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Federal Housing Policy

The Federal Government wields a great deal of influence over New York’s housing markets. Below are brief summaries of some of the diverse policies and programs it utilizes to exert that influence. While each of these tools sparks its own set of controversies, a few fundamental questions about federal housing policy run throughout all of the debates: Should federal aid be directed at urban or rural areas? Should policies focus on homeownership or rental housing? Should funding be place-based (providing support for physical developments or communities) or people-based (providing support to individuals seeking affordable housing through vouchers or other means)? Among place-based strategies, should aid be allocated to developers building the housing or local governments administering and subsidizing programs?

Section 8 –
The U.S. Department of Housing and Urban Development (HUD) oversees the Section 8 Housing Choice voucher program, which is administered by 2,500 Public Housing Agencies (PHAs) throughout the country. Created under the Housing and Community Development Act of 1974, with funding subject to annual appropriation by Congress, the Section 8 program seeks to provide additional choice to those receiving public housing benefits and to de-concentrate the incidence of public housing. As such, it provides a voucher—usable in any residence meeting program quality standards—that subsidizes the portion of market-rate rent above 30% of the recipient’s income (30% being the traditionally accepted standard for affordable rent). The program currently provides over 115,000 vouchers for subsidized housing to residents of New York City, the bulk of which are distributed by the New York City Housing Authority (which operates the largest Section 8 program in the nation). The New York City Department of Housing Preservation and Development and the New York State Division of Housing and Community Renewal also provide a limited number of vouchers to city residents.

From 2003 to 2006, Congress and HUD made a series of controversial changes to the Section 8 funding model, which left many large PHAs unable to issue new vouchers or cope with declines in tenant incomes and increased utility costs. As a result, program rolls shrunk by 150,000 vouchers between 2004 and 2006. Appropriations were increased in 2007 and again in 2008 in response to repeated budget shortfalls, but PHAs and tenant organizations maintain that funding remains inadequate and project continued declines in the number of program participants. The proposed Section 8 Voucher Reform Act, passed by the House and under committee review in the Senate, would address these concerns by mandating annual funding renewal for all existing vouchers plus an additional 20,000 vouchers each year for five years.

Program critics, on the other hand, contend that costs must be contained further and advocate sweeping changes to the program’s administrative structure and eligibility requirements. On the eligibility side, reformers call for revising or eliminating income targeting requirements. Currently, one must earn 50% or less of the area median income (AMI) to qualify for the program, and 75% of all vouchers must go to those earning 30% or less of the AMI. This directs aid towards those with the lowest incomes, but it also raises the cost of each voucher (because the difference between market rate rent and 30% of the recipient’s income is larger, requiring greater subsidy). Critics argue that higher income limits should be set in order for the program to either serve more families with the existing budget or serve the same number of families at a lower cost (since targeting higher income recipients would result in a reduced per-voucher expenditure). Other proposals include raising the tenant contribution cap above 30% of income and instituting time limits on program participation.

Finally, in addition to cost concerns, there is also debate as to how effective the Section 8 program is in its goal of reducing the concentration of people receiving public housing assistance. Recent studies have shown that voucher holders tend to cluster in certain geographic areas, either due to the refusal of landlords in other areas to accept Section 8 vouchers or the location preferences of voucher holders themselves. In March 2008, the New York City Council attempted to eliminate the former problem by passing a law that bans landlords from discriminating against Section 8 participants. The council overrode a veto from Mayor Bloomberg, who claimed the law would unfairly compel private owners to participate in a voluntary public program.

Federal Housing Administration –
The Federal Housing Administration (FHA) was established in the 1930s to provide insurance to protect lenders from borrowers that default on their mortgages. The goal was to allow more mortgages to be issued than the private market might otherwise make available if the federal government did not share the financial risk. From the time of its formation through the 1960s, FHA loan guarantee activity was concentrated in areas outside of the center cities and deliberately excluded areas whose residents were not white, a practice known as red-lining. Lawmakers sought to curtail this discrimination through the Fair Housing Act of 1968, which prohibits racial discrimination in the sale or rent of housing, and the Community Reinvestment Act of 1977, which requires financial institutions to submit to periodic review of the fairness of their lending practices.

In recent years, FHA’s share in the mortgage market declined significantly, as home prices in many urban markets exceeded its guarantee limits and borrowers turned to more flexible (often adjustable rate) loans with smaller or no required down payments and low introductory rates. Efforts to broaden the reach of the FHA have intensified amidst the current subprime mortgage crisis. A broad package of housing legislation sponsored by Christopher Dodd in the Senate and Barney Frank in the House—and expected to pass Congress later this summer—would significantly increase the current borrowing limits for FHA-backed loans, enhance counseling services for first-time homebuyers, and establish a new FHA program to refinance billions of dollars in mortgages for homeowners at risk of foreclosure. In exchange for a significant discount on their new FHA-insured loans, homeowners would agree to share future appreciation with the FHA.

Government-Sponsored Enterprises –
Government-sponsored enterprises (GSEs) are private businesses that were originally chartered by the federal government to make certain types of publicly beneficial credit—agricultural, educational, and home-buying loans—more readily available. While they receive no federal funding and do not have the explicit financial backing of the government, it is widely assumed that government would step in to prevent major default on the part of any of the companies. (Critics argue that GSEs unfairly benefit from this implied guarantee—enjoying the perceived security of a government organization without the accompanying public oversight.) The housing-focused GSEs include the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac in particular play a large role in the U.S. mortgage industry, though they do not themselves issue any mortgages. Instead, they buy mortgages from the original lenders, freeing up capital that the lenders can then use to make additional loans.

Accounting scandals in 2004 prompted renewed calls for more stringent regulation of the mortgage GSEs. If passed, the Dodd-Frank housing legislation would consolidate oversight of the enterprises under a new, independent regulator and create an affordable housing trust fund financed by a portion of their revenues.

Low Income Housing Tax Credit –
The Federal government administers the Low Income Housing Tax Credit (LIHTC), which is intended to encourage the development of affordable multi-family housing for low-income tenants. Developers of qualifying real estate projects (either new construction or renovated property) can apply to their state’s housing financing agency for these 10-year, dollar-for-dollar tax credits and then sell the credits to investors to raise start-up capital. In exchange, developers agree to meet one of two possible occupancy thresholds: either at least 20% of the units must be rented to tenants making up to 50% of the area median income or at least 40% of the units must be rented to tenants making up to 60% of the AMI. Rents for the affordable units are capped at 30% of the maximum eligible income for the unit (though these caps can be raised via interaction with other subsidy programs such as Section 8). Finally, though the tax credits only last for 10 years, the LIHTC program requires that the units remain affordable for at least 30 years.

According to HUD, an average of 100,000 units were placed into service each year between 1995 and 2005 as a result of the LIHTC program. Additionally, a 2005 Brookings report found that 42% of LIHTC are located in the suburbs, areas where project-based housing was typically unavailable. Nevertheless, some argue that LIHTC has not created new opportunities for affordable housing so much as it has supplanted older programs. Critics also contend that most LIHTC units remain unaffordable to the lowest-income tenants and that current subsidies for developers are unnecessarily generous.