, Barbara Wolf, and James Spaulding, “Childhood Events and Circumstances Influencing High

School Completion” Demography 28:1 (1991): 133-57. U.S. General Accounting Office, Elementary School

Children: May Change Schools Frequently, Harming Their Education (Washington, D.C.: GAO/HEHS-94-45, 1994).

 3. See literature reviews in Jeffrey M. Lubell, Kathryn P. Nelson, and Barbara Sard, “How Housing Programs’

Admissions Policies Can Contribute to Welfare Reform Efforts,” Housing Policy Debate, forthcoming, and Barbara

Sard and Jeff Lubell, The Increasing Use of TANF and State Matching Funds to Provide Housing Assistance to Families

Moving From Welfare to Work (Washington, D.C.: Center on Budget and Policy Priorities, February 2000).

4. Cynthia Miller, et al, Reforming Welfare and Rewarding Work: Final Report on the Minnesota Family Investment

Program (New York: Manpower Demonstration Research Corporation, September 2000).

5. Thomas P. Boehm and Alan M. Schlottmann, “Does Homeownership by Parents Have an Economic Impact on Their

Children?” Journal of Housing Economics 8 (1999): 217-232. Denise DiPasquale and Edward L. Glaeser, Incentives

and Social Capital: Are Homeowners Better Citizens? (Cambridge, MA: Joint Center for Housing Studies, Harvard

University, December 1997). Edward Scanlon, Homeownership and Its Impacts: Implications for Housing Policy for

Low-Income Families (St. Louis: Center for Social Development, Washington University, 1996).

6. Daniel Aaronson, “A Note on the Benefits of Homeownership,” Journal of Urban Economics 47 (2000): 356-369.

7. Richard Green and Michelle White, “Measuring the Benefits of Homeowning: Effects on Children,” Journal of Urban

Economics 41 (1997): 441-461.

8. Donald Haurin, Toby Parcel, and R. Jean Haurin, “The Impact of Homeownership on Child Outcomes,” Low-Income

Homeownership: Examining the Unexamined Goal (Washington, D.C.: Brookings Press, expected 2002).

9. Gary W. Evans, Hoi-Yan Erica Chan, Nancy M. Wells, and Heidi Saltzman, “Housing Quality and Mental Health,”

Journal of Consulting and Clinical Psychology 68:3 (2000): 526-530.

10. Centers for Disease Control, “Blood Lead Level in Young Children 1996-1999,” Morbidity and Mortality Weekly

(December 22, 2000).

11. Doc4Kids Project of Boston Medical Center, Children’s Hospital, Not Safe at Home: How America’s Housing Crisis

Threatens the Health of Its Children (February 1998).

12. Ingrid Gould Ellen and Margery Austin Turner, “Does Neighborhood Matter? Assessing Recent Evidence,” Housing

Policy Debate 8:4 (1997): 833-866. Sandra Newman, Joseph Harkness, and Wei-Jung J. Yeung, Neighborhood

Poverty, Assisted Housing, and the Educational Attainment of Children (1999). Revised paper prepared for Moving

to Opportunity conference, Washington D.C., November 21, 1997.

13. James J. Mazza and William M. Reynolds, “Exposure to Violence in Young Inner-City Adolescents: Relationship with

Suicidal Ideation and PTSD,” Journal of Abnormal Child Psychology 27:3 (1999): 203-13. Margaret Wright Berton

and Sally D. Stabb, “Exposure to Violence and PTSD in Urban Adolescents,” Adolescence 31:122 (Summer 1996):
75

489-98. Naomi Breslau, et al, “Traumatic Events and Post-Traumatic Stress Disorder in an Urban Population of

Young Adults,” Archives of General Psychiatry 48:3 (1991): 216-22.

14. James E. Rosenbaum, “Changing the Geography of Opportunity by Expanding Residential Choice: Lessons from

the Gautreaux Program,” Housing Policy Debate 6:1 (1995): 231-269. Jens Ludwig, Greg Duncan, and Helen Ladd,

“The Effects of MTO on Baltimore Children’s Educational Outcomes,” Poverty Research News, Joint Center for

Poverty Research 5:1 (2001): 13-15. Greg J. Duncan and Jens Ludwig, “Can Housing Vouchers Help Poor

Children?” Brookings Institution, Children’s Roundtable 3 (July 2000). Jeffrey R. Kling, Jeffrey B. Liebman, and

Lawrence F. Katz, Bullets Don’t Got No Name: Consequences of Fear in the Ghetto (Chicago: Joint Center for

Poverty Research, April 2001).

15. Early results from the Moving to Opportunity program, a strong randomized experimental design, are mixed. In

Boston, early results suggest little impact on employment. See Lawrence F. Katz, Jeffrey R. Kling, and Jeffrey B.

Liebman, “Moving to Opportunity in Boston: Early Results on a Randomized Mobility Experiment,” Quarterly Journal

of Economics 116:2 (2001). In Chicago, however, moving to a better neighborhood is, so far, also correlated with

positive employment outcomes. Emily Rosenbaum and Laura E. Harris, “Residential Mobility and Opportunities:

Early Impacts of the Moving to Opportunity Demonstration Program in Chicago,” Housing Policy Debate 12:2

(2001): 312-346.

16. Anthony Downs, Neighborhoods and Urban Development (Washington, D.C.: The Brookings Institution, 1981).

William G. Grigsby and Louis Rosenburg, Urban Housing Policy (New York: Center for Urban Policy Research,

Rutgers University, 1975). James R. Cohen, “Abandoned Housing: Exploring Lessons from Baltimore,” Housing

Policy Debate 12:3 (2001): 415-448.

17. It remains unclear, however, whether it is flagging demand for the housing in such neighborhoods, independent of

the influence of a few vacant properties, that causes both the initial few abandoned properties and the growing

many. What is clearer is that demolition is more common in areas with greater concentrations of poverty and

concentrations of housing affordable to the poor. This is the finding of a study by Tsuriel Somerville and Cynthia

Holmes. Note that the model of filtering and demolition used does not contain a control for rental vacancy rates or

proportion of abandoned properties in the zones analyzed. Therefore, concentration of poverty and affordable units

may be proxies for other housing market conditions. See C. Tsuriel Somerville and Cynthia Holmes, “Dynamics of

the Affordable Housing Stock: Microdata Analysis of Filtering,” Journal of Housing Research 12:1 (2001): 115-140.

18. U.S. General Accounting Office, Urban Development Action Grants: An Analysis of Selection Criteria and Program

Results (Washington, D.C., 1989). Ingrid Gould Ellen, Michael Schill, Scott Sussin, and Amy Ellen Schwartz, “Do

Homeownership Programs Increase Property Values in Low-Income Neighborhoods?” Low-Income Homeownership:

Examining the Unexamined Goal (Washington, D.C.: Brookings Press, expected 2002).

19. Anthony Downs, New Visions for Metropolitan America (Washington, D.C.: The Brookings Institution, 1994).

20. Frank E. Nothaft, Trends in Homeownership and Home Equity: Report to the Consumer Federation of America’s

National Forum to Promote Lower-Income Household Savings (Washington, D.C.: November 2000).

21. In 2001, the average homeowner lowered their interest rate by 115 basis points. This led to a $10 billion savings

in 2001 (based on an average loan size of $132,000) and a monthly average savings of approximately $100.

Freddie Mac, Homeowners Dramatically Lowered Their Mortgage Rates in 2001 as Housing Continued to Shore Up

Economy (Washington, D.C.: Press Release, February 20, 2002).

22. Leland C. Brendsel, Chairman and CEO, Freddie Mac, Speech at the Regional Conference of MBAs, General Session

(New Jersey: March 20, 2002).

23. Alan Greenspan, Mortgage Markets and Economic Activity: Remarks Before a Conference of Mortgage Markets and

Economic Activity sponsored by America’s Community Bankers (Washington, D.C.: November 2, 1999).
76

24. Equivalent payments by homeowners are called “imputed rent.” Imputed rent is best thought of as the equivalent

rent payment an owner would have to make if they rented a unit of comparable quality and in a comparable home

to the one they own.

25. Calculations based on the National Association of Home Builders (NAHB), The Local Impact of Home Building in

Average City, USA (Washington, D.C.: February 2002). National aggregates calculated by the Millennial Housing

Commission using 2001 Housing Start data from the U.S. Bureau of the Census.

26. NAHB estimates local effects of homebuilding by netting out impacts likely to accrue outside the local economy.

New multifamily housing produced slightly fewer jobs and wages. Every 100 new multifamily apartments generates

about 112 full-time equivalent local jobs, $5.3 million in local income, and $1.97 million in federal, state, and

local tax revenues and fees in the first year alone.

27. NAHB, February 2002.

28. Federal Reserve, Federal Flow of Funds Account, Fourth Quarter 2001 (Washington, D.C: Federal Reserve,

 March 2002).

America’s Housing Challenges (pages 12 to 21)

1. The federal government has a variety of criteria for targeting and for eligibility. For the largest programs—Section 8

and public housing—the aid is focused on ELI and VLI households. Therefore this number is based on 4.8 million

assisted units and 13.3 million ELI and VLI renter households.

2. Meryl Finkel, et al, Status of HUD-Insured (or Held) Multifamily Rental Housing in 1995 (Prepared for the U.S.

Department of Housing and Urban Development, May 1999).

3. In the case of renters, housing costs include the cost of utilities whether or not they pay for them separately. In the

case of owners, costs include mortgage payments, taxes, insurance, and utilities.

4. Rameswar P. Chakrabarty, American Housing Survey: A Quality Profile (Washington, D.C.: U.S. Department of

Housing and Urban Development, Bureau of the Census, H121/95-1, July 1996).

5. The overwhelming majority of worst-case needs problems stem from affordability, and it is relatively uncommon to

have an adequacy problem without also having an affordability problem.

6. Michael A. Stegman, Roberto G. Quercia, and Walter Davis, The Earned Income Tax Credit as an Instrument of

Housing (Chapel Hill: University of North Carolina, forthcoming 2002).

7. Zhu Xiao Di and Eric Belsky, How Great are the Nation’s Worst Case Housing Needs? A Plea for Cautious

Interpretation (Cambridge, MA: Joint Center for Housing Studies, Harvard University, April 2002).

8. An alternative method of measuring housing affordability would be to calculate how much income a household has

available to cover their housing costs after meeting other basic needs. This residual approach has a special traction

when gauging the extent of housing affordability problems at the two extremes of the income distribution. Among

many of those with extremely low incomes (defined as households with incomes at 30 percent or less of area

medians), even spending 30 percent may be a serious hardship. Conversely, among those with middle and higher

incomes (defined as households with incomes above 120 percent of area medians), spending 30 percent or more

may not be a hardship at all.

9. Barbara J. Lipman, et al, Paycheck to Paycheck: Working Families and the Cost of Housing in America (Washington,

D.C.: Center for Housing Policy and the National Housing Conference, June 2001).
77

10. It is worth noting that affordability measures are based on the top end of each income range. By definition, then,

many units considered affordable to households in a particular income range are in fact not affordable to those at

the middle or bottom of that range. In addition, comparisons of supply and demand are based simply on a count

of households and units in each income range. These comparisons therefore ignore all of the critical factors—such

as location, size, quality, and availability—necessary to equate housing demand and housing supply.

11. Charlie Wilkins, Policy Option Paper: Issue: Production of Units for ELI Households (with incomes below 30%

of AMI) (Washington D.C.: Prepared for the Millennial Housing Commission, September 23, 2001).

12. Jack Goodman, Housing Affordability in the United States: Trends, Interpretations and Outlook (Washington, D.C.:

Prepared for the Millennial Housing Commission, November 2001).

13. Charlie Wilkins, Financial Modeling Summary (Washington, D.C.: Prepared for the Millennial Housing Commission,

2001).

14. These special risks include cash flows that are typically close to break-even points, permit delays and restrictions

resulting from community resistance to affordable housing, and risks that special waivers of zoning, subdivision, or

code rules required to lower costs to affordable levels will not be granted.

15. U.S. Department of Commerce and the U.S. Department of Housing and Urban Development, 1999 American

Housing Survey (Washington, D.C., October 2000).

16. Ann B. Schnare, Impact of Recent Trends in Multifamily Housing Finance on Older Urban Areas (Cambridge, MA:

Joint Center for Housing Studies, Harvard University, June 2001).

17. These fees can be very high. In the San Francisco Bay area, for example, development impact fees are as high as

$65,000 per new owner-occupied unit and over $40,000 per new rental unit. Wendell Cox, Smart Growth and

Housing Affordability (Washington, D.C.: Prepared for the Millennial Housing Commission, March 2002).

18. The following findings emerge from the literature:

• Exclusionary zoning artificially restricts the supply of land and leads to higher housing prices. See William A.

Fischel, Do Growth Controls Matter? A Review of Empirical Evidence on the Effectiveness and Efficiency of Local

Government Land Use Regulation (Cambridge, MA: Lincoln Institute for Land Policy, 1990). Bruce W. Hamilton,

“Zoning and the Exercise of Monopoly Power,” Journal of Urban Economics 5 (1978): 116-130. Louis A. Rose,

“Urban Land Supply: Natural and Contrived Restrictions,” Journal of Urban Economics 25 (1989): 325-345.

James A. Thorson, “An Examination of the Monopoly Zoning Hypothesis,” Land Economics 72:1 (1996): 43-55.

Henry Pollakowski and Susan M. Wachter, “The Effects of Land-Use Constraints on Housing Prices,” Land

Economics 66:3 (1990): 315-324. Susan M. Wachter and Man Cho, “Interjurisdictional Price Effects of Land

Use Controls,” Journal of Urban & Contemporary Law 40 (1991): 49-63. Richard K. Green, “Land Use

Regulation and the Price of Housing in a Suburban Wisconsin County.” Journal of Housing Economics 8 (1999):

144-159.

