Millennial Housing Commission Request for Comments
Bank of America Response
June 29, 2001

Consumer-Based Assistance

1.	How well or badly are vouchers working in different markets? What factors lead to success with vouchers for tenants?

•	Vouchers tend to work better in less highly valued real estate markets, markets characterized by stable rents and markets with higher levels of vacancy. 

•	Vouchers tend to work less well in markets with high valuations, rising rents and low vacancies.

•	These observations reflect the fact that vouchers are rarely the first choice of private, profit-motivated owners. The conclusion seems to be that rent-ceiling mechanisms for voucher-assisted programs need to be much more flexible, particularly in “hot” markets.

2.	How can vouchers best support mobility and self-sufficiency for the families that receive them?

•	Vouchers should be paired more systematically with a broader range of federal, state and local self-sufficiency initiatives.

•	Consolidation of administration and the elimination of jurisdictional barriers for vouchers would enhance greatly mobility and self-sufficiency for families in metropolitan areas. 

3.	To what extent should vouchers be project based or otherwise linked to production programs? If so, how and how many?

•	In general, one-time capital subsidies are preferable to ongoing operating subsidies, but some combination of the two is necessary. While the former is much less subject to diminution over time or future political event risk, some operating subsidies for dwellings occupied by extremely low income households can ensure the sustainability of the project. This is especially true during inflationary times when operating subsidies serve to counter the effects of extraordinary increases of operating costs and support proper upkeep and maintenance. 

•	It should be recognized that capital subsidies are easier for private capital suppliers to underwrite and work with. 

•	That noted, project-based support for new production should be limited to developments which deliver a broader range of policy goals including mixed income, tenure, and land use as well as work and housing geographic balance. 
In essence, project-based support should support developments that speak to a local smart growth agenda.

•	Project-based support for new developments, which meaningfully address several of the goals listed above, should be substantial in terms of the number of such developments that could be supported. Access to incremental, project-based support also might be structured to include incentives for private, state and local companion investments and for developments that represent substantial investments in low-income census tracts.

4.	Should consumer-based assistance also be made available to low-income homeowners with severe housing cost burdens? If so, how should this be done?
•	Generally, no. However, there is a legitimate role for limited duration, transitional assistance to low-income homebuyers, for example a more realistic and refined version of the existing Section 8(y) authority.
•	For low-income homeowners with severe cost burdens, there is a federal role in fostering alternative ownership models that can reduce the financing burden to low- income homeowners while not promoting short-term private windfall gains. Two examples are the community land trust or the limited equity co-op model.
Housing Finance

1.	How can access to capital for homeownership (for refinancing as well as purchase) be improved for those who currently fall through the gaps?

•	Access to capital today is actually quite good. The real problems or barriers relate much more to underwriting issues such as amount of debt or payment histories and the distribution of household incomes. As such, a focus on “access” may be misplaced much of the time.

•	The notable exception to this observation concerns low-value, owner-occupied houses in depressed markets. These homeowners often have little or no equity in their homes and have difficulty securing capital for needed repairs and occasional improvements. In these situations, access to capital might be enhanced through some type of systematic retooling of the FHA Title 1 program. 

•	There are two areas FHA Title 1 retooling should emphasize. First, use of FHA Title 1 should be linked and coordinated with structural code enforcement efforts of local government.  Additionally, a homogeneous secondary market for the insured loans needs to be created.  A limited number of institutional bulk purchasers could perform a role analogous to that of Fannie Mae and Freddie Mac for first mortgages. 

2.	How can the multifamily housing finance delivery system be improved for housing production and preservation?

•	Experiment with delegated underwriting for FHA multifamily. Ideas include:
•	Use a risk share with risk share burn-off model;
•	Limit delegation to well-capitalized, federally supervised entities; and
•	Engineer a new version of FHA-delegated underwriting after studying moral hazard and perverse incentive problems of the 1980s.

Preservation

1.	How can we best provide the capital to finance the rehabilitation needs of the affordable housing stock (both public housing and the assisted inventory)?

•	Relative to the public housing stock, HUD should simplify and promote its mixed finance program. The program should be clearly and especially receptive to local strategies that “preserving” public housing and also deliver a wider range of revitalization objectives. Such objectives would include mixed income, tenure, and land use, work and housing geographic balance, and neighborhood reinvestment and revitalization master plans. 

•	“Preservation” of public housing must be separated from the preservation of particular structures. It should be possible to “preserve” or to “modernize” public housing by outright replacement, including acquisition of existing properties. 

•	Relative to the private-assisted affordable housing stock, the primary area in need of attention by the federal government is exit taxes facing existing owners. An approach that would be valuable would be to link exit-tax forgiveness with property transfer to new, socially motivated owners. Concurrent with transfer, the new owners would make appropriate capital investments to modernize and correct deferred maintenance. 

2.	How can this existing stock be preserved so that the properties involved are self-supporting in the future?

•	See our prior comments regarding capital subsidies vs. operating subsidies. These remarks are also applicable to this question and suggest that a recapitalization aimed at reducing required subsidy levels may be useful. 

•	Operating subsidies are often necessary for extremely low-income households where “affordable” rents are not sufficient to fund current operating expenses, let alone provide a rental stream funded return to capital.

Production

1.	How well do current programs operate as production tools (e.g., HOME, CDBG, HOPE VI, §202, §811)? How well do they work with each other? How can they be improved?

•	While current programs, especially HOME and CDBG, are critically important to existing production efforts, they often lack adequate flexibility, have conflicting regulations and often are accompanied by excessive administrative costs. Congress may wish to consider offering local governments an option to consolidate these two programs for housing-related uses. Restrictions on uses of CDBG for some types of new production costs should be eliminated. 

•	While HOPE VI supports a desperately needed effort to end the historic isolation of severely distressed public housing communities, the current administrative regime is wildly expensive and burdensome. Severely distressed public housing would be much better served by a more flexible approach  that:
(a) increases the level of capital available;
(b) links access to this capital to efforts that also use private risk capital and state 
or local government capital; 
(c) provides certain types of procedural “safe harbors” intended to reduce the
administration and transaction cost burden of the current approach;
(d) promotes mixed-income and mixed-tenure replacement efforts, and;
(e) allows distressed public housing to be revitalized with off-site replacement, 
including acquisitions, so long as the off-site replacement meets income mixing criteria.

2.	What are the merits of the various proposals to create a new housing production program? What unmet needs are being addressed in each proposal?

•	Most housing markets in the country would benefit from a low- and moderate- income production program. The keys to success are to involve private risk capital; to attract appropriate long-term stewardship of investor-owned properties; to avoid a need for ongoing operating subsidy; and, to target subsidy level to local real estate capitalization values. 
3.	
What innovative and creative programs are being used by states and local governments to produce affordable housing?

•	In some geographic areas, local government is a local effort funding and/or risk participant in production efforts. Mechanisms include use of tax revenues as a development capitalization resource and the use of state or local government balance sheet as guarantee resource to induce deeper private capital involvement.

•	In some areas, local government may co-develop, lease or master lease portions of developments in order to attract private capital investment. Property tax abatement, inclusionary zoning and housing impact fees or SDCs are also in use in some local areas. 

•	While the federal government should mandate none of these responses, it is appropriate for the federal government to deploy its own resources in ways that foster and reinforce deeper state and local government involvement. States and localities should be rewarded for their own meaningful, local financial efforts in support of affordable housing.

•	In some areas, local public housing authorities, acting under their state and local law powers and not relying on HUD derived resources, have played a meaningful role in acquiring, developing and preserving affordable housing. Many of these ventures are undertaken in partnership with local government. A few of these authorities now have non-HUD real estate portfolios that are larger than their public housing portfolios. 

•	Notably, in some cases, the non-HUD portfolios generate significant unencumbered, recurring cash flows and represent a locally controlled and locally developed subsidy stream. The federal government should support and encourage such locally driven entrepreneurial initiatives and examine ways to propagate and generalize these skills and capacities across the public housing industry. Bank of America, LISC, Enterprise and NAHRO recently launched a joint initiative, the NAHRO Access Alliance, to do just that. NAA deserves federal recognition and support. 

Tax Policy

1.	How could the various tax policy “tools” (e.g., tax credits, bonds, passive loss allowances) be better used to promote (a) the production of affordable rental housing, including housing for extremely low-income families, and (b) homeownership?

•	We should experiment with efforts to target a portion of the LIHTC based on a mix of household income and local market affordability factors. The notion addresses two issues. First, it would offer a deeper level of credit for developments that target households further down the income spectrum. Second, it would extend the reach of credit up the income spectrum in very highly valued markets.
			It also may be worth exploring LIHTC adjustments to allow for use with sustainable
first-time homebuyer programs (i.e. link to community land trust use or limited equity co-op use).

•	The current older property, federally assisted “preservation crisis” is, to an important degree, a tale of the perverse long-term consequences of a housing policy built on passive tax losses. This experience suggests that passive tax losses are a poor foundation on which to build a production policy.

•	The largest single use of federal tax policy in the housing area is the homeowner mortgage interest and property tax deduction. The tax expenditure associated with this item is more than twice as large as the entire HUD budget and may not be well-targeted to low- and moderate-income households.

•	The President’s proposal for a “Renewing the Dream” homeownership tax credit is a bold suggestion worthy of support.  While many details and refinements remain to be developed, the single family housing tax credit could make an important contribution to expanded housing affordability and neighborhood enhancement.

2.	Regarding the preservation of affordable housing, what changes to tax policy would enable owners of assisted properties and older Low-Income Housing Tax Credit units to either maintain these properties as affordable housing or to sell them to owners who would rehabilitate them?

•	As we noted above under the caption “Preservation,” the single largest area in need of attention by the federal government concerns “exit taxes” faced by existing owners. An approach linking exit tax forgiveness with transfer to new, socially motivated owners who, concurrent with transfer made appropriate capital investments to modernize and correct deferred maintenance would be valuable. 

Community Linkages

1.	How can the eligibility requirement and planning requirements that govern housing programs be coordinated with non-housing programs (such as transportation, childcare, and health care) so that housing policy reinforces welfare reform to assist strong, self-sufficient families?

•	At numerous points above we have suggested that larger levels of federal incentives should be made available to communities and to developments that address broader community revitalization agendas. While most of the prior comments focused on land use and real estate aspects of the community revitalization agenda, federal policy should also promote and reward local efforts that focus on the economic and social integration of distressed and isolated communities. 
For example, it may be appropriate to provide a tax credit “bonus” to offset funding consequences in a development that uses the improved cash flow associated with lower levels of debt to fund ongoing childcare or other social service efforts. 

2.	Are there best practices that should be used in affordable housing programs so that housing assistance has a positive impact on the broader community and helps create healthy neighborhoods? Are mixed-income, mixed-use developments preferable?
•	Yes, there are best practices that can extend beneficial consequences beyond the immediate site of a development. As we have noted above, the federal role is to offer meaningful incentives to facilitate, reward and promote these practices.
•	Also as noted, income mixing is a desirable outcome from public sector involvement and investment in housing. Finally, as land use mixing is intimately related to efforts to mitigate some of the adverse consequences of sprawl, locally calibrated incentives for mixed-use development are also worthwhile. 
Millennial Housing Commission Cross-Cutting Issues

1.	How are the challenges of meeting very low-income and extremely low-income households’ housing needs best met? To what extent should this challenge be met with debt subsidies, capital subsidies or tenant-based subsidies?
•	As noted and explained above, capital subsidies are preferable to operating subsidies, but some combination of the two is necessary. Certainly, below a certain household income level, some operating subsidy is required even in cases where 100 percent of development costs are paid from subsidy capital.
•	Accordingly, we believe the answer to the question posed is not just one strategy, but a mix of approaches.  First, use capital subsidy only to the extent that unsubsidized private capital is unavailable. Second, favor subsidy mechanisms like LIHTC that attract private investment and keep that private investment at risk. And, finally, provide operating subsidy for that portion of a development that cannot pay operating expenses from affordable rents. 
•	The Commission’s request for comment contains only a single explicit reference to HUD’s public housing program, which serves the very lowest income households, represents an annual federal expenditure of nearly $7 billion, and has evolved over the past few decades in a manner that threatens its long-term stability and survival.
•	We believe The Commission should consider how the nation’s public housing system and associated federal resource commitment might be reconfigured, drawing upon the past three decades of “learnings” from the larger affordable housing and community development industry.
•	In any such effort, resources should continue to focus primarily on extremely low-income households, but should do so in the context of overcoming the economic and social isolation that characterizes too many of today’s public housing communities.
2.		How should technology be best used to meet housing challenges?
•	Federal resources should include incentives for developments that mitigate the otherwise present “digital divide.” This may include amenities such as Internet wiring for all units or provision of common spaces with computer and Internet access. As an example, Bank of America’s Make A Difference Centers provide such access to computers as well as after-school programs and computer training for children and adult education programs for residents of the properties.
3.	How should quality control be best ensured in an era of devolution? How can accountability be assured without unnecessary bureaucracy?
▪	The soundest approach to quality control borrows from the best aspects of the existing LIHTC program. The big themes are:
(a)	structure federal involvement to attract private capital investment; 
(b)	link access to a return on that private investment to compliant and prudent long-term stewardship of the development; and
(c)	avoid detailed micro-specification of how the federal resource is to be used beyond a certain threshold specification of appropriate use.
4.	How should housing policies best intersect with issues of place, including sprawl, “smart growth,” and neighborhood revitalization?
•	Housing policies – and, more critically, federal funding and support - should be stronger and more accessible for local undertakings that address a broader range of policy goals including mixed income, tenure, land use as well as work and housing geographic balance and private or state and local reinvestment in distressed neighborhoods. The appropriate role of the federal government is to offer meaningful incentives for locally crafted results that address these issues and involve private capital in the process. 
5.	How should policies to increase housing availability and affordability best intersect with fair housing policies?
•	Polices that effectively promote income and tenure mixing in developments are likely to do more for fair housing than any politically feasible level of fair housing policy enforcement. Accordingly, a federal focus on incentives and support for mixed-income, mixed-tenure developments is likely a much more effective way to promote fair housing than a narrow, singular emphasis on enforcement.