Michigan Journal of Law Reform
Copyright (c) 1987 University of Michigan Law School
University of Michigan Journal of Law Reform
20 U. Mich. J.L. Ref. 727
LENGTH: 25059 words
HOUSING FOR THE 1990's
Harold A. McDougall *
* Associate Professor and Director, Clinical Program in Law and Public Policy,
School of Law, Catholic University of America. B.A., Harvard College, 1967;
J.D., Yale Law School, 1971.
I wish to thank George Lefcoe, Daniel Mandelker, Henry McGhee, and Roberta
Youmans for helpful comments. I also appreciate the contributions of my
research assistant, Alice Curtiss. I wish to express special appreciation for
the work of Morton Schussheim, Senior Research Specialist on
Housing in the Economics Division of the Congressional Research Service, and of his
colleagues Grace Milgram, Barbara Miles, Jane Gravelle, and Charles Welborn,
whose work has greatly influenced my own thinking. Of course, all the mistakes
... The New Deal erected an entire financial system to facilitate home
ownership for Americans who could not otherwise afford it, and a system of
housing for those who could not afford to own their own home despite federal
intervention. ... In deference to political and constitutional objections,
housing authorities, not the federal government, took on the task of developing,
constructing, and managing public
housing. ... The bond debt was serviced by the federal government with funds issued
pursuant to an annual contributions contract, which now comprises the principal
vehicle by which the USHA (now part of HUD) regulates LHA's operation of public
housing. ... The United States
Housing Act of 1937, connecting slum clearance with the development of public
housing, was the first federal statute to make the connection between
housing and community development an explicit one in a program aimed at state and
local government. ... The second model is public
housing or assisted
housing developed by state or local government, without direct federal financing or
subsidy on the supply side and without federal constraints as to design and
housing policy begins with the New Deal,
n1 perhaps because the Depression was the first time that poor
[*728] homelessness hit mainstream people in large numbers. The disruption of
mortgage lending and a rash of mortgage foreclosures short-circuited home
ownership for the middle class.
n2 Lower income renters lived in substandard
housing characterized by crowding, lack of private toilet facilities, lack of running
water, and the need for major repairs.
The New Deal erected an entire financial system to facilitate home ownership
for Americans who could not otherwise afford it,
n4 and a system of public
housing for those who could not afford
[*729] to own their own home despite federal intervention.
n5 The New Deal's
housing agenda was mixed with other agendas, however -- the need for jobs, the need to
shore up financial institutions, and the need to dramatically upgrade the
housing stock. In the fifty years since then, these other agendas have either been
met, more efficient techniques have been identified to achieve them, or the
agendas have simply been discarded. Without the support of other goals, home
ownership for the middle class and subsidized
housing for the poor have proven increasingly difficult to justify -- and fund -- in
an age of government fiscal austerity.
housing problems do not seem as extreme as those of the Depression era,
n6 but the cause remains the same -- the gap between what people earn and what it
costs to purchase or rent
housing is no longer as widespread as it was during the first years of the Depression;
rather, the lack of affordable
housing is the central problem for
housing policy today.
n7 The lack of affordable
housing has also ominously climbed the socioeconomic ladder,
n8 and the gap between consumer income and
housing cost is constantly widening. At the same time, the federal government's
housing has been decreasing ever since the New Deal.
Although federal assistance to middle class home ownership and lower income
housing has been decreasing for decades, it is the Reagan administration that has been
most closely associated with taking the federal government out of the
housing business. As one of its key initiatives, the Reagan administration
deregulated the savings and loan institutions that were the cornerstone
[*730] of federal
housing policy for the middle class since World War II. The administration has also
massively cut various subsidized
housing programs aimed at low and moderate income groups. As a result, the
housing industry is depressed, while many middle income persons cannot afford to own
their own homes and some lower income persons cannot afford
housing at all.
This Article examines the history of national
housing policy and the factors that will influence its future. Part I discusses the
role of capital costs in influencing
housing policy. Part II summarizes the changes that have occurred in
housing policy in the last fifty years. Part III studies how local- and state-level
institutions have reacted to these changes. Finally, Part IV predicts the
future of national
housing policy, focusing particularly on local efforts.
I. The Place of Capital Costs in Contemporary
Housing Price: A Policy Problem
The cost of
housing is a function of the price of land, materials, capital, labor, and industry
n10 The two elements of
housing cost that have shown the greatest increase as a percentage of overall
housing costs since 1949 are the cost of capital and the cost of land.
Labor costs have not increased as a percentage of the cost of
housing production since 1970.
n12 Surprisingly, the percentage has even decreased somewhat because of emerging
trends toward preassembly of modular units and the use of more unskilled
workers for assembly at the site.
n13 The cost of materials as a percentage of overall
housing cost has also remained fairly stable, primarily as a result of the use of new
technologies, new substances in place of wood, and standardized, preassembled
n14 Small builders, materials suppliers, and construction workers have not
embraced these innovations, however.
n15 Local governments closely regulate such materials as well, further limiting
n16 Finally, established homeowners often oppose inexpensive
housing per se, as they feel it depresses property values, or competes with their own
homes on the market when they wish to sell.
Unlike the cost of labor and materials, the cost of land has risen as a
percentage of total
housing cost since 1949. This increase is primarily attributable to higher site
preparation costs due to stringent environmental and land use controls.
n18 So costly and arduous is the process of complying with these controls that
larger builders have begun to subcontract out site preparation to small
entrepreneurs who are struggling to stay in business.
