BACKGROUND PAPER

Federal Housing Policy:

Current Programs and

Recurring Issues

June 1978

fBfZ.

Congress of the United States

Congressional Budget Office
FEDERAL HOUSING POLICY:

CURRENT PROGRAMS AND RECURRING ISSUES

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, 0.C. 20402
PREFACE

Each year, the Congress faces a number of recurring issues

concerning the funding, design, and operation of federal housing

programs as well as specific proposals for altering current

housing policy. This paper, prepared at the request of the

Senate Budget Committee, presents an overview of federal housing

policy to provide a background for addressing those issues and

evaluating specific budgetary and programmatic proposals.

Martin D. Levine of CBO's Human Resources and Community

Development Division prepared this paper under the general

supervision of Robert D. Reischauer and David S. Mundel. Paul

Warren provided technical assistance in completing the data

analysis. A large number of individuals contributed useful

comments on earlier drafts, including Donald Campbell, Michael

Deich, John W. Ellwood, John Korbel, Brent Shipp, and James M.

Verdier. The paper was edited by Marion F. Houston. Jill Bury

patiently and expertly typed the several drafts of the paper and,

with Toni Wright, prepared the manuscript for publication.

In accordance with CBO's mandate to provide objective and

impartial analysis, this paper contains no recommendations.

Alice M. Rivlin

Director

June 1978

iii

CONTENTS

PREFACE ill

SUMMARY ix

CHAPTER I. INTRODUCTION 1

CHAPTER II. THE OBJECTIVES OF FEDERAL HOUSING

POLICY AND CURRENT HOUSING NEEDS 3

Ensuring the Availability of Adequate and

Affordable Housing 3

Increasing Residential Construction and Reducing

Instability in the Homebuilding Industry 13

Expanding Access to Credit 15

Encouraging Homeownership 16

Providing Equal Housing Opportunities 18

Providing Housing for Special Users 19

Encouraging Community Development and

Neighborhood Preservation and Revitalization 20

CHAPTER III. CURRENT HOUSING PROGRAMS 23

Housing Assistance Programs 23

Housing-Related Community Development Programs 35

Mortgage Credit Activities 37

Housing-Related Tax Expenditures 42

Housing and Credit Market Regulations 47

CHAPTER IV. THE BUDGETARY FRAMEWORK OF FEDERAL

HOUSING POLICY 49

The Budgetary Framework 49

Program Costs 53
CONTENTS (Continued)

Page

CHAPTER V. RECURRING HOUSING POLICY ISSUES 61

The Funding Level of Housing Assistance

Programs 61

The Appropriate Mix of Housing Assistance

Programs 65

Providing Lower-Income Homeownership

Assistance 68

Encouraging Residential Construction and

Stabilizing the Home Building Industry 70

Housing Assistance Programs and Community

Development 73

vi
TABLES

1. Trends in the Physical Adequacy of Housing,

1940-1976 6

2. Trends in Overcrowded Housing, 1940-1976 9

3. Percent of Households Paying 25 Percent of More

of Annual Family Income for Housing, by Tenure:

1950-1976 10

4. Percent of Specified Households Paying 25 Percent

or More of Family Income for Housing, by Annual

Family Income, 1976 11

5. Privately Owned Single-Family and Multifamily

Housing Construction Starts: Calendar Years

1967-1976 13

6. Amount and Percent of Outstanding Mortgage Debt

on Nonfarm One- to Four-Family Homes, Federally

Held or Federally Insured or Guaranteed, 1960-1976 16

7. Distribution of Ratios of Housing Costs to Income

Among Renters Buying Homes in 1976, by Annual

Family Income 18

8. Percent of Households Occupying Units in Need of

Rehabilitation, by Annual Family Income and Race,

1976 19

9. Percent of Households Reporting Selected

Undesirable Neighborhood Conditions, by Annual

Family Income and Location, 1976 21

10. Primary and Secondary Objectives of Current Federal

Housing Programs and Housing-Related Activities 24

vii
TABLES

11. Approximate Number of Assisted Housing Units

Occupied and in Process, by Program, 1977 26

12. Selected Characteristics of Recipient Households

in Current Major Housing Assistance Program, 1977 28

13. Status of Major Federal Home Loan and Mortgage

Insurance and Guarantee Programs, 1977 38

14. Distribution of Benefits of Major Housing-Related

Tax Expenditures by Income of Beneficiary,

Fiscal Year 1977 44

15. The Budgetary Framework of Federal Housing Policy 50

16. Budget Authority and Outlays for Housing in 1978,

Projections of Current Policy for 1979-1983, and

Requested Funding for 1979 55

17. Estimated Revenue Losses Resulting from Major

Housing-Related Tax Expenditures, 1978-1983 60

viii
SUMMARY

Each year the Congress faces a number of recurring issues

concerning the funding, design, and operation of federal housing

programs. The complexity of current housing programs, the

numerous policy objectives and changing housing needs they are

intended to address, and uncertainty as to their effectiveness

contribute to the occurrence of these issues and make it difficult for the Congress to deal with them conclusively.

POLICY OBJECTIVES AND CURRENT HOUSING NEEDS

Among the objectives of federal housing policy are: reducing

the incidence of substandard housing and overcrowding, and

alleviating excessive housing costs; increasing residential

construction and reducing cyclical instability in the home

building industry; expanding access to mortgage credit and

encouraging homeownership; encouraging residential integration

and deconcentration of lower-income households; providing housing

for individuals with special needs due to age or disability; and

promoting community development, and neighborhood preservation

and revitalization. Progress towards those objectives has

been uneven. Improvements in one area have sometimes been at the

expense of gains in other areas, creating shifting policy concerns. Available evidence regarding current housing needs

and persisting problems reveals that:

o Substandard housing and overcrowding are much less common

today than in the past, but large numbers of lowerincome families remain ill-housed. Between 1940 and

1970, the proportion of all occupied housing units that

were dilapidated or lacked complete plumbing facilities

declined from 49 to 7 percent and the proportion of all

families living in units with more than one person per

room dropped from 20 to 8 percent. Nevertheless, in

1976, 13 percent, or 3.9 million, of all families with

incomes low enough to qualify them for federal low- and

moderate-income housing assistance were living in units

needing rehabilitation; 7 percent, or 2 million, lived

in units with more than one person per room.

29-939 O - 78 - 2
o The share of family Income allocated to housing has

increased in recent years, and housing cost burdens

are especially great among low^r-income families.

Between 1950 and 1976, the proportion of all cash renters

paying one-fourth or more of their income for housing

increased from 31 percent to 47 percent. In 1976, 61

percent of all renters with an income below $10,000 were

paying more than one-fourth of their income for housing;

19 percent were paying greater than one-half. Among

homeowners with an income of less than $10,000, 39

percent were devoting more than one-fourth of their

income for housing, and 10 percent were paying more than

one-half•

(

o Despite—or, perhaps because of—numerous federal

interventions, the residential construction industry

remains highly cyclical. Between 1967 and 1976, the

annual number of construction starts for privately owned

housing has varied from 1.2 to 2.4 million units, and

swings of 30 percent or more in a single year have been

common.

o The overall rate of homeownership is high, and it has

continued to grow, even in the face of sharply rising

costs; however, the rate of increase has begun to slow,

as first-time homebuyers are having to spend an increasing share of their income on housing. In 1976,

65 percent of all households were owner-occupants,

and nearly half of all families with an annual income

of less than $10,000 owned their own home. Among

renters who bought homes in that year, the median proportion of income devoted to homeownership was 22 percent; for first-time buyers with an income below $10,000,

the median housing cost was 34 percent of income.

o Despite federal prohibitions against discrimination

in the sale and rental of housing and in mortgage lending, racially discriminatory practices persist. Partly

as a consequence of this discrimination, there are

significant disparities in the housing conditions of

black and white families with similar incomes.

o Reports of undesirable neighborhood conditions are

common among higher- as well as lower-income households,

in both urban and non-urban locations. Recent data show
no improvement in neighborhood conditions paralleling the

improvement in the physical adequacy of the housing

stock. Data on the social viability of neighborhoods, an

issue of increasing concern, are not available.

CURRENT HOUSING PROGRAMS

Unmet housing needs are currently addressed through a

variety of direct housing assistance programs, housing-related

community development programs, mortgage credit activities, tax

provisions, and regulatory activities (see Summary Table 1).

During fiscal year 1978, direct federal expenditures for housing

will total over $5 billion, and more than twice that amount will

be lost in revenues because of housing-related tax benefits.

Housing Assistance Programs. Housing assistance programs

provide lower-income families with physically adequate housing

and reduce their housing costs to between 15 and 30 percent of

their income. Most programs benefit renters only, permitting

lower-income families and elderly or handicapped individuals—

those whose income is 80 percent or less of the median in their

area of residence—to live in predesignated projects or in

existing housing in the private market while paying only a

fixed percentage of their income for rent and utility expenses.

Homeownership assistance programs reduce mortgage interest costs

for families with incomes of up to 95 percent of the area

median. Because of funding limitations, however, housing assistance programs serve only a small portion of the income-eligible

population. As of the end of of 1977, approximately 2.5 million

households were receiving assistance; in fiscal year 1978,

federal outlays for assisted housing are expected to total $4

billion.

Community Development Programs. Several community development programs subsidize housing rehabilitation by lowering the

cost of the units or by providing below-market interest rate

financing. Community development programs may also fund local

building code enforcement and neighborhood revitalization projects and may be used to provide relocation assistance to persons

displaced through government action. Housing-related community

development programs may benefit persons at a higher income level

than those eligible for direct housing assistance. In fiscal

year 1978, outlays for community development programs affecting

housing are expected to exceed $700 million.

xi
SUMMARY TABLE 1. PROJECTED COST OF PRINCIPAL FEDERAL HOUSING PROGRAMS, FISCAL YEAR 1978:

IN MILLIONS OF DOLLARS

Program Description

Projected Fiscal Year 1978

Outlay or Revenue Loss

Housing Assistance Programs

Low-Rent Public Housing. Pays development costs and annual operating subsidies for rental projects owned and managed by local

public agencies and rented to lower-income tenants at reduced

charges.

Section 8 New Construction/Substantial Rehabilitation. Subsidizes

rents of lower-income households occupying public and privately

developed projects. Federal payment per unit equals the difference

between government-established Fair Market Rent and one-fourth of

tenant income.

Section 8 Existing Housing. Provides assistance on behalf of

households occupying physically adequate, moderate-cost rental

housing of their own choosing in the private market. Federal ^— 3,687

payment per unit similar to Section 8 new construction/substantial rehabilitation.

Section 235 Homeownership Assistance. Provides mortgage interest

subsidies to lower- and middle-income households purchasing new or

substantially rehabilitated homes.

Section 236 Rental Assistance and Rent Supplements. Section 236

subsidizes mortgages for rental housing projects. Rent supplements make subsidy payments to the owners of private rental

housing on behalf of lower-income tenants; generally used in

conjunction with mortgage subsidy projects.

Section 202 Housing for Elderly and Handicapped. Provides direct

loans for the development of rental housing for the elderly and 320

and handicapped. Projects also receive Section 8 subsidies.

(Continued)
SUMMARY TABLE 1. (Continued)

Projected Fiscal Year 1978

Program Description Outlay or Revenue Loss

Housing-Related Community Development Programs

Community Development Block Grants. Provides grants to local

governments, allocated by needs-based formulae. About one-fourth

of all CDBG funds go towards housing rehabilitation, building code

enforcement, and relocation assistance.

—.. 662 b_/

Urban Development Action Grants. Funds development projects

involving both private and public investment. Available to

distressed cities only.

Section 312 Rehabilitation Loans. Provides 3-percent interest

loans for the rehabilitation of privately owned housing for

occupancy by limited-income households. 43

Urban Homesteading. Makes federally held homes available at

nominal expense to limited-income persons willing to rehabilitate

and occupy units. cj

Mortgage Credit Activities

Direct Loan Programs. Farmers Home Administration provides

market-rate and subsidized home loans in credit-deficient rural

areas. Veterans Administration provides market-rate mortgages to

qualifying servicemen and veterans. 339

Mortgage Insurance Programs. Federal Housing Administration insures

market-rate single-family and multifamily mortgages and subsidized

mortgages on assisted housing projects. Farmers Home Administration

and Veterans Administration guarantee privately written mortgages in

credit-deficient areas. 704

(Continued)
SUMMARY TABLE 1. (Continued)

Projected Fiscal Year 1978

Program Description Outlay or Revenue Loss

Credit-Market Interventions. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and the Government

National Mortgage Association purchase and resell mortgages to

encourage use of capital for housing and provide limited financing

subsidies. Federal Home Loan Banks provide advances to financial

institutions to make up temporary credit shortages and stimulate

additional lending. -225 d/

Housing-Related Tax Expenditures

Homeownership Incentives. Permit deduction of mortgage interest

and property tax payments for owner-occupied housing; allow deferral

of capital gains on the sale of homes under certain circumstances;

and exclude capital gains taxation on the sale of residences by

elderly homeowners. 10,655 js/

Promoting Rental Housing Development. Accelerated depreciation

allowances for rental housing and the favorable treatment of construction-period interest and property tax payments for developers. 1,010 e/ fj

Tax Benefits for Financial Institutions. Preferential bad-debt

deduction allowances for financial institutions that serve as

primary sources of residential mortgage credit. 705

(Continued)
SUMMARY TABLE 1. (Continued)

Projected Fiscal Year 1978

Program Description Outlay or Revenue Loss

Housing and Credit Market Regulations

Guaranteeing Equal Housing Opportunities. Prohibitions against

discrimination in the sale and rental of most housing and in

mortgage lending• NA

Controlling Supply and Cost of Mortgage Credit. Regulations

govern maximum interest rates paid on deposits in financial

institutions and dictate minimum shares of assets applied to

home loans. NA

a/ Includes expenditures for public housing operating subsidies,

b/ Estimated share of expenditures to be allocated to housing.

cj New initiative proposed for fiscal year 1979; funded as a demonstration with outlays of

$15 million in fiscal year 1978.

df Cost of Government National Mortgage Association Special Assistance Functions Fund and

Emergency Mortgage Purchase Assistance program only. Operations of Federal National

Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan

Banks are off-budget.

e/ Simple arithmetic sum of separate tax expenditures. Because of overlap and interactions among separate expenditures, the total shown does not represent the amount

of additional revenue that would be raised if all provisions were repealed simultaneously.

f/ A substantial portion of this amount applies to nonresidential real estate.
Mortgage Credit Activities. Federal direct loan and mortgage insurance programs expand the access of homebuyers to credit

and, in certain cases, reduce the cost of home financing. Other

mortgage-credit activities are designed to increase private

lending by providing secondary markets for disposing of residential mortgages. Selected secondary market activities also

provide interest subsidies for privately developed assisted

housing and for residential development in distressed areas.

Still other federal programs directly allocate credit to housing

through advances to financial institutions that use the funds

for home loans. As of the end of fiscal year 1977, in excess of

900,000 direct federal loans were outstanding, and,an additional

8.8 million federally insured or guaranteed home loans were in

force. Outstanding advances to financial institutions totaled

$17 billion.

Tax Provisions. The federal tax code encourages homeownership by permitting taxpayers to deduct mortgage interest and

property tax payments, by allowing persons selling homes to defer

taxation on the capital gain if they purchase a new residence,

and by excluding some or all of the capital gain on sales by

elderly homeowners. Other provisions encourage rental housing

development by allowing developers favorable depreciation

deductions and permitting them to deduct certain development

costs as ongoing business expenses. Preferential bad-debt

allowances decrease the tax rate of financial institutions, which

serve as the principal sources of mortgage financing, to a level

less than half that of other corporations. All of these provisions primarily benefit middle- and upper-income taxpayers.

Together, they will account for more than $10 billion in lost

revenues during fiscal year 1978.