• Exactions and impact fees drive up housing costs directly for new construction, but also indirectly for existing

housing. See Larry D. Singell and Jane H. Lillydahl, “An Empirical Examination of the Effect of Impact Fees on

the Housing Market,” Land Economics 66:1 (1990): 82-91. Marla Dresch and Steven M. Sheffrin, Who Pays for

Development Fees and Exactions? (San Francisco: Public Policy Institute of California, June 1997). Brett M.

Baden and Don L. Coursey, An Examination of the Effect of Impact Fees on Chicago’s Suburbs (Chicago: Irving

B. Harris Graduate School of Public Policy Studies, University of Chicago, 2001). See also Mark Skidmore and

Michael Peddle, “Do Development Impact Fees Reduce the Rate of Residential Development?” Growth and

Change 29 (Fall 1998): 383-400.

• Growth controls lift prices and rents. See Lawrence Katz and Kenneth Rosen, “The Interjurisdictional Effects of

Growth Controls on Housing Prices,” Journal of Law and Economics 30 (1987): 149-160. Ned Levine, “The

Effects of Local Growth Controls on Regional Housing Production and Population Redistribution in California,”
78

Urban Studies 36 (1999): 2047-2068. Wendell Cox and Ronald D. Utt, “Smart Growth, Housing Costs and

Homeownership,” The Heritage Foundation Backgrounder 1426 (April 6, 2001). Samuel R. Staley and Gerard C.

S. Mildner. “Urban-Growth Boundaries and Housing Affordability: Lessons From Portland,” Reason Public Policy

Institute, Policy Brief 11 (1999). G. Donald Jud and Daniel T. Winkler, “The Dynamics of Metropolitan Housing

Prices,” Journal of Real Estate Research 23:1/2 (2002): 29-45. A recent study using an index of restrictive

regulations concluded that rents are 17 percent higher, house values 51 percent higher, and homeownership

rates 10 percentage points lower, all else equal, in heavily regulated metropolitan areas. See Richard K. Green

and Stephen Malpezzi, A Primer on US Housing Markets and Housing Policy (Madison: Center for Urban Land

and Economics Research, University of Wisconsin, Working Paper Series, October 4, 2000). Note that this

paper’s index measure captures qualitative assessments of zoning and subdivision approval times, rezoning

times, acreage of land zoned for single-family and multifamily housing in relationship to demand for them,

percent of zoning changes approved, and adequacy of road and sewers. Another paper concluded that permit

approval delays and growth control restrictions sharply reduce construction levels. See Christopher J. Mayer and

C. Tsuriel Somerville, “Land Use Regulation and New Construction.” Regional Science & Urban Economics 30

(2000): 639-662.

19. Nearly a quarter of the stock was classified as “distressed,” meaning that annual backlog-adjusted cash flow

deficits exceeded $250 per unit. These properties’ operating and physical needs would significantly outstrip

available revenues and reserves. See Meryl Finkel, et al, Status of HUD-Insured (or Held) Multifamily Rental

Housing in 1995 (Washington, D.C.: Prepared for the U.S. Department of Housing and Urban Development,

May 1999).

20. For example, HUD’s reserve requirements on rent-restricted properties were based on practices used in

underwriting unsubsidized properties, even though the latter depend on rent increases in excess of operating costs

(in addition to adequately funded reserve accounts) to fund major system upgrades.

21. Joint Center for Housing Studies, State of the Nation’s Housing 2001 (Cambridge, MA: Harvard University, 2001).

22. Howard Savage, “Who Can Afford to Buy a House In 1995?” Current Housing Reports, U.S. Census Bureau (August

1999). Stuart S. Rosenthal, “Eliminating Credit Barriers to Increase Homeownership: How Far Cab We Go?” LowIncome Homeownership: Examining the Unexamined Goal (Washington, D.C.: Brookings Press, expected 2002).

Peter Linneman and Susan Wachter, “The Impacts of Borrowing Constraints on Homeownership,” AREUEA Journal

17:4 (1989): 389-402.

23. From special tabulations created by the Federal Housing Finance Board for the Joint Center for Housing Studies of

Harvard University.

24. These figures are based on the Current Population Survey. The 2000 Census shows lower overall homeownership

rates but similarly wide gaps in homeownership rates between whites and minorities and high and low-income

households.

25. Joint Center for Housing Studies, State of the Nation’s Housing 2000 (Cambridge, MA: Harvard University, 2000).

The Federal Role in Housing (pages 22 to 26)

1. Eugene J. Meehan “The Evolution of Public Housing Policy,” Federal Housing Policy and Programs: Past and Present

(Rutgers University: Center for Urban Policy Research, 1985).

2. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006 (Washington, D.C.,

January 17, 2002).
79

Principal Recommendations to Congress: A Framework for Change (pages 27 to 63)

1. Andrew Reschovsky, Robert M. La Follette, and Richard K. Green, “Tax Credits and Tenure Choice,” Proceedings of

the 91st Annual Conference on Taxation (Washington, D.C.: National Tax Association, 1999).

2. Abdighani Hirad and Peter Zorn, A Little Knowledge is a Good Thing: Empirical Evidence of the Effectiveness of PrePurchase Homeownership Counseling (Washington, D.C.: Freddie Mac, May 21, 2001).

3. Projects financed under Sections 202 and 811 are categorically ineligible for prepayment or opt out.

4. HUD tabulations of the 1999 American Housing Survey prepared for the Millennial Housing Commission.

5. The history of subsidized rental housing programs demonstrates that annual inflation adjustment is superior to

approaches based on project-specific operating costs. In theory, the inflation factor should be related to operating

costs, but this has proven difficult in practice.

6. Thrifty production vouchers, a new kind of project-based subsidy currently under consideration by Congress, differ

from regular vouchers in that their “payment standard” would be equal to unit operating costs rather than some

percentage of Fair Market Rent.

7. Housing choice voucher holders may pay up to 40 percent of their income for rent, so this provision would effectively

limit them to units where the rent is at or moderately higher than the applicable voucher payment standard. The

standard is set by the applicable PHA and is between 90 and 110 percent of the FMR, unless HUD approves an

exception.

8. The Final Report of the National Commission on Severely Distressed Public Housing, A Report to the Congress and

the Secretary of HUD (Washington, D.C.: August 1992).

9. Meryl Finkel et al., Capital Needs of the Public Housing Stock in 1998: Formula Capital Study (Washington, D.C.:

Prepared for the U.S. Department of Housing and Urban Development, January 30, 2000).

10. Funded by annual appropriations.

11. For PHAs with individual scattered-site homes in their inventory, a “property” is probably a group of such homes

located near one another, rather than a “project” as defined by HUD.

12. An instrument similar to that used in the Mark-to-Market process could be employed for these assessments, which

would also benefit from the significant planning already conducted by many PHAs.

13. As units become vacant.

14. This approach will not work in locations where lack of affordable private rental housing makes vouchers unusable.

It is particularly unlikely to work for small rural PHAs.

15. For information on the characteristics of high poverty neighborhoods, see: Sandra J. Newman and Ann B. Schnare,

“’...And a Suitable Living Environment’: The Failure of Housing Programs to Deliver on Neighborhood Quality,”

Housing Policy Debate 8:4 (1997): 703-742. Paul Jargowsky, Poverty and Place: Ghettos, Barrios, and the

American City (New York: Russell Sage Foundation, 1997).

16. For more details on this proposal see James G. Stockard, Gregory A. Byrne, et al. Public Housing Operating Cost

Study (Cambridge, MA: Harvard University, Graduate School of Design, 2001).
80

17. That is, properties that, once investments are complete, would have market rents capable of supporting the debt

service needed to bring them to adequate condition.

18. U.S. Department of Housing and Urban Development, Resident Characteristics Report for Public Housing (October

2000).

19. FHA Comptroller’s Report to the Commissioner, FHA Portfolio Analysis: Data as of September 2001 (Washington,

D.C., October 2001). Office of the President of the United States, Budget of the U.S. Government, FY 2003,

Appendix (Washington, D.C.: January 2002).

20. Passed in 1945, the GCCA is the legislation under which wholly owned government corporations are chartered.

These include a large number of entities that support themselves through their own revenues.

21. These include equity pay-in rules that make FHA insurance difficult to use with Low Income Housing Tax Credits,

a developer’s profit calculation (called BSPRA), a cost-certification process that has limited relevance in today’s

market, and overly complex and costly rules for oversight of wage rate requirements.

22. A properly designed risk-sharing program would rely upon the strengths of the respective partners and have

controls to assure partners selected are well capitalized and able to honor risk-sharing commitments. The target

market for any program would need to be well understood, including how it related to FHA’s current programs and

those markets that are already well served by the private sector. The risk-sharing agreement would also need to

properly align incentives so that the partner would be motivated to protect FHA against inappropriate losses. See

Sarah Rosen Wartell, Single-Family Risk-Sharing: An Evaluation of its Potential as a Tool for FHA (Washington, D.C.:

Prepared for the Millennial Housing Commission, May 2002).

23. In particular, some believe that there is an important expanded role for FHA to play in the growing subprime

mortgage market, but few believe that FHA today has the risk management and delivery systems in place to insure

those higher risks prudently. On the other hand, there are potential partners who have the technology, skills, and

systems to manage risk, but not the capital or risk tolerance for the subprime market. Risk-sharing with these

actors would allow FHA to rationalize underwriting, promote transparency, reduce predatory practices, and enhance

price competition in the subprime market.

24. There are several ways in which FHA can mitigate risks in the program. Two-party checks for any disbursement of

funds, endorsed by both the borrower and the contractor, for example, might help keep contractors from defrauding

homeowners. Requiring frequent property inspections with strict standards also might help ensure loans are

appropriate. Do-it-yourself borrowers should face additional scrutiny. In addition, the mortgage insurance premium

should be adjusted to reflect program costs and risks.

25. Martha R. Burt, What Will it Take to End Homelessness? (Washington D.C.: Urban Institute, September 2001).

26. Ibid.

27. Dennis Culhane, et al., The Prevalence of Homelessness 1998: Results from the Analysis of Administrative Data in

9 U.S. Jurisdictions (Philadelphia: University of Pennsylvania, May 2000).

28. Dennis P. Culhane, Stephen Metraux, and Trevor Hadley, The Impact of Supportive Housing for Homeless People

with Severe Mental Illness on the Utilization of the Public Health, Corrections and Emergency Shelter Systems: The

New York-New York Initiative (Philadelphia: Center for Mental Health Policy and Services Research, University of

Pennsylvania, May 2001).

29. The most recent evaluation of the Minnesota Family Investment Program (MFIP) found that the MFIP welfare reform

intervention had a greater impact on families living in subsidized housing than on those living in private-market

housing. For families living in subsidized housing, MFIP’s impact on employment rates was 17.9 percentage points,

compared to 7.9 percentage points for families in private-market housing. Cynthia Miller, et al., Reforming Welfare
81

and Rewarding Work: Final Report on the Minnesota Family Investment Program (New York: Manpower

Demonstration Research Corporation, 2001).

30. The utilization rate is defined as the percentage of available vouchers that the PHA has under lease or the

percentage of its annual budget authority that it has spent. The success rate is the percentage of families provided

vouchers who lease a unit meeting the program requirements within the allotted amount of time. Both utilization

rates and success rates are declining in the voucher program and in some places are unacceptably low.

31. The causes of low utilization and success rates are not well understood. Research to date suggests little

relationship between market conditions and low utilization rates by PHAs. Success rates also vary widely among

PHAs, and some PHAs operating in tight rental markets nonetheless have high success rates. In general, however,

relatively low success rates are associated with low rental vacancy rates at those rent levels affordable to

households with vouchers.

32. This would maintain the intent of the cap while giving families access to some units in better neighborhoods that

they are not now permitted to rent.

33. The regulations governing project-basing in the voucher program were recently substantially revised to increase the

percentage of tenant-based funds that PHAs can project-base and expand the range of properties eligible for

project-basing. At the same time, the regulations limit the proportion of units in a building that may receive projectbased assistance and require PHAs to provide tenant-based assistance to families who wish to leave project-based

units. HUD has also implemented the statutory requirement on deconcentration of poverty by requiring that all new

project-based units be located in census tracts with poverty rates of less than 20 percent.

34. John Goering, Judith Feins, et al., Moving to Opportunity for Fair Housing Demonstration Program: Current Status

and Initial Findings (Washington, D.C.: U.S. Department of Housing and Urban Development, Abt Associates, and

Computer Based Systems Incorporated, September 1999).

35. Barbara Sard, The Family Self-Sufficiency Program: HUD’s Best Kept Secret for Promoting Employment and Asset

Growth (Washington, D.C.: Center on Budget and Policy Priorities, April 2001).

36. According to the National Council of State Housing Agencies, “a majority [of apartments produced under the

program] is dedicated for periods longer than 30 years, and several are permanently dedicated to low income use”

(http://www.ncsha.org/).

37. Catalog of Federal Domestic Assistance (http://www.cfda.gov/). Program Number 14.239.

38. National Council of State Housing Agencies, Ten Year Rule Impact on MRB Mortgage Lending, 2001-2005 (2001).

Supporting Recommendations (pages 64 to 73)

1. John D. Hawke Jr., “Banking in Indian Country: Challenges and Opportunities.” Community Developments,

Comptroller of the Currency, Fall 2001.

2. Coalition for Indian Housing and Development, June 29, 2001, response to Millennial Housing Commission

solicitation letter.

3. One Stop Mortgage Center Initiative in Indian Country: A Report to the President (Washington, D.C.: U.S. Department

of Housing and Urban Development, U.S. Department of the Treasury, October 2000).

