Federal Financing Shapes the Housing Market


Key facts:

  • Eighty-one percent of federal loans and loan guarantees support single-family home ownership.
  • Federal Housing Administration, Fannie Mae and Freddie Mac loans, loan guarantees and mortgages typically cap commercial floor space or income at 10 to 25 percent of multi-family projects, effectively disallowing most buildings with less than five stories and in some cases making even seven-story buildings non-compliant. Non-commercial rent is also discounted by underwriting rules designed to reflect risk, furthering the problem.
  • These regulations promote larger buildings that are out of scale in many communities, and bring less diversity than do smaller, mixed-use buildings.
  • Recent research on loan performance indicates that loans in walkable, mixed-use neighborhoods are less risky than those in single-use, single-family neighborhoods, suggesting that updated rules could also reduce loan program costs.
Photo by  M J Richardson

The Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac all place regulatory limits on the amount of nonresidential space allowed within developments, and usually cap the non-residential share of a project at percentages that are too low for low-rise communities. These rules had their genesis during the Great Depression or early post war era, and are based on the obsolete assumption that mixed-use developments are financially riskier than single-purpose residential developments. In addition to eliminating government financing that is essential to keeping new housing affordable, these non-residential limits are also adopted by private lenders, which can doom projects that would otherwise be viable, often without government support.

The restrictions can have a particular impact on low-income neighborhoods sorely in need of upgraded housing and services. Many of America’s poor and moderate-income households live in three-to-four story neighborhoods, with a large share suffering from disinvestment. Caps on non-residential development can impede rehabilitation and new infill development that could improve housing choices, job opportunities and quality of life for residents of these neighborhoods. Making projects conform to the regulations they results in developments that are bigger and bulkier, with set-backs and other design features that may reduce neighborhood vitality and the viability of commercial activity essential to a healthy mixed-use community. Removing these restrictions would enhance the success of comprehensive community development strategies. Public investment to preserve affordability, limit displacement and improve infrastructure and public services would still be essential in most instances, but lowering the threshold for private investment would better leverage these taxpayer investments.

Far more needs to be done to align public financing with private demand and the housing needs of the most vulnerable families and individuals.

Recognizing these unintended outcomes, HUD has proposed relaxing one of the non-residential limitations for one of its programs and recommended that its regional administrators have limited flexibility to grant waivers for particular projects, if other conditions are met (e.g. supplemental market studies). However, these changes are too small to significantly increase the number of qualifying projects or alter private lending practices. Far more needs to be done to align public financing with private demand and the housing needs of the most vulnerable families and individuals. By discouraging mixed use, the non-residential restrictions are also inconsistent with the goals of HUD and other federal agencies regarding healthy diets, automobile and energy use and overall sustainability.

Federal financing guidelines have had considerable impact on the nation’s housing market and the character of its communities. Government actions, from the legal doctrines governing property transactions to investments in infrastructure that make private development possible, are essential to the efficient functioning of the economy. Federal housing finance regulations, including direct subsidies, tax deductions and mortgage guarantees, play an enormous role in determining what type of housing gets built, where it is located and who can afford to live in it. Virtually every home in America is reliant either directly or indirectly on some aspect of federal housing rules and funding. Forty-seven percent of homeowners receive a federal tax deduction on their mortgage. Thirteen percent of rental homes are directly subsidized. All of these fuel a large secondary mortgage market, allowing circulation of an exponentially larger amount of private capital reinvested in housing construction, but almost entirely for single-use residential homes. The definitions and framework of federal regulations affect home prices and rents even for homeowners or renters who don’t directly benefit from tax deductions, subsidies or other elements of the federal housing programs.

Federal regulations created low-density, single-use suburbs, and continue to incentivize them  

America’s current suburban landscape has been developed through a perfect storm of socioeconomic trends and intentional policies. Postwar preferences for single-family homes were reinforced by cheap energy and land that made single-family developments in open space less costly than infill development. The creation and maintenance of interstate highways made autocentric, low-density suburbs accessible, and HUD and FHA programs and the mortgage interest tax deduction subsidized, and continues to support, the purchase of single-family homes at a massive scale. Middle- and upper-class baby boomers flocked to the suburbs, reaping the benefits of these programs. Many low-income populations, especially of color, were barred from moving to the suburbs due to discriminatory regulations such as exclusionary zoning and redlining. As wealthier residents moved out of cities, poverty was further concentrated in urban centers.  The primary housing programs simply were not designed to maintain older, mixed-use areas. 

Federal housing programs through HUD, FHA, and the federally-sanctioned Fannie Mae and Freddie Mac programs continue to favor single-family home ownership. Since 1934,  FHA and HUD have insured mortgages for 34 million homes,  of which only 7.4 million were in multifamily buildings. These programs have, perhaps unintentionally, given disproportionate financial support to single family homes in mono-use suburbs,  while discouraging development in mixed use, urban areas and suburban downtowns.5 

Image from  RPA report

Image from RPA report

The lion’s share of federal loans and guarantees also support single-family home ownership. As shown in the chart to the right, of the $1.363 trillion in loans and loan guarantees issued by the federal government between 2007 and 2011, 81 percent went toward single-family loan programs, while only 8 percent of these funds were used for multifamily loan programs. These figures do not include loans made by Freddie Mae and Freddie Mac, which further support the production and ownership of single-family homes.

Federal guidelines and programs also shape the vast secondary market that fuels much of the private financing for housing. This market, in which mortgage originators sell their loans to third parties, provides liquidity to banks and other mortgage originators, allowing them to expand the availability of loans to both home buyers and developers. Federal support for single-family homes gets magnified in the secondary market. Freddie Mae and Freddie Mac are actually the “market makers” for most of the secondary market, issuing massive volumes of bonds sold worldwide. The Federal program guidelines also shape how private financial markets assess the risks of different types of loans. Defined as unconforming, there is no significant secondary market for mixed use loans or even a defined asset class for them; most banks simply don’t make them. 

(Top photo from Wikimedia)

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