Housing and Credit Market Regulations. In order to promote

equal housing opportunities and expand the access of all homebuyers to credit, federal laws and regulations prohibit discrimination in the sale or rental of most housing and in mortgage

lending. Other federal regulations affect the supply and cost of

mortgage credit. By governing the types of loans that certain

financial institutions may make, regulations assure that a large

share of all credit goes towards housing; by controlling the

interest rates that financial institutions may pay on deposits,

they indirectly control the rates those institutions will charge

when they lend funds for mortgages.

xvi
RECURRING POLICY ISSUES

The Funding of Housing Assistance Programs. Each year,

the Congress must determine the level of funding to be allocated

to lower-income housing assistance. Most housing assistance

programs involve 15- to 40-year federal commitments funded in

advance, and the annual funding decision, therefore, requires

both a normative judgment as to the number of additional households to be assisted and an estimate of the spending that will

be needed to subsidize their housing costs over extended periods

of time. Although spending authority presumed to be sufficient

to pay the long-term federal expense is set aside the first

year in which a subsidy commitment is to be made, the actual

federal obligation is generally to pay the difference between

the operating expense of the housing unit, including debt-service

costs, and a fixed percentage of the occupants' income. Both

of those factors increase over time and are difficult to estimate for years in advance; thus, it is impossible to determine

with certainty what initial authorization will prove adequate

over the life of a subsidy commitment. The history of federal

housing assistance efforts has been one of substantially underestimating their actual long-term costs, making it necessary to

authorize additional spending in subsequent years to support

prior commitments.

The principal housing assistance programs since 1975 have

been Section 8, whose long-term costs are especially difficult to

predict, and public housing, which has required substantial

annual operating subsidies since the 1960s. New public housing

commitments to be entered into during fiscal year 1979 will

almost certainly require operating subsidies in the future.

Additional funding may also be required in subsequent years to

pay the long-term federal obligation associated with Section 8

subsidy commitments. Options for dealing with these long-term

funding uncertainties could include:

o requiring that alternative procedures be used to estimate

expected long-term program costs for all programs; and

o employing alternative funding procedures that would not

involve advanced funding.

The Choice of Types of Housing Assistance. In setting

the level of funding for housing assistance and the number of

households to receive aid, the Congress can also specify the mix

xvii

29-939 O - 78 -.3
of new, rehabilitated, and existing housing to be assisted* New

construction and substantial rehabilitation programs add to

the total supply of housing but may merely substitute for private

development. Existing housing aid does not contribute to construction but may improve long-term maintenance. Existing

housing assistance also expands the housing opportunities of the

families receiving assistance by allowing them to choose where

they wish to live. By contrast, new construction and rehabilitation programs limit persons to designated projects, and the

contribution of such programs to racial and economic integration

therefore depends on the location of the housing projects.

Rehabilitation programs may contribute to neighborhood revitalization by targeting development on areas where substandard

housing is located. Because of differences in allowable rents,

existing housing assistance is less than half as costly per unit

as assistance involving either new construction or substantial

rehabilitation.

The Adminstration's proposed fiscal year 1979 budget calls

for 110,000 additional units of Section 8 new construction,

70,000 units of Section 8 substantial rehabilitation, 56,000

newly built or rehabilitated units of public housing, and 164,000

additional commitments under Section 8 existing housing, including 39,000 units for a new moderate rehabilitation program.

Providing Lower-Income Homeownership Assistance. For

each of the past several years, the Congress has provided mortgage assistance enabling a limited number of lower-income

families to purchase homes. Both the number of recipients

and the extent of the mortgage subsidy have been recurring

issues. The Administration has proposed increasing the number of

additional families to receive assistance under Section 235 from

30,000 in fiscal year 1978 to 50,000 in fiscal year 1979 and the

number of subsidized Farmers Home Administration (FmHA) homeownership loans from 67,200 to 75,000. In addition, proposed

changes in Section 235 would allow the program to serve lowerincome persons than those who may currently receive assistance,

and the Administration has proposed a new FmHA homeownership

program for very low-income persons.

Other options available to the Congress for assisting

lower-income homeownerships include: expanding eligibility in

the Section 8 existing housing program to homeowners; and providing a refundable tax credit for a portion of mortgage interest

and property tax payments instead of the current deduction, which

xviii
benefits mostly higher-income persons. These options would assist

both current and potential homeowners. Homeownership tax credits

could also extend aid to families with incomes too high to

qualify for present housing assistance programs but too low to be

benefited by current homeownership deductions.

Encouraging Home Building and Stabilizing Residential

Construction Activity. The federal government has sought to

encourage residential construction since the enactment of the

first housing programs in response to the Depression. In recent

years, this concern has focused on stimulating particular

types of residential development and reducing the severity

of cyclical declines in the homebuilding industry. Tax reforms

proposed for fiscal year 1979 would reduce the potential profitability of rental housing but would leave housing relatively more

attractive than nonresidential investments and would continue to

provide especially favorable tax treatments for lower-income

rental housing. Other proposals would phase down certain

tax benefits enjoyed by banks and savings and loan associations,

thereby reducing the profitability of these primary sources of

mortgage credit. This year, the Congress is also considering

extending the access of certain types of mortgage lenders to

federally controlled secondary mortgage markets—a proposal

intended to expand the supply of credit for housing.

The Use of Housing Programs to Encourage Community Development. In recent years, there has been increasing concern that

housing programs promote community development as well as housing policy objectives. As part of this thrust, a new program

providing limited mortgage interest subsidies for the development

of private multifamily rental housing in distressed urban areas

is being implemented in fiscal year 1978. The Federal Home Loan

Banks will also begin providing funds this year to savings and

loan associations that will enable them to lend money for housing rehabilitation at rates below those that would otherwise

be possible. HUD has also proposed that a fixed percentage of

all Federal National Mortgage Association mortgage purchase

commitments be made in inner city areas. Significant expansions

in several housing rehabilitation programs proposed for fiscal

year 1979 are also likely to promote community revitalization.

xix

CHAPTER I. INTRODUCTION

In fiscal year 1978, the federal government will spend

more than $5 billion on housing and will lose more than twice

that amount in revenues as a result of housing-related tax provisions. Despite its significant effect on the federal budget

and on a major sector of the private economy, housing policy

remains among the most confusing and the least understood areas

of federal involvement. This confusion is not surprising, for

federal housing policy encompasses a complex set of direct housing assistance and community development programs, mortgage

credit activities, tax expenditures, and regulations governing

housing and mortgage credit markets. Together, these programs

address an equally complex set of policy objectives. In addition, federal housing programs are administered by numerous

agencies and are funded through numerous budgetary accounts and

financing mechanisms.

The scope and complexity of current housing policy, the

multiple and often contradictory objectives that policy is

intended to address, the difficulties in assessing the effectiveness of often overlapping housing programs, and the changing

nature of U.S. housing conditions and needs give rise to a

number of recurring issues concerning the appropriate type and

mix of housing programs and the distribution of resources among

them. This paper seeks to provide the Congress with an overview of the wide range of current federal housing programs and

housing-related activities, and an understanding of recurring

housing policy issues. Chapter II describes the objectives

of federal housing policy, assesses current housing needs, and

considers the degree to which federal programs have been responsible for progress already made. Chapter III examines existing housing and community development programs, credit market

activities, tax expenditures, and regulatory actions affecting

the supply, price, and distribution of housing. Chapter IV

describes the budgetary framework of housing policy and program

costs. Chapter V examines several housing policy issues, discusses proposals that are likely to be considered by this Congress, and outlines several longer-term policy options.

CHAPTER II. THE OBJECTIVES OF FEDERAL HOUSING POLICY

AND CURRENT HOUSING NEEDS

Among the sometimes explicit but often only implicit objectives of federal housing policy are:

o Ensuring the availability of adequate and affordable

housing, particularly among lower-income households;

o Increasing residential construction and reducing cyclical

instability in the home building industry;

o Increasing the availability of mortgage credit;

o Encouraging homeownership;

o Providing equal housing opportunities and encouraging

racial and economic integration;

o Providing housing for individuals with special needs due

to age or disability; and

o Encouraging community development and neighborhood

preservation and revitalization.

In the years since federal involvement in housing began,

attention has shifted among these objectives, in part because of

changes in housing conditions brought about by federal policies.

At times pursuit of some of these objectives has been at the

expense of gains in another area. This chapter examines the

degree to which each objective has been realized, assesses the

extent to which federal programs have been responsible for

progress already made, and notes current policy concerns.

ENSURING THE AVAILABILITY OF ADEQUATE

AND AFFORDABLE HOUSING

A central objective of federal housing policy is to reduce the incidence and severity of housing needs, including:

(1) physically substandard housing and hazardous or unhealthy
conditions in the immediate environment, (2) overcrowding, and

(3) excessive housing costs* When the first federal housing

assistance efforts began some 40 years ago, substandard housing

and overcrowding were prevalent and were the principal policy

concerns. As those problems diminished, interest in addressing

the increasingly common problem of excessive housing costs has

grown.

Substandard Housing

The incidence of substandard housing has declined dramatically in recent decades. Between 1940 and 1970, the proportion

of all occupied housing units _!/ lacking complete plumbing facilities decreased from 45 to about 5 percent; by 1976, the rate

had fallen to less than 3 percent. During that same 30-year

period, the frequency of dilapidated housing declined from 18 to

less than 4 percent of all occupied housing units. 2J Applying

JY The term "housing unit" refers to a house, apartment, group

of rooms, or single room occupied or intended for occupancy

as separate living quarters. Separate living quarters are

those in which the occupants—or intended occupants in the

case of vacant units—do not live and eat with any other

persons in a structure and which have either (1) direct

access from the outside of the building or through a common

hall which is used or intended to be used by the occupants of

another unit or by the general public or (2) complete kitchen

facilities for the exclusive use of the occupants.

2^1 The only measures of physical inadequacy available for

nationally representative samples of housing units over an

extended period of time are those provided by the decennial

censuses: the absence of some or all plumbing facilities,

and the designation of a unit as "dilapidated." Since 1950,

"complete plumbing facilities" has been defined as the

presence of hot and cold piped water inside the structure as

well as a flush toilet and a bathtub or shower inside the

structure for the exclusive use of the occupants of the unit;

for the 1940 census, hot running water was not required. The

definition of dilapidation has varied over time and has

not been applied uniformly to all units during any given

decennial count. For the 1960 census, a unit was to be

(continued)
a more recent and more comprehensive indicator of housing adequacy—one that Includes 15 separate variables measuring physical

condition--in 1976, only 8 percent of all occupied units were

found to need rehabilitation (see Table 1). _3/

Improvements in housing conditions have been especially

pronounced among lower-income households. .47 In 1950, 57 percent of the poorest two-fifths of all households—a population

corresponding roughly to the population eligible for federal

low- and moderate-income housing assistance programs—were

living in units that were dilapidated or lacked complete plumbing; by 1970, the proportion had declined to 14 percent. _5_/

Despite these gains, lower-income households remain significantly

less well-housed than higher-income persons. As of 1976, approximately 13 percent of all households with annual family

2/ (continued) classified as dilapidated if it had one or more

"critical" defects or two or more "intermediate" defects that

rendered the unit "no longer... safe and adequate shelter."

For a more complete discussion of measures of housing quality, see Congressional Budget Office, Patterns of Housing

Quality (March 1978).

_3_/ The measure of need for rehabilitation was developed by CBO

using data from the Annual Housing Survey, which has been

conducted jointly by the Bureau of the Census and the Department of Housing and Urban Development since 1973. See

Table 1, footnote b, for the criteria used in classifying

a unit as needing rehabilitation.

kj The term "household" refers to occupants of a single housing

unit. The term "family" refers to the head of a household

(as designated by the household members) and any person

living in the same housing unit who is related to the head

by blood, marriage, or adoption. If the head of household lives alone or with nonrelatives only, he or she is

considered to be a "primary individual," but not a family.

Thus, a household may consist of any combination of individuals, families, or subfamilies sharing a single housing

unit.

_5/ Unpublished data provided by the Bureau of the Census.

29-939 O - 78 - 4
TABLE 1. TRENDS IN THE PHYSICAL ADEQUACY OF HOUSING, 1940-1976

Criteria of Physical Adequacy 1940 1950 1960 1970 1976

Percent of All Occupied

Housing Units

Lacking some or all

plumbing facilities

Dilapidated a/

44.6

18.1

Lacking some or all plumbing

facilities and/or dilapidated 48.6

In need of rehabilitation b/ NA

34.0

9.1

35.4

NA

15.2

5.8

17.0

NA

5.1

3.7

7.4

NA

2.6

NA

NA

7.8

SOURCE: Unpublished Census data and CBO analysis of 1976 Annual

Housing Survey.

aj Census definition of dilapidation has varied over time.

b/ A unit was classified as needing rehabilitation if it had

at least one of the following conditions: (1) the absence of

complete plumbing facilities; (2) the absence of complete

kitchen facilities; (3) the absence of either a public sewer

connection, a septic tank, or cesspool; (4) three or more

breakdowns of six or more hours each time in the sewer,

septic tank, or cesspool during the prior 90 days; (5) three

or more breakdowns of six or more hours each time in the

heating system during the last winter; (6) three or more

times completely without water for six or more hours each

time during the prior 90 days; (7) three or more times

completely without a flush toilet for six or more hours each

time during the prior 90 days; and/or if the unit had two or

more of the following conditions: (1) leaking roof; (2)

holes in interior floors; (3) open cracks or holes in interior walls or ceilings; (4) broken plaster over greater

than one square foot of Interior walls or ceilings; (5)

unconcealed wiring; (6) the absence of any working light in

public hallways for multi-unit structures; (7) loose or no

handrails in public hallways in multi-unit structures; (8)

loose, broken, or missing steps in public hallways in multiunit structures.
incomes low enough to qualify them for federal housing assistance

lived in units needing rehabilitation, as compared with only 4

percent of all middle- and upper-income households. 6/

These gains in housing adequacy have been due largely to

increases in real income, which have enabled more persons to

afford adequate shelter and to spend more of their income on

housing. In addition, during most of the past three decades,

the rate of housing production has far exceeded growth in the

number of households, resulting in the replacement of large

numbers of substandard units. More recently, however, the rate

of new construction has declined relative to growth in the number

of households. Thus, today, a greater share of the continuing

gains in the physical quality of housing has been the result of

improvements in existing units, the conversion of nonresidential

structures, the renovation of abandoned units, and other means

exclusive of new construction.

Federal policy has contributed to overall gains in the

availability of adequate housing through its mortgage credit

programs and tax provisions, which have increased housing demand

and indirectly subsidized the production of new housing. It is

not possible, however, to determine how many new housing units

would have been built without federal financing or insurance,

nor is it possible to measure the net effect of the tax incentives on housing production. Indeed, if these programs have

stimulated housing production in areas with an excess supply of

adequate units, they may actually have encouraged the abandonment and decay of still-standard structures.

Federal programs designed specifically to improve the

housing conditions of lower-income persons have also generally

involved the production of new units. Again, however, the net

effect of subsidized housing construction on the supply of

housing cannot be determined. For one thing, the degree of

6/ Derived from the 1976 Annual Housing Survey. Eligibility

for low- and moderate-income federal housing assistance

varies with family size: Individuals with incomes less than

or equal to 50 percent of the median for the area may be

eligible; the maximum allowable income for families ranges

from 64 percent of area median for a family of two to 100

percent of the area median for a family of eight or more.
substitution of assisted housing units for privately built

housing is not known. In addition, units constructed specifically for occupancy by low- and moderate-income persons may

represent less enduring additions to the housing stock than

privately developed housing. In contrast to the many programs

encouraging new construction, only a small portion of all direct

federal expenditures and tax benefits has gone to the rehabilitation of existing housing.

With severely substandard housing less common today than in

the past, attention has shifted to reducing less serious physical deficiencies and the undesirable neighborhood characteristics often associated with marginal housing. This shift in

concern has been accompanied by a growing interest in programs

that improve existing housing and enable persons to remain

in their present dwellings as an alternative to programs that

improve housing by replacing inadequate units with new housing

and requiring households to relocate*

Overcrowding

A significant reduction in overcrowding has accompanied

the improvement in the physical adequacy of housing. Between

1940 and 1976, the proportion of all households with more than

1.5 persons per room declined from 9 percent to 1 percent.