[*732] The cost of capital, however, is the factor that has increased the most since
1949 as a percentage of overall
n20 Most of the increase can be attributed to tax deductions for mortgage interest
and fluctuating interest rates due to changes in
housing credit markets. Capital costs have become increasingly important as the
government has subsidized private home ownership through tax deductions for
mortgage interest payments. These deductions have encouraged consumers to pay
far more for owner-occupied
housing, drastically inflating the price of
housing for owners and renters alike, and further widening the gap between income and
Housing Policy: From Roosevelt to Reagan
The problem of affordable
housing -- the gap between income and
housing price -- can be addressed by reducing
housing cost (the supply side) or increasing consumer buying power (the demand side).
Both techniques have been used, with varying degrees of success, during the
fifty-year period that marks the height of national consciousness regarding
At the national level, middle income homeowners have been the focal point of
n23 This Part will discuss techniques for facilitating middle income home
ownership that range from supply-side mortgage insurance and secondary market
activity to demand-side mortgage interest payment deductions. Supply- and
demand-side techniques for facilitating low and moderate income rental
housing will also be discussed.
[*733] A. Supply-Side Techniques: The Roosevelt Legacy
1. Middle class
housing on the supply side -- Because
housing is usually too expensive an item to be purchased outright, the structure and
functioning of capital markets for mortgage financing has proven central to the
program of providing home ownership opportunities to the middle class. As a
result of various governmental subsidies, home mortgage financing today
represents about twenty percent of the Nation's investment capital, the largest
single use of investment capital in the economy.
housing starts are very sensitive to the interest rate, the large share of investment
capital devoted to financing middle class home ownership causes a grave
instability in general capital markets. The financial crises of the early
1930's demonstrate that the economic instability associated with
housing finance can jeopardize the entire economy.
The New Deal sought to counter this dangerous volatility by segregating
housing finance from general capital markets. The federal government also committed
substantial funds for subsidizing the
housing capital market and set up an extensive regulatory system for
housing finance. Policy objectives other than the provision of
housing -- economic stabilization and rationalization of capital movement on a
regional and national basis -- played a major role in federal
housing policy of the time.
n27 These various objectives were pursued through the Federal Home Loan Bank Board
(FHLBB) and affiliated agencies, a system of federal support for and regulation
of savings and loan banks that engaged primarily in home mortgage lending. The
FHLBB tinkers with the secondary mortgage market, which draws in investment
"bail out" primary lenders.
a. The FHLBB and its affiliates -- From 1932 to 1947, the government
established six major organizations to aid
[*734] The Federal Home Loan Bank Board (FHLBB), the Federal Savings and Loan
Insurance Corporation (FSLIC), the Federal
Housing Administration (FHA), the Federal National Mortgage Association (FNMA), the
home financing division of the Veteran's Administration, and the
Housing Home Finance Agency (HHFA). The FHLBB, established in 1932 by President
Hoover, but restructured by Roosevelt during the first year of his
administration, was the cornerstone of New Deal strategy.
n28 In 1933, it began chartering federal savings and loan institutions (S
& L's) to serve the home mortgage financing market.
n29 Deposits in S
& L's were insured by the FSLIC under the same Act that established the FHA.
The FHA was created in 1934 to operate independently of, but in association
with, the FHLBB system.
n31 The FHA provided home mortgage insurance. FHA insurance spread the risk of
mortgage default across the taxpaying public and correspondingly reduced the
risk taken by the lender.
n32 The FHA was chartered to facilitate home ownership, encourage uniformity among
lending institutions, and upgrade
[*735] Ten years later, the Servicemen's Readjustment Act of 1944
n33 established another government
housing organization, the Veterans' Administration (VA). The VA offered federally
guaranteed home mortgages, with no down payments, to ten million veterans.
Finally, in 1947, the government consolidated its various
housing programs under HHFA, the forerunner of the Department of
Housing and Urban Development (HUD).
n34 New Deal financing structures -- FHLBB, FHA, VA, HHFA -- facilitated,
channeled, and directed the tremendous
housing demand that existed at the close of World War II and transformed the United
States from a nation of renters to a nation of home owners, contrary to
housing tenure patterns throughout the world.
Housing starts surged from 326,000 in 1945 to one million in 1946.
Savings and loan banks, federally chartered by the FHLBB, provided the
principal source of mortgage lending for middle class homeowners of the
post-war era. Federal law insulated the S
& L's from competition with commercial banks and gave the S
& L's access to advances of funds from regional Federal Home Loan Banks. At the
same time, other regulations restricted S
& L's investment opportunities. As a result, the S
& L's eschewed risk and devoted a substantial portion of their funds to home
The early programs' successes were not without their costs. The FHA's early
years were marred by the agency's support for racially restrictive covenants,
n36 which suburban developers adopted to protect property values, and by its
refusal to insure mortgages originating from black areas, which encouraged
inner city redlining.
n37 The VA mortgage program, oblivious to the outstanding
[*736] contribution black veterans had made to the war effort, followed the same
discriminatory practices as the FHA. FHA and VA discriminatory practices
skewed the great spurt of
housing production and suburbanization of the late 1940's and the 1950's,
n38 resulting in a rigid pattern of metropolitan segregation that persists today.
b. The secondary mortgage market -- The secondary mortgage market provides a
means by which loans originated by S
& L's and mortgage banks can be sold to investors, freeing the primary lenders
to originate more mortgages. Mortgages are traded individually on the
secondary market or can be pooled.
n40 In the latter case, securities based on the pool
n41 are traded on the market rather than the mortgages themselves.
n42 In either case, loans originating in areas where the demand for credit exceeds
the supply can be traded on the secondary market to areas where the supply of
credit (in the form of deposits) exceeds demand.