4. The Report of the Native American Lending Study, CDFI Fund, U.S. Department of the Treasury.
82

5. Mr. Campbell, Providing for Business Development and Trade Promotion for Native Americans, and for Other

Purposes (Washington, D.C.: Report 106-139, 106th Congress, September 1999).

6. Native American Housing News, Special Convention Issue, 2001.

7. Hawaiian Community Assets, letter to the Millennial Housing Commission, October 16, 2001.

8. U.S. Bureau of the Census, Reason Modestly Priced Home Cannot be Afforded (Washington, D.C.: 1995).

9. Funds from the $200 million American Dream Downpayment Fund, part of the President’s budget for fiscal year

2003, could be used as matching grants for IHDAs.

10. Merriam-Webster’s Collegiate Dictionary, online version.

11. State-issued housing bonds issued prior to the 1986 Tax Reform Act are exempt from AMT, making this comparison

possible. “Comparison of Interest Rates on Housing Bond Issues Sold during Week of January 28, 2002,” The Bond

Buyer (February 2002).

12. “Quarterly Financing Survey, 3rd Quarter 2001: Summary Findings,” National Association of Home Builders

(March 2002).

13. Abdighani Hirad and Peter Zorn, A Little Knowledge is a Good Thing: Empirical Evidence of the Effectiveness

of Pre-Purchase Homeownership Counseling (Washington, D.C.: Freddie Mac, May 21, 2001).

14. Hugh Mahoney and Peter Zorn, “Promise of Automated Underwriting,” Secondary Mortgage Markets 13:3

(November 1996).

15. Calculations by the Millennial Housing Commission based on placement data from the U.S. Census−Manufactured

Homes Survey, March 2002, and the U.S. Census Survey of New Residential Construction (one-unit structures),

March 2002.

16. Michael Collins, David Crowe, and Michael Carliner, “Examining Supply-Side Constraints to Low-Income

Homeownership,” Low-Income Homeownership: Examining the Unexamined Goal (Washington D.C.: Brookings

Press, expected 2002).

17. National Association of Home Builders—Research Center, Factory and Site-Built Housing: A Comparison for the 21st

Century (Washington, D.C.: NAHB, October, 1998).

18. Marsha Courchane, David Nickerson, and Frank Nothaft. Evolution of the Housing Finance System in America

(Washington, D.C.: Freddie Mac working paper, prepared for the Millennial Housing Commission, May 2002).
83

Appendix 1 | Supporting Data

Table 1. Household and Housing Stock Characteristics by Income, 1999

Table 2. Affordable Rental Stock by Income Group, 1985-1999

Table 3. Stock of Federally Assisted Units by Funding Source, 1999

Table 4. Selected Household Characteristics by Tenure and Area Median Income, 1999

Table 5. Homeownership Rates by Race and Ethnicity of Householder, 1983-2001

Table 6. Households Receiving Direct Housing Assistance Administered

by HUD, 1977-2000

Table 7. Number of Units Eligible for Assisted Housing Payments by Program, 1957-2000

Table 8. Key Federal Housing Budget Trends

Table 9. Housing Market Indicators, 1975-2001

Table 10. Terms on Conventional Single-Family Mortgages, 1980-2001
84

Table 1 | Household and Housing Stock Characteristics by Income, 1999 (Thousands)

Notes:

1. ELI (extremely low income) defined as having incomes below 30% of AMI; VLI (very low income) defined as having incomes 30-50% of AMI; LI (low

income) defined as having incomes 50-80% of AMI; MI (moderate income) defined as having incomes 80-120% of AMI; HI (high income) defining as

having incomes over 120% of AMI.

2. Households in the “not burdened” group include those reporting zero or negative income. Depending on their reported housing costs, the households

were included in ELI or MI.

Source: HUD tabulations of the 1999 American Housing Survey prepared for the Millennial Housing Commission.

ELI (1) VLI LI MI HI

Households

Total Households 6,410 7,138 10,680 14,284 30,283

Not Burdened (0-30%) (2) 1,854 4,259 7,571 11,888 28,701

Moderately Burdened (30-50%) 1,372 1,728 2,328 1,931 1,344

Severely Burdened (>50%) 3,175 783 1,151 465 239 

Working Status of Households

Earning at Least FTE Minimum Wage 393 2,647 7,024 11,478 28,136

Number with Severe Cost Burdens 167 582 564 383 217 

Earning Between Half and FTE Minimum Wage 598 515 495 180 204 

Number with Severe Cost Burdens 268 96 28 5 - 

Earning Less than Half FTE Minimum Wage 703 355 349 210 156 

Number with Severe Cost Burdens 514 59 25 16 2 

Elderly, Not Working 3,188 3,086 2,396 1,678 1,306

Number with Severe Cost Burdens 290 1,392 118 32 7 

Non-elderly, Not Working 537 1,528 416 738 481 

Number with Severe Cost Burdens 843 124 46 29 13 

Affordable Housing Stock

Units Affordable at 30% of Income 6,606 11,669 23,475 17,053 11,445

Affordable and Available 1,724 3,778 7,322 6,324 11,445

Gap between Available Units and Households (4,686) (3,360) (3,358) (7,960) (18,838)

Adequate 5,586 10,602 22,280 16,440 10,962

Moderately Inadequate 511 548 539 289 169 

Severely Inadequate 168 171 302 161 67 

Vacant: No Information 341 347 354 163 247 

Owners
85

ELI VLI LI MI HI Total

 8,513 6,243 7,270 6,681 5,300 102,802

 2,134 2,172 5,034 6,092 5,174 74,879

 1,580 2,950 496 1,984 110 15,823

 4,798 252 1,121 93 15 12,092

 1,110 4,452 6,603 6,056 5,108 73,007

 679 482 197 82 8 3,361

 606 1,631 131 22 19 4,401

 130 984 2 - 2 1,515

 146 1,710 57 15 17 3,718

 43 1,311 5 - - 1,975

 749 1,721 377 197 100 14,798

 181 898 42 12 5 2,977

 291 2,340 102 389 55 6,877

 88 1,124 7 - - 2,274

 6,681 12,092 14,222 2,950 1,073 107,266

 3,570 6,631 7,231 1,645 1,073 50,743

(4,943) 388 (39) (5,036) (4,227) (52,059)

 5,288 9,598 11,845 840 2,483 95,924

 609 867 1,116 121 56 4,825

 397 330 381 61 15 2,053

 981 454 285 1,129 162 4,463

Renters
86

Table 2 | Affordable Rental Stock by Income Group, 1985-1999 (Thousands)

Notes: Units are classified by comparing their rents (adjusted for number of bedrooms) to the rent affordable in local markets to households with incomes at

the upper and lower threshold incomes of the group. For example, units with monthly gross rents that are 30% of monthly incomes between 30% and 50% of

AMI are classified as affordable to very low-income households. Income cutoffs are determined by deflating/inflating 1995 HUD Income Limits for general price

inflation and real income growth.

Source: HUD tabulations of the American Housing Survey prepared for the Millennial Housing Commission.

ELI VLI HI Total

under 30% 30-50% 50-60% 60-80% 80-100% 100-120% over 120%

1985 6,285 9,392 5,888 8,053 3,832 502 1,194 35,146

1995 6,633 9,936 6,998 8,388 990 3,545 434 36,924

1999 6,681 12,092 6,948 7,274 678 2,271 1,073 37,017

Change in Units

1985-1999 396 2,700 1,060 (779) (516) (1,561) 571 1,871

LI MI
87

Table 3 | Stock of Federally Assisted Units by Funding Source, 1999

Note: Numbers are adjusted for overlap based on HUD’s A Picture of Subsidized Households, 1998, RHS data, and GAO’s Tax Credits: Opportunities to

Improve Oversight of the Low-Income Housing Program, GAO/GGD/RCED-97-55.

Sources: GAO, Federal Housing Assistance: Comparing the Characteristics and Costs of Housing Programs, GAO-02-76; HUD Budget Office; Rural Housing

Service, Deputy Administrator for Single-Family Housing; and U.S. House of Representatives, 2000 Green Book.

Thousands 

of Units

Inactive: Publicly Owned, Project-Based

Public Housing 1,274

Inactive: Privately Owned, Project-Based

Section 8 New Construction / Substantial Rehabilitation 644

Section 202 Elderly Housing Direct Loan 207

Section 8 Property Disposition 60

Section 8 Loan Management Set-Aside 409

Rent Supplement 21

Section 236 60

Section 221(d)(3) Below Market Interest Rate 71

Active: Tenant-Based

Section 8 Certificates and Vouchers 1,581

Active: Privately Owned, Project-Based

Section 202 Supportive Housing for the Elderly 65

Section 811 Supportive Housing for Persons with Disabilities 18

Section 515 Rural Housing Rental Assistance 410

Total: Rental Assistance 4,820

Total: Owner Assistance 5 91

Total: Direct Assistance 5,411
88

Table 4 | Selected Household Characteristics by Tenure and Percent of Area Median Income,

1999 (Millions)

Source: HUD tabulations of the 1999 American Housing Survey prepared for the Millennial Housing Commission.

Number Percent

Renter Households

Under 30% 8.5 25 $7,000 $175 $426

30-50% 6.2 18 $17,000 $425 $509

50-80% 7.3 21 $26,541 $664 $565

80-120% 6.6 19 $40,000 $1,000 $643

Over 120% 5.3 16 $68,000 $1,700 $736

All 34.0 100 $24,400 $610 $560

  

Owner Households

Under 30% 6.4 9 $6,500 $163 $300

30-50% 7.1 10 $15,613 $390 $324

50-80% 10.7 16 $27,000 $675 $453

80-120% 14.3 21 $41,200 $1,030 $633

Over 120% 30.3 44 $81,000 $2,025 $908

All 68.8 100 $45,400 $1,135 $617

  

All Households

Under 30% 14.9 15 $7,000 $175 $369

30-50% 13.3 13 $16,000 $400 $426

50-80% 18.0 18 $27,000 $675 $520

80-120% 20.9 20 $40,050 $1,001 $637

Over 120% 35.6 35 $79,000 $1,975 $865

All 102.7 100 $36,000 $900 $585

Total Reported 

Income

Percent of Area 

Median Income

Households Median Household Income

Amount Affordable 

for Housing at 30%

Median 

Monthly 

Housing Cost
89

Number Percent Number Percent Number Percent

58 2.1 25 1.6 18 4.8 56

35 2.2 35 3.0 48 1.1 18

25 5.0 69 2.0 27 0.3 3

19 6.1 92 0.5 8 0.1 1

12 5.2 98 0.1 2 0.0 0

25 20.6 61 7.2 21 6.3 18

50 1.9 29 1.4 21 3.2 50

25 4.3 60 1.7 24 1.2 16

21 7.6 71 2.3 22 0.8 7

17 11.9 83 1.9 14 0.5 3

13 28.7 95 1.3 4 0.2 1

17 54.4 79 8.6 13 5.9 8

54 4.0 27 3.0 20 8.0 54

31 6.5 48 4.7 35 2.3 17

23 12.6 70 4.3 24 1.1 6

18 18.0 86 2.4 12 0.6 3

13 33.9 95 1.4 4 0.2 1

19 75.0 73 15.8 15 12.2 12

Housing Costs

Under 30% of Income 30-50% of Income Over 50% of Income

Median 

Housing Cost 

as Percent of 

Income
90

Table 5 | Homeownership Rates by Race and Ethnicity of Householder, 1983-2001 (Percent)

Note: Breakdowns of “other races” are not available before 1994. Starting in 1996, all “other races” were added into one of two existing categories.

Source: U.S. Bureau of the Census.

U.S. 

Total

Total 

White

NonHispanic 

White

Total 

Black Other

American 

Indian, 

Aleut, 

Eskimo

Asian or 

Pacific 

Islander Other Hispanic

1983 64.9 n/a 69.1 45.6 53.3 n/a n/a n/a 41.2

1984 64.5 n/a 69.0 46.0 50.9 n/a n/a n/a 40.1

1985 64.3 n/a 69.0 44.4 50.7 n/a n/a n/a 41.1

1986 63.8 n/a 68.4 44.8 49.7 n/a n/a n/a 40.6

1987 64.0 n/a 68.7 45.8 48.7 n/a n/a n/a 40.6

1988 64.0 n/a 69.1 42.9 49.7 n/a n/a n/a 40.6

1989 64.0 n/a 69.3 42.1 50.6 n/a n/a n/a 41.6

1990 64.1 n/a 69.4 42.6 49.2 n/a n/a n/a 41.2

1991 64.0 n/a 69.5 42.7 51.3 n/a n/a n/a 39.0

1992 64.1 n/a 69.6 42.6 52.5 n/a n/a n/a 39.9

1993 64.1 n/a 70.2 42.0 50.6 n/a n/a n/a 39.4

1994 64.2 67.7 70.0 42.3 47.7 51.7 51.3 36.1 41.2

1995 64.7 68.7 70.9 42.7 47.2 55.8 50.8 37.4 42.1

1996 65.4 69.1 71.7 44.1 51.0 51.6 50.8 n/a 42.8

1997 65.7 69.3 72.0 44.8 52.5 51.7 52.8 n/a 43.3

1998 66.3 70.0 72.6 45.6 53.0 54.3 52.6 n/a 44.7

1999 66.8 70.5 73.2 46.3 53.7 56.1 53.1 n/a 45.5

2000 67.4 71.1 73.8 47.2 53.5 56.2 52.8 n/a 46.3

2001 67.8 71.6 74.3 47.7 54.2 55.4 53.9 n/a 47.3
91

Table 6 | Households Receiving Direct Housing Assistance Administered by HUD, 1977-2000

Notes: 

1. Includes units assisted with Section 8 certificates and vouchers.

2. Includes units assisted through the Section 8 Loan Management Set Aside, PD, Conversion (from rent supplement and Section 236 Rental Assistance

Program), and Moderate Rehabilitation Programs.