The proportion of households with more than 1 person per room

decreased from 20 to 5 percent during that same period (see

Table 2). Today, overcrowding is uncommon, even among lowerincome families. In 1976, only 2 percent of all individuals

and families poor enough to qualify for housing assistance

were living in units with more than 1.5 persons per room; only

7 percent were living in units with more than 1 person per

room. TJ

Many of the same factors that led to improvements in the

quality of housing helped reduce crowding. The growth in the

average size of housing units and the decline in the average

household size have also alleviated overcrowding. Thus, concern

in this area currently focuses on assisting large families, for

whom crowding remains a problem. 8/

]_l 1976 Annual Housing Survey.
TABLE 2. TRENDS IN OVERCROWDED HOUSING, 1940-1976

Criteria of Overcrowding 1940 1950 1960 1970 1976

Percent of All Households

with:

More than 1.5

Persons Per Room a/ 9.0 6.2 3.6 2.0 1.0

More than 1.0

Persons Per Room a/ 20.3 15.7 11.5 8.0 4.6

SOURCE: U.S. Department of Commerce, Social Indicators; 1976

Table 3/2, p. 89. Bureau of the Census, Series H-150-

76A, Annual Housing Survey; 1976, Part A, General

Housing Characteristics, Table A-l, pp. 1-9.

aj Rooms counted include whole rooms used for living purposes,

such as living rooms, dining rooms, bedrooms, kitchens, finished attic or basement rooms, recreation rooms, permanently

enclosed porches suitable for year-round use, lodgers' rooms,

and rooms used for offices by a person living in the unit.

Excessive Housing Costs

As substandard housing and overcrowding have become less

common, the incidence of excessive housing costs has increased.

Between 1950 and 1976, the proportion of all renters paying onefourth or more of their income towards housing increased from

31 to 47 percent. _9/ In 1976, 22 percent of all homeowners

8/ Of the 2 million low- and moderate-income households with

six or more members, 17 percent were living in units with

more than 1.5 persons per room in 1976 and 64 percent had

more than 1 person per room.

j)_/ These figures exclude all renters paying no cash rent. Many

of these persons perform services for the landlord in lieu

of monthly cash payments.
were paying one-fourth or more of their income for housing (see

Table 3). Among poorer persons—for whom high housing costs are

more likely to represent a real hardship and for whom they are

more often a matter of necessity than of choice—heavy housing

cost burdens are especially common. In 1976, 61 percent of all

renters with an annual income of less than $10,000—including

those paying no cash rents—were paying more than one-fourth of

their income on housing; 19 percent were paying more than onehalf of their income for shelter. For homeowners with an income

below $10,000, the comparable figures were 39 and 10 percent.

The incidence of excessive housing costs drops off sharply for

families and individuals with an income of $10,000 or more (see

Table 4).

TABLE 3. PERCENT OF HOUSEHOLDS PAYING 25 PERCENT OR MORE OF

ANNUAL FAMILY INCOME FOR HOUSING, BY TENURE:

1950-1976 a/

Tenure 1950 1960 1970 1976

Renters b_/ 30.8 35.2 39.6 46.6

Homeowners c/ NA NA NA 21.7

SOURCE: 1950-1970 Censuses of Housing and 1976 Annual Housing

Survey.

ji/ Housing costs for renters include rent payments due the

landlord, plus utility and fuel costs not included in the

rental payment. Housing costs for homeowners include principal and interest payments on the mortgage, real estate

taxes, property insurance, utilities, fuel, and garbage and

trash collection.

b_/ Excludes households paying no cash rents and all others for

whom rent-to-income ratios are not computed or reported by

the Bureau of the Census. ,

cj Limited to owner-occupants of single-family homes on less

than ten acres and with no business on the property.

10
TABLE 4. PERCENT OF SPECIFIED HOUSEHOLDS PAYING 25 PERCENT

OR MORE OF FAMILY INCOME FOR HOUSING, BY ANNUAL

FAMILY INCOME, 1976 a./

Annual Family Income

Ratio of Housing $0- $10,000- $20,000 All

Costs to Income $9,999 $19,999 or more Households

Renters b/

More than 0.50 18.5 0.3 0.1 10.8

More than 0.35 37.8 2.0 0.2 22.6

More than 0.25 61.1 10.9 1.3 39.0

Homeowners £/

More than 0.50 9.7 0.4 d./ 3.0

More than 0.35 23.1 3.2 0.3 8.0

More than 0.25 39.0 15.4 3.9 19.3

SOURCE: CBO analysis of 1976 Annual Housing Survey.

a/ All percentages expressed as a proportion of total number of

households for whom a ratio of housing cost to income is

reported.

— Excludes renters residing in single-family homes on ten acres

or more.

c_/ Limited to single-family homes on less than ten acres and

with no business on the property.

d/ Less than 0.05 percent.

A number of federal programs are designed to reduce housing

costs, with different programs benefiting different income

groups. Federal tax provisions that permit homeowners to deduct

mortgage interest payments and state and local property taxes

from their taxable income benefit principally middle- and upperincome taxpayers. Direct loan and mortgage insurance programs

reduce the housing costs of large numbers of moderate-income

11
homeowners by providing somewhat more favorable financing than

would otherwise be available. Relief for lower-income households

is provided primarily through housing assistance programs,

which generally reduce participants' housing costs to between

15 and 25 percent of their income, but serve only a small fraction of all eligible persons, j.0/

In the past, when the supply rather than the cost of standard housing was the more salient issue, subsidizing the construction of units that would be available to only a small proportion

of those in need was not considered to be a serious shortcoming

of housing assistance programs. With recent increases in the

supply of physically standard units, however, attention has

shifted from producing more housing towards making existing

housing affordable to more persons. It has thus been argued

that the funding needed to subsidize construction of a limited

number of new units, at considerable expense per assisted household, can assist many more families occupying already existing

units. In addition, the limited availability of funds for

housing assistance, the large number of lower-income families

paying extremely high proportions of their income for housing,

and the increased level of housing costs among all households

have led some to question the appropriateness of maintaining the

25 percent rent-to-income ratio required of tenants in most

federally assisted housing. If that ratio were increased, the

federal cost per assisted household would be reduced, more

persons could receive assistance for the same level of funding,

and the gap in housing costs between recipients and nonrecipients

would not be as great as it is today. On the other hand, of

course, the benefit per assisted household would be lower than

it is now.

10/ As of October 1977, fewer than 3 million households were

receiving assistance under lower- and middle-income housing

assistance programs administered by the Department of

Housing and Urban Development (HUD) and the Farmers Home

Administration (FmHA). That number represents less than

10 percent of the income-eligible population. (Data on

number of assisted households provided by HUD and FmHA;

the estimate of the eligible population is based on CBO

analysis of the 1976 Annual Housing Survey.)

12
INCREASING RESIDENTIAL CONSTRUCTION AND REDUCING

INSTABILITY IN THE HOMEBUILDING INDUSTRY

Since the Great Depression, there has been a continuing

presumption that federal policy should encourage residential

construction and mitigate the cyclical declines that characterize

the industry. The cyclical instability of residential construction has obvious short-term costs for housing producers and their

employees as well as long-term costs for housing consumers, who

are forced to pay the premium charged in an uncertain market.

Still, despite numerous federal interventions, cyclical swings

have persisted and have shown no signs of diminishing in severity. Over the past ten years, annual shifts of more than 30

percent in the production of multlfamily housing have been common

(see Table 5).

TABLE 5. PRIVATELY OWNED SINGLE-FAMILY AND MULTIFAMILY HOUSING

CONSTRUCTION STARTS: CALENDAR YEARS 1967-1976, UNITS

IN THOUSANDS

Single-Family Housing Multifamily Housing

Year

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

Number

of Units

Started

844

900

811

813

1,151

1,309

1,132

888

892

1,163

Percent

Change from

Prior Year

+ 6.6

- 9.9

+ 0.2

+ 41.6

+ 13.7

- 13.5

- 21.6

+ 0.5

+ 30.4

Number

of Units

Started

447

608

656

620

900

1,047

913

450

269

374

Percent

Change from

Prior Year

+ 36.0

+ 7.9

- 5.5

+ 30.1

+ 16.3

- 12.8

- 50.7

- 40.2

+ 39.0

SOURCE: U.S. Department of Housing and Urban Development,

1976 Statistical Year Book.

13
Many factors can affect the level of residential construction. Some are sector-specific—such as the availability and

price of construction materials and labor or temporary imbalances

between supply and demand in local housing markets—and some

are common to the economy as a whole—such as the availability

and cost of credit. Most federal programs designed to encourage

private housing production focus on assuring an adequate supply

of mortgage credit, increasing the demand for housing, or increasing the profitability of real estate investments. In

addition, the federal government subsidizes the construction

and operation of privately and publicly owned assisted housing

for lower-income persons. Few federal housing programs are

operated specifically as countercyclical devices.

Direct financing and loan guarantee programs can increase

the overall supply of mortgage credit but they have not been

notably successful in affecting credit availability during

periods of tight money. Federal regulations and tax preferences

giving certain types of financial institutions a competitive

edge in attracting investments are also intended to increase the

supply of mortgage credit, but they are generally not specifically designed as countercyclical tools. Programs involving

the purchase and resale of privately written mortgages and the

direct allocation of credit to mortgage lenders are especially

amenable to use as countercyclical devices because of their

short-term controllability; however, many of these programs have

been only recently implemented. Federal tax expenditures subsidizing homeowership and increasing the profitability of investments in certain types of rental housing also stimulate construction. But because these tax benefits are available on an

entitlement basis—that is, they are available to every eligible

taxpayer who chooses to avail himself of them—the government

cannot turn them on and off over short periods of time, which

limits their utility as countercyclical devices.

Federally subsidized housing built specifically for lowerincome persons contributes to overall residential construction,

but assisted housing represents a small fraction of total production and may merely substitute for construction that would

have occurred in any event. In addition, the lead time required

between a federal subsidy commitment and a construction start

limits the usefulness of assisted housing programs as countercyclical tools. Discontinuities in the administration of assisted housing programs have also reduced their effectiveness

14
as mechanisms for stabilizing housing production, ll/ Nonetheless, pressure to use assisted housing programs for that purpose

has historically been great.

EXPANDING ACCESS TO CREDIT

Expanding prospective homebuyers' access to mortgage credit

in order to increase homeownership and to counter discriminatory

aspects of private credit markets is another objective of federal

housing policy. The difficulty of obtaining mortgage credit

in sparsely populated rural areas or in racially concentrated

and economically declining urban areas has been of particular

concern.

The government allocates credit directly to housing through

a number of home loan programs. Some provide financing, on terms

preferable to those available in the private market, to lowerincome persons who could not qualify for conventional mortgages.

Other mortgage credit programs subsidize the interest on privately written home loans to lower-income borrowers. The government also guarantees or insures large numbers of unsubsidized

privately written home loans. Through those activities, the

federal government is a major force in the mortgage credit

market. Of the $558 billion in outstanding mortgage debt on

nonfarm, one- to four-family houses at the end of 1976, 14 percent was held by some agency of the U.S. government and 24

percent was government-insured. During the past 15 years, the

federally held share of the total mortgage debt has grown while

the share that is federally guaranteed or insured has decreased

(see Table 6).

Barriers to credit in rural areas have been dealt with

primarily through direct loan programs administered by the

Farmers Home Administration. Credit barriers in urban areas

have been addressed through a combination of high-risk mortgage

11/ From 1968 through 1972, federally subsidized housing starts

averaged 182,000 units and constituted 23 percent of all

multifamily housing starts each year. In January 1973, a

moratorium was imposed on additional subsidy commitments;

during the years 1973 through 1975, the number of subsidized

housing starts declined to 56,000 annually, or 10 percent

of the yearly production.

15
insurance for privately written loans in declining areas and

regulations governing the practices of private lending institutions.

TABLE 6. AMOUNT AND PERCENT OF OUTSTANDING MORTGAGE DEBT ON

NONFARM ONE- TO FOUR-FAMILY HOMES, FEDERALLY HELD

OR FEDERALLY INSURED OR GUARANTEED, 1960-1976:

IN BILLIONS OF DOLLARS

Federally Insured

Calendar

Year

1960

1965

1970

1971

1972

1973

1974

1975

1976

Total Debt

Outstanding

End of Year

141.3

212.9

280.2

328.9

372.8

416.9

449.9

491.6

558.4

Federally Held a/

Dollars

7.1

6.4

22.1

29.9

35.2

40.7

52.0

66.0

77.6

Percent

of Total

5.0

3.0

7.9

9.1

9.4

9.8

11.6

13.4

13.9

or Guaranteed b/

Dollars

56.6

73.1

97.2

105.2

112.9

116.2

121.3

127.7

133.5

Percent

of Total

40.1

34.3

34.7

32.0

30.3

27.9

27.0

26.0

23.9

SOURCE: 1976 HUD Statistical Yearbook, p. 297.

aj Includes mortgages held by Federal Housing Administration,

Federal National Mortgage Association, Farmers Home Administration, and Veterans Administration.

b_/ Includes mortgages insured by FHA or guaranteed by VA.

ENCOURAGING HOMEOWNERSHIP

Related to the federal goal of expanding access to mortgage

credit is the broader objective of encouraging homeownership.

Partly as a consequence of federal incentives and subsidies, the

rate of homeownership in the United States is high and it has

risen steadily for the past four decades. As of 1976, 65 percent of all households owned their own homes; nearly half of all

households with annual incomes of less than $10,000 are owneroccupants.

16
Despite the increasingly high rates of homeownership,

sharp'increases in housing costs in recent years have given

rise to concerns about the ability of would-be homebuyers—of

lower-income and young families, in particular—to purchase

homes. Data on the effects of rising costs on the rate and

affordability of homeownership are mixed. In the years between

1970 and 1976—when homeownership costs as measured by the

Consumer Price Index increased by 49 percent in comparison to a

52 percent increase in the median family income—the rate of

homeownership continued to grow, but at a slower pace than during

the two preceding decades. The homeownership rate among households with incomes low enough to qualify for federal homeownership assistance—generally less than 95 percent of the median

income for the area of residence—actually declined slightly

between 1974 and 1976, from 53.5 percent to 52.4 percent. Rising

costs have apparently not deterred young families from becoming

homeowners. The rate of homeownership among husband-wife households in which the head of household is less than 30 years old

increased from 39 percent in 1970 to 48 percent in 1976. 12/

Regarding affordability, although it is true that recent firsttime homebuyers are allocating an increasing share of their

income to housing, the housing cost burden for most such buyers

remains within, or only slightly above, the guidelines reflected

in federal assistance programs. The median proportion of income

devoted to housing for all renters who bought homes in 1976 was

22 percent, up by one percentage point from 1974; for buyers with

an annual income of less than $10,000, the median ratio of

housing costs to income was 34 percent, reflecting a considerably

greater burden (see Table 7).

Federal programs facilitating or subsidizing homeownership

include tax provisions that primarily benefit middle- and

upper-income households; loan insurance and loan guarantee

programs, which facilitate homeownership for many moderate-income

households; and mortgage subsidy programs, which aid a small

number of lower-income homebuyers. There are, however, no

large-scale programs designed specifically to reduce housing

costs for lower-income persons who have already purchased homes.

12/ 1976 Annual Housing Survey.

17
TABLE 7. DISTRIBUTION OF RATIOS OF HOUSING COSTS TO INCOME AMONG

RENTERS BUYING HOMES IN 1976, BY ANNUAL FAMILY INCOME

Annual Housing Costs

as Percent of Annual

Family Income &l

Less than 20

21 to 30

31 to 40

41 to 50

Greater than 50

Total

Annual Family

$0 -

$9,999

16.0

29.0

20.8

16.9

17.4

100.0

$10,000-

$19,999

36.0

44.1

15.5

2.6

1.9

100.0

Income

$20,000

or more

74.4

22.4

2.9

0.3

—

100.0

All

Renters

Buying Homes

45.9

33.9

12.0

4.3

3.9

100.0

Median Ratio of Housing

Costs to Income 0.34 0.24 0.17 0.22

SOURCE: CBO analysis of 1976 Annual Housing Survey.

a/ Housing costs include principal and interest payments on

mortgage, real estate taxes, property insurance, utilities,

fuel, water, and garbage and trash collection for unit

purchased.

PROVIDING EQUAL HOUSING OPPORTUNITIES

Assuring equal housing opportunities is another explicit

objective of federal policy. Federal statutes prohibit racial

discrimination in the sale or rental of most housing and ban

discrimination in mortgage lending on the basis of race, religion, national origin, sex, marital status, or age. The

prohibition against discrimination has been expanded in federally

assisted housing into a requirement that owners take affirmative

action to encourage residential integration.

Despite de jure prohibitions against unfair sale, rental,

and credit activities, discriminatory practices persist. 137

13/ Housing and Development Reporter, vol.

p. 1115.

18

5 (April 1978),
There is also evidence that residential segregation in metropolitan areas has been increasing, as recently as the 1960s. 14/

Partly as a result of that segregation, significant disparities

in housing conditions exist between black and white households.