After initial experimentation with wholly private secondary mortgage
associations, Congress chartered the FNMA in 1938, the first public institution
of this type, to rationalize capital motion between regional
n44 The FNMA, originally
[*737] chartered to handle FHA-insured mortgages, has gone through a number of
transformations since then. In 1948, the FNMA was given responsibility for
processing VA-guaranteed loans. In 1954, the FNMA was partly privatized, in
response to the growing strain on the federal budget occasioned by its
In 1968, Congress assigned the FNMA's
"special assistance" functions of managing and liquidating certain subsidized mortgages that had
been created in the 1960's to a newly-formed secondary market association, the
Government National Mortgage Association (GNMA).
n46 The FNMA was further privatized as a result, becoming a federally-sponsored,
semiprivate, stockholderowned corporation.
n47 In its new privatized form, the FNMA continued to trade FHA and VA loans in
the secondary market and also to manage or liquidate the
"seasoned" mortgage loans that it had in its portfolio as of 1968. In 1970, Congress
allowed the FNMA to add conventional mortgages to its portfolio,
n48 though it was restricted to mortgage amounts thought to correspond with the
upward limits of moderate income
n49 Congress established the Federal Home Loan Mortgage Corporation (FHLMC) at the
same time it loosened the FNMA's portfolio limits. The FHLMC facilitated S
& L's resort to the secondary market by accepting conventional mortgages
regardless of principal amount.
[*738] c. Disintermediation and S
& L failure: Prelude to the Reagan years -- A crisis buffeted the New Deal home
financing system beginning in the late 1960's -- disintermediation. The term
has been called a
"splendid neologism" by Professor Mandelker,
n51 and signifies the loss by S
& L's of their position as financial intermediaries between their depositors and
persons wishing to finance the purchase of a home (hence
"disintermediation"). By the 1960's, the centrality of the S
& L's as the cornerstone of federal
housing policy for the middle class began to be challenged by mortgage bankers.
n52 Increasing fluctuations in interest rates
n53 had undermined the S
& L's ability to intermediate -- that is, to draw in funds from depositors
n54 at a low interest rate
n55 and relend to home purchasers at higher rates. Because so much of their
business was mortgage lending, many S
& L's faltered or went under completely.
During the last years of the Carter administration and the early years of the
Reagan administration, disintermediation and the resultant problems of S
& L's were dealt with by a one hundred and eighty-degree turn from New Deal
[*739] -- deregulation. One phase of deregulation was to make S
& L's more competitive with commercial banks and mutual funds as candidates for
public savings. A variety of short-term investment instruments were authorized
to make S
& L's more attractive loci of savers' deposits despite rising interest rates.
n56 These instruments were generally more attractive to investors, as they
provided higher interest rates and shorter terms than those that S
& L's had previously offered.
Though these instruments brought in deposits, their high rates and short terms
required interest payments that were incompatible with the S
& L's long-term, low interest mortgages that still comprised the bulk of their
portfolios. At the same time, new mortgages were difficult to sell because of
prohibitively high interest rates. In an effort to make mortgages with higher
interest rates more palatable to the
housing consumer, a variety of exotic mortgage instruments were permitted, all of
which served to pass the higher risks prevalent on the market to the borrower.
At the same time, the general process of deregulation allowed S
& L's to make riskier investments to generate the high interest rates demanded
by the new savings instruments and to behave more like commercial banks.
n59 Few S
& L's were prepared for
[*740] the competition or the pressure, however, and they began to dash themselves
between the rocks of disintermediation and disastrous investments. By 1981,
both the home ownership and mortgage lending industries were in deep trouble --
seventy-five percent of all S
& L's were unprofitable.
n60 Because deregulation deconstructed many of the barriers that insulated
housing from commercial lending, the failure of the S
& L's threatened to take the whole financial market under, in a replay of the
scenario of 1929.
The FSLIC, established to head off threats to the economic system at large
posed by S
& L instability, proved unable to keep up with the precipitous increase in S
& L failures after 1980. The FHLBB drew heavily on FSLIC funds to close down
many sick S
& L's or merge them with healthier thrifts. As a result, the FSLIC's resources
were taxed severely. Congress reacted to the crisis and passed a bill that
recapitalized the FSLIC.
The gap in home mortgage finance left by the exit of the S
& L's might be addressed, though probably not filled, by a combination of
mortgage bankers originating mortgages for pension funds, insurance companies,
and secondary market associations. Regulations restricting pension fund
activity in residential mortgage lending are being lifted to facilitate the
funds' entry into the field.
n63 Their participation would most likely be at the secondary market stage, via
n64 Because the funds have capital available and can commit for long periods of
time, they would seem to be good candidates to take over some part of the S
& L's role. It is doubtful that the pension funds will be able to fill entirely
the gap left by the exit of the S
& L's, however.
[*741] The Reagan administration has sought not to regulate the role of mortgage
credit in the economy but rather to reduce the centrality of the role of
housing mortgages in the financial system as a whole. The present administration
appears to view reliance on
housing for economic growth and stability as unjustified.
n66 The Republican program has rather been to attempt to merge
housing finance with general capital markets, and to eliminate subsidy and regulation
in all financial sectors. Deregulation, however, has not only accelerated the
flow of capital out of the
housing mortgage market but significantly weakened the entire financial system as
2. Supply-side techniques for low and moderate income
housing -- Providing new
housing at upper income levels using existing techniques has proven tremendously
expensive and drives up the cost of
housing for sale or rent throughout the market.
n68 Moreover, arguments that new construction at upper income levels trickles down
to the poor have been strongly rebutted since the 1950's, partly because the
number of lower income families is greater than the number of upper income
n69 and also because the chain of
housing unit exchange between affluent homeowners and
housing consumers in lower income and minority groups is lengthy and fragmented.