3. Includes units assisted through the Section 8 New Construction and Substantial Rehabilitation Program, Section 236, Rent Supplement, and Public

Housing Programs (including Indian units constructed under Public Housing but now assisted through the other programs).

4. The total number of assisted renters has been adjusted since 1980 to avoid double-counting of households receiving more than one type of subsidy.

The total number therefore is lower than the sum of the components.

5. Includes units assisted through various Section 235 programs.

Source: 2000 Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee of Ways and Means, U.S. House of

Representatives, October 6, 2000.

Tenant- Project- New Total Assisted Total Assisted Total Assisted

Based Based Construction Renters Homeowners Households

(1) (2) (3) (4) (5)

1977 162 105 1,799 2,067 331 2,398

1978 297 126 1,928 2,350 293 2,643

1979 427 175 1,978 2,580 262 2,842

1980 521 185 2,090 2,797 235 3,032

1981 599 221 2,228 3,212 219 3,431

1982 651 194 2,373 3,379 241 3,620

1983 691 265 2,485 3,615 242 3,857

1984 728 357 2,589 3,851 230 4,081

1985 749 431 2,657 4,015 210 4,225

1986 797 456 2,686 4,135 200 4,335

1987 893 473 2,721 4,279 182 4,461

1988 956 490 2,736 4,371 159 4,530

1989 1,025 509 2,748 4,485 148 4,633

1990 1,090 527 2,755 4,569 141 4,710

1991 1,137 540 2,778 4,656 130 4,786

1992 1,166 554 2,786 4,705 125 4,830

1993 1,326 574 2,762 4,861 98 4,959

1994 1,392 593 2,764 4,939 95 5,034

1995 1,474 607 2,778 5,049 80 5,129

1996 1,413 608 2,817 5,028 76 5,104

1997 1,465 586 2,822 5,063 68 5,131

1998 1,481 564 2,786 5,021 60 5,081

1999 1,613 542 2,757 5,101 53 5,154

2000 1,621 522 2,728 5,061 43 5,104

Existing Housing

Assisted Renters
92

Table 7 | Number of Units Eligible for Assisted Housing Payments by Program, 1957-2000

(Thousands)

* These numbers are estimates.

Notes: 1. Excludes units funded with capital grants and project rental assistance through the Section 202|811 program, but includes Section 202 Direct Loans.

2. Includes units receiving assistance through the Section 8 LMSA program, Property Disposition, Conversion (from Rent Supplement and Section 236 RAP), and Moderate

Rehabilitation programs.

Sources: 1957-1998: Edgar O. Olson, Housing Programs for Low-Income Households, National Bureau of Economic Research, April 2001. 1999: Federal Housing Assistance:

Comparing the Characteristics and Costs of Housing Programs, GAO-02-76. LIHTC numbers: Estimates by Recapitalization Advisors in a paper prepared for the Millennial

Housing Commission.

Public 

Housing Total 

With 

Section 

8

Rent 

Supplement Total

With Rent 

Supplement 

or Section 8

TenantBased

New 

Subrehab 

(1)

Other 

ProjectBased (2) LIHTC

1957 366 0 0 0 0 0 0 0 0 0

1958 374 0 0 0 0 0 0 0 0 0

1959 401 0 0 0 0 0 0 0 0 0

1960 425 0 0 0 0 0 0 0 0 0

1961 465 0 0 0 0 0 0 0 0 0

1962 483 n/a 0 0 0 0 0 0 0 0

1963 511 n/a 0 0 0 0 0 0 0 0

1964 540 n/a 0 0 0 0 0 0 0 0

1965 577 n/a 0 0 0 0 0 0 0 0

1966 609 n/a 0 0 0 0 0 0 0 0

1967 640 n/a 0 1 0 n/a 0 0 0 0

1968 687 n/a 0 3 0 n/a 0 0 0 0

1969 768 n/a 0 12 0 n/a 0 0 0 0

1970 830 n/a 0 31 5 n/a 0 0 0 0

1971 893 n/a 0 58 32 n/a 0 0 0 0

1972 989 n/a 0 92 99 n/a 0 0 0 0

1973 1,047 n/a 0 118 191 n/a 0 0 0 0

1974 1,109 n/a 0 148 294 n/a 0 0 0 0

1975 1,151 n/a 0 165 400 n/a 0 0 0 0

1976 1,172 26 0 174 447 n/a 162 6 105 0

1977 1,174 50 1 180 543 n/a 297 30 126 0

1978 1,173 81 7 172 545 n/a 427 89 175 0

1979 1,178 114 16 179 541 n/a 521 192 185 0

1980 1,192 151 24 165 538 163 599 333 221 0

1981 1,204 185 32 158 537 161 651 474 194 0

1982 1,224 217 40 153 537 175 691 571 265 0

1983 1,314 247 44 77 533 177 728 664 357 0

1984 1,341 274 45 56 531 178 749 730 431 0

1985 1,355 301 46 46 528 196 797 757 456 0

1986 1,380 326 46 34 529 192 893 778 473 0

1987 1,390 349 46 23 528 189 956 794 490 34

1988 1,398 368 46 23 528 203 1,025 799 509 116

1989 1,404 386 46 20 528 197 1,090 804 527 242

1990 1,405 402 46 20 531 200 1,137 823 540 316

1991 1,410 418 46 20 528 199 1,166 827 554 428

1992 1,409 434 46 20 510 199 1,326 822 574 519

1993 1,408 449 46 19 510 190 1,392 827 593 623

1994 1,409 464 46 19 505 190 1,487 845 595 740

1995 1,397 476 46 21 508 190 1,413 890 608 827

1996 1,389 483 46 21 505 190 1,465 907 586 902

1997* 1,372 483 46 21 494 190 1,499 880 564 972

1998* 1,295 483 46 21 476 190 1,606 854 542 1,041

1999* 1,274 485 45 21 464 n/a 1,581 851 n/a 1,104

Section 515 Section 236
93

Table 8 | Key Federal Housing Budget Trends (Billions of Constant 2002 Dollars)

Source: National Low Income Housing Coalition, Changing Priorities: The Federal Budget and Housing Assistance, 1996-2006, 2001.

Federal Spending for Housing 1977-1981 1982-1986 1987-1991 1992-1996 1997-2001 2002-2007

Assisted Housing Outlays $4.9 $13.5 $14.9 $23.7 $28.6 $33.8

Assisted Housing Budget Authority $28.1 $15.3 $12.0 $18.8 $18.6 $31.4

Tax Expenditures $44.8 $63.7 $90.9 $107.5 $117.9 $120.2

All HUD Outlays $10.1 $18.1 $19.4 $26.0 $31.1 $34.0

All HUD BA $78.8 $33.3 $24.2 $27.9 $25.4 $35.2

Federal Tax Expenditures for Housing 1977-1981 1982-1986 1987-1991 1992-1996 1997-2001 2002-2007

Mortgage Interest Deductions $25.2 $39.4 $49.6 $55.4 $60.0 $66.3

Property Tax Deductions $14.5 $13.9 $13.9 $16.5 $21.3 $19.2

Capital Gains $2.9 $3.9 $15.7 $21.8 $22.4 $20.1

Other Homeowner $0.1 $0.9 $0.0 $0.0 $0.0 $0.0

Homeowner Subtotal $42.7 $58.1 $79.3 $93.7 $103.6 $105.5

Investor Deductions $2.1 $5.6 $11.6 $13.8 $14.3 $14.7

Total $44.8 $63.7 $90.9 $107.5 $117.9 $120.2
94

Table 9 | Housing Market Indicators, 1975-2001 (Thousands)

Note: Single-family is defined as both attached and detached one-unit dwellings; multifamily as any structure with two or more units. Manufactured housing

is defined as HUD-code housing.

Source: U.S. Bureau of the Census, Construction Reports, 1975-2001.

Year Single-Family Multifamily Single-Family Multifamily Manufactured New Existing

1975 676 264 892 268 229 549 2,476

1976 894 403 1,162 375 250 646 3,064

1977 1,126 564 1,451 536 258 819 3,650

1978 1,183 618 1,433 587 280 817 3,986

1979 982 570 1,194 551 280 709 3,827

1980 710 480 852 440 234 545 2,973

1981 564 421 705 379 229 436 2,419

1982 546 454 663 400 234 412 1,990

1983 902 704 1,068 636 278 623 2,719

1984 922 759 1,084 665 288 639 2,868

1985 957 777 1,072 670 283 688 3,214

1986 1,078 692 1,179 626 256 750 3,565

1987 1,024 510 1,146 474 239 671 3,526

1988 994 462 1,081 407 224 676 3,594

1989 932 407 1,003 373 203 650 3,346

1990 794 317 895 298 195 534 3,211

1991 754 195 840 174 174 509 3,220

1992 911 184 1,030 170 212 610 3,520

1993 987 213 1,126 162 243 666 3,802

1994 1,069 303 1,198 259 291 670 3,946

1995 997 335 1,076 278 319 667 3,812

1996 1,070 356 1,161 316 338 757 4,196

1997 1,062 379 1,134 340 336 804 4,382

1998 1,188 425 1,271 346 374 886 4,970

1999 1,247 417 1,302 339 338 880 5,205

2000 1,198 394 1,231 338 273 877 5,113

2001 1,222 390 1,275 328 n/a 900 5,251

Permits Starts Home Sales 
95

Table 10 | Terms on Conventional Single-Family Mortgages, Annual National Averages,

All Homes, 1980-2001

Source: Federal Housing Finance Board, Monthly Interest Rate Survey.

Effective Term Mortgage Purchase Loan

Interest to Loan Amount Price To

Rate Maturity (1,000s of (1,000s of Price Loan-to-Price Adjustable

Year (%) (Years) 2001 Dollars) 2001 Dollars) Ratio Ratio Above .9 Rates

1980 12.8 27.2 111.1 157.8 72.9 10 n/a

1981 14.9 26.4 104.6 148.7 73.1 15 n/a

1982 15.3 25.6 100.9 143.9 72.9 21 41

1983 12.7 26.0 106.5 147.8 74.5 21 40

1984 12.5 26.8 109.9 147.6 77.0 27 62

1985 11.6 25.9 115.5 158.2 75.8 21 51

1986 10.2 25.6 128.1 178.7 74.1 11 30

1987 9.3 26.8 138.9 189.9 75.2 8 43

1988 9.3 27.7 145.8 197.0 76.0 8 58

1989 10.1 27.7 149.3 204.0 74.8 7 38

1990 10.1 27.0 140.9 193.2 74.7 8 28

1991 9.3 26.5 138.2 190.8 74.4 9 23

1992 8.1 25.4 137.2 184.8 76.6 14 20

1993 7.1 25.5 131.1 175.4 77.2 17 20

1994 7.5 27.1 131.3 169.7 79.9 25 39

1995 7.9 27.4 128.3 165.9 79.9 27 32

1996 7.7 26.9 134.0 175.1 79.0 25 27

1997 7.7 27.5 139.7 181.5 79.4 25 22

1998 7.1 27.8 143.2 188.4 78.9 25 12

1999 7.3 28.2 148.1 195.8 78.5 23 21

2000 8.0 28.7 152.5 204.6 77.8 22 24

2001 7.0 27.6 155.7 215.5 76.2 21 12

Percent of Loans With
96

Appendix 2 | Assumptions Used in Analyzing the American Housing Survey

To approximate the extent of need, housing affordability, and cost burdens for this report, the Millennial Housing

Commission worked with the U.S. Department of Housing and Urban Development to generate special tabulations of

the 1985, 1995, and 1999 American Housing Surveys (AHS). The estimates cited in this report reflect the following

assumptions and calculations.

Household Income Groups

The Commission used HUD-Adjusted Median Family Income (HAMFI) to define household income groups. Using this

method, the HAMFI value was adjusted to establish cutoffs for extremely low-income (not exceeding 30 percent of area

median income (AMI)), very low-income (30 to 50 percent of AMI), low-income (50 to 80 percent of AMI), middleincome (80 to 120 percent of AMI), and high-income (more than 120 percent of AMI) groups.

The first step was to estimate income cutoffs for the three years examined. To do this, the MHC chose to use published

1995 HAMFI cutoffs for all three years and then adjust for both inflation and real income growth to approximate 1985

and 1999 cutoffs.

While almost all households can be grouped using this simple method, additional criteria are necessary for those with

zero or negative income. Households reporting zero or negative income and housing costs greater than or equal to the

fair market rent (FMR) for their areas were included in the middle-income group. Those with housing costs below FMR

were considered extremely low-income households.

Households were sorted by how their income compared with the HAMFI cutoffs. Household income includes wages

and salaries, business income, social security and pensions, interest income, stock dividends, rental income, welfare or

SSI payments, alimony or child support, and “other income,” such as worker’s compensation and unemployment

payments. This measurement is before tax or other deductions.

Housing Costs

Real housing costs were examined for each record in the AHS. For renters, housing cost is defined as rent plus utilities

as reported by each survey respondent. For owners, housing cost includes reported mortgage payments, taxes,

insurance, and utility payments. These are the real housing costs for each household.

Households who reported paying no cash rent were included in the appropriate income group and labeled as having

no housing costs.

Cost Burdens

To determine the extent and severity of affordability problems in America, the MHC calculated the ratio of income to

housing costs for each household surveyed. Households were then grouped by these ratios to determine the extent of

their cost burdens. A household is considered moderately cost-burdened if it pays between 30 percent and 50 percent

of income for housing. A household is considered severely cost-burdened if it pays more than 50 percent of income for

housing.