As of 1976, black households with an annual income of less than

$10,000 were more than twice as likely to live in units needing

rehabilitation as were their white counterparts. Overall, black

households were three times more likely than whites to live in

inadequate units, reflecting the lower average income among

blacks (see Table 8).

TABLE 8. PERCENT OF HOUSEHOLDS OCCUPYING UNITS IN NEED OF

REHABILITATION, BY ANNUAL FAMILY INCOME AND RACE,

1976 a/

Annual Family Income

Race of Head

of Household

Black

White

$0 - $10,000-

$9,999 $19,999

24.9 11.5

10.6 4.7

$20,000

or more

7.1

2.4

All

Households

19.6

6.4

SOURCE: CBO analysis of 1976 Annual Housing Survey,

a./ Need of rehabilitation defined in note to Table 1.

PROVIDING HOUSING FOR SPECIAL USERS

Another goal of federal housing policy is to provide assistance to persons with special housing needs due to age or disability. With nearly 20 percent of all households headed by a

person aged 65 years or older and with estimates of the proportion of all handicapped persons running as high as 10 percent,

the potential special housing need is great. Reliable data

on the degree to which private market forces are already meeting

this need are not available.

14/ See Ann B. Schnare, Residential Segregation by Race in U.S.

Metropolitan Areas (The Urban Institute, 1977).

19
Fed-eral direct loan programs subsidize the development

of rental projects designed to accommodate the unique requirements of the elderly and handicapped. In addition, low-rent

projects developed under other federally assisted housing programs may be designated for the exclusive use of the elderly or

the handicapped, and a portion of all units in housing projects

for the non-aged may be designed for handicapped individuals.

ENCOURAGING COMMUNITY DEVELOPMENT AND NEIGHBORHOOD

PRESERVATION AND REVITALIZATION

In recent years, federal housing programs have also sought

to support the broader objective of community development.

The goal of community development has, in turn, been expanded to

encompass not only the traditional notions of economic and

commercial development but also that of socially viable neighborhoods. Although reliable measures of social viability are not

available, data on neighborhood blight and inadequate services

indicate that reports of undesirable neighborhood conditions

are not limited to lower-income households or urban areas (see

Table 9). Reports of undesirable neighborhood characteristics

have increased slightly in the last few years, a trend that may

reflect a greater sensitivity toward neighborhood amenities as

well as an actual decline in conditions.

Federal housing programs seek to support community development and revitalization by encouraging higher-income households

to relocate in currently low-income urban areas, by acting

as a catalyst to commercial development in disadvantaged areas,

by slowing the d'ecline of marginal neighborhoods through the

rehabilitation of deteriorating but salvageable housing, and

by enabling lower-income families to maintain their homes in

areas undergoing revitalization. But, to the extent that such

federal assistance is used to preserve currently homogeneous

neighborhoods, it conflicts, of course, with the objective of

encouraging racial and economic deconcentration. Similarly,

programs that encourage higher-income persons to move into

economically distressed areas result in the displacement of

lower-income persons and tend to increase the housing costs of

those who remain.

20
TABLE 9. PERCENT OF HOUSEHOLDS REPORTING SELECTED UNDESIRABLE

NEIGHBORHOOD CONDITIONS, BY ANNUAL FAMILY INCOME AND

LOCATION, 1976

Annual Family Income

All

Location and $0 - $10,000- $20,000 HouseCondition Reported $9,999 $19,999 or more holds

Central Cities of Large

Metropolitan Areas a/

Litter, abandoned, or

rundown but

occupied buildings 34.1 28.4 23.3 30.1

Inadequate transportation 10.8 13.1 19.7 13.3

Inadequate shopping 13.4 9.8 8.7 11.3

Inadequate police

protection 12.9 10.4 10.0 11.5

All Other Areas

Litter, abandoned, or

rundown but

occupied buildings 23.0 21.1 16.6 20.7

Inadequate transportat ion

Inadequate shopping

Inadequate police

protection

42.3

16.0

10.5

46.7

13.6

9.5

49.1

11.5

7.7

45.5

14.1

9.4

SOURCE: CBO analysis of 1976 Annual Housing Survey.

aj Large metropolitan areas are Standard Metropolitan Statistical Areas with populations of 250,000 or greater in 1970.

21

29-939 O - 78 - 6

CHAPTER III. CURRENT HOUSING PROGRAMS

Numerous housing programs—varying widely in scope and

design—have evolved over the years to respond to changing

housing needs and to address the changing housing policy objectives of the federal government. This chapter describes current

housing programs and discusses the effects of each on the policy

objectives outlined earlier. The overlap among programs and

objectives—with each program addressing several objectives and

each objective served by many programs—makes it impossible,

however, to determine the independent effect of each element of

current policy. Table 10 summarizes the primary and secondary

policy objectives of current federal housing programs.

HOUSING ASSISTANCE PROGRAMS

The Department of Housing and Urban Development (HUD)

administers several programs designed to reduce the housing

costs of lower-income persons and to provide them with physically

standard housing. The principal federal housing assistance

programs are: (1) low-rent public housing, (2) Section 8 new

construction/substantial rehabilitation, (3) Section 8 existing

housing, (4) Section 235 homeownership assistance, (5) Section

236 rental assistance and (6) rent supplements. For thirty years

following its authorization in 1937, the public housing program

served as the federal government's primary housing assistance

mechanism. The Section 235, Section 236, and rent supplement

programs were authorized during the late 1960s and were the most

heavily utilized programs for several years thereafter. In 1973,

activity under all of these programs was halted under a national

moratorium imposed by the Nixon Administration. Housing assistance activity resumed with the passage of the 1974 Housing and

Community Development Act, which authorized the Section 8 programs. Since then, Section 8, public housing, and a revised

Section 235 program have been the most heavily used housing

assistance devices. During fiscal year 1978, federal outlays for

assisted housing are expected to total about $4 billion. Table

11 describes the status of the assistance programs as of 1977.
TABLE 10. PRIMARY AND SECONDARY OBJECTIVES OF CURRENT FEDERAL HOUSING PROGRAMS AND HOUSING-RELATED ACTIVITIES a/

Federal Housing

Programs and

Activities

Providing

Adequate

and

Affordable

Housing

Increasing

or

Stabilizing

Residential

Construction

Activity

Expanding

Access to

Mortgage Encouraging

Credit Homeownership

Ensuring

Equal

Housing

Opportunity

Providing

Housing

for

Special

Users

Encouraging Community Development and Neighborhood Preservation and

Revitalization

Housing Assistance Programs

Low—rent public housing XX

Section 8 new construction/

substantial rehabilitation XXSection 8 existing housing XX

Section 235 homeownership

assistance XX

Section 236 rental assistance and

rent supplements XX

Section 202 elderly/handicapped

housing XX

Community Development Programs

Community development block grants X

Urban development action grants

Section 312 rehabilitation loans XX

Urban homesteading X

Mortgage Credit Activities

FmHA direct loans XX

VA direct loans

FHA insured loans

VA insured Loans

FNMA, GNMA, FHLB and FHLMC

secondary mortgage market

activities

XX

XX

XX

XX

XX

XX

X

X

X

XX

X

XX

XX XX

X

X

X

XX

X

X

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

(Continued)
TABLE 10. (Continued)

Federal Housing

Programs and

Activities

Increasing

Providing or

Adequate Stabilizing Expanding

and Residential Access to

Affordable Construction Mortgage

Housing Activity Credit

Encouraging

Encouraging CornProviding munity Develop—

Ensuring Housing ment and NeighEqual for borhood PreserHousing Special vation and

Homeownership Opportunity Users Revitalization

Tax Expenditures

Deduction of mortgage interest

and property tax payments

Deferrals and exclusions of capital

gains on sales of homes

Favorable depreciation for rental

housing

Favorable treatment of construction-period development costs

Preferential treatment of real

estate tax shelter

Tax benefits for financial

institutions

Housing and Credit-Market

Regulations

Prohibitions against discrimination

in sale/rental of housing and

mortgage lending

Regulation of financial institutions

and mortgage credit markets

X

X

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

Note: XX - Primary Objectives

X = Secondary Objectives

aj The classification scheme presented here is based on similar typologies developed by several housing analysts. It is meant

to depict the key relationships between programs and policy objectives; it is not intended to be exhaustive of possible

program effects.
TABLE 11. APPROXIMATE NUMBER OF ASSISTED HOUSING UNITS OCCUPIED AND IN PROCESS, BY PROGRAM, 1977 a/

Number of

Housing Units

Currently Occupied

In Processing Pipeline

Available for occupancy

but not occupied

Under construction

All

Programs

2,448,300

188,400

188,400

Public

Housing

1,147,700

29,400

62,700

Section 8

New Construction/

Substantial

Rehabilitation

30,000

12,900

117,800

Section 8

Existing

Housing

327,800

146,100

Section 235

Original

Program b_/

287,300

Section 235

Revised

Program c/

7,500

6,300

Section 236

and Rent

Supplements

648,000

1,600

With initial commitments;

construction not yet

begun, subsidy contracts

not yet executed

Without initial

357,200 85,100 205,000 57,800 9,300

commitments

Subtotal

Total

425,900

1,159,900

3,608,200

66,400

243,600

1,391,300

177,600

513,300

543,300

152,500

356,400

684,200

29,400

45,000

287,300 52,500

1,600

649,600

SOURCE: HUD Budget Office.

a/ Data for Section 8 and the revised Section 235 program are as of December 31, 1977. Data for public housing,

the original Section 235 program, Section 236, and Rent Supplements are as of September 30, 1977.

b_/ Suspended in 1973.

c/ Initiated in 1975.
Although all assisted housing programs serve limited-income

persons, each program assists a somewhat different group of

families and individuals. Section 8, public housing, and rent

supplements serve the poorest households, those with an average

annual income between $3,500 and $4,500; Section 236 serves

somewhat higher-income persons; the Section 235 program serves

the highest-income persons among those receiving housing assistance (see Table 12).

Low-Rent Public Housing

The low-rent public-housing program funds the construction

or the purchase and rehabilitation costs (including financing

expenses), and a portion of the operating expenses, of rental

projects that are owned and managed by state or local government

agencies and made available to lower-income tenants at reduced

charges. Public housing is generally limited to low- and

moderate-income families and to elderly, handicapped, or displaced individuals. Tenant rental and utility charges are

limited to a total of not more than 25 percent of adjusted family

income. As of the end of fiscal year 1977, nearly 1.2 million

public housing units were available for occupancy, with more than

40 percent designated for elderly or handicapped persons. \J

In addition to being designed as a mechanism for providing

lower-income persons with physically standard low-cost housing,

public housing is also viewed as a means of increasing housing

production. Nevertheless, during the last 20 years, public

housing construction and rehabilitation starts have averaged only

about 36,000 units annually and that figure has exceeded 50,000

only four times during that period. J2/ Further, there is no way

of determining the extent to which public housing construction

may be merely substituting for private development. By building

units specifically designed for the elderly or handicapped or for

large families, public housing may, however, serve special

housing needs inadequately met by the private market.

_!/ HUD, Summary of the HUD Budget. Fiscal Year 1979. p. H-10.

_2/ HUD, 1976 Statistical Year Book, p. 158.

27
TABLE 12. SELECTED CHARACTERISTICS OF RECIPIENT HOUSEHOLDS IN CURRENT MAJOR HOUSING ASSISTANCE PROGRAMS, 1977 a/

Household Characteristics

Average Family Income b/

Annual Family Income (as a percent of

Below $3,000

$3,000 to $4,999

$5,000 to $6,999

$7,000 to $9,999

Above $10,000

Percent of All Households with Some

Welfare Income

Percent with Minority Head

Percent with Elderly Head

Percent with Handicapped Member

Section 8

New Const 'n/ Section 8

Substantial Existing

Rehab. Housing

$4,376

all households)

27.7

39.0

21.6

10.0

1.7

16.2

27.7

42.9

2.0

$3,506

37.3

38.6

16.0

7.1

1.0

26.7

29.8

33.4

2.3

Section 235

Public Original

Housing Program

$3,691

35.4

32.6

15.4

9.6

6.9

42.6

62.9

35.8

1.2

$8,085

NA

NA

NA

NA

NA

NA

NA

NA

NA

Section 235

Revised

Program

$11,532

NA

NA

NA

NA

NA

NA

23.0

2.1

NA

Rent

SuppleSection 236 ments

$6,285

NA

NA

NA

NA

NA

NA

NA

26.0

NA

$3,544

NA

NA

NA

NA

NA

NA

NA

31.0

NA

Household Size (as percent of all households)

Single person

2-4 persons

5-6 persons

7 or more persons

43.1

50.9

5.4

0.6

36.0

53.3

8.4

2.3

33.3

45.2

14.6

6.9

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

SOURCE: HUD Office of the Budget.

aj Data for Section 8 are as of June 1977; data for public housing, the original Section 235 program, Section 236, and

rent supplements are as of September 1977; data for the revised Section 235 program are as of December 1977.

b_/ Figure reported is the mean family income for the original Section 235 program, Section 236, and rent supplements.

Median family income is reported for Section 8, public housing, and the revised Section 235 program.
During the years of large-scale urban redevelopment, In the

1950s and 1960s, public housing was viewed as a tool for dealing

with displaced households and encouraging the creation of heterogeneous neighborhoods in redeveloped areas. The program has been

used more recently as a means of expanding the housing opportunities of lower-income families and minorities in areas previously closed to them. The overall record of the public housing

program in promoting either redevelopment or residential integration has, however, not been good; in fact, some critics have

argued that public housing has actually contributed to segregation and urban decay by accelerating the flight of whites and

higher-income families from racially mixed and declining areas.

Section 8 New Construction/Substantial Rehabilitation

The Section 8 new construction/substantial rehabilitation

programs provide assistance on behalf of lower-income households

occupying newly built or significantly rehabilitated units

that meet certain criteria as to cost, physical adequacy, and

location. Under these programs, public agencies or private

sponsors develop housing projects in which a portion of the units

are made available to low- and moderate-income renters at reduced

costs. The difference between the HUD-established allowable

rent for each unit and the household contribution—limited to

15-25 percent of family income—is made up by regular payments

from HUD to the project owner/manager. Assistance contracts

between HUD and project sponsors cover five-year periods and are

renewable at the owner's discretion for 20 to 40 years, depending

on the type of sponsor and the kind of financing used. Income

limits for Section 8 assistance recipients are set at approximately 80 percent of the area median. Only about 30,000 new

construction/substantial rehabilitation units were occupied as

of December 1977, but more than 500,000 units were in the processing pipeline. 3_l

The brief time these programs have been underway precludes

firm conclusions concerning their effects. Although they are

intended to encourage the production of additional housing by

guaranteeing an income stream to potential developers, interest

^3/ Data provided by HUD Office of the Budget.

29
among private developers has not been strong during the initial

implementation period. Further, concerns have been raised that

the interest the developers have shown may merely reflect a

desire to have a federal guarantee of rental income for units

that will be made available to lower-income persons only if

unassisted tenants cannot be found. 4/

The effect of the Section 8 new construction and substantial

rehabilitation programs on racial and economic integration

will depend largely on the location of Section 8 projects and

the ability of project managers to maintain a demographic mix

among tenants. Anecdotal evidence suggests that the new construction program may be somewhat more successful in locating

projects in desirable neighborhoods than earlier subsidy programs

have been. 5_l The designation of nearly all Section 8 new

construction/substantial rehabilitation projects as 100-percent

subsidized suggests, however, that the program may be less

successful in maintaining economically mixed projects than had

been expected. The substantial rehabilitation program may be

especially useful in promoting neighborhood revitalization; it

may also encourage economic integration, if the projects enable

lower-income persons to remain in previously depressed areas

undergoing housing cost increases.

Section 8 Existing Housing

The existing housing component of the Section 8 program

provides assistance on behalf of lower-income households occupying physically adequate, moderate-cost rental housing of their

own choosing in the private market. Public housing agencies

_4/ Despite a stated preference for economically mixed housing,

most Section 8 projects currently in the processing pipeline

involve a presumption of 100-percent occupancy by assisted

households, indicating an apparent desire on the part of the

developer for the maximum guarantee available. There is also

some evidence of private sponsors withdrawing from tentative

commitments.

_5/ U.S. Department of Housing and Urban Development, LowerIncome Housing Assistance Program, Section 8: Interim

Findings of Evaluation Research (February 1978).