The consequence of these structural problems is that either affordable
housing for low and moderate income
n71 persons must
[*742] be directly introduced into the
housing supply through an expanded program of public or publicly assisted
housing construction, or the incomes of such persons must be supplemented.
Supply-side policies have included direct government construction (public
housing), direct governmental loans (section 202 of the
Housing Act of 1959),
n72 assistance in debt service (GNMA tandem mortgages, sections 235 and 236), and
below market interest rates secured by federal insurance or guarantees (section
Housing problems at lower income levels involve a wide range of social problems such
as racial and economic integration, job creation, and urban blight. Some
policy objectives point toward new construction, others toward demand
subsidies, and still others toward subsidies at different levels -- reaching
more or fewer citizens, of greater or lesser income.
n74 Policies may also conflict -- racial desegregation may conflict with the
development of affordable
housing, for example.
n75 Demand subsidies themselves may have the side effect of inflating rents in the
absence of stringent rent controls. Such conflicts make the passage of
housing legislation difficult, as a policy that feeds the ox of one group gores the ox
of another. Only in times of great social attention to
housing issues and in times of relative prosperity is it possible for comprehensive
housing legislation, such as the
Housing and Urban Development Act of 1968, to be passed.
[*743] a. Public
housing -- Where national will and national resources are limited,
housing policy is less ambitious. The national government first experimented with
direct production of
housing during World War I, when the units were constructed for the use of workers in
wartime industry. The experiment was not long lasting, however, as all the
units were sold on the private market as soon as the war was over.
n77 The next large-scale effort was introduced during the Depression, by the
Housing Act of 1937.
n78 The United States
Housing Authority (USHA), established by the 1937 Act to administer the development of
housing, built on the earlier experiences of the Reconstruction Finance Corporation,
which made four percent loans to limited dividend corporations, the National
Recovery Administration, which had its own subsistence
housing program, the Public Works Administration, and the Federal Emergency Relief
Administration, which experimented with new towns and greenbelt communities.
The primary purpose for which the 1937 Act was passed was not
housing but job creation.
Housing construction seemed a logical way to employ people, as the Nation's
housing stock was marred by major disrepair and lack of essential facilities. Shelter
advocates, blight-fighters, and those concerned with stimulating employment
merged into an uneasy coalition to get the 1937 Act passed over the objection
of conservative business interests.
n81 In deference to political and constitutional objections, local
housing authorities, not the federal government, took on the task of developing,
constructing, and managing public
Under the public
housing system, local
housing authorities (LHA's) borrowed construction funds from the federal government
n83 and committed themselves to repay the debt from the proceeds of tax-exempt
bonds issued with the full faith and credit of the federal government.
housing was then developed, constructed, and managed by the LHA's, which used project
[*744] rents to cover operating expenses. The bond debt was serviced by the federal
government with funds issued pursuant to an annual contributions contract,
which now comprises the principal vehicle by which the USHA (now part of HUD)
regulates LHA's operation of public
Working people buffeted by the Depression were the first to occupy public
housing; in fact it was for this group that public
housing was conceived. After World War II, however, opportunities for home ownership
and jobs in the suburbs opened up to many such people. Income ceilings for
continued occupancy in public
housing also propelled upwardly mobile persons out of public
housing and into the private sector. Federal regulations required that project
tenants' incomes be twenty percent below that needed to purchase decent
housing on the private market, to ensure private developers a comfortable margin from
competition by public
n86 Not only did projects become reservations for the exclusively low income
groups, but so-called
"moderate" income groups, caught in the twenty percent gap between the public and the
private sector, could not find affordable
housing at all. More and more, public
housing became the living quarters of minorities and the poor who were left behind
after waves of suburbanization that took place between 1944 and 1960.
housing projects were built on a very large scale to provide fuel, utilities, and
other economies. When public
"housing of last resort" for low income people and those displaced by slum clearance and urban renewal,
n88 the large scale of the projects also meant a concentration of people with
social problems, some rather extreme.
n89 With tenant
[*745] problems increasing, maintenance becoming more expensive, and tenant income
held at low levels, public
housing throughout the country incurred operating deficits; essential services
suffered, and deterioration and expenses increased.
n90 Granting operating subsidies to projects in difficulty became a regular
practice, and these subsidies climbed to one billion dollars per year by fiscal
housing development that now takes place is either rehabilitation of existing units or
small scale new construction.
housing -- Direct
housing production is an expensive and government-intrusive supply-side technique.
[*746] government first attempted to reduce the cost of producing subsidized
housing and to eliminate the direct involvement of a public instrumentality with the
Housing Act of 1959.
n94 Section 202 of the Act provided below market interest rate loans to nonprofit
corporations (rather than local
housing authorities) to develop
housing for the elderly and handicapped.
n95 These corporations constructed 45,000 units before an executive order by
President Nixon in 1973 suspended the program along with all other
n96 When section 202 was revived by Congress in 1974, its reach was limited by
excluding elderly and handicapped persons who were not low income.