Again, households reporting zero or negative income were treated separately. Regardless of their income grouping, the

Commission considered these households not burdened for purposes of this report (i.e., paying less than 30 percent of

income for housing). This was done to ensure a more conservative estimate of the extent of housing affordability

problems since there is no way to discern which of these households may be cost-burdened. Households who reported

paying no cash rent were also considered to have no housing cost burden.
97

Affordable Units by Income Range

Each unit included in the American Housing Survey was placed into an affordability category by comparing its gross

rent or estimated ownership cost (described below) to the household income cutoffs noted above. A unit was

considered affordable to an income group if the gross rent or estimated ownership cost fell between 30 percent of the

monthly income that demarcated the top and bottom of the income group. To approximate the actual number of

affordable units, the Commission excluded those identified as “seasonal” or “usual residence elsewhere” (URE), which

are typically second homes and unavailable to households seeking affordable housing.

To sort units by income group, the Millennial Housing Commission attempted to include all housing costs in the

measurement. To this end, utility costs for vacant units had to be imputed or allocated. These allocations are based on

four factors: monthly housing costs (rent or mortgage payment), structure type (single- or multifamily), region of the

country (census region), and tenure (owner or renter).

Reported monthly principal and interest payments for owner-occupied units varied widely and therefore did not

correlate well with property values. To standardize owner-occupied housing costs, the MHC assumed a 30-year

mortgage with a 7-percent interest rate as well as a 10-percent downpayment, plus the cost of utilities, taxes, and

insurance.

The final calculation to ensure that housing units were grouped appropriately was to adjust the threshold for

affordable rents by bedroom size. The following adjustments were made to reflect the size of the households that would

occupy the unit:

0 bedrooms: AMI * 0.70

1 bedroom: AMI * 0.75

2 bedrooms: AMI * 0.90

3 bedrooms: AMI * 1.04

4 bedrooms: AMI * 1.16

5 bedrooms: AMI * 1.28

6 bedrooms: AMI * 1.40

7+ bedrooms: AMI * (1.40 + 0.12 per bedroom over 6)

Earnings Classifications

The Millennial Housing Commission was also interested in determining the working status of households. To this end,

households were first sorted by total household income. Wage and salary earnings within each income group were then

calculated, and households were again sorted into four groups: those with zero wage earnings, less than half the fulltime equivalent of minimum wage, half- to full-time minimum wage, or greater than minimum wage. Households were

then classified by cost burden, based on housing costs relative to total household income.

Household groups were also sorted by age to identify which were elderly (65 or older) and non-elderly (younger than

65). To examine the cost burdens and characteristics of some working households, a second set of tabulations was run

using salary cutoffs based on the average incomes of several professions.
98

Appendix 3 | Description of Housing Programs

Public Housing

Public Housing

Enactment: U.S. Housing Act of 1937

Program Description: Full subsidy of capital costs and those operating costs of public housing that exceed tenant rent

billed up to an allowable expenses level. Subsidy paid to local public housing authority (PHA).

Tenant Eligibility: Income lower than 80% of area median, adjusted for family size. Forty percent of new admissions

every year must have incomes below 30% of area median. Local PHAs may apply further prioritizing criteria, such as

family size or type, age, employment status, and income based on local housing need.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of monthly adjusted income for rent, or a

minimum rent (up to $50) set by the housing authority.

Number of Existing Units: 1,273,500

FY 2001 Budget Authority: $3,000,000,000 (Capital Fund), $3,242,000,000 (Operating Fund), $310,000,000 (Drug

Elimination Grants)

FY 2001 Outlays: $3,550,000,000 (Capital Fund), $3,137,000,000 (Operating Fund), $310,000,000 (Drug Elimination

Grants)

Current Status: Funding for public housing development stopped in 1995 when Congress rescinded the final

development funds appropriated. PHAs were permitted to use capital funds for new housing development, but funding

was not increased. The public housing stock reached its peak in 1991 (1,410,137 units).

Revitalization of Severely Distressed Public Housing (HOPE VI)

Enactment: U.S. Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies

Appropriations Act of 1993

Program Description: Project-specific grants to PHAs to demolish, rehabilitate or replace distressed public housing

units while promoting mixed-income communities. Units may be privately owned and managed, and some may be

market-rate rentals or affordable homeownership.

Tenant Eligibility: The same as public housing for units receiving public housing subsidy.

Rent Structure: Units receiving public housing subsidy have public housing rents.

Number of Existing Units: 14,554 as of September 30, 2001

FY 2001 Budget Authority: $575,000,000

FY 2001 Outlays: $487,000,000

Current Status: Since 1993, HUD’s HOPE VI Revitalization Grant program has awarded 165 grants to 98 cities,

representing approximately $4.55 billion in development funds. According to HUD program data, this will result in

demolition of about 78,000 distressed public housing units and development of a roughly equal number of new units.

As of September 2001, about 47,000 units had been demolished and about 14,500 units had been developed.
99

Rental Assistance

Section 202 Supportive Housing for the Elderly

Enactment: Housing Act of 1959

Program Description: Direct federal grants and project-based Section 8 subsidies to nonprofit sponsors to finance

rental or cooperative housing for the elderly.

Tenant Eligibility: Only households with heads 62 years or older and with very low incomes.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of adjusted monthly income.

Number of Existing Units: 65,000

FY 2001 Budget Authority: $779,000,000

FY 2001 Outlays: See Section 811 below.

Current Status: Approximately 6,500 units are funded annually in recent years.

Section 811 Supportive Housing for Persons with Disabilities

Enactment: Cranston-Gonzalez Affordable Housing Act of 1990

Program Description: Direct federal grants and project-based Section 8 subsidies to nonprofit sponsors to finance

rental or cooperative housing for the disabled.

Tenant Eligibility: Available only for very low-income people with disabilities.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of adjusted monthly income.

Number of Existing Units: 18,000

FY 2001 Budget Authority: $217,000,000

FY 2001 Outlays: Section 202 and 811 had $774,000,000 in combined outlays.

Current Status: Approximately 1,650 units have been funded annually in recent years.

Section 221(d)(3) and Section 221(d)(4) Multifamily Rental Housing for Moderate-Income Families

Enactment: National Housing Act of 1961

Program Description: HUD insures mortgages made by private lenders to help finance construction or substantial

rehabilitation of multifamily rental or cooperative housing for moderate-income or displaced families. The principal

difference between the two programs is that HUD may insure up to 100% of total project cost under Section 221(d)(3)

for nonprofit and cooperative mortgagors, but only up to 90% under Section 221(d)(4), regardless of the type of

mortgagor.

Applicant Eligibility: Section 221(d)(3) and 221(d)(4) mortgages may be obtained by public agencies; nonprofit,

limited dividend, or cooperative organizations; private builders; or investors who sell completed projects to such

organizations. Section 221(d)(4) mortgages may also be obtained by profit-motivated sponsors.

Tenant Eligibility: Tenant occupancy is not restricted by income limits. Projects may be designed specifically for the

elderly or handicapped.
100

FY 2001 Program Level: $2,353,706,686 in mortgages insured

Current Status: In FY 2001, the department insured mortgages for 179 projects with 32,343 units.

Section 221(d)(3) Below Market Interest Rate (BMIR)

Enactment: National Housing Act of 1961

Program Description: Subsidized below-market interest rate mortgage insurance program providing rental housing for

low-income families. Loans are made by private lenders at the reduced rate and then purchased at face value by the

federal government.

Tenant Eligibility: New tenants generally could not have an income exceeding 95% of area median. The program was

intended to serve those ineligible for public housing but unable to meet market rents.

Rent Structure: Tenants paid the established FHA rent or, if their incomes exceeded 110% of the area median, an

amount equal to 120% of the FHA rent. In some of the projects, deeper subsidies were added to some units so that

tenants would pay no more than 30% of their income.

Number of Existing Units: 144,978 (73,939 also have Section 8 funding)

Current Status: There have been no additional financial commitments for this program since 1968. Many BMIR

projects ran into financial difficulties in the early 1970s. All projects suffered from the surge in operating costs after

1973 and many received assistance under the Section 8 Loan Management program.

Rent Supplement Program

Enactment: Housing and Urban Development Act of 1965

Program Description: The first direct rent supplement. This subsidy paid the difference between the economic rent

(the rent necessary to cover debt service, operating costs and limited profit) and 25% of tenant income (now raised to

30%).

Tenant Eligibility: Rent supplement subsidies were converted to Section 8 subsidies by 1983. Section 8 eligibility rules

now apply.

Rent Structure: Tenants paid between 25% and 30% of monthly adjusted income or 30% of the market rent, whichever

was greater.

Number of Existing Units: 20,860

Current Status: No new commitments since 1973.

Section 236 Rental Program

Enactment: Housing and Urban Development Act of 1968

Program Description: Interest-rate subsidy to nonprofit or limited-dividend developers. The mortgage interest rate was

subsidized down to 1% for loans made through private lenders and insured by FHA. Basic rents on the projects were

calculated to cover the mortgage, operating costs, and a limited profit.

Tenant Eligibility: Incomes at or below 80% of the area median. In addition, tenants had to be able to pay a “basic rent”

(the lowest rent made possible by the mortgage interest subsidy that supported the project’s development), unless

supplemented with some form of rental subsidy (e.g., Rental Assistance, Rent Supplement or Section 8 Loan

Management Set Aside).
101

Rent Structure: Tenants paid the higher of basic rent or 30% of adjusted monthly income (up to an established

ceiling). Rents in excess of basic rents were remitted to the government.

Number of Existing Units: 464,020 (403,697 also have Section 8 Loan Management funding)

Current Status: No new commitments since 1973.

Section 8 New Construction and Substantial Rehabilitation

Enactment: Housing and Community Development Act of 1974

Program Description: Subsidy to fill gap between tenant rent and contract rent for the unit. Subsidy commitment to

owner for 20-40 years provides incentive for construction and for owner to reserve units for low-income tenants. Many

projects were built with Section 202 direct loans for elderly housing.

Tenant Eligibility: Income below 80% of the area median, adjusted for family size. Forty percent of new admissions

each year must have incomes below 30% of area median.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of monthly adjusted income in rent.

Number of Existing Units: 850,766 (including 207,131 built under the original Section 202 direct loan program)

Current Status: No new commitments since 1983.

Section 8 Moderate Rehabilitation

Enactment: 1978

Program Description: Rental subsidy administered by the housing authority and tied to rehabilitated units. Subsidy

commitment to owner is 15 years.

Tenant Eligibility: Income lower than 50% of the area family median, adjusted for family size.

Rent Structure: Rents are limited to 125% of the local fair market rent (FMR) for comparable Section 8 Existing units.

Current Status: No new commitments since 1991.

Section 8 Certificate and Voucher (Existing Housing) Program

Enactment: Housing and Community Development Act of 1974 (certificates) and 1987 (vouchers). In 1998, the Quality

Housing and Work Responsibility Act (QHWRA) merged the two programs into the housing choice voucher program.

Program Description: Vouchers that pay property owner the difference between 30% of the tenant’s income and the

lower of the unit rent or a payment standard. Any unit meeting program housing quality standards with a reasonable

(i.e., market comparable) rent that leases for no more than the FMR is eligible. Recipients are chosen by local PHAs

from Section 8 waiting lists. Recipients have the freedom and responsibility to find housing that meets program quality

and rent standards. If recipients’ existing housing unit meet standards and are available at a reasonable rent, they do

not need to move.

Tenant Eligibility: Income must not exceed 50% of the area median adjusted for family size or, on an exception basis,

80% of the area median. At least 75% of families admitted to the voucher program must have extremely low incomes

(not exceeding 30% of area median).

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of adjusted monthly income in rent.

Tenants may choose to rent units for more or less than the payment standard. When initially leasing a unit where the

gross rent exceeds the payment standard, a tenant may not pay more than 40% of adjusted monthly income.
102

Number of Existing Units: 1.8 million

FY 2001 Budget Authority: $11,970,000,000

FY 2001 Outlays: $16,720,000,000

Current Status: In recent years, an average of 38,000 vouchers have been added to the budget annually. In 2001, the

voucher utilization rate (defined as the percentage of available vouchers under lease or the percentage of annual

budget authority spent) was 93%. In 2002, the utilization rate is estimated at 95%. In comparison, the national voucher

success rate (defined as the percentage of families provided vouchers who succeed in leasing units) was estimated to be

71% in 2000, down from 86% in 1993.

Section 8 Loan Management, Property Disposition and Conversions

Enactment: Housing and Community Development Act of 1974

Program Description: Section 8 Loan Management Set Aside program reduces claims on the department’s insurance

funds by aiding FHA-insured or Secretary-held projects with potentially serious financial difficulties. The Section 8

Property Disposition Program provides assistance with the sale of HUD-owned multifamily rental housing projects and

the foreclosure of HUD-held mortgages on rental housing projects. The conversion of Rent Supplement and Rental

Assistance Payments contracts to Section 8 Loan Management was completed over a decade ago. These converted units

are now accounted for as Loan Management contracts and units.

Tenant Eligibility: Income below 80% of the area median adjusted for family size. Forty percent of new admissions each

year must have incomes below 30% of area median.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of adjusted monthly income. Section 8

subsidizes the difference between the tenant rent and the basic rent (Section 236 mortgages) or the tenant rent and

the economic rent (Section 221 BMIR mortgages).

Number of Existing Units: Approximately 5,200 Loan Management contracts cover 388,000 units. Approximately 650

Property Disposition contracts cover 59,000 units.

FY 2001 Outlays: Annual outlays for these units amount to approximately $1.5 billion for the Loan Management

Program and $330 million for the Property Disposition Program.

Current Status: The department has not provided new funding for several years. At present, the only activity associated

with these programs is the renewal of previous contracts. ] The FY 2003 budget request to renew expiring Loan

Management units amounts to $1.5 billion for an expected 331,879 units. The Property Disposition renewal request for

the 34,066 units is $232 million.

