A New Model for Housing Finance by Murtaza Baxamusa

Author:Murtaza Baxamusa [Murtaza Baxamusa]
Language: eng
Format: epub
Publisher: Taylor and Francis
Published: 2020-01-15T00:00:00+00:00

Figure 4.1 Department of Housing and Urban Development, Percent of Total Federal Budget.

Source: White House, Office of Management and Budget, https://www.whitehouse.gov/omb/historical-tables/.

As a result of federal cuts and devolution, state and local governments started getting involved in housing policy and funding (Goetz 1995; Basolo 1999). They also advocated for and received block grants, rather than prescriptive categorical aid from the federal government which gave them flexibility to set policy at a local level. The Housing and Community Development Act of 1974 created a block grant to localities that continues to be a primary vehicle for funding community development. Although President Reagan cut this program as well, the nonprofit network had already gained momentum, and showed resilience in adapting to the ebb and flow of Community Development Block Grants with different federal administrations.

Smaller, local nonprofits showed entrepreneurship in adapting to the evolving regulatory and funding structures, blurring the lines between service provision by the public and private sectors (Erickson 2006). A decentralized network of nonprofits and community development corporations started taking a central role in the production and management of affordable housing (Keyes et al. 1996; Erickson 2006). They are often funded by federal grants and tax credits, and partner with private investors (financial institutions) to sustain these programs politically, legislatively and programmatically. NHC which was rooted in public housing campaigns against the real estate industry, somewhat became an ally of developers and builders (Hansan 2013).

Federal devolution thus got the political backing of the decentralized network of nonprofit housing associations and local community development groups. One such example of devolved funding is the HOME Investment Partnership program established in 1990, which provides a formula block grant to states and localities. HOME funds can be used to finance a wide variety of affordable housing activities that generally fall into four categories: rehabilitation of owner-occupied housing; assistance to home buyers; acquisition, rehabilitation, or construction of rental housing; and tenant-based rental assistance (Jones 2014). Yet in conforming to the devolving role of the federal government, it shies away from HUD-based production (Orlebeke 2000).

Another form of block grant to the states is the Low Income Housing Tax Credit program, established in 1986. Each state receives a flat rate per person, which was $2.76 in 2019 (Congressional Research Service 2019). States then allocate the credits to developers who apply with projects that need investment. Priority is given to projects that serve the lowest-income households and that remain affordable for the longest period of time. Upon receipt of a tax credit allocation, developers typically exchange it for equity from investors who use the tax credit to offset their income tax liabilities. The vast majority of investors are either financial institutions motivated to comply with the Community Reinvestment Act, or corporations using it as a tax shelter. This program has become the primary vehicle for the construction of affordable housing in the nation, though there have been questions raised about its efficiency. For example, a direct capital grant to the project sponsor for the same development project would cost the federal government half of what it costs through the tax credits to investors (Stegman 1991).

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