The next step was to replace direct loans with loan insurance. Section 221 of
Housing Act, established by legislative amendment in 1961, was a mortgage insurance
program analogous to that of the FHA.
n98 The section 221 program was directed at multifamily rental
housing for displaced and moderate income persons, rather than single-family
housing for middle income owner occupants. This program included features that
distinguished it from FHA insurance, however. Section 221(d)(3) carried a
government agreement to purchase section 221(d)(3) mortgages on moderate income
rental properties immediately after they were originated, making the program
very close to a direct
[*747] federal loan both in concept and expense.
n99 Section 221(d)(5) established a program of below market interest rate
mortgages for owners of apartments renting to families with incomes below the
median for the standard metropolitan statistical area.
n100 Developers constructed 400,000 rental units under the auspices of section 221.
The next step was taken with the
Housing and Urban Development Act of 1968,
n102 a piece of legislation spurred by urban riots.
n103 The 1968 Act expanded the federal government's financial commitment in the
short run, but further reduced its structural involvement in
housing supply. Not only had the government now retreated from direct
housing construction and direct mortgage lending, but the automatic purchase of
section 221 loans was superseded by a commitment to assist in mortgage interest
payments only. The 1968 Act proposed that twenty-six million new units of
housing be produced over ten years, six million of the total to be subsidized for low
and moderate income persons by the federal government. The government was
committed to aid nonprofit sponsors only by servicing the mortgage debt in an
amount sufficient to reduce the interest rate to three percent, not by
purchasing the mortgage or by making the loan itself. Section 235 was added to
Housing Act to establish a low down payment (as low as $ 200), below market interest
rate (as low as three percent) home ownership loan program for moderate income
n104 Section 236 created a multifamily rental program for families falling into the
twenty percent gap between public and private
n105 Both programs were suspended during the 1973 moratorium,
n106 however, and the
housing gap identified in 1968 was not filled. Of the assistance programs originated
in the 1960's, only section 236 was
[*748] revived, in emasculated form, by the
Housing and Community Development Act of 1974.
Sections 221(d)(3), 235, and 236 combined to produce 2.7 million units of
housing in the ten years after 1968 -- a great, but very expensive, achievement.
housing production fell short of the original six million unit goal, but this
shortfall was arguably caused in part by the 1973 moratorium.
housing starts had actually increased between 1970 and 1973.
B. Demand-Side Techniques
Supply-side techniques to house both middle income and lower income Americans
have fallen on hard times since the advent of national
housing policy in the 1930's. This Article now turns to an investigation of the fate
of demand-side techniques during this same period.
1. Tax deductions for middle income persons -- The largest single subsidy to
middle class home ownership -- indeed to all
housing, regardless of income class or tenure pattern -- is a demand-side subsidy.
n111 The subsidy, a deduction from federal taxes for interest paid on home mortgage
[*749] boosts middle class buying power in owner-occupied
housing. Moreover, this subsidy becomes more valuable as income increases.
The mortgage interest deduction skews national investment drastically toward
housing -- at the expense of investment in more socially productive uses.
n113 Such a policy would be considered an impermissible extravagance in most of the
developed, let alone underdeveloped, world. The Tax Code since World War II
has constantly been revised to undo such skewing by making investment in
industry more attractive relative to investment in owner-occupied
n114 As a result of such changes in the law, the after-tax return on owner-occupied
housing has declined significantly since 1950 compared to investment in business or
n115 Today, it is no longer clear that owner-occupied
housing is heavily favored by tax subsidies relative to capital investment in business
n116 The Tax
[*750] Code has also made investment in tax-free accumulation of wealth through
various pension plans increasingly attractive relative to investment in
With rapid depreciation write-offs for investment in low income
housing already eliminated,
n118 the largest single item of federal subsidy to the nonindustrial private sector
-- the deduction for home mortgage interest payments -- is an attractive target
in the game of
"balance the budget."
n119 Although well-publicized
[*751] skirmishes over this deduction have been fought, and always lost by its
opponents, the very phenomenon of tax rate reduction is rendering the deduction
less important to the taxpayer and the government.
Since 1969, declining tax rates have made the deduction for home mortgage
interest payments less attractive to middle class persons while the value of
the standard deduction has increased relatively and in absolute terms for low
and moderate income persons.
n120 The Tax Reform Act of 1986 reduces the highest marginal tax rate to
twenty-eight percent beginning in 1988. At marginal tax rates of twenty-five
percent or less, the standard deduction is a superior tax-saving vehicle to
itemized deductions for home mortgage interest, and the home owner who elects
to itemize deductions foregoes the standard deduction.
n121 By 1980, the average American
n122 who did not own his or her own home gained no tax advantage by itemizing.
Thus, the value of tax subsidies has gone down as the standard deduction has
increased and as tax rates have decreased.
n123 These trends have made the tax subsidy valuable to an increasingly smaller,
more affluent sector of the population.
[*752] Home ownership is becoming a luxury rather than a tax shelter. The huge
financing charges now associated with home ownership are no longer supportable
at marginal tax rates of twenty-five percent or less. As the tax rates drop
further, the financing industry may well be faced with a rash of defaults.
