The Unintended Consequences of Housing Finance

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Growing numbers of young and old Americans prefer to live in communities where they can walk to stores, school, services, parks and public transportation. But federal housing rules make it difficult to meet this demand. By capping the amount of commercial development permitted in federally-backed mortgages and programs, the rules make it hard to finance construction or renovation of three-to-four story buildings in many mixed-use, walkable neighborhoods. These rules, mostly devised for an earlier era to reduce perceived risks to federal investments, have a number of unintended but damaging consequences.

Americans want walkable neighborhoods, but development is not meeting this demand

  • Fifty-six percent of millennials and 46 percent of baby boomers prefer to live in more walkable, mixed-use neighborhoods; demand is also evidenced by sharp increases in rents in recent years.
  • While there is a growing shortage of multi-family housing, the nation’s current supply of single-family homes is estimated to exceed future demand for at least the next 25 years.

Federal loan programs do not support the mixed-use, multi-family development essential to these communities

  • 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.

Financing rules reinforce concentrations of poverty

  • Much of America’s poor live in low-rise neighborhoods in older urban areas and inner suburbs, where the finance rules discourage rehabilitation and otherwise work at cross-purposes with federal and local initiatives designed to break the cycle of disinvestment.
  • Increasing suburban poverty and worsening gentrification in some areas also argue for greater flexibility to encourage construction and renovation of mixed-income housing.
  • The 2015 decision by the Supreme Court upholding the government’s obligation to affirmatively further fair housing when policies result in disparate impacts underscores the need to remove these impediments.

A range of actions could eliminate or reduce these impediments

  • Raise non-residential caps on loans to mixed-use projects.
  • Allow alternatives, such as shorter loan periods or larger down payments, to address risk, to the extent it still exists.
  • Provide higher limits on non-residental development for projects with low income housing and community services.
  • Implement higher, context sensitive caps that reflect federal and local policy priorities, such as for development areas or housing initiatives.
  • Create a secondary market for mixed-use loans.
  • Investigate ways to encourage program participation by smaller developers. 

(Top photo from Wikimedia)

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