Mark to Market

Enacted: Multifamily Assisted Housing Reform and Affordability Act of 1997

Program Description: Preserves low-income rental housing affordability while reducing the long-term costs of federal

rental assistance, including project-based assistance, and minimizing the adverse effect on FHA insurance funds. This

includes (1) reducing project rents to no more than comparable market rents, (2) restructuring the HUD-insured or

HUD-held financing so that monthly payments on the first mortgage can be paid from the reduced rent levels, (3)

performing any needed rehabilitation of the project, and (4) ensuring competent management.

Tenant Eligibility: Income below 80% of area median, adjusted for family size. Forty percent of new admissions each

year must have incomes below 30% of area median.

Project Eligibility: The project must have one or more FHA-insured mortgages, one or more project-based Section 8 or

other approved housing assistance contracts expiring on or after October 1998, and assisted rents must exceed

comparable market rents.

Rent Structure: Tenants pay the greater of 10% of monthly income or 30% of monthly adjusted income.
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FY 2001 Obligation: $293,000,000 for loan restructures

FY 2001 Program Level: As of May 2001, $53,900,000 in payments from the FHA fund had been made since the Office

of Multifamily Housing Assistance Restructuring (OMHAR) came into existence. The Mark-to-Market program is

expected to result in Section 8 program savings of $218 million in FY 2002.

Number of Existing Units: About half of the HUD-insured Section 8 portfolio is estimated to have above-market rents

and eventually enter the mark-to-market program. OMHAR estimated that about 62% of those would receive full

mortgage restructuring and the remaining 38% would receive rent restructuring only.

Current Status: As of June 15, 2001, OMHAR had contracts with 33 administrative entities and the number of

properties in the program was 1,558. OMHAR had completed restructurings for 138 of the properties requiring full

mortgage restructurings and 500 of those requiring only rent reductions. OMHAR estimates that the restructurings will

result in about $563,000,000 in federal savings over a 20-year period. In January 2002, President Bush signed legislation

extending the program for another five years.

Section 515 Rural Rent Housing Direct Loans

Enactment: Housing Act of 1949

Program Description: Direct loans made to developers at 1% interest rate through the Rural Housing Service (RHS) of

the U.S. Department of Agriculture. Payments are made directly from the federal government to the developer.

Tenant Eligibility: Tenants must have incomes at or below 80% of area median. Households with incomes below 50% of

median may receive additional assistance through the HUD Section 8 program or the FmHA Section 521 program.

Rent Structure: Tenants may obtain rental assistance through the Section 521 program, which provides funds directly

to developers so that tenants pay no more than 30% of adjusted income for rent and utilities. The developer receives

enough rent to cover mortgage costs, with any excess going back to the government to offset the reduced interest rate.

Number of Existing Loans: 484,672 (including 45,000 Section 8 units)

FY 2001 Authorized Level: $114,000,000 (direct loan level supportable by subsidy budget authority)

FY 2001 Program Level: In FY 2001, $1,212,000,000 new disbursements were made for all RHS direct loan programs,

including the Section 515 program.

Current Status: Through 2000, 523,609 loans had been made through the Section 515 direct loan program.
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Homeownership Assistance

Section 235 Low-Income Homeownership Program

Enactment: Housing Act of 1968

Program Description: Interest rate subsidy to low- and moderate-income homeowners. In its initial form, the interest

rate could be reduced as low as 1% to limit mortgage payments to 20% of income. Subsidy is attached to the unit, not

the family, and is non-transferable.

Homebuyer Eligibility: Homebuyers must have incomes at or below 95% of area median.

Number of Existing Units: 31,176

Current Status: No funding since 1974.

Section 502 Rural Homeownership Program, Direct Loan Program

Enactment: Housing Act of 1949

Program Description: Direct loans from the Rural Housing Service of the U.S. Department of Agriculture to rural

homeowners to assist in the purchase, rehabilitation, or improvement of housing units. Section 502 direct loans may

also be used to refinance debts when necessary to avoid losing a home or when necessary to make rehabilitation of a

house affordable.

Homebuyer Eligibility: Homebuyers must have incomes at or below 80% of area median. At least 40% of appropriated

funds are reserved for households with incomes at or below 50% of area median; the remaining funds may be used for

households with incomes between 50% and 80% of area median.

FY 2001 Loans Outstanding: 547,622

FY 2001 Authorized Level: $1,065,000,000 (direct loan level supportable by subsidy budget authority)

FY 2001 Program Level: In FY 2001, $1,212,000,000 new direct loan disbursements were made for all RHS direct loan

programs, including but not limited to the Section 502 direct loan program.

Current Status: The FY 2002 obligation for the program is estimated at $1,076,998,750. Approximately 15,000 new

direct loans have been made annually in recent years.

Community Development

Urban Renewal

Enactment: Housing Act of 1954

Program Description: Funding for the acquisition, clearance and development of large parcels of urban land to achieve

large-scale redevelopment of blighted communities. Displaced households had to be relocated to other affordable

units. The program’s primary focus was not housing development.

Eligibility: Open space or rundown or deteriorated residential areas.
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Number of Existing Units: During the program’s duration, approximately 400,000 units were demolished and 10,760

units were constructed.

Current Status: No funding since 1974.

Model Cities

Enactment: Housing and Urban Development Act of 1966

Program Description: Demonstration program to help 150 cities improve living conditions. Cities were chosen for

participation with the consent of the elected leadership. Participating cities were allowed to plan and develop, with

citizen participation, individual programs according to their particular needs.

Eligibility: Communities chosen on a competitive basis to receive grants based on needs.

Number of Existing Units: Unknown.

Current Status: The program was funded for a total of $2.3 billion, to be used over a six-year period. No new funding

since 1974.

Community Development Block Grants (CDBG)

Enactment: Housing and Community Development Act of 1974

Program Description: Block grants to localities to fund neighborhood redevelopment, economic development, and

community services. Eligible uses include acquisition, rehabilitation or demolition of real estate and public facility

provision.

Applicant Eligibility: Any central city of an MSA, any local government of over 50,000 people (842 jurisdictions), urban

counties with at least 200,000 people (147 counties) automatically qualify for formula-based funds. All other

jurisdictions receive their funds through the state.

Recipient Eligibility: At least 70% of all funds must be used for people with low or moderate incomes. The national

average share used for these groups is 90%.

FY 2001 Budget Authority: $5,112,000,000

FY 2001 Outlays: $4,939,000,000

Current Status: The CDBG program receives widespread political support for providing local flexibility in community

development. Since its inception, approximately 28% of CDBG funds have gone to housing. In FY 2001, housing’s

share was 35%.

HOME Investment Partnerships

Enactment: National Affordable Housing Act of 1990

Program Description: Block grants to localities to expand the supply of affordable housing. Uses include acquisition,

rehabilitation, and new construction of rental units; development of homeownership units; direct assistance to

homebuyers; and tenant-based rental assistance.

Applicant Eligibility: States, cities, urban counties, and consortia (of contiguous units of general local governments with

a binding agreement) are eligible to receive formula allocations.

Beneficiary Eligibility: The maximum income for tenants in HOME-assisted rental housing units are set at 80% of area

median adjusted for family size. However, 90% of families receiving rental assistance from a fiscal year’s allocation must

have incomes of no more than 60% of area median family income. In projects with five or more HOME units, at least
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20% of the units must be affordable to households earning 50% of the area median income. Assisted homeowners and

homebuyers must earn less than 80% of the area median income.

Number of Existing Units: 627,000 units created, rehabilitated or purchased with funds committed; 72,000 families

have received tenant-based rental assistance.

FY 2001 Budget Authority: $1,796,000,000

FY 2001 Outlays: $1,424,000,000

Current Status: Funding for the program continues. Households with incomes below 30% of area median occupy 45%

of HOME rental housing; 97% of recipients have less than 50% of area median income. Recent annual production has

been 55,000-85,000 units annually.

Empowerment Zones and Enterprise Communities

Enactment: Omnibus Budget Reconciliation Act of 1993

Program Description: Project grants and tax relief to distressed neighborhoods to encourage economic revitalization

and job creation, as well as move residents towards self-sufficiency. Recipients of Empowerment Zone designation

receive $10 million per year for 10 years as well as access to $2.2 billion in tax-exempt bond authority, Enterprise

Communities alternatively receive a smaller grant of $3 million per year.

Recipient Eligibility (urban areas only): Areas of pervasive poverty and unemployment and general distress; maximum

population of 200,000 or 20 square miles or less in area; a continuous boundary, or consists of not more than six

noncontiguous parcels, with the total noncontiguous are no more than 2,000 acres; located entirely within the

jurisdiction of the application group; 90% of census tracts in the zone must have a poverty rate of at least 25% and

none may have less than 20%; may not include any part of the CBD unless the poverty rate in all parts of the district

exceeds 35%. Note: Rural area criteria are set by the Department of Agriculture.

Beneficiary Eligibility: Residents and businesses in designated urban areas.

FY 2001 Budget Authority: $185,000,000

FY 2001 Outlays: $31,000,000

Current Status: Education and job training have been provided to 42,000 residents of zones, and 30,000 people have

received help finding employment. In the first round of funding in 1994, 8 urban Employment Zones (EZs) and 65

Enterprise Communities (ECs), and 33 rural EZ / ECs were designated. In 1999, a second round of funding established

another 15 urban EZs.

Special Populations

Homeless Assistance Grants

Enactment: McKinney Act of 1987

Program Description: Funds provided for emergency shelter, supportive housing, Section 8 Moderate Rehabilitation

for single-room occupancy developments, and the Shelter Plus Care program, all of which provide both housing and

services for the homeless. Grants are disbursed to local groups that belong to continuums of care through a

combination of formula and competitive NOFA programs.

Applicant Eligibility: States, local governments (as well as local consortia), nonprofits and PHAs are all eligible. Funds

can be used for acquisition, rehabilitation, new construction, operations, assistance, and services.
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Number of Existing Units: FY 2001 funding will be used to support or create 70,000 beds (emergency, transitional and

permanent) for the homeless. FY 2001 funding will serve 229,000 people at any one time, with 683,000 people served

over the terms of the contracts.

FY 2001 Budget Authority: $1,023,000,000

FY 2001 Outlays: $965,000,000

Current Status: In 2001, 3,275 communities applied for funds totaling $1.33 billion; 78% of the community program

proposals were approved.

Native American Housing Assistance and Self-Determination Act

Enactment: Native American Housing Assistance and Self-Determination Act of 1996

Program Description: Block grant assistance to Indian tribes to permit affordable housing- related activities including

development, assistance, services, housing management, and safety.

Eligibility: Low-income families living within Indian tribal jurisdictions.

FY 2001 Budget Authority: $650,000,000

FY 2001 Outlays: $684,000,000

Number of Existing Units: Since 1997, 25,000 units have been rehabilitated or developed using block grant funds.

Current Status: Tribes use the block grants for a variety of housing and housing-related services. Funding has

consistently been less than necessary to meet needs.

Housing for Persons with AIDS (HOPWA)

Enactment: AIDS Housing Opportunity Act, as amended by the Housing and Community Development Act of 1992

Program Description: Resources and incentives for states and localities to devise long-term comprehensive strategies for

meeting the housing needs of persons with AIDS or related diseases and their families.

Applicant Eligibility: Entitlement grants are awarded by formula to states and qualifying cities for eligible metropolitan

statistical areas (EMSAs) with the largest number of cases of AIDS. The most populous city serves as the applicant /

grantee for the award. Competitive grants are also awarded to (a) states, local governments and nonprofit organizations

for special projects of national significance, and (b) projects submitted by states and localities in areas that do not

qualify for HOPWA formula allocations. Nonprofit organizations can apply for projects of national significance and

may also serve as a project sponsor for other types of grants.

Beneficiary Eligibility: Beneficiaries are low-income persons with HIV or AIDS and their families. Regardless of income,

persons with AIDS may receive housing information. Persons living near community residences may receive

educational information.

Rent Structure: When the grant is used for rental housing, rents cannot exceed 30% of tenant incomes.

Number of Existing Units: HOPWA funds have been used for either operating costs or capital development of

approximately 8,000 units.

FY 2001 Budget Authority: $258,000,000

FY 2001 Outlays: $241,000,000

Current Status: In FY 1999, HOPWA provided housing assistance to 51,875 people; 68% of the funds went to housing

assistance.
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Mortgage Insurance and Loan Guarantees

FHA-Single Family

Enactment: National Housing Act of 1934

Program Description: Mortgage insurance provided through private lenders to enhance the credit of homebuyers and

help them qualify for mortgages. The Section 203(b) program is currently the primary FHA single-family mortgage

insurance program and provides mortgage insurance without a subsidy.

Eligibility: There are no income limits for this program. Insurance premiums vary based on the applicant’s loan-tovalue (LTV) ratio.

Number of Loans Outstanding: 810,995 at the end of 2000

FY 2001 Authorized Level: $160,000,000,000 (guaranteed loan level supportable by subsidy budget authority)

FY 2001 Program Level: $107,449,000,000 in insurance written

Current Status: Since 1934, FHA and HUD have insured the mortgages on 30 million homes.

FHA-Multifamily

Enactment: National Housing Act of 1934

Program Description: Mortgage insurance provided for credit enhancement of privately developed multifamily

properties. The primary programs are the Section 221(d)(4) and Section 221(d)(3) programs for the construction and

substantial rehabilitation of multifamily rental or cooperative housing, and the Section 223(f) program for the

purchase and refinance of existing multifamily rental properties.

Tenant Eligibility: There are no specific tenant requirements for FHA multifamily loans.

Number of Existing Units: An estimated 1.4 million units are in developments with active insurance contracts.