2. Transfer payments for lower income persons -- The lack of affordable
housing at low and moderate income levels, just as at higher income levels, is a
function of the disparity between
housing cost and consumer resources. Supply-side remedies are costly, though the cost
is small when compared to the expense of mortgage interest deductions.
n125 Perhaps for this reason, techniques to bolster consumer buying power for lower
income persons, rather than supply-side production techniques, have become
increasingly popular among policymakers.
housing projects, like public
housing, often have had difficulty meeting operating expenses.
n127 Although the federal government has subsidized construction in the past, the
gap between tenant income and the rent needed for operating expenses continues
to increase due to inflation and a variety of other factors. Such
circumstances have compelled the federal government to move to the demand side
by supplementing the incomes of tenants of assisted
housing rather than continuing to expend large sums in
Some section 236 projects proved very difficult to manage; as operating costs
increased and tenant rents stayed the same, some section 236 projects defaulted
on their mortgage loans,
[*753] prompting FHA foreclosure.
n129 The section 23 public
housing leasing program, designed to provide scattered site and lower public
housing, was also used to help section 221(d)(5) projects, and later, section 236
projects, stay afloat by filling vacancies.
n130 The funds came from LHA annual contributions contract awards, enabling the
LHA's to lease section 221(d)(5) and section 236 units for tenants of public
housing. The next step toward the demand side was taken in 1965, when rent supplements
were established to pay section 221(d)(5) and section 236 project managers the
difference between the contract rent and twenty-five percent of a tenant's
Section 8, the closest thing to an exclusively demand-side technique
established before the Reagan administration, was created by the
Housing and Community Development Act of 1974.
n132 Section 8 funds could be used for direct payments to landlords of existing
n133 but could also be used to service
[*754] debt for the construction of new
housing or the substantial rehabilitation of existing dwellings.
n134 In either event, the payments were made by the local HUD office. Section 8
entails regulation by local HUD officials of maximum rent levels paid (thirty
percent of the tenant's income) and minimum standards of habitability.
Officials are empowered to deny funds where the regulations are not heeded.
The program has been increasingly targeted towards the very low income in
Section 8 was expected to reduce federal outlays, but the two million units for
which section 8 reservations were made
n136 apparently did not cut costs enough to suit the administration.
n137 By fiscal year 1983, the Reagan administration had phased out the new
construction and substantial rehabilitation programs and had begun a practice
of issuing section 8
housing" contracts for very short terms, two to five years, instead of the fifteen year
average that was characteristic of the Carter administration.
The Reagan administration has recently proposed lessening the federal
contribution even more, by further narrowing the range of tenants served and
transforming section 8 into a demand-side program entirely, by using
housing voucher certificates to make payments directly to tenants.
n139 The President's
[*755] Commission on
Housing in 1983 recommended that
housing vouchers, targeted to the very lowest income consumers, be substituted for all
other forms of low and moderate income
housing assistance, on the grounds that the problem was not supply, but rather
affordability, and that supply-side subsidies to foster new construction were
unnecessary, inappropriate, and unduly expensive.
n140 New construction, under this proposal, would become more a responsibility of
local government, executed with some federal assistance through community
development block grants, the guidelines for which would be altered to include
housing development as a permissible use for the funds.
n141 The results of a 1983 voucher experiment sponsored by the administration were
used to support arguments that this approach was feasible.
C. The Current State of Affordable
Housing credit markets have changed significantly since the New Deal. From the 1960's
to the late 1970's,
n143 and assisted, had a high social priority. Prior to the Reagan era, for
& L's, the cornerstone of middle class
[*756] home ownership, enjoyed a protected status vis-a-vis commercial banks. This
status has recently been eroded.
In the early 1980's, inflation and soaring interest rates played havoc with S
& L's that had invested heavily in low-yield, longterm, fixed-rate mortgages.
n144 Congress passed legislation authorizing the S
& L's to diversify their assets, take more risks, and loosen their links to
Deregulation of the nation's S
& L's has made the
housing industry even more vulnerable to fluctuations in interest rates, however.
& L's have emerged stronger and more competitive, but many more have been
crippled or destroyed. Furthermore, deregulation of S
& L's means that all
housing consumers, including those of middle income, compete for capital with
nonhousing consumers; commercial concerns; industry; and federal, state, and
In addition to these factors, the value of tax deductions for mortgage interest
has changed significantly. Middle income
housing consumers investigating the option of home ownership, particularly first time
buyers, must now weigh carefully acquisition costs, interest rates, utility
charges, the deductibility of expenses, and expected capital gains. The
availability of funds for
housing increasingly depends directly on the state of the economy and those federal
fiscal and monetary policies that affect interest rates.
n146 Direct government actions are impeded by pressures to balance the budget as
well as a declining economy. As a
[*757] result, the government has found it difficult to finance the production of
housing needed by the entire population while carrying the staggering cost of
subsidizing private ownership of owner-occupied
With lower income
housing, the problem is even greater -- new construction is virtually closed as an
housing rehabilitation, the remaining alternative, is greatly curtailed by most
projects' inability to compete with other investment opportunities.
n147 The gradual withdrawal of the government from subsidized
housing for lower income groups has taken place over thirty years. From public
housing to subsidized
housing, from direct loans to mortgage amortization, from payments to landlords to
payments to tenants, from long-term subsidy contracts (fifteen years) to
short-term subsidy contracts (three to five years), the pattern has been clear.
The government has withdrawn first from construction, then from lending, and
finally from regulation.
Added to the structural withdrawal of the federal government from
housing are several immediate problems which exacerbate the shortage of funds for
housing. First, the supply of low income
housing is dwindling while the number of people who cannot afford market rate
housing is increasing. Second, the institutions that support middle income home
ownership are in an extremely weakened state.
1. Low income
housing -- The subsidized multifamily
housing of the 1960's was built by private developers pursuant to twenty-year mortgage
contracts under Federal
Housing Act sections 221 and 236, which required the owners to rent to persons of
moderate income at prices they could afford. Those contracts are beginning to
expire, and many of the multifamily dwellings in question are in
"gentrifying" neighborhoods, where there is considerable demand for their use at market
n148 Within the next fifteen years, more than half of the 600,000 privately
[*758] owned, federally subsidized apartments in the nation could be freed from the
regulatory restraints that ensure their continued use as low and moderate
housing under sections 221 and 236.