30
under contract to HUD subsidize the housing costs of lowerincome families by paying their landlords the difference between

the tenants' rental fee and the tenants' contribution of 15 to 25

percent of their monthly income. All housing units must meet

standards of physical adequacy, must be located within the

jurisdiction served by the local agency, and must rent for an

amount equal to or less than a HUD-established maximum. Beyond

these restrictions, assisted households are free to select the

location and type of housing, so long as the landlord is willing

to enter into a lease with the tenant and a participation agreement with the administering agency. The reliance on the initiative of the household and the latter's freedom to choose from

among existing rental units in the private market distinguish

this program from all other federal housing assistance efforts.

After some initial delays, implementation of this program has

been quite smooth and much more rapid than has been the case with

the new construction and substantial rehabilitation programs. As

of December 1977, more than 300,000 households were receiving

assistance under the Section 8 existing housing program. _6/

The most obvious effect of the Section 8 existing housing

program has been on recipients' housing costs. Of households

receiving assistance in October 1976, the average share of their

income going towards housing before joining the program was in

excess of 40 percent; after enrollment, that figure dropped to

between 20 and 25 percent. The effect of the program on recipients' housing conditions has been less striking. About half of

all households receiving assistance remained in their original

units, only a minority of which had to be upgraded in order to

enter the program. ]_/ But studies of similar programs indicate

that, in the absence of a requirement that households live in

physically adequate units, many families living in standard

housing would either move to substandard housing or allow their

units to deteriorate. 8/

6_f Data provided by HUD Office of the Budget.

TJ HUD, Lower-Income Housing Assistance Program Section 8;

Interim Findings of Evaluation Research (February 1978).

_§_/ Abt Associates, Inc., Housing Expenditures Under a Housing

Gap Housing Allowance (Cambridge, Mass.: Abt, May 1977).

31
There is no evidence that the demand generated by an existing housing program is sufficient to induce the construction of

new units. On the other hand, this type of program does not

appear to inflate housing costs—a commonly expressed fear—

even when assisted households constitute a substantially greater

proportion of a local market than is now the case with Section 8

households. J9/

One of the arguments in support of this kind of program is

that it can both promote racial and economic deconcentration and

revitalize neighborhoods. Available evidence indicates that

although it does not induce mobility, when minority-headed

households receiving this type of assistance do move, they are

indeed more likely to relocate in areas of lower concentrations

of minority households. Its effects on neighborhood revitalization, on the other hand, appear to be minimal.

Section 235 Homeownership Assistance

The Section 235 program provides mortgage assistance to

lower-income households purchasing new or substantially-rehabilitated homes. Families with an income of up to 95 percent

of the area median may buy modest homes at a reduced rate of

interest on the mortgage, with HUD making up the difference

between the family's payment and the amount due the mortgagee.

The Section 235 program was first authorized in 1968 and

was suspended in 1973 as part of the national moratorium on

housing assistance programs. Because program rules permitted

minimal downpayments and effective interest rates as low as 1

percent many families unable to handle the financial burden

became homeowners under this program. In addition, many only

marginally adequate or completely inadequate units were certified as eligible for the program. As a result, more than 15

percent of all the homes purchased under the original Section

235 program have already been acquired by HUD, often in barely

j9/ The Rand Corporation, Fourth Annual Report of the Housing

Assistance Supply Experiment; Executive Summary (Santa

Monica, California: Rand, March 1978).

32
salvageable condition. 10/ Section 235 was reinstated in 1975,

with the minimum effective rate of interest to the buyer raised

to 4 percent and the minimum downpayment set at 3 to 5 percent of

the purchase price. The tighter restrictions, designed to reduce

the problem of defaults, have limited program activity: in the

two years since the reinstatement of the program, subsidy commitments were made for only about 23,000 homes, ll/

The principal effects of the Section 235 program have been

on the level of residential construction and the incidence of

homeownership among lower-income households. During the years in

which the original Section 235 program was active, units built

under the program represented as much as 6 percent of the annual

number of single-family housing starts. 12/

Section 236 Rental Assistance and Rent Supplements

The Section 236 program, authorized in 1968, provides

mortgage interest subsidies to developers of rental projects in

which a portion of the housing units are made available to

lower-income persons at reduced rates. The interest subsidy alone

is sufficient to reduce tenant rental payments to an average of

about 30 percent of family income. Additional subsidies are

provided on behalf of the occupants of some of the units through

rent supplement payments, Section 8 assistance, or "deep subsidy"

payments specifically authorized for use in conjunction with

Section 236. This piggybacking of those subsidies, which are

paid to the project owner, permits tenants' rents for some units

to be reduced to 25 percent of their income without jeopardizing

the financial viability of the projects. Despite these multiple

subsidies, Section 236 has been plagued by the defaults that

characterized the original Section 235 program. More than 14

percent of the approximately 4,000 Section 236 mortgages written

through 1976, had been assigned to HUD by the mortgagee or

10/ HUD, Summary of HUD Budget. Fiscal Year 1979. pp. 52, 91,

and 92.

ll/ Data provided by HUD Office of the Budget.

L2/ HUD, 1976 Statistical Yearbook, pp. 50 and 278.

33
foreclosed by the end of that year. 13/ A small number of new

subsidy commitments are still being made under the program,

utilizing spending authority released by the Congress before

the 1973 housing moratorium.

The rent supplement program was authorized in 1965 to

provide payments to the owners of private rental housing on

behalf of lower-income tenants, but it has been used primarily to

reduce rental charges in Section 236 and other mortgage subsidy

projects. As of the end of fiscal year 1977, there were active

rent supplement commitments for approximately 180,000 units.

Section 202 Housing for the Elderly

and Handicapped

The Section 202 program provides direct federal loans to

nonprofit organizations developing rental housing for the

elderly and the handicapped. Under the original Section 202

program authorized in 1959, loans were written at a 3 percent

rate of interest and the program primarily benefited persons with

incomes too high to qualify for public housing. The program in

that form was suspended in 1970, but it was reinstituted in 1974

with the interest charge raised to slightly above the yield on

all outstanding Treasury obligations—an interest rate more

nearly approximating that of conventional financing. Projects

developed under the revised Section 202 program also carry a

Section 8 subsidy, which enables the rents of lower-income

families and individuals to be reduced to a maximum of 25 percent

of their income. To date, the Section 202 program has been used

primarily to build housing for the elderly. In recent years, an

interest in developing a portion of all Section 202 projects for

the exclusive use of the handicapped has been expressed. Through

the end of fiscal year 1977, subsidy commitments under the

revised Section 202/8 program had been made for about 55,000

units. 14/

13_/ HUD 1976 Statistical Yearbook, p. 89.

14/ HUD Justification for 1979 Budget Estimates. Part 1, p.

14-23.

34
HOUSING-RELATED COMMUNITY DEVELOPMENT PROGRAMS

Several community development programs provide housing

benefits to a wider range of income groups than are eligible for

housing assistance programs. The principal housing-related

community development programs are: (1) community development

block grants, (2) urban development action grants, (3) Section

312 rehabilitation loans, and (4) urban homesteading.

The Community Development Block Grants (CDBG)

The CDBG program, authorized in 1974, provides grants to

state and local governments to fund projects designed to promote

viable urban communities. Most CDBG funds are allocated by means

of needs-based formulae among cities within metropolitan areas

with populations of 50,000 or more and urban counties with

populations of 200,000 or more. Beginning in fiscal year 1978,

two formulae are used to distribute these entitlement grants.

Both consider the number of persons in the jurisdiction with

incomes below the poverty line. One of the formulae also takes

into account total population and the number of overcrowded

housing units within the jurisdiction; the other formula considers lag in population growth relative to the national rate and

the number of pre-1940 housing units. Communities that receive

entitlement grants must also submit housing assistance plans that

estimate the extent and nature of housing needs among low- and

moderate-income persons residing or expected to reside in the

jurisdiction and indicate how federal housing assistance will be

used to address those needs. Communities that fail to provide

lower-income housing assistance may forfeit their eligibility for

the community development funds.

During fiscal year 1978, $3.6 billion are available for

community development block grants; that sum is expected to

fund approximately 3,200 grants, including as many as 637 grants

to entitlement jurisdictions. About 26 percent of the funds

to be expended in grants to entitlements cities during fiscal

year 1977 are expected to be used for projects involving housing

rehabilitation, building code enforcement, or relocation assistance for displaced persons. 15/

15/ HUD, Third Annual Report of the Community Development

Block Grant Program (March 1978).

35
Urban Development Action Grants (UPAG)

The UDAG program was authorized in 1977 as an adjunct to

block grants, and the program is being implemented for the first

time in fiscal year 1978. UDAG funds are available only to

distressed cities and they are to be used to support projects

involving private investment as well as public funds. Current

criteria for determining urban distress include: the proportion

of the housing stock constructed before 1940, net increase in per

capita income from 1969 to 1974, population growth between 1960

and 1975 relative to the national rate,' the level of unemployment, the rate of growth in employment, the percent of the

population below the poverty level, and unique local factors.

More than 300 localities are eligible for UDAG funding under

those criteria—a number that has been criticized by some as

being too high and by others as too low.

During fiscal year 1978, $400 million are available for urban development action grants. Through April 1978, 50 projects,

involving $150 million in federal funding, had been approved.

The majority of the UDAG funds approved thus far are earmarked

for commercial redevelopment. Subsequent grants are expected to

focus somewhat more heavily on neighborhood-based projects.

Section 312 Rehabilitation Loans

The Section 312 loan program, authorized in 1964, provides

direct financing for the rehabilitation of privately owned

residential and commercial buildings in designated urban renewal,

neighborhood-development, and code-enforcement areas. Loans bear

a 3-percent interest rate, with a maximum repayment period of 20

years. Most of the approximately 58,000 Section 312 loans made

through the end of fiscal year 1977 financed the rehabiliation of

owner-occupied housing. The Section 312 program provides benefits to people with higher incomes than those who receive direct

federal housing assistance. Less than 4 percent of the Section

312 funds lent to owner-occupants during 1977 went to families

with an annual income below $4,000; nearly one-third of the funds

went to families with an income of more than $15,000. 16/

16/ The Congress is currently considering legislation that

could raise interest rate charges for higher-income borrowers to the Treasury borrowing rate.

36
Despite low levels of activity in the past, there has been

considerable interest recently in expanding this program*

For fiscal year 1978, $80 million is expected to finance 6,800

loans. The Administration's urban policy proposals, announced in

March 1978, include a significant increase in funding for the

Section 312 program.

Urban Homesteading

A small-scale urban homesteading demonstration program,

under which federally held single-family properties are deeded to

localities and sold by them at nominal cost to persons willing to

rehabilitate and occupy them, has been operating since 1976.

This program is intended to encourage residential reinvestment in

distressed areas and to stimulate economic integration and

neighborhood revitalization. In fiscal year 1978, 2,500 homes

are to be conveyed to local governments for disposition under the

program, at a cost to the Federal Housing Administration fund of

$15 million. The HUD budget submission for fiscal year 1979

includes a proposal to make urban homesteading an ongoing

program.

MORTGAGE CREDIT ACTIVITIES 17/

Through a number of mortgage credit programs, the federal

government provides direct financing for residential construction, insures and guarantees private loans, and acts as a thirdparty broker in the mortgage market. These programs are designed to increase housing production, reduce cyclical swings

in construction activity, increase access to mortgage credit,

and expand homeownership opportunities. Table 13 summarizes

the status of major federal direct loan and mortgage insurance

and guarantee programs as of 1977.

17/ For a more complete discussion of mortgage credit programs

see Congressional Budget Office, "Housing Finance: Federal

Programs and Issues," Staff Working Paper (September 23,

1976).

37
TABLE 13. STATUS OF MAJOR FEDERAL HOME LOAN AND MORTGAGE

INSURANCE AND GUARANTEE PROGRAMS, 1977

Program

Unpaid Principal

Number of Loans Balance (in

Outstanding millions of $)

Direct Loans

FmHA rural housing loans aj 825,608

VA home loans b/ 80,087

Insured and Guaranteed Loans

FHAb/ 4,824,574

VA b/ 3,956,751

13,713

486

89,641

70,120

SOURCE: Farmers Home Administration Budget Office; Veterans

Administration Budget Office; HUD, Justification for

1979 Budget Estimates, Part 1, p. 1-14.

a/ As of December 1977.

b/ As of September 1977.

Direct Loan Programs

The Farmers Home Administration (FmHA). FmHA—an agency

of the Department of Agriculture—administers several direct loan

programs that finance the purchase, construction, and improvement

of homes in rural areas. Market-rate loans are made to persons

who could qualify for conventional financing but for whom private

credit sources are not available; loans with interest charges as

low as 1 percent are made to persons with incomes that would

disqualify them for private financing. FmHA also makes marketrate and interest subsidy loans to developers of multifamily

rental housing. Interest-subsidy rental projects carry reduced

rental charges, and rents can be further reduced through the use

38
of Section 8 assistance or through rural rental assistance

payments, an PmHA program similar to HUD's Section 8 existing

housing program. During fiscal year 1977, FmHA made about

111,000 homeownership loans, of which approximately 64,000 were

subsidized. During that same period, the agency provided rental

housing loans for 32,000 units; almost all of those loans were

subsidized. As of December 1977, more than 825,000 FmHA rural

housing loans were outstanding, with an unpaid principal balance

of $13.7 billion.

Veterans Administration (VA). The VA is a source of marketrate mortgages for qualified veterans seeking to buy, build,

or improve single-family homes in rural areas, small towns, or

credit-short urban areas. Maximum loan amounts are set by

statute; the interest rate charged and other terms for the loans

are fixed by regulation. About 80,000 VA loans are currently

outstanding; approximately 2,700 direct VA loans were made

during fiscal year 1977, and about: 2,400 loans are expected to be

made in fiscal year 1978.

^nsured and Guaranteed Loans

Federal Housing Administration (FHA). The FHA, which was

created by the National Housing Act of 1934 and is now an arm of

HUD, is the largest single source of government mortgage insurance. Originally intended to encourage recovery of the housing

construction industry from the Great Depression, the FHA is now

viewed as a means of increasing the access of limited-income

persons to credit as well as a way of promoting residential

construction. The largest of some 40 active FHA mortgage programs, Section 203(b), provides insurance for single-family

loans, with maximum interest rates, downpayment requirements, and

loan amounts set periodically by statute and regulation. In

addition to this and other relatively low-risk programs, the FHA

administers a number of higher-risk single-family and multifamily

loan programs, including a number of programs that provide

mortgage insurance for lower-income assisted housing. Insurance

premiums charged on standard single-family loans have generally

covered losses under those programs; however, since 1975, high

default rates in other programs have resulted in net losses to

the FHA fund.

39
The Veterans Administration (VA). The VA guarantees

and insures large numbers of privately written mortgages for

eligible veterans and servicemen. Since the programs were

initiated in 1944, the VA has guaranteed or insured more than

nine million home loans, totaling in excess of $120 million.

Nearly 4 million VA-guaranteed or -insured loans were outstanding

as of the end of fiscal year 1977, and the VA expects to guarantee 382,000 additional loans in fiscal year 1978.

The Farmers Home Administration (FmHA). FmHA is authorized to guarantee privately written home mortgages in rural

areas; however, this program has been largely inactive because of

severe restrictions on the terms of eligible loans. Recent

changes in the law allow the FmHA to guarantee a much wider range

of mortgages, which will enable the agency to play a more active

role.

Mortgage Market Interventions

Several government agencies and government-chartered private

entities buy and resell privately written mortgages and mortgagebacked securities, thereby affecting the supply, cost, and

distribution of credit for residential construction and home

purchases. Specifically, these activities, maintaining a secondary mortgage market and dealing in that market, are intended to

increase the availability of mortgage credit, reduce the severity

of cyclical declines in the homebuilding industry, and encourage

mortgage lending in credit-short areas. Other governmentsponsored enterprises allocate credit directly to housing by

advancing funds to financial institutions expected to use them

for residential mortgages.

Federal National Mortgage Association (FNMA). FNMA is

a government-sponsored private corporation that purchases and

resells privately written loans. By offering lenders a means

of liquidating residential mortgages, the credit market activities of FNMA (also referred to as "Fannie Mae") are intended to encourage the use of private funds for home loans. In

particular, purchases of government-insured and governmentguaranteed mortgages are meant to encourage lenders to make those

kinds of loans. FNMA's activities are also intended to increase

lending in urban areas where financial institutions may be

reluctant to write loans that they would have to hold and service

themselves. As of December 1976, FNMA's portfolio included

40
more than 1.5 million mortgages, with a total unpaid principal of

nearly $33 billion, or about 5 percent of the total residential

mortgage debt outstanding at the time. 18/ During fiscal year

1977, FNMA purchased more than $4 billion in loans.

Government National Mortgage Association (GNMA). GNMA is

an agency of HDD created in 1968 when the once-public FNMA was

reconstituted as a private corporation. Like FNMA, GNMA ("Ginnie

Mae") purchases government-insured and government-guaranteed

mortgages. . GNMA then sells securities backed by the pool of

mortgages. In 1977, GNMA issued over $17 billion in such securities; by the end of the year, $43 billion in GNMA mortgagebacked securities were outstanding. GNMA is also authorized

to purchase mortgages with interest rates as low as 7.5 percent

and to resell them as market-yield instruments, absorbing the

difference as an interest subsidy. Under the Emergency Home

Mortgage Purchase Assistance program, this authority may be

utilized on an ad hoc basis to stimulate private mortgage lending. This "tandem" financing can also be made available to

private developers of assisted housing projects and it is now

being heavily used by developers of Section 8 new construction/

substantial rehabilitation projects, thereby providing a financing subsidy In addition to the rent subsidy which projects enjoy.

Beginning in fiscal year 1978, tandem assistance will be used—in

what is referred to as a "targeted tandem program"—for nonsubsidized residential construction in distressed urban areas.

Federal Home Loan Banks (FHLBs). The Federal Home Loan

Banks are a system of twelve regional institutions that operate

under the auspices of the Federal Home Loan Bank Board (FHLBB),

tfie federal agency responsible for overseeing the nation's

federal savings and loan associations and mutual savings banks.

The Federal Home Loan Banks are empowered to make monetary

advances to member institutions to cover net withdrawals during

periods of tight money or to enable savings and loan associations

to expand their lending activities. Since 1960, the volume of

such advances has increased sharply, reaching a peak of ' $12.8

billion In net advances In 1974. As of the end of fiscal year

1977, $17.0 billion in advances were outstanding.

JjJ/ HUD, Statistical Year Book for 1976. pp. 298 and 306.

41
Federal Home Loan Mortgage Corporation (FHLMC). The FHLMC

("Freddie Mac") is a federally chartered corporation under the

control of the Bank Board. The FHLMC was created in 1970 to

purchase mortgages from private savings and loan associations and

to sell shares in those mortgages to individual investors. These

secondary market activities are designed to encourage lending

by enhancing the marketability of mortgages and, at the same

time, increase the supply of capital available for home loans.

HOUSING-RELATED TAX EXPENDITURES

The tools of federal housing policy include a number of

tax expenditures designed to encourage homeownership, to increase

the production of certain types of rental housing, and to increase the supply of credit available for residential construction. Unlike direct spending programs, which serve only a

fraction of the eligible population, housing-related tax expenditures are available to everyone who meets their criteria of

eligibility.

Among the specific tax expenditures affecting housing

are:

o The deductibility of mortgage interest and property

tax payments for homeowners.

o The deferral of capital gains on the sale of a residence.

o The exclusion of a share of capital gains tax liability

on the sale of residences by elderly homeowners.

o Favorable depreciation treatment for rental housing.

o Five-year amortization of the cost of rehabilitating

low-income housing.

o Favorable treatment of construction-period interest and

property taxes in rental housing development.

o Beneficial bad-debt deductions for financial institutions

engaged in mortgage lending.

42
These tax provisions result In revenue losses far exceeding

direct federal expenditures for housing, and their beneficiaries

typically have higher incomes than do beneficiaries of either

housing assistance or federal mortgage credit programs. Table 14

summarizes major housing-related tax expenditures in fiscal year

1977 and their distribution by income class.

Homeownership Tax Provisions

Deductibillty of Mortgage Interest and Property Tax Payments

for Owner-Occupied Housing. The federal tax code permits homeowners who itemize their deductions to subtract mortgage interest payments and state and local real estate taxes from their

federally taxable incomes, thereby reducing the cost of owning a

home relative to the cost of renting. Together, these provisions

reduced tax revenues during fiscal year 1977 by more than twice

the amount of funds expended on lower-income housing assistance

programs. Because these provisions benefit only those who

itemize their deductions, and because the benefit is greater

for those in higher marginal tax brackets, the bulk of this tax

savings goes to middle- and upper-income households. Nearly 40

percent of the $4.5 billion in revenue lost in fiscal year 1977

as a result of the deducibility of mortgage interest payments

went to taxpayers with an annual income in excess of $30,000.

Similarly, more than 50 percent of the $4.2 billion in tax

expenditures resulting from homeowners' deduction of real estate

taxes benefited those whose annual Income exceeded $30,000.

Deferral of Capital Gains on the Sale of a Residence. Some

or all of the capital gains realized on the sale of a home are

deferred for tax purposes if the seller buys or begins building

another home within 18 months of the sale. This tax provision

subsidizes the ownership of increasingly expensive homes. To the

extent that this encourages "buying up," it may contribute to

inflation in housing costs. Further, through a series of such

deferrals a homeowner can avoid paying any capital gains tax

until a point late in life when his total income has declined,

reducing his rate of taxation. About 20 percent of the nearly

$900 million in revenue lost in fiscal year 1977 as a result of

the deferral of capital gains taxes on home sales went to taxpayers with an annual income in excess of $30,000.

43
TABLE 14. DISTRIBUTION OF BENEFITS OF MAJOR HOUSING-RELATED TAX EXPENDITURES BY INCOME OF BENEFICIARY,

FISCAL YEAR 1977: IN PERCENTS a/

Expanded Annual

Income Class

of Taxpayer b/

Exclusion of

Deductibility DeductIbility Deferral of Capital Gains Accelerated Favorable Treatment

of Mortgage of Real Estate Capital Gains on Sales by Depreciation for ConstructionInterest for Taxes for on Home Elderly for Rental

Homeowners Homeowners Sales Homeowners Housing

Period Interest

and Taxes

$0 to $9,999 2.1

$10,000 to $19,999 24.5

$20,000 to $29,000 35.9

$30,000 to $49,999 25.2

$50,000 to $99,999 10.5

$100,000 and over 1.8

Revenue Loss

(millions of dollars) 4,490

SOURCE: CBO Tax Analysis Division

1.9

19.4

28.4

24.6

16.1

9.6

4,205

and Special Analyses

4.0

42.8

33.7

14.6

3.4

1.5

890

of the Budget

2.5

15.0

17.5

15.0

22.5

27.5

40

of the United

2.2

3.4

3.8

15.0

22.3

52.8

320

States

2.0

3.3

4.0

14.7

22.7

53.3

150 cj

Government . Fiscal

Year 1979 Budget, pp. 158-160.

a/ Revenue losses are for individual income taxes only.

b_/ Expanded income is a broader concept than the "adjusted gross income" concept that appears on income tax returns.

Expanded income includes the untaxed half of capital gains, percentage depletion in excess of cost, depreciation

in excess of straight line, and other "tax preference" items included in the minimum tax; however, it excludes

investment interest up to the amount of investment income. It therefore comes closer to "real" total economic

income than does the adjusted gross income figure.

cj A substantial portion of the amount shown for this tax expenditure is attributable to nonresidential construction.
Exclusion of Capital Gains Tax Liability on Sale of Primary

Residence by Elderly Homeowners. Taxpayers who sell their homes

after reaching the age of 65 may escape taxation on a share

or all of the capital gains resulting from the sale. This

provision is designed to benefit elderly persons who sell

their homes and become renters. If this exclusion is combined

with earlier deferrals, some homeowners may escape all or most of

their long-term liability. Fully 65 percent of the benefits from

this tax expenditure go to taxpayers with an annual income of

$30,000 or more.

Rental Housing Tax Provisions 19/

A separate set of tax provisions complements the homeownership inducements described above by promoting the construction or rehabilitation of rental housing. However, instead

of aiding the occupant of the housing unit directly—as do the

homeownership tax provisions—tax provisions favoring rental

housing benefit the developer primarily and the renter secondarily, if at all.

Favorable Depreciation Treatment for Rental Housing.

Developers of new rental housing may depreciate the cost of the

units for tax purposes at a 200-percent declining balance

rate, involving deductions in the early years as much as twice

those available to investors in other income-producing assets. A

somewhat less favorable, but still advantageous, depreciation

treatment is available to investors who acquire existing rental

units. In addition, certain expenses incurred in rehabilitating rental units for lower-income households may be fully

amortized within five years by deducting one-fifth of the cost of

the work per year.

These tax benefits are intended to stimulate the development

of rental housing by increasing its attractiveness as an investment. But, without a conco*. itant increase in the demand for

rental housing, the extent to which those provisions result in

the production of units that would have otherwise not been built

19/ For a more complete discussion of tax expenditures affecting

real estate investment, see Congressional Budget Office,

Real Estate Tax Shelter Subsidies and Direct Subsidy Alternatives May 1977.

45
is arguable. The extent (if any) to which these tax provisions

reduce tenant rents is also questionable. The net effect of

these provisions may be simply to increase the profitability

of rental housing as an Investment, and to bid up development

costs, as more investors compete for a limited number of investment opportunities.

Favorable Treatment of Construction-Period Interest and

Property Tax Payments. Builders of rental housing have been

permitted to treat interest and property tax payments made during

construction as current business costs, deducting these expenses

as they occur, rather than including them in the cost of construction and writing them off over the life of the building. As

a result of the Tax Reform Act of 1976, these substantial frontend construction subsidies will be phased down as of 1978, for

most rental housing, and for low- and moderate-income rental

housing, as of 1982.

Preferential Treatment of Real Estate Investment as a Tax

Shelter for Limited Partnerships. The Tax Reform Act of 1976

exempts limited partnership investments in rental housing and

other forms of real estate from a new rule that prohibits individual investors from taking deductions for tax losses in excess

of the amount they actually have at risk in a project. This

exemption gives real estate investment an edge over other investment opportunities in competing for private capital.

Tax Benefits for Financial Institutions

The federal tax code gives preferential treatment to commercial banks, mutual savings banks, and savings and loan associations, the primary sources of residential mortgage credit.

Although most businesses may deduct from their net income an

allowance for bad debt losses that is based on actual losses in

recent years, financial institutions are allowed bad-debt deductions considerably in excess of actual losses. These tax

provisions increase the profitability of financial institutions

relative to other businesses, and they may therefore affect the

availability of mortgage credit by encouraging the formation

and expansion of banks and savings and loan associations. Primarily as a consequence of favorable bad-debt allowances, in

1972—the latest year for which such data are available—banks

and savings institutions paid taxes averaging 19 percent of

46
income as compared with an average tax rate of 41 percent for all

other corporations. 20/

HOUSING AND CREDIT MARKET REGULATIONS

The federal government directly affects the supply, cost,

and distribution of housing and home financing by regulating

various aspects of housing and credit markets. The cost of these

regulatory activities and the distribution of their benefits are

difficult to measure.

Prohibitions Against Discrimination and the

Promotion of Fair Housing Opportunities

Federal statutes prohibit racial discrimination in the sale

or rental of most privately owned housing. In addition, federal

regulations require managers of federally assisted projects to

take affirmative steps to ensure that the housing units are made

available to minorities and that: the projects promote racial and

economic deconcentration. Regulations also favor siting assisted

projects in locations that will induce deconcentration.

Federal statutes also prohibit discrimination in mortgage

lending on the basis of race, color, national origin, sex,

religion, marital status, or age. Until recently, attention in

this area has focused almost exclusively on racial discrimination

and, in particular, on redlining—the practice of systematically

denying mortgage credit to certain geographic areas, usually

older inner-city neighborhoods with large minority populations.

Anti-redlining regulations currently prohibit denials of loans on

the basis of the racial composition of the area in which the home

is located or its age.

20/ U.S. Department of The Treasury, "Effective Income Tax Rates

Paid by United States Corporations in 1972" (May 1978),

p. 43.

47
The Regulation of Financial Institutions

The Federal Home Loan Bank Board and the Federal Reserve

Board set maximum rates of interest that savings and loan associtions, mutual savings banks, and federally chartered commercial

banks are permitted to pay on deposits, affecting the cost of

money for these institutions and thereby affecting the cost of

mortgage credit to borrowers. These interest rate ceilings also

give savings and loan associations and mutual savings banks—the

primary sources of residential mortgage credit—a relative

advantage over commercial banks in attracting deposits. But, the

interest rate ceilings also place all banks and savings and loan

associations at a relative disadvantage in attracting investments, thereby reducing the supply of mortgage credit during

periods of tight money, when more attractive alternative investments are available.

Finally, Federal Home Loan Bank Board regulations prohibit member institutions from making many kinds of loans,

which ensures that most funds are available for residential

mortgages. In 1975, more than three-fourths of all savings and

loan associations assets were in the form of residential mortgages and these institutions held more than 45 percent of all

outstanding mortgages.

48
CHAPTER IV. THE BUDGETARY FRAMEWORK OF FEDERAL HOUSING

POLICY

The housing programs described in the preceding chapter

appear in a number of different accounts within the federal

budget and are financed through a variety of different funding

mechanisms* Furthermore, many of the programs are entirely

off-budget. Housing-related tax expenditures are reported

each year in federal budget documents but generally escape

annual Congressional scrutiny. Regulatory activities affecting

housing may be even less visible within the budget. This budgetary fragmentation makes it difficult for the Congress to obtain a

comprehensive accounting of all funds expended on housing or to

control that total.

This chapter first describes the budgetary framework of

federal housing policy (see Table 15) and then examines current

and projected program costs.

THE BUDGETARY FRAMEWORK

Housing Assistance Programs

The assisted housing programs administered by HUD all

involve multiyear subsidy commitments on the part of the federal

government. The estimated amount of budget authority—the

authorization to expend federal funds—needed to subsidize

a housing unit for the duration of the federal commitment is

released in the year that the commitment is to be made. Outlays

utilizing that authority are then spread out over a period of

up to 40 years. Where the long-term spending authority proves

to be insufficient to pay the full subsidy costs, additional

budget authority may be released on a yearly basis in the form of

operating subsidies, or further long-term spending authority

may be provided to amend the initial subsidy commitment. In the

case of public housing, budget authority expected to be sufficient to pay the full development and financing costs of a

project Is released at the outset of a commitment and expended in

installments over 40 years. The federal government also pays

annual operating subsidies for most public housing projects, with
TABLE 15. THE BUDGETARY FRAMEWORK OF FEDERAL HOUSING POLICY

Program

Budget

Subfunctlon a/ Financing Mechanism

Housing Assistance Programs

Low-rent public housing

Section 8 leased housing

assistance

Section 235 homeownership

assistance

Section 236 rental

assistance

Rent supplements

Section 202 housing for

the elderly & handicapped

Community Development Programs

Community development block

grants and urban development action grants

604 Budget authority sufficient to pay development or purchase and rehabilitation costs is released in the year in which a new commitment

is to be made; outlays liquidate long-term budget authority over the

life of the subsidy commitment. Annual appropriations pay operating

subsidies for most projects.

604 Budget authority presumed to be sufficient to pay full multiyear

rental assistance costs is released in the year in which a commitment

is to be made; outlays liquidate long-term budget authority over the

life of the subsidy commitment.

604 Budget authority presumed to be sufficient to pay full multiyear

interest-subsidy costs is released before a subsidy commitment is

made. Outlays occur annually over the life of the subsidy commitment.

New subsidy commitments since fiscal year 1976 are financed out of

unutilized budget authority released prior to 1973.

604 Funding procedure similar to Section 235. Since the program was

suspended in 1973, new subsidy commitments are being made only for

projects approved before 1973. New commitments are financed out of

unutilized budget authority released prior to 1973.

604 Funding procedure similar to Section 8. Most new subsidy commitments

since 1973 are financed out of unutilized budget authority released in

prior years and recaptured from terminated projects.

371 Projects financed out of revolving loan fund. Authority for

cumulative outstanding Treasury borrowings of $3.3 billion created

in 1976 subject to release in annual appropriations. All future

Section 202 projects to carry Section 8 subsidy commitments as well.

451 Grants funded through annual appropriations.

TContinuedT
TABLE 15. (Continued)

Program

Budget

Subfunction a/ Financing Mechanism

Section 312 rehabilitation 451

loans

Urban homesteading 451

Mortgage Credit Activities

Farmers Home Administration 371

direct loans

Loans financed through a revolving fund,

covered by annual appropriations.