FY 2001 Authorized Level: $10,685,000,000 (guaranteed loan level supportable by subsidy budget authority)

FY 2001 Program Level: $4,195,000,000 of insurance written

Current Status: Since 1934, FHA has insured 38,000 multifamily properties with 4.1 million apartments.

VA Loan Guarantees

Enactment: Serviceman’s Readjustment Act of 1944

Program Description: Encourages private lenders to make mortgages to veterans by guaranteeing payment on a

portion of the loan in the case of default.

Eligibility: A varying amount of duty served depending on the type and timing of service.

Number of Outstanding Loans: 3,090,338 in FY 2000

FY 2001 Authorized Level: $31,948,000,000 (guaranteed loan level supportable by subsidy budget authority)

FY 2001 Program Level: $31,138,000,000 of new guaranteed loans disbursed

Current Status: From its beginning through 1996, VA guaranteed 15.3 million loans.
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Section 502 Guaranteed Rural Housing Loan Program

Enactment: Housing Act of 1949

Program Description: Variant of the Section 502 Direct Loan program (described above), designed to assist low- and

moderate-income rural households in purchasing homes. In this case, the Rural Housing Service does not make a loan

directly to an eligible borrower, but instead guarantees a loan made by a commercial lender.

Homebuyer Eligibility: Homebuyers must have incomes at or below 115% of the area median and be unable to qualify

for conventional mortgage credit.

Number of Existing Units: 215,708 as of April 2001

FY 2001 Authorized Level: $3,136,000,000 (guaranteed loan level supportable by subsidy budget authority)

FY 2001 Program Level: In FY 2001, $2,171,000,000 in new loan disbursements were made for the Section 502 and

Section 538 loan guarantee programs combined.

Current Status: The FY 2002 obligation is estimated at $3,137,968,750.

Section 538 Rural Rental Housing Guarantee Program

Enactment: Housing Act of 1949

Program Description: Guarantees up to 90% of the total loan amount for development of rural rental housing.

Applicants must be approved by Fannie Mae, Freddie Mac, HUD or a state HFA. The guarantees are awarded by NOFA

applications on a monthly basis. In FY 2000, an earlier demonstration program became the Section 538 Guaranteed

Rural Rental Housing Loan.

Tenant Eligibility: Very low- or moderate-income families. Elderly or disabled persons are permitted with incomes up to

115% of area median income.

Number of Existing Units: 672 units as of January 2002

FY 2001 Authorized Level: $100,000,000 (guaranteed loan level supportable by subsidy budget authority)

FY 2001 Program Level: In FY 2001, $2,171,000,000 in new loan disbursements were made for the Section 502 and

Section 538 programs combined.

Current Status: In 2000, the Section 538 program guaranteed 2,895 units.

Tax and Bond Programs

Private Activity Bonds

Enactment: Private activity bonds were referred to as Industrial Development Bonds before the Tax Reform Act of

1986.

Program Description: Tax-exempt bond issuances from the state that have a public benefit but can be used by private

individuals. A per capita allocation is provided to each state, with a “small state minimum” of $225 million. Uses

include single-family and multifamily housing, manufacturing facilities, student loans, transportation, municipal

services, among others.

FY 2002 Authorized Level: $24,216,606,217

FY 2001 Program Level: $3,750,000,000 (outlay equivalent of tax expenditures)
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Current Status: Per capita allocation was put in place in 1986 and set at $50. This amount was raised in 2001 and will

now increase with inflation.

Mortgage Revenue Bonds

Enactment: Single-family bonds were authorized by the Tax Code of 1954 and generally followed Industrial

Development Bond rules until enactment of the Mortgage Subsidy Bond Tax Act of 1980. This act created “mortgage

subsidy bonds” and restricted their issuance through various requirements, including purchase price limits.

Program Description: Low interest-rate bonds issued as part of the private activity bond authority are used to provide

below-market interest rate mortgages to first-time homebuyers to lower the costs of homeownership.

Homebuyer Eligibility: First-time homebuyers with up to median income (either state or area). The cost of the home

cannot exceed 90% of the area average purchase price. In disadvantaged areas, income and price limits can be higher.

2000 Program Level: $10,767,892,177 (total 2000 issuance); $1,150,000,000 (outlay equivalent)

Current Status: Through 2000, 2,177,873 loans had been made through the MRB program. Most loans are used to

assist homebuyers with incomes below the program limits.

Tax-Exempt Multifamily Bonds

Enactment: Tax-exempt multifamily bonds were authorized under the Tax Code of 1954 as Industrial Development

Bonds. The 1986 Tax Reform Act prohibited issuance of industrial development bonds except for certain purposes,

such as creation of rental housing.

Program Description: Authority for state HFAs to issue bonds (private activity, taxable, nonprofit or government

purpose) for multifamily housing. Bonds for nonprofits are uncapped; issuances for all other groups have limits.

Project Eligibility: Developers have two ways to meet affordability requirements—20% of the units in the development

must be available to tenants with less than 50% of area median income, or 40% of the units must be occupied by

tenants with incomes of less than 60% of area median.

Rent Structure: Rents must be held at a reasonably affordable level "consistent with other federal programs." This is

generally interpreted as no more than 30% of the selected income thresholds.

Number of Existing Units: 766,392 as of the end of 2000

2000 Program Level: $1,668,713,563 (total new issuances); $280,000,000 (outlay equivalent)

Current Status: This program financed 52,000 units in 2000. Three-quarters of these units were affordable to families

with 60% or less of area median income.

Low Income Housing Tax Credit

Enactment: Tax Reform Act of 1986

Program Description: A ten-year tax credit as an incentive to private developers to acquire, build or rehabilitate lowincome rental units. Developers enter into a minimum 30-year, extended low-income use agreement. Four percent tax

credits are uncapped and can be used in combination with tax-exempt multifamily bonds. Nine percent tax credits are

authorized based on a per capita allocation by state; they are administered by state HFAs and can be used in

conjunction with certain additional subsidies. Developers also have access to a national pool of unused tax credits
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Project Eligibility: Developers have two ways to meet affordability requirements—20% of the units in the development

must be available to tenants with less than 50% of area median income, or 40% of the units must be occupied by

tenants with incomes of less than 60% of area median.

Rent Structure: Gross rents on designated units may not exceed 30% of the “imputed income limitation,” which is the

maximum income a family within the rent restrictions could have.

Number of Existing Units: 1,122,240 units received allocations (of 9% credits) between 1987 and 2000.

FY 2002 Authorized Level: $513,800,832 in per capita credits

FY 2001 Program Level: $4,360,000,000 (outlay equivalent)

Current Status: Tax credits serve an even lower-income population than is required and produce 60,000-100,000 units

per year. Per capita allocations have recently been raised and starting in 2003, both the per capita allocation and small

state minimum will be adjusted for inflation.

Fair Housing

Fair Housing Initiatives Program (FHIP)

Enactment: Civil Rights Act of 1968

Program Description: Funds fair housing enforcement efforts. The program concentrates on areas where significant

discrimination has occurred or where there is a lack of local fair housing assistance or enforcement services. Funds can

be used for starting new organizations aiding grantees to use good methods to investigate or resolve fair housing

complaints.

Applicant Eligibility: Eligible entities include state and local government, public or private nonprofit organizations or

institutions, and other public or private entities formulating or carrying out programs to prevent or eliminate

discriminatory housing practices.

Beneficiary Eligibility: Any person or group of persons aggrieved by a discriminatory housing practice because of race,

color, religion, gender, disability, familial status, or national origin.

FY 2001 Budget Authority: $24,000,000

FY 2001 Outlays: See FHAP below

Current Status: In FY 2000, FHIP made 26 awards totaling about $5.5 million. One of the projects was national in scope

while the rest were regional, local or community-based. Six grants emphasized disability rights or homeownership.

Fair Housing Assistance Program (FHAP)

Enactment: Civil Rights Act of 1968

Program Description: Funds to promote coordination of federal, state, and local efforts to enforce and uphold fair

housing laws. Funding is provided through a formula grant for enforcement and training activities.

Applicant Eligibility: State and local fair housing enforcement agencies administering state and local fair housing laws

and ordinances that have been certified by HUD. The agencies must be dedicated to upholding the Fair Housing Act

and have executed formal written agreements with HUD to process housing discrimination complaints. 
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Beneficiary Eligibility: Any person or group of persons aggrieved by a discriminatory housing practice because of race,

color, religion, gender, disability, familial status, or national origin.

FY 2001 Budget Authority: $22,000,000

FY 2001 Outlays: FHIP and FHAP together had outlays of $39,000,000

Current Status: Since passage of the strengthened Fair Housing Act in 1989, 89 jurisdictions have amended their fair

housing laws to make them substantially equivalent to the Act. In 2000, 88 jurisdictions received financial assistance

under this program.

Federal Income Tax Treatment

Rental Housing Deductions

Distinction Between Cash Flow and Taxable Income: Depreciation and amortization are deductible expenses for

federal income tax purposes; deposits to the reserve for replacements and mortgage principal payments are not. A

substantial fraction of rental property cash flow is therefore sheltered from taxes, at least in the early years when

depreciation and amortization deductions are high and when reserve deposits and principal payments are low.

Refinancing: Excess proceeds are not subject to income taxation but, instead, create a deferred income tax liability

payable when the property is sold.

Basis: The rental property owner’s basis is the original acquisition cost, plus additional capital investments made over

time, minus depreciation deductions. Any amount that exceeds this is taxed at the capital gains rate.

“Step up on Death”: Under current tax law, if an owner dies, his or her estate receives the rental property at its fair

market value and no capital gain is recognized. This creates a powerful incentive for owners of rental property to hold

properties until death.

Depreciation: Under current tax law, investments in buildings can be depreciated on a straight-line basis over a

standard 27.5-year useful life. Investments in fixtures and site improvements can be depreciated over shorter useful

lives.

Passive losses: Prior to 1986, owners whose rental properties generated tax losses could offset those losses against other

taxable income. In 1986, however, Congress provided that passive losses could be offset only against passive income and

not against other types of income. This restriction does not apply to active investors (generally, real estate professionals

who directly manage their real estate investments).

Homeowner Deductions

Mortgage interest: Homeowners who itemize on their tax returns can deduct the interest paid pay on their mortgages.

Capital gains on sales: Only gains on home sales that exceed $250,000 per individual are taxable.

State and local property taxes: Homeowners may deduct the value of state and local property taxes paid on their

homes.

Information verified by Abt, Associates, Inc.

Sources: Catalog of Federal Domestic Programs website (http://www.cfda.gov/); Code of Federal Regulations; HUD

website ( http://www.hud.gov/); HUD Office of the Deputy Assistant Secretary for Public and Assisted Housing

Delivery, Real Estate and Housing Performance Division; National Council of State Housing Agencies; Congressional
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Legislation website ( http://thomas.loc.gov); U.S. General Accounting Office, Multifamily Housing: Issues Related to Markto-Market Program Reauthorization, Report #GAO-01-800, July 11, 2001; Barry G. Jacobs, HDR: Handbook of Housing and

Development Law: 1999 (New York: West Group, 1998); National Association of Home Builders. Low and Moderate Income

Housing: Progress, Problems and Prospects (Washington, D.C.: 1986).
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Appendix 4 | Acronyms Used in Report

ACC Annual Contributions Contract

AIDS Acquired Immune Deficiency Syndrome

AMI area median income

AMT alternative minimum tax

BMIR below-market interest rate

CBD central business district

CBO Congressional Budget Office

CDBG Community Development Block Grant

CDC community development corporation

CDFI Community Development Financial Institution

CRA Community Reinvestment Act

DOI U.S. Department of the Interior

DOL U.S. Department of Labor

DOT U.S. Department of Transportation

EITC earned income tax credit

ELI extremely low income

EMSA eligible metropolitan statistical area

EZ/EC Empowerment Zone / Enterprise Community

FASIT Financial Asset Securitization Investment Trust

FHA Federal Housing Administration

FHAP Fair Housing Assistance Program

FHIP Fair Housing Initiatives Program

FHLB Federal Home Loan Bank

FHLMC Federal Home Loan Mortgage Corporation (Freddie Mac)

FmHA Farmers Home Administration

FMR Fair Market Rent

FNMA Federal National Mortgage Association (Fannie Mae)

FSS Family Self-Sufficiency program

GAO General Accounting Office

GCCA Government Corporation Control Act

GDP Gross Domestic Product

GI/SRI General Insurance and Special Risk Insurance fund

GNMA Government National Mortgage Association (Ginnie Mae)
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GSE government-sponsored enterprise

HAP Housing Assistance Payment

HDR Housing and Development Reporter

HFA housing finance agency

HHS U.S. Department of Health and Human Services

HI high income

HIV human immunodeficiency virus

HOME Home Investment Partnerships Program

HOPWA Housing Opportunities for Persons with AIDS

HQS Housing Quality Standards

HUD U.S. Department of Housing and Urban Development

IBC International Building Code

IHDA Individual Homeownership Development Account

IRA Individual Retirement Account

IRC Internal Revenue Code

LI low income

LIHTC Low Income Housing Tax Credit

LTV loan to value

MAP Multifamily Accelerated Processing

MFIP Minnesota Family Investment Program

MI moderate income

MRB Mortgage Revenue Bond

MSA metropolitan statistical area

MTO Moving to Opportunity program

NAHASDA Native American Housing Assistance and Self Determination Act

NCDI National Community Development Initiative

NOFA Notice of Funding Availability

OFHEO Office of Federal Housing Enterprise Oversight

OMB Office of Management and Budget

OMHAR Office of Multifamily Housing Assistance Restructuring

PHA public housing authority or agency

PHAS Public Housing Assessment System

PHMAP Public Housing Management Assessment Program

PTI preservation tax incentive

QAP Qualified Allocation Plan

QHWRA Quality Housing and Work Responsibility Act of 1998

RAP Rental Assistance Payment
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REMIC Real Estate Mortgage Investment Conduit

RESPA Real Estate Settlement Procedures Act

RHS Rural Housing Service

TANF Temporary Assistance to Needy Families

TILA Truth in Lending Act

VA Veterans Administration

VLI very low income

WIA Workforce Investment Act
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Appendix 5 | Materials Available on CD-ROM & MHC Website

In addition to its report, the Millennial Housing Commission makes available a number of items on its CD-ROM and website

(www.mhc.gov).

CD-ROM

• Description of methods by which the Commission sought public input.

• List of Commission-sponsored meetings and hearings, including names of participants.

• Text of letter the Commission distributed seeking input on key issues, as well as a list of the people and organizations to

which it was sent.

• Hearing testimony and statements submitted during other Commission-sponsored meetings.

Website

• Letter from MHC Co-Chairs Susan Molinari and Richard Ravitch.

• The Commission’s legislative mandate and mission statement.

• Commissioner bios.

• Commission task forces.

• List of MHC hearings and links to testimony.

• Consultant products.

• List of focus meetings and links to statements.

• Responses to MHC solicitation letter, including summaries of responses on a variety of topics.

• PowerPoint presentation entitled “Federal Housing Assistance.”
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Appendix 6 | Acknowledgments

The Commissioners and staff wish to recognize the following individuals for their ongoing involvement and support, which was

especially important to the completion of the Commission’s work.

Sarah Eilers

Rita Harding, Executive Assistant, Ravitch Rice & Co. LLC

Dina Lehmann, U.S. Department of Housing and Urban Development

Jeffrey M. Lubell, Director, Policy Development Division, Office of the Deputy Assistant Secretary for Policy

Development, U.S. Department of Housing and Urban Development

Teresa Meyers, Executive Assistant, Alaska Housing Finance Corporation

Kathryn P. Nelson, Economist, Office of Policy Development, U.S. Department of Housing and Urban Development

O. Angie Nwanodi, Deputy Director of Housing Policy, National Housing Development Corporation

David A. Vandenbroucke, Economist, U.S. Department of Housing and Urban Development

Roberta Youmans, Federal Housing Finance Board

The Commissioners and staff would also like to thank the following individuals, all of whom contributed in meaningful ways to the

work of the Commission.

Daniel S. Anderson, Senior Vice President, Community Development Banking, Bank of America

Roland Anglin, Senior Vice President, SEEDCO

Frederic L. Ballard, Jr., Partner, Ballard Spahr Andrews & Ingersoll, LLP

Julio Barreto, Legislation & Program Development, Division Director, National Association of Housing and

Redevelopment Officials

Richard Belas, Partner, Davis & Harman

Joseph Belden, Deputy Executive Director, Housing Assistance Council

Peter H. Bell, Executive Director, National Housing and Rehabilitation Association

Nate S. Betnun, Principal, Legg Mason Wood Walker, Inc.

Thomas Bledsoe, President, Housing Partnership Network

Rodger Boyd, Program Manager, Community Development Financial Institutions Fund

Sara Brazeal, Program Associate, Local Initiatives Support Corporation

William O. Brisben, CEO and Chairman, Brisben Development, Inc.

Paul Brophy, Principal, Brophy and Reilly
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Mike Buller, Chief Administrative Officer, Alaska Housing Finance Corporation

Kim H. Burke, Ernst & Young LLP

Judy Calogero, Deputy Commissioner, New York State Division of Housing and Community Renewal

Chad Chirico, Analyst, Congressional Budget Office

Raymond R. Christman, President and CEO, Federal Home Loan Bank of Atlanta

Janet Clarke, Board Member, Alaska Housing Finance Corporation

Mike Cook, Board Member, Alaska Housing Finance Corporation

Pat Costigan, Senior Vice President, The Community Builders

Lamar Cotton, Board Member, Alaska Housing Finance Corporation

Marsha Courchane, Principal Economist, Freddie Mac

David Crowe, Senior Staff Vice President, Housing and Finance Policy, National Association of Home Builders

Kevin Day, Senior Research Analyst, Harvard University, Graduate School of Design

Judith DeSpain, Deputy Executive Director, Alaska Housing Finance Corporation

Anthony Downs, Senior Fellow, The Brookings Institution

Joe Dubler, Chief Financial Officer / Director, Alaska Housing Finance Corporation

Mark Duda, Research Analyst, Joint Center for Housing Studies of Harvard University

Frantz Dutes, Program Manager, Orange County Housing and Community Development Division

Charles L. Edson, Senior Counsel, Nixon Peabody LLP

Mark J. Einstein, CPA, Principal, Reznick Fedder & Silverman

Gary R. Eisenman, Executive Vice President, Related Capital Company

Paul Emrath, Regulatory Economist, National Association of Home Builders

Nick Farr, Executive Director, National Center for Lead-Safe Housing

Dennis Fricke, Assistant Director, U.S. General Accounting Office

Vernon M. Fuller, Rural Development Specialist, USDA Rural Development

Daniel Garcia-Diaz, Housing Analyst, U.S. General Accounting Office

Chrisanne Gayl, Special Temporary Assistant to the Commission

Richard C. Gentry, Senior Vice President, Asset Management, National Equity Fund, Inc.

David Gilmore, Managing Partner, Gilmore, Kean

Mitchell L. Glasser, Manager, Orange County Housing and Community Development Division

Rich Godfrey, Executive Director, Rhode Island Housing Finance Agency
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Edward Golding, Senior Vice President, Financial Research, Freddie Mac

Jeff Goldstein, Executive Vice President, Director of Real Estate, Boston Capital Corporation

Debbie Gross, Ph.D., Research Director, Council of Large Public Housing Authorities

Bob Grove, Board Vice-Chair, Alaska Housing Finance Corporation

Theresa A. Hayes, Communications Director, City of San Jose Department of Housing

John Hazelroth, Executive Director, Nonprofit Housing Roundtable of Central Florida

Anker Heegaard, Principal, The Compass Group, LLC

Charles Hill, Illinois Mine Subsistence Insurance Fund

Steven Hornburg, Consultant

Jewel Jones, Board Chair, Alaska Housing Finance Corporation

Steve Kantor, President, Arimax Financial Advisors

Paul Kapansky, Mortgage Operations Director, Alaska Housing Finance Corporation

Claudia Kedda, Director, Multifamily Finance, Housing Finance Department, National Association of Home Builders

Richard Kogan, Senior Fellow, Center on Budget and Policy Priorities

Ellen Lazar, Executive Director, Neighborhood Reinvestment Corporation

David Learah, Senior Vice President and Chief Economist, National Association of Realtors

Dave Ledford, Staff Vice President, Housing Finance, National Association of Home Builders

Ruth Lednicer, Assistant to the Mayor, Office of the Mayor, City of Chicago

Lezli Levene

Judd S. Levy, President and Chief Executive Officer, Community Development Trust

Kenneth G. Lore, Partner, Swidler Berlin Shereff Friedman, LLP

Eugene T. Lowe, Assistant Executive Director, The U.S. Conference of Mayors

Moises Loza, Executive Director, Housing Assistance Council

Edward J. Lubitz, Senior Vice President, Collins & Company, LLC

Jeffrey A. Lupisella, Principal, Vizuäl, Inc.

Kristy McCarthy, Executive Director, Coalition for Indian Housing and Development

John K. McIlwain, Senior Resident Fellow, ULI / J. Ronald Terwilliger Chair for Housing

John Monahan, Senior Fellow, Annie E. Casey Foundation

Andrew Mooney, Senior Program Director, Local Initiatives Support Corporation

Robert C. Moss, Vice President, Boston Capital Corporation
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Beth A. Mullen, CPA, Principal, Reznick Fedder & Silverman

Marcus Murga

John Murphy, Executive Director, National Association of Local Housing Finance Agencies

Lori Myers-Carpenter, Marketing Coordinator, National Association of Housing and Redevelopment Officials

Clarine Nardi-Riddle, Senior Vice President, Government Affairs, National Multi Housing Council

Frank Nothaft, Chief Economist, Freddie Mac

Mark Obrinsky, Chief Economist / Vice President of Research, National Multi Housing Council

David Ortega, Events Coordinator, The Cultural Center of Chicago

Sarah Pang, First Deputy Chief of Staff, Office of the Mayor, City of Chicago

Larry Persily, Board Member, Alaska Housing Finance Corporation

Aquila Powell, Associate Director, Washington Office, City of Chicago

Wendell Primus, Director of Income Security, Center on Budget and Policy Priorities

Robert A. Rapoza, Executive Secretary, National Rural Housing Coalition

Susan Rees, Director, Policy & Research, McAuley Institute

Nooley Reinheardt, Nooley Reinheardt & Associates

Nicolas P. Retsinas, Director, Joint Center for Housing Studies of Harvard University

Garth Rieman, Director for Program Development, National Council for State Housing Agencies

Gene Rizor, Vice President, Quadel Consulting Corporation

Benson Roberts, Vice President, Policy, Local Initiatives Support Corporation

Ellen Roche, Managing Director, Business Research, National Association of Realtors

Jacqueline Rogers, Senior Fellow, University of Maryland School of Public Affairs

Nan P. Roman, President, National Alliance to End Homelessness

Mark Romick, Planner II, Alaska Housing Finance Corporation

Don Ryan, Executive Director, Alliance to End Childhood Lead Poisoning

Barbara Sard, Director of Housing, Center on Budget and Policy Priorities

Kris Sarri, Legislative Director, Northeast-Midwest Senate Coalition

Joe Schiff, President, The Schiff Group

Michael Schoenbeck, Senior Financial Analyst, Financial Research Department, Freddie Mac

Morton J. Schussheim, Former Senior Specialist in Housing, Government and Finance Division, Congressional

Research Service, The Library of Congress
122

Harry Sewell, Director, Maryland Community Development Administration

Marty Shuravloff, Board Member, Alaska Housing Finance Corporation

Ray Skinner, Secretary, Maryland Department of Housing and Community Development

Heather L. Smith, Program Manager, Chicago Metropolis 2020

Rod Solomon, Deputy Assistant Secretary for Policy, Programs and Legislative Initiatives, U.S. Department of Housing

and Urban Development

Leslie A. Steen, President, Community Preservation and Development Corporation

Deidre Swesnik, Policy Associate, National Rural Housing Coalition

Barbara Thompson, Executive Director, National Council of State Housing Agencies

Michael Tierney, Senior Vice President for Programs, Local Initiatives Support Corporation

Nancy J. Trick, CPA, Director, Reznick Fedder & Silverman

Margery Turner, Director, Metropolitan Housing Communities Center, The Urban Institute

Shannon Van Zandt, Doctoral Candidate, Department of City and Regional Planning, University of North Carolina at

Chapel Hill

Alexander von Hoffman, Research Fellow, Joint Center for Housing Studies of Harvard University

Joanne Veto, Director of Public Affairs, The Enterprise Foundation

Gordon Walik, Program Associate, Local Initiatives Support Corporation

Tom Warnke, Director, Local Communications, Local Initiatives Support Corporation

Paul Weech, Managing Director of Policy Development, Fannie Mae

Betty Weiss, Executive Director, National Neighborhood Coalition

Stanley N. Wellborn, Director, External Affairs, Annie E. Casey Foundation

Peter Werwath, Vice President, The Enterprise Foundation

James Wiedel, Planner I, Alaska Housing Finance Corporation

Stockton Williams, Senior Director, The Enterprise Foundation

Zhu Xiao Di, Research Analyst, Joint Center for Housing Studies of Harvard University

David E. Yudin, Director, Washington Office, City of Chicago

Sunia Zaterman, Executive Director, Council of Large Public Housing Authorities

Barry Zigas, Senior Vice President, Director of National Community Lending Center, Fannie Mae

Peter Zorn, Vice President, Housing Economics, Freddie Mac
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The following individuals and organizations served as consultants (contractors) and informed the findings and recommendations

of the Commission.

William C. Apgar, Senior Scholar, Joint Center for Housing Studies of Harvard University

Lisa K. Bates, University of North Carolina at Chapel Hill

Charles Buki, Consultant, czbLLC

Michael Collins, Analyst, Neighborhood Reinvestment Corporation

Wendell Cox, Principal, Wendell Cox Consultancy

Shaun Donovan

Al Eisenberg

Jack Goodman, President, Hartrey Advisors

Jill Khadduri, Principal Associate, Abt Associates, Inc.

Sheila Maith

George S. Masnick, Senior Research Fellow, Joint Center for Housing Studies of Harvard University

John McEvoy, Consultant, Author, and former Executive Director, National Council of State Housing Agencies

National Academy of Public Administration

Robert G. Quercia, Professor, University of North Carolina at Chapel Hill

Robert Rozen, Washington Council Ernst & Young, LLP

Mary Ann Russ, Principal Associate, Abt Associates, Inc.

Michael Schill, Director, Center for Real Estate and Urban Policy, New York University

John Sidor, Principal, The Helix Group

David A. Smith, President, Recapitalization Advisors, Inc.

Jennifer Turnham, Associate, Abt Associates, Inc.

Sarah Rosen Wartell, Visiting Scholar, Georgetown University Law Center

Charles S. Wilkins, Jr., Principal, The Compass Group, LLC

Many others helped the Commission in its deliberations, including assistants to the Commissioners, advisors to Commissioners and

staff, and those who helped develop programming and materials for the Commission hearings,

forums, and other activities.
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Staff of the Millennial Housing Commission

Conrad Egan, Executive Director

Eric S. Belsky, Director of Research

Sylvia Boone, Secretary

Thalia Brown, Policy Analyst

Darren Franklin, Director of Administration

Jennifer C. Lavorel, AICP, Director of Operations

Michael Patterson, Director of Communications

Kristin Siglin, Director of Policy