It is clearly in the interest of the owners of such
housing to refinance their mortgages, evict their moderate income tenants, and create
market rate multifamily dwellings.
n150 It is difficult to see how this process can be averted without additional,
arguably unconstitutional, restrictions being placed on the private property
rights of these owners. Any action will certainly require compensation of such
owners or renewed subsidies for the multifamily projects, or both. At the same
time, the Reagan administration has made several efforts to sell section
221(d)(3) and section 236 mortgages on the open market, further reducing the
protection of low income project residents.
n151 Most efforts have been rejected by Congress
n152 or stalled by public interest lawsuits, however.
The other problem, alluded to above, is that the subsidized
housing of the 1970's established in section 8 of the United States
Housing Act (new construction, substantial rehabilitation, and existing
housing programs) involved fifteen- and twenty-year contracts between the federal and
local governments, through which the federal government provided funds to
subsidize the purchasing power of low income tenants in private
housing that met federal standards.
n154 Since the beginning of the Reagan administration, the section 8 new
construction and substantial rehabilitation programs have been eliminated and
contracts for section 8 existing
housing have been issued for increasingly shorter periods.
n155 As a result, outstanding contracts for section 8
housing are either expiring or are on very short terms, and a massive outpouring of
funds will soon be necessary to maintain existing commitments.
The federally subsidized
housing programs of the 1980's, offered to replace those of the 1960's and 1970's,
housing voucher contracts with local governments. The voucher program is similar to
section 8, but there are two important differences. First, the quality of
housing is not monitored and a higher percentage of the tenant's income is available
for rent. It was recently revealed that low income tenants are paying
unacceptably high rents under this program, often for substandard
n156 Second, voucher contracts are for very short terms, making them unsuitable as
anchors for long-term mortgage financing for the development of low income
housing. Congress has halted further expansion of the voucher program, and will return
to the section 8 program in the interim.
housing, the oldest and most durable of the subsidized programs, has foundered on
social problems endemic to its locations in depressed, inner city
n158 Efforts to integrate such
housing have been challenged by the Reagan administration,
n159 and efforts to locate public
housing in better neighborhoods have failed except for experiments in such cities as
Baltimore, Maryland, and Newport News, Virginia.
n160 Congress has generally stymied efforts by the Reagan administration
[*760] to sell existing public
housing units, but tenant abuse, lack of maintenance, and lack of funds have taken
their toll on existing public
housing and little more is being built.
2. Middle income
housing -- The amount of affordable
housing for middle income persons has declined primarily due to interest rate
increases, but also due to local growth controls and reductions in the
viability of income tax deductions for home mortgage interest payments. S
& L's, the mainstay of the home mortgage finance industry, have been severely
buffeted by disintermediation and unwise investments. The FSLIC, which shores
up these institutions, is on the verge of bankruptcy. The Federal Home Loan
Bank Board, responsible for pruning inefficient S
& L's, is hampered in this endeavor by the scarcity of FSLIC funds with which to
ease sick S
& L's out of business. The result is that the S
& L's that are in trouble sink deeper and healthy S
& L's seek to leave the system, join the Federal Deposit Insurance Corporation,
and become commercial banks. Generally speaking, pension funds, insurance
companies, and other institutions that might conceivably bridge the resulting
home financing credit gap have not moved into the breach.
3. The Reagan
"revolution" in national
n161 -- The Reagan
housing agenda has been
"to reduce federal spending and
housing regulation, transfer authority to states and localities, emphasize private
initiatives and provide needy families with direct payments, in the form of
housing vouchers, to find their own
n162 These goals have been realized;
housing starts are down to Depression levels and federal funds for
housing have been cut seventy percent since 1980.
n163 Market conditions, tax reform, and budget cuts over the past six years have
eliminated nearly all new construction of
housing for the poor.
The effect of the Reagan
housing program is graphically illustrated by the growth in the number of homeless
persons during his administration to a figure unparalleled since the Depression
[*761] -- perhaps as many as three million people.
n165 The lack of affordable
housing is the single most important factor in a variety of causes of homelessness.
n166 The lack of affordable
housing has become more extreme, primarily because of reductions in federally assisted
n167 but also because of such diverse factors as exclusionary zoning,
[*762] increased demand for rental units by middle income persons pushed out of the
housing ownership market.
Homelessness will increase as the low income
housing stock deteriorates and federal programs for assisted
housing and social service continue to shrink.
n171 New policies to produce affordable
housing within modern budget constraints must respond to the problem of homelessness.
n172 Possible sources of initiative include state and local governments and
n173 In fact, the Reagan administration's
housing cutbacks in general seem to have been made upon the assumption that local
government and community organizations would pick up the slack. There is some
limited precedent for this view.
III. Reaction and Response at the Local Level
Rapid urbanization and population growth accompanying the industrial revolution
of the late nineteenth century first created intense demand at the local level
n175 Before the states stepped in during the early Depression years, local
governments had tried, and failed, to deal with
housing problems. Before local governments got involved, charitable organizations of
the early 1900's vainly but courageously confronted slum conditions, the harsh
negative fallout of urbanization. Such charitable organizations were
themselves developments that followed earlier efforts by voluntary
organizations which served a certain faith or ethnic group.
A number of states experimented with
housing production initiatives after World War I, including New York
n177 and California.
[*763] State governments also attempted to deal with the
housing crisis of the Depression before calling in the federal government for
assistance. Although the Depression made it necessary for the states to call
on the federal government for a nationally coordinated policy and for national
n179 there has always been an impulse to return the problem to the local level,
where the connections between
housing and community development seem clearest.