Interest-subsidy costs

Financed through annual appropriations, which reimburse the FHA fund

for properties transferred to local governments for disposition.

Loans made from a revolving Rural Housing Insurance Fund financed

through borrowings from the Treasury and sale of loans to Federal Financing Bank. Interest-subsidy costs covered by annual appropriations

as costs occur.

Veterans Administration

direct loans

Federal Housing Administration insured loans

Veterans Administration

guaranteed loans

GNMA secondary market

activities

704

371

704

371

Federal National Mortgage Association,

Federal Home Loan Banks, Federal

Home Loan Mortgage Corporation

Loans made from a self-financing revolving fund. Appropriations Act

calls for transference of retained earnings to VA loan guaranty fund.

Insurance financed by borrowings from the Treasury and issuance of debentures. Occasional appropriations provided to cover insufficiencies.

Loan guarantees financed from a revolving VA loan guaranty fund.

Activities financed by borrowings from the Treasury and sales of participation certificates in the mortgage pool. Losses resulting from

tandem financing activities carried as impairments against capital.

Certain insufficiencies covered by occasional appropriations.

Off-budget public enterprises.

a/ Subfunction 371 - Mortgage Credit and Thrift Insurance; 451

and Other Income Supplements; and 704 = Veterans Housing.

Community Development; 604 = Public Assistance
budget authority for each year's operating subsidies released in

the year in which those payments are to be made. Section 8

subsidy commitments obligate the federal goverment to pay the

owner of the housing unit the difference between a fixed percentage of the tenant's income and the allowable rental charge, which

is set by HUD. Budget authority expected to be sufficient to pay

this difference for 15 to 40 years—depending on the development

method used—is released in the year in which a subsidy commitment is to be made. The actual long-term cost to the federal

government, however, will depend on initial tenant incomes and

rent levels and on the relative rates of inflation in incomes and

rents. Thus, it is by no means certain that the budget authority

created in the first year of a Section 8 subsidy commitment will

cover the eventual subsidy cost; amendments to the initial

commitments may prove necessary in the future.

Community Development Programs

Community development block grants and urban development

action grants are financed through annual appropriations, with

each year's funds expended shortly after they are released.

The Section 312 rehabilitation loan program is financed from a

revolving fund, with budget authority created periodically

to pay the cost of the interest subsidy. The ongoing urban

homesteading program proposed for fiscal year 1979 would be

funded through annual appropriations that would be used to

reimburse the Federal Housing Administration fund for units

transfered to local governments.

Mortgage Credit Activities

Most Farmers Home Administration direct housing loans

are finaced through a revolving Rural Housing Insurance Fund.

Losses resulting from the sale of below-market rate loans at

market-rate yields are made up by annual appropriations over the

life of the loans. Thus, in contrast to HUD assisted housing

programs, budget authority to cover the costs of FmHA housing

programs is released annually, as costs are incurred, rather than

at the time the long-term commitments are made. Direct VA

housing loans are made from a self-financing revolving fund.

52
FHA mortgage and loan insurance programs are financed

through four separate funds. The primary sources of income for

the FHA funds are insurance premiums and fees paid by mortgagors;

expenses to the funds include operating costs, losses due to

failures of mortgagors to meet their obligations, repayment of

premiums under certain mutual insurance programs, and expenditures associated with maintaining acquired properties or preparing them for sale. To the extent that these expenses are not

covered by premiums, fees, and income from property dispositions,

the FHA funds may borrow directly from the Treasury or offer

their own debentures. In fiscal year 1977, the FHA received an

appropriation of $1.9 billion to cover a portion of its unrestored losses; an additional appropriation is being sought for

fiscal year 1979. Veterans Administration loan guarantees are

financed by a separate revolving fund; no premiums are paid by

mortgagors, and losses from the fund are covered by occasional

appropriations. The small-scale FmHA mortgage guarantee program

is financed through the same Rural Housing Insurance Fund that

finances direct rural housing loans.

The mortgage market activities of the Government National

Mortgage Association are financed by borrowings from the Treasury; losses inherent in the purchase of below-market interest

rate mortgages and their resale at a market yield are carried on

the GNMA books as impairments against capital. Activities of the

Federal National Mortgage Association are off-budget and they are

generally self-financing. Credit market activities of both

the Federal Home Loan Banks and the Federal Home Loan Mortgage

Corporation are off-budget and are entirely self-financing.

Expected revenue losses attributable to housing-related tax

expenditures are itemized by functional category within federal

budget documents, but the actual amount of each such expenditure

is not voted on directly by the Congress. Mortgage and other

housing market regulatory activities do not appear as separate

items in the budget.

PROGRAM COSTS

Table 16 describes the budget authority and anticipated

outlays, for federal housing programs during fiscal year 1978,

estimates of the cost of sustaining current policy for the next

five years, and the funding requested in the President's 1979

budget submission. Table 17 presents estimates of the revenue

53
losses resulting from housing-related tax expenditures for fiscal

years 1978-1983. In fiscal year 1978, total federal expenditures

related to housing (including the portion of community development block grant and urban development action grant funds estimated to go towards housing) are expected to amount to approximately $5.5 billion. Outlays for assisted housing, including

public housing operating subsidies, Section 202 interest-credit

costs, and FmHA interest subsidy costs will account for nearly 80

percent of that total. Revenue losses resulting from housingrelated tax expenditures in fiscal year 1978 are expected to

amount to as much as $12.4 billion, with homeownership deductions

accounting for more than four-fifths of that sum.

54
TABLE 16. BUDGET AUTHORITY AND OUTLAYS FOR HOUSING IN 1978, PROJECTIONS OF CURRENT

POLICY FOR 1979-1983 a./, AND REQUESTED FUNDING FOR 1979: BY FISCAL YEARS,

IN MILLIONS OF DOLLARS

1978 1979 1980 1981 1982 1983

Ul

Ul

Housing Assistance Programs

Public Housing, Section 8, Section

235, Section 236, Rent Supplements

Current policy projection of

budget authority and outlays

Budget authority 31,523 28,111 36,903 39,072 41,252 43,533

Outlays 3,100 3,577 - 4,236 5,047 5,921 6,829

President's proposal

Budget authority 24,691 b/

Outlays 3,577

Public Housing Operating Subsidies

Current policy projection of

budget authority and outlays

Budget authority 685 724 790 873 971 1,072

Outlays 587 686 727 803 893 986

President's proposal

Budget authority 729

Outlays 686

Section 202

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

750

320

800

550

800

713

874

852

932

758

995

756

1,062

796

TConfinuedT
TABLE 16. (Continued)

1978 1979 1980 1981 1982 1983

Ul

Housing-Related Community Development

Programs

Community Development Block Grants

and Urban Development Action Grants

(estimated share devoted to housing) c/

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's Proposal

Budget authority

Outlays

Section 312 Rehabilitation Loans

• Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

Urban Homesteading

New fiscal year 1979 initiative d/

President's Proposal

Budget authority

Outlays

1,044

662

1,111

764

1,083

732

43

58

56

95

85

20

10

1,179

945

1,255

1,149

1,337

1,286

1,432

1,373

58

55

56

54

54

51

51

48

(Continued)
TABLE 16. (Continued)

1978 1979 1980 1981 1982 1983

Credit Market Activities

FmHA Direct Loans

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

VA Direct Loans

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's Proposal

Budget authority

Outlays

FHA Insured Loans

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

730

414

617

588

388

-128 e/

694

666

785

759

879

853

980

951

-75 -73

-73

-73 -69 -65 -64

705

650

465

290

451

221

482

287

483

266

495

256

424

161

(Continued)
TABLE 16. (Continued)

1978 1979 1980 1981 1982 1983

VA Guaranteed Loans

Ol

00

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

GNMA Tandem Financing f./

Total

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's Proposal

Budget authority

Outlays

54 27

27

64 76 88 97

Current policy projection of

budget authority and outlays

Budget authority

Outlays

President's proposal

Budget authority

Outlays

8 396 2,094 1,540 860

-225 389 474 483 386

1,507

389

875

390

35,445

5,530

32,282

6,854

29,764

6,239

43,074

8,233

44,696

9,326

46,843

10,425

49,429

11,567
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TABLE 17. ESTIMATED REVENUE LOSSES RESULTING FROM MAJOR HOUSING-RELATED TAX EXPENDITURES, a/

1978-1983: FISCAL YEARS, IN MILLIONS OF DOLLARS

Tax Expenditure 1978 1979 1980 1981 1982 1983

Deduction of mortgage interest payments by

homeowners 4,985 5,530 6,140 6,815 7,565 8,395

Deduction of property tax payments by

homeowners 4,665 5,180 5,750 6,385 7,085 7,865

Deferral of capital gains on sale of home 935 980 1,030 1,080 1,135 1,195

Exclusion of capital gains on sale of home

by elderly homeowners 70 70 70 70 75 75

Accelerated depreciation for rental housing 370 360 360 375 395 420

Favorable treatment of construction-period

interest and taxes b/ 640 615 700 750 820 875

Favorable bad-debt allowances for financial

institutions 705 790 930 1,025 1,040 1,085

TOTAL cj 12,370 13,525 14,980 16,500 18,115 19,910

SOURCE: CBO Tax Analysis Division.

a/ Sum of corporate tax and individual income tax losses.

b/ A substantial portion of the amount shown for this tax expenditure is attributable to

nonresidential construction.

cj This is simply the arithmetic total of the listed tax expenditures. Because of overlaps

and interactions among some of these tax expenditures and because potential changes in

taxpayer behavior are not taken into account in the estimates, the totals shown do not

represent the amount of revenue that would be raised if all of these tax expenditures

were repealed.
CHAPTER V. RECURRING HOUSING POLICY ISSUES

Each year, the Congress faces a number of recurring issues

concerning the funding* design, and operation of federal housing

programs• The still unmet housing policy objectives, the sheer

complexity of current housing programs, and uncertainty as to

their effectiveness give rise to these issues and contribute to

their recurring nature. This chapter discusses five such recurring housing policy issues, examines proposals contained in

the Administration's 1979 budget and legislative program, and

presents policy options available to the Congress for this and

subsequent years. The issues considered are:

o What level of funding should be provided for housing

assistance programs and how should they be financed?

o What should be the mix of new construction, rehabilitation, and existing housing assistance?

o What kind of housing assistance should be provided to

lower-income homeowners, and should direct assistance be

extended to higher-income families?

o What mix of programs is most effective in encouraging

housing production and providing countercyclical aid to

the home building industry?

o How should housing assistance programs be used to encourage community development?

THE FUNDING LEVEL OF HOUSING ASSISTANCE PROGRAMS

Each year, the Congress must determine the level of funding

to be allocated to housing assistance programs. For each program, this requires separate judgments as to the level of funding

required to finance new subsidy commitments and the additional

spending authority needed, if any, to fulfill multiyear subsidy

commitments made in the past. The complex funding procedures for

different programs—and the inevitable uncertainties attending

advanced financing—make it difficult, however, for the Congress
to estimate accurately either the actual cost of new commitments

over many years or the additional expenditures needed to meet

underfunded prior commitments.

Current Funding Procedures and Proposals

for Fiscal Year 1979

Funding mechanisms differ among the various housing assistance programs. Under the Section 8 program, assisted housing

units are financed through release of the full amount of budget

authority assumed to be necessary to pay the cost of the 15- to

40-year federal commitment. The current procedure for estimating

that amount is to multiply the maximum allowable rent for the

first year of a commitment—expressed as a yearly sum—by the

maximum number of years the federal subsidy may run. (For

example, if the allowable monthly rent for a unit is $300 and

the federal commitment is for up to 30 years, the long-term

budget authority set aside for that unit would be $108,000-^

$300 per month, times 12 months per year, times 30 years.)

Yet, the actual federal obligation is to pay, not the allowable

rent, but the difference between that and the independently

determined tenant contribution. Both of those can be expected to

rise over time. The actual long-term per-unit subsidy cost

therefore will depend on the initial tenant income and the rates

by which rents and tenant income increase over time, as well as

on the initial rent level and the duration of the commitment.

There is an assumption implicit in the current cost estimation

procedure that tenant contributions in the early years of a

long-term commitment will provide a large enough reserve to pay

for the added cost of future rent increases.

If the present income distribution of Section 8 tenants

proves to be representative of the income mix once the program

is fully underway, if allowable rents increase at the same rate

in the future as they have in the past, and if tenant incomes

increase at rates similar to those observed in recent years

for public housing, then existing Section 8 subsidy commitments

will turn out to be seriously underfunded. Even under fairly

optimistic assumptions concerning future increases in rent levels

and tenant incomes, additional federal funding may be required to

meet the full term of the subsidy commitments. On the other

hand, however, if large numbers of commitments do not run their

full course—either through financial failure or conversion

of projects from subsidized to unsubsidized status by their

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sponsors—the amount of budget authority already released may

prove to be excessive. No proposals for dealing with these

Section 8 funding uncertainties are contained in the Administration's 1979 budget submission.

In the case of public housing, budget authority expected to

pay the principal and interest costs for the building or purchase

of new housing projects is released the year in which a new

commitment is to be made. Once the commitment is entered into,

the long-term federal expenditure is fixed as is the annual

spend-out rate, which eliminates the uncertainty created by

the Section 8 financing procedure. On the other hand, debt

service payments for public housing are supplemented by annual

operating subsidies—a feature absent from the Section 8 program. The amount of the operating subsidy for each public

housing agency is calculated each year by means of a complex

formula that takes into account tenant incomes and numerous

project characteristics. In contrast to public housing debt

service payments and Section 8 funding, budget authority for

public housing operating subsidies is released the year in which

they are to be paid, and there is no attempt to estimate longterm expenditures when a new subsidy commitment is made. As a

result of these different funding procedures the per-unit cost of

public housing appears considerably lower than the cost of

Section 8 subsidy commitments of equivalent duration, where the

full run-out cost is estimated at the outset. For fiscal year

1979, the HUD budget requests $729 million in operating subsidies

to assist approximately 1.1 million units of public housing.

Additional uncertainty in the funding of Section 8 and

public housing is created by the fact that in estimating per-unit

costs of additional subsidy commitments to be made in different

fiscal years, HUD budget submissions in recent years have included no provision for inflation. But development costs for new

construction and rents for existing housing are both increasing,

and the effect of this unrealistic assumption of no inflation

is, therefore, to overestimate the number of units that can be

assisted at any given level of funding. For fiscal year 1979,

the HUD budget calls for the release of $24.7 billion in budget

authority, which, together with $6.4 billion in unutilized

authority expected to be carried over from fiscal year 1978, is

to fund subsidy commitments for an additional 400,000 Section 8

and public housing units. If the estimated per-unit cost of

additional Section 8 existing housing is inflated by 5.5 percent

to reflect the projected increase in rents between fiscal year

63
1978 and fiscal year 1979, and the 7.6 percent projected rate of

increase in residential construction costs is used to inflate the

estimated per-unit cost of additional Section 8 new construction/

substantial rehabilitation and public housing commitments,

then the proposed funding would support only about 375,000 units.

Approximately $2.2 billion more budget authority would be needed—

in addition to the $6.4 billion carryover—to fund the proposed

400,000 additional units.

In contrast to both Section 8 and public housing, budget

authority to pay the long-term subsidy costs of the Farmers

Home Administration assisted housing programs is released annually as those costs are incurred. When below-market interest

rate rural housing loans are made, they are sold to the Federal

Financing Bank in the form of certificates of beneficial ownership with market-rate yields. Annual appropriations then release

enough budget authority to pay the yearly cost of the difference

between the interest income and the interest expense of the Rural

Housing Insurance Fund. Thus, the full cost to the government of

interest credit loans may not become apparent for as long as 50

years, with increments of budget authority released each year

over that period. The per-unit cost of additional subsidized

rural housing loans will therefore appear to be much less than

equivalent commitments for Section 8 or public housing units,

which are funded for years in advance.

Comparisons of program costs are also complicated by the

fact that the managers of the Rural Housing Insurance Fund have

considerable discretion in deciding when to retain loans and when

to sell them off, thereby affecting net outlays in any given

year. By projecting high loan sales for fiscal year 1979, the

FmHA budget submission shows a negative outlay that year, as

compared with positive outlays of over $400 million in fiscal

year 1978. This projected drop in outlays occurs despite the

fact that, between fiscal year 1978 and fiscal year 1979, the

proportion of loans made at below-market interest rates is

projected to increase from 69 to 80 percent and total obligations

are projected to increase by 6 percent.

Options Available to the Congress

Given such inconsistent financing procedures and the inadvertent uncertainties of estimating long-term costs, the Congress

cannot be sure of either the number of households that will be

assisted for any level of funding or the long-term cost to the

64
government of assisted housing. Options available to the Congress

for reducing those uncertainties include:

o Requiring that Administration estimates of the longterm costs of Section 8 housing assistance be based

on available data regarding current tenant incomes and

rents and their projected increases rather than on

initial rent levels only, as is now the case;

o Requiring that HUD budget submissions include estimates of the long-term costs of operating subsidies for

public housing, which would make the cost figures

for public housing and Section 8 more comparable;

o Requiring that estimates of budget authority requirements for new commitments under both Section 8 and

public housing take into account projected increases

in development costs and rents from commitments made

in prior years;

o Requiring that FmHA budget submissions include estimates of the long-term costs of rural housing loans

comparable to those included in HUD budget submissions

for Section 8 and public housing;

o Establishing common financing procedures for all housing

assistance programs.

THE APPROPRIATE MIX OF HOUSING ASSISTANCE PROGRAMS

The selection among types of housing assistance programs—

those involving new construction, those entailing the rehabilitation of substandard units, and those subsidizing rents in

existing standard units—is one of the most significant housing

policy choices facing the Congress each year. Although these

three kinds of programs have similar effects in reducing the

housing costs of lower-income rental households, their impact on

the housing sector of the economy, on nonparticipants, and on the

community at large are very different. In addition, the programs

differ greatly in their costs to the government.

65
Trade-offs Among Programs and Proposals

for Fiscal Year 1979

Housing assistance programs involving new construction

appear to contribute most heavily to the overall supply of

housing while also aiding lower-income households* Nevertheless,

rehabilitation programs may contribute at least as much to net

housing supply as new cosntruction programs, for federally

supported rehabilitation may be less likely to substitute for

privately sponsored construction activity. Firm data on this

question are, however, unavailable. Although existing housing

assistance does not contribute to residential construction, it

may improve the maintenance of previously built units and hence

it may indirectly affect the supply of standard housing.

By focusing aid on areas with below-standard housing,

rehabilitation programs may significantly affect community

development and neighborhood revitalization. Existing housing

programs are less likely to have significant neighborhood revitaliation effects, but they are more likely to result in some

deconcentration among lower-income families. Subsidized new

construction may have either of those effects, depending on the

location of the projects; however, regardless of their location,

if newly built assisted-housing projects are not viewed as

community assets, they are unlikely,to improve distressed areas

or reduce concentrations of lower-income persons.

Widely varying rent levels result in great differences in

program costs. Maximum allowable annual rents for Section 8

commitments entered into in fiscal year 1977 averaged $3,939

for new construction, $3,845 for substantial rehabilitation,

and $2,133 for existing housing. Thus, for a family with a

$4,000 income and a $1,000 annual contribution towards its own

housing expenses (near the average for all Section 8 households),

the annual subsidy cost in the first years of these long-term

commitments will be more than twice as great for new construction and substantial rehabilitation as for existing housing. _!_/

l_l Rent figures are adjusted to take into account cost differences among regions with different types of program

activity. Existing housing subsidy cost includes an administrative fee paid by HUD to the local housing agency

for each unit under lease; fee is equal to 8.5 percent of

the allowable rent on a two bedroom unit.

66
By law, HUD must, to the extent practicable, allocate

housing assistance among local communities in a manner consistent

with their needs, as specified in housing assistance plans

submitted by local governments. In accordance with the most

recent local plans, the 1979 HUD budget request calls for a

significant increase in rehabilitation programs and reductions in

both new construction and existing housing assistance. The

number of new subsidy commitments under the Section 8 substantial

rehabilitation program is scheduled to grow from about 24,000

units in fiscal year 1977 to 56,000 units in 1978 and 70,000 in

1979. In addition, an allocation of 39,000 units is proposed for

a new Section 8 "moderate" rehabilitation program in 1979, to be

targeted on substandard units requiring between $1,500 and $5,000

of repairs to bring them up to standard. The proportion of

additional Section 8 subsidy commitments for new construction is

to be reduced from 47 percent of the total during 1977 to 38

percent in 1978 and 33 percent in 1979. Existing housing assistance is to decline from 45 percent in 1977 to 42 percent in 1978,

and 34 percent in 1979. 2/

Options Available to the Congress /

If the Congress wished to significantly alter the program

mix for fiscal year 1979 or for any year thereafter, it might

consider reducing or eliminating local discretion in determining

the types of housing assistance and, instead, establish the mix

of programs either for the nation as a whole or for different

types of local markets. Specifying different program mixes for

different kinds of housing markets would probably require

more knowledge of housing market dynamics than currently exists.

If the Congress chose to move in the direction of market-specific

targeting, it could initiate studies to identify the relevant

market characteristics and determine the relationship between

market conditions and program effects.

_2/ These proportions are exclusive of the share of Section 8

assistance applied to previously existing HUD-insured multifamily projects. HUD, Summary of the HUD Budget. Fiscal Year

1979. p.H-4.

67
If the Congress chose to place greater emphasis on new

construction, longer-term options include reactivating the

Section 236 mortgage-subsidy rental program or designing a

similar alternative, and expanding tax benefits available to

developers of new lower-income projects. Alternatives emphasizing rehabilitation include expanding participation in the

Section 8 program to lower-income homeowners, thereby providing direct cash assistance for upgrading and maintaining

homes; offering interest subsidies or federal guarantees for

privately written rehabilitation loans; or providing additional

tax expenditures to promote rehabilitation.

A longer-term policy option emphasizing the use of existing

housing would be the enactment of a full-entitlement^ housing

allowance program, which would provide direct cash assistance to

all income-eligible families—homeowners as well as renters—on

the condition that they occupy standard units in the private

market. In contrast to the Section 8 existing housing program,

housing allowance payments could be made directly to the recipient family or individual, eliminating the administrative burden

on local agencies of acting as an intermediary between landlords

and program beneficiaries. Furthermore, allowance payments could

be set at the difference between 25 percent of family income and

some benchmark cost for housing, with families allowed to rent

units costing more than that amount at their own additional

expense. This would appreciably expand the housing opportunities

of recipient households. Finally, an allowance program could be

financed through annual appropriations without resort to the

advanced funding procedures currently used in Section 8. Because

of its exclusive reliance on existing housing, an allowance

program would be considerably less expensive per household than

the current mix of housing assistance programs. Short of instituting such a comprehensive change in policy, the Section 8

existing housing program could be altered to more nearly resemble

a direct cash assistance approach.

PROVIDING LOWER-INCOME HOMEOWNERSHIP ASSISTANCE

How and whether to help lower-income families become

homeowners and maintain their own homes has been a recurrent

policy issue for some years. Debate on the issue intensified when the problems with the original Section 235 program

became apparent in the early 1970s. Recent sharp increases in

the costs of homeownership focused further attention on this

68
question and broadened the issue to include the housing needs of

middle-income families ineligible for current limited-income

homeownership assistance programs.

Proposals for Fiscal Year 1979

The Administration's budget submission for 1979 proposes

significant increases in both the Section 235 program and rural

housing interest credit loans benefiting lower-income families.

Program changes that would increase the maximum subsidy provided

to any homebuyer and would allow families with lower incomes to

receive assistance are also proposed. None of the proposals

directly address the housing-costs problem of lower-income

persons who already own their own homes. And even with the

increases proposed for 1979, existing programs will continue to

serve only a very small share of the eligible population.

The 1979 HUD budget proposes an increase in additional

Section 235 subsidy commitments from 4,719 new units in fiscal

year 1977 to 30,000 in fiscal year 1978, and to 50,000 in 1979.

The minimum effective mortgage interest rate for homebuyers under

Section 235 would also be reduced from 5 to 4 percent and the

downpayment requirement would be lowered from the current 3- to

5-percent level to 3 percent of the purchase price. Neither of

these changes requires new authorizing legislation.

The Farmers Home Administration budget submission calls for

increasing the number of subsidized home loans from 67,200 during

fiscal year 1978 to 75,500 in fiscal year 1979. A new very

low-income rural homeownership assistance program to serve

families with incomes "much lower" than those that can currently

be accommodated, even under FmHA's existing 1-percent interest

mortgage program, is also being proposed. Under the new program, very low-income families would contribute 25 percent of

their income towards their total housing costs—the principal

and interest on a 1-percent loan, utility costs, maintenance

expenses, property taxes, and insurance. In addition to absorbing the interest subsidy cost of the loan, FmHA would also pay

the balance of the recipients' homeownership expenses. As with

all FmHA subsidized loans, the full cost of the program would be

spread out over the effective life of the mortgage. Provisions

would be made under the new program for the FmHA to recapture at

least a portion of the subsidy costs when the homes were sold.

69
But, because of the lower incomes of the borrowers, the risks of

delinquency and default might be greater under the proposed

program than under the current program. Over 20 percent of

current interest credit home loans are delinquent, and more

than one-third of those delinquencies are for more than three

months. Approximately 3 percent of all homes on which interest

credit loans were outstanding in fiscal year 1977 were acquired

by the Farmers Home Administration during that twelve-month

period.

Options Available to the Congress

Other options for providing assistance to limited-income

homeowners include expanding eligibility in the Section 8

existing housing program to homeowners, and providing a refundable tax credit for a share of mortgage interest and property

tax payments as an alternative to the current deduction, which

benefits mostly higher-income persons. In contrast to current

and proposed assistance programs, these options would both

provide relief to low- and moderate-income persons who already

own their own homes and encourage homeownership among lowerIncome renters. Neither option would entail federal liability

in the case of mortgage delinquency or default. In addition,

homeownership tax credits could be designed to benefit families with incomes too high to qualify for lower-income assistance programs but too low to be aided by current homeownership

deductions.

ENCOURAGING RESIDENTIAL CONSTRUCTION AND STABILIZING

THE HOME BUILDING INDUSTRY

Repeated downturns in housing production, despite—or, as

some have argued, because of—various government interventions,

have created a continuing concern over the appropriate role of

the federal government in encouraging residential construction

and stabilizing the home building industry. Proposals being

considered for fiscal year 1979 in this area include changes in

the tax code that would provide differential incentives for

different kinds of construction and mortgage credit and tax

provision changes that could affect the supply and cost of

financing for residential construction.

70
Proposals for Fiscal Year 1979

The tax reform proposals submitted by the President in

conjunction with the 1979 budget include a proposal to eliminate

accelerated depreciation deductions on new nonresidential business properties and reduce the favorable depreciation treatment

available for new multifamily rental housing. The proposed

changes would reduce depreciation deductions on new nonresidential properties from the current 150-percent declining balance

rate to a straight line rate. Depreciation on new multifamily

rental housing, which can now be calculated on the basis of

a 200-percent declining balance method, would be reduced to

a 150-percent declining balance rate through 1982, and to a

straight line rate thereafter. Depreciation deductions on

new lower-income rental housing projects could be claimed at the

200-percent declining balance rate through 1982, but would be

limited to a 150-percent declining balance rate after that.

Stricter rules that would make it difficult for real estate

investors to increase their depreciation deductions by claiming

artificially short building lives for tax purposes would also be

applied. If enacted, these changes would reduce the potential

profitability of rental housing as an investment. Housing would

nevertheless remain relatively more attractive than nonresidential investments until 1983,, and, from a tax standpoint,

federally subsidized lower-income housing would continue to be

relatively more attractive than other residential investments.

Other 1979 tax reform proposals would prohibit the deduction

of investment losses in excess of the amount for which an investor is personally liable, except for real estate investments,

and, for tax purposes, would treat new limited partnerships with

more than 15 members as corporations, except for those engaged

in developing new low-income rental housing. Because most

tax shelters operate as limited partnerships with "paper losses"

passed through to members, the effect of these proposed changes

would be to leave residential real estate as the major intact tax

shelter opportunity, affording it a considerable relative advantage in attracting investments.

The President has also recommended that favorable bad-debt

deduction allowances currently enjoyed by commercial banks be

eliminated in 1979 rather than phased out by 1987, as current law

provides. Bad debt deductions allowed by mutual savings banks

and savings and loan associations (S&Ls) would be phased down

over a five-year period, from the current level of 40 percent to

71
30 percent of net income. The President's proposals also call

for phasing in a tax on credit unions, with their tax treatment

becoming the same as that of mutual savings banks and S&Ls by

1983. If these changes are enacted, the profitability of all

financial institutions would be diminished, but mutual savings

banks and S&Ls, which write the vast majority of all residential

mortgages, would remain relatively advantaged.

Two mortgage credit proposals that might affect housing

production are being considered by the Congress this year. One

would expand the authority of the Federal Home Loan Mortgage

Corporation to permit it to purchase and resell loans held by

mortgage bankers. Access to the FHLMC secondary mortgage market

is currently limited to institutions regulated by the Federal

Home Loan Bank Board. To the extent that such a change increasd

the supply of credit or reduced its cost by generating competition among mortgage lenders, it might favorably affect the

housing industry; however, by expanding access to secondary

mortgage markets, one source of credit might simply be substituted for another.

The Congress is also being asked this year to extend the

authority of the Government National Mortgage Association (GNMA)

emergency mortgage purchase assistance program beyond its currently scheduled expiration date of October 1978. Under this

program, GNMA may make commitments to purchase below-market

interest rate conventional and government-insured mortgages on

new and existing housing. Subject to the availability of mortgage purchase authority released by the Congress, the program may

be activated any time there is a determination by the Secretary

of the Department of Housing and Urban Development that unfavorable economic conditions are having a disproportionate

effect on the housing industry and are causing a serious reduction in residential construction. The administrative flexibility

of this program and the speed with which it can be triggered make

it among the potentially most effective countercyclical housing

policy tools, but its effectiveness is highly dependent on the

judgment of the Secretary of HUD in determining when it ought to

be activated.

Options Available to the Congress

The complex and overlapping nature of existing federal

interventions in the housing sector make it difficult to estimate

72
the net effect of any incremental change in tax or credit

policy. Among the other options available to the Congress for

stimulating overall housing production are: providing a real

estate investment tax credit that would permit builders to deduct

a portion of total development costs from their income tax

liabilities; and offering direct construction grants that would

provide front-end financial assistance to housing developers

without reliance on either the tax system or the various credit

markets. Options for providing countercyclical assistance to the

housing industry include: mandating greater coordination among

institutions that currently regulate the supply and price of

credit—including overall monetary policy—so that they are not

acting at cross purposes, as can now occur; and lifting maximum

interest rate restrictions on short-term deposits in mutual

savings banks and S&Ls, which would permit them to compete more

effectively for deposits during periods of tight money.

HOUSING ASSISTANCE PROGRAMS AND COMMUNITY DEVELOPMENT

The Housing and Community Development Act of 1974, mandated

some degree of coordination between housing assistance and

community development program objectives. Actions being considered this year to increase the impact of housing assistance

programs on community development focus on using federal credit

market activities to target residential development on distressed

areas and increasing the proportion of housing assistance funds

being devoted to rehabilitation.

As a means of promoting neighborhood revitalization, the

Administration has proposed using GNMA below-market interest

rate mortgage purchase commitments in a new "targeted tandem"

program to aid private multifamily rental projects in distressed

urban areas beginning in fiscal year 1978. Loan purchase authority in the amount of $500 million is to be applied to this program in each of fiscal years 1978 and 1979, to permit the purchase of loans on 16,700 units during each year. In a related

action, HUD has proposed that, in the future, at least some fixed

percentage of all FNMA mortgage purchase commitments be made in

inner city areas and a minimum number be applied to low- and

moderate-income housing. HUD has contended that the Secretary of

Housing and Urban Development has the authority to impose such a

restriction under the charter which established FNMA as a private

corporation; FNMA has disputed that contention. Neither of these

proposed actions requires further Congressional authorization.

73
HUD Section 8 program regulations calling for the designation of specified "neighborhood strategies areas" in which

housing assistance would be used to enable lower-income families

to remain in areas undergoing revitalization can also be seen as

a community development-related housing assistance initiative.

Proposed expansions in housing rehabilitation assistance under

both Section 8 and the Section 312 loan program are also likely

to help revitalize decaying neighborhoods and promote economic

integration in areas already undergoing change.

74

O