How the Federal Government can Increase Housing Options
THE FOLLOWING IS AN EXCERPT FROM THE RECENTLY-RELEASED RPA REPORT, summarizing concrete next steps the federal government can take to increase housing options in America.
The federal government can improve housing choices and remove barriers to investing in urban areas, and especially in poor neighborhoods and without additional subsidy, simply by reforming the outdated program rules inhibiting mixed-use. Since the non-residential limits are regulations, syncing them in line with market needs would not require new law or budget allocation. The recent relaxation of the floor area regulation to 25 percent will likely have very limited impact, and only over an extended period, unless a change in the income limitations is also made. Similarly, the waiver process, based on supplemental submissions, may be difficult and costly to apply in practice. A number of potential reforms would more successfully align risk with the realities of the market and enable more production of mixed use, mixed income and higher density developments in desired areas.
Raise non-residential caps on loans to mixed-use projects
The caps on non-residential loans within federal financing should be raised or potentially lifted altogether. This is the simplest and most powerful reform. It would allow the private financing market to better meet market needs and preferences, and determine the risk and cost associated with different projects. Raising the non-residential limits to at least 35 percent but under 50 percent would allow three-story mixed-use buildings to be financed. HUD should also review its commercial appraisal policies; the 20 percent commercial vacancy assumption is three to seven times that for residential, and means less commercial income can be capitalized as a loan. A lower maximum loan size could make a relatively low-rent tenant (such as a hardware store, small grocery, non-profit, or other community service) even less viable for a building, and encourage more high-end tenants in neighborhoods that may need basic services.
Provide alternatives for mitigating potential risk
HUD, Fannie Mae and Freddy Mac could formulate alternate ways of addressing risk that would be more flexible and market-friendly. Instead of fixed limits, risk can be mitigated using standard tools of finance. Just as private finance creates flexibility with nuanced approaches to risk, federal rules can do the same by permitting some or all of the following for mixed-use projects:
- Shorter loan periods
- Larger down payments
- Higher interest rates
- Supplemental/secondary mortgage insurance for initial years of a project
Provide flexibility for projects with low income housing and community services
Along with modest relaxation of the existing limits, affordable housing and community services in low income communities could be incentivized with further relaxation of the limits on non-residential floor space and income. Thus, higher limits might be allowed if a stated share of low income housing is provided; for example, if 20 percent of a project is devoted to lower income housing, up to 40 percent non-residential space and income might be allowed. Given that rent from low income housing can be less, it may be especially important to allow higher non-residential income.
Similarly, designating space for “community supportive services” – e.g., health services, day care or other non-profit -- could enable a project to have a further increase in the share of non-residential use. The current regulations actually discourage community services, especially the 50 percent vacancy underwriting assumption, as they mandate that non-residential space generate the highest possible income, vs. providing supportive services important to a complete neighborhood. Especially important for a low income area could be the provision of a grocery to address the “food desert” problem.
Any of these revisions or other variants would move toward what cities historically produced and what is currently most desired and recommended by urban advocates: complete communities.
Implement context sensitive caps
Short of eliminating the caps, or to supplement modest relaxation, it would make more sense to have non-residential development caps that reflect the context of the development. If, for example, a project is located close to transit, the development could be allowed a higher percentage of non-residential floor area and revenue; this would support traditional transit-oriented development, reduced auto use, etc. Other considerations could include:
Photo by Ron Cogwell
- Projects in undeveloped areas could be precluded (riskier per recent research)
- Projects in existing suburban areas
- Projects in “stable neighborhoods”
- Projects in areas deemed at risk for loss of low income housing
- Projects where walkability currently exists; per the recent research, walkability is the primary factor in reducing default risk
- Projects where transit exists (transit is the second most important factor in reducing default risk, and beyond central and old inner suburban areas it often exists along newer suburban corridors with considerable vacant property and opportunity for new housing)
Secondary Market
The market for conventional housing loans is based in part on the secondary market, that banks and other mortgage lenders can sell the loans to Fannie Mae, Freddy Mac, major banks and other financial intermediaries who then package the loans as bonds. This generally does not exist for mixed use loans, largely because they are defined as non-conforming. Creating a mixed use loan asset class and otherwise stimulating the market for sale of such loans and bonds could markedly increase the availability of mixed use loans. Changing the non-residential limits for conforming loans would remedy this. Other ways of doing so should also be explored; for example, even if the non-residential caps are not changed the intermediaries (especially Fannie and Freddy) might be encouraged to define a new category for mixed use loans and begin to purchase them, such that a market for “quasi-conforming loans” is created.
Consistency of goals and practice
HUD should seek to better align its financing regulations with its policy goals, as reflected in many of its mandates such as those in its Sustainable Communities program. The disconnects in the finance process inhibit the delivery of desired projects and thus greatly diminish progress in realizing policy and program goals. A restatement of the relevant program goals and assessment of each financing provision relative to the broader HUD goals could be effective to this end. This effort would also contribute to any reform of Fannie Mae and Freddy Mac.
(Top photo by Joe Mabel)
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