Housing must be considered in the context of infrastructure, employment,
transportation, amenities, social and physical environment, and neighborhood
life. All are matters of community concern because all interrelate in systemic
and organic fashion, particularly at the local level.
n180 The following discussion explores historical and present techniques available
to state and local governments and to voluntary organizations seeking to play a
role in producing affordable
A. Federalism in National
The United States
Housing Act of 1937, connecting slum clearance with the development of public
housing, was the first federal statute to make the connection between
housing and community development an explicit one in a program aimed at state and
n181 The Act initiated a program of massive federal intervention to provide decent,
housing for the working poor, using local
housing authorities for implementation. The
Housing Act of 1949 linked a decent home with a suitable living environment for the
middle class and gave localities broader powers to connect
housing and environment at
[*764] all economic levels.
n182 Localities were authorized to engage in slum clearance and, through amendments
in 1954, to engage in redevelopment activities known as
n183 The 1954 Urban Renewal amendments laid the blueprint for exercises not only in
slum clearance, but also in land assembly for planned
housing and community redevelopment.
Because of the economic and social mixture of communities that could legally be
served through urban renewal statutes, a fundamental issue in community
"Which community is being served, and who represents it?," a telling question when set against the background of persons excluded from
political participation by income, social class, and racial origin. Between
1949 and 1974, an ongoing tension existed between community development for the
middle class and community development for the poor, as municipal officials
sought to attract middle class persons back from the suburbs by building
attractive edifices atop the rubble of
"cleared" slum neighborhoods. Relocation of businesses and individuals displaced by
urban redevelopment -- whether of the
"urban renewal" clearance type or the revitalization that has prompted
n184 -- have thus become matters of intense public concern.
n185 Such problems point toward the need for
"maximum feasible participation" of all groups in the community in any newly initiated development process, and
the heightening of professional ethics and standards regarding advocacy
[*765] 1. Community Development Block Grant (CDBG) funds and the
Housing Assistance Plan -- The
Housing and Community Development Act of 1974
n186 revived the local role in the production of affordable
housing, essentially dormant since the Depression. The 1974 Act vastly increased the
discretion afforded local government in the allocation and use of federal
funds. The Act recognized that urban government, to rest on a sound financial
base, must balance service to the poor with outreach to the middle class, and
struck a compromise:
n187 localities were required to provide for the
housing needs of low and moderate income people as a condition of receiving CDBG
n188 The compromise was framed in Title I of the Act. Title I required local
government recipients of CDBG funds to prepare a
housing assistance plan (HAP).
n189 Pursuant to the HAP, the locality must project
housing need for eligible low and moderate income families residing in or expected to
reside in the community. The HAP is perhaps the clearest statutory connection
housing opportunities for the poor and overall community development objectives.
n190 In the absence of fair
housing or other objectives,
n191 the local government's view of
housing development as expressed in the HAP is authoritative,
[*766] and HUD must respect it when granting or denying requests for subsidies from
private sponsors of low income
Housing Development Action Grants -- The
Housing Development Action Grant (HODAG) program, which originated in 1983, transfers
capital from federal to state and local government for new construction and
rehabilitation of multifamily rental
n193 The grant is modeled after the highly successful Urban Development Action
Grant. Recent legislation would reauthorize HODAG at nearly $ 100 million to
build or substantially rehabilitate 5000 dwelling units.
n194 States receiving HODAG funds could determine their use -- for shallow or deep
subsidies; for public
housing; for private, assisted
housing; for the needs of the homeless; and so forth.
n195 Funds could be used by local governments to rehabilitate properties foreclosed
for tax arrearages or could be paid directly to neighborhood-based, nonprofit
3. State use of mortgage revenue bonds -- State and local governments in the
1970's used mortgage revenue bonds to provide below market interest rate home
mortgages primarily to young, first time home buyers. States used tax-exempt
bonds to fill the gap left when President Nixon withdrew the federal government
from the field of subsidized
housing in 1973.
n197 Since that time, many more states have begun to use mortgage revenue bonds,
especially for the development of multifamily
n198 Authority to issue such bonds as tax-exempt capital-raising
[*767] vehicles has so far been permitted by Congress for short periods only, with a
sunset provision ending the option after a few years.
4. Linkage and the
"builder's remedy" harnessing the local development process -- Linkage programs are based on the
assumption that upper-status employees of major businesses associated with
downtown redevelopment may bid up the price of inner city
gentrification or, if they live in the suburbs, impose unacceptable burdens on highways, mass
transit, and commuter railroad facilities. Linkage thus requires businesses to
share in some of the costs that their development imposes on the urban social
and physical environment, either through cash payments or by incorporating low
and moderate income
housing units as part of commercial development.
n200 San Francisco, the first American city to adopt such a plan, limits office
production via floor area ratios and height maxima and assesses developers for
housing, transit, park space, child care, and various other community amenities.
n201 Linkage techniques have also been used, with mixed results, in Santa Monica
n202 and Boston.
n203 A linkage program is also on the drawing board in Washington, D.C.
Linkage is an important and innovative tool for harnessing and regulating the
effects of large scale development on the transportation, employment, and
housing systems of urban areas. The analogue in the suburban context is called the
"builder's remedy" in New Jersey, or the
"mandatory set-aside" in other jurisdictions.
n205 It has generally worked better in the
[*768] suburbs, where the nexus between the need for low and moderate income
housing and the development of market rate
housing is clearer and developers are more eager to build, regardless of conditions.
Linkage has been challenged by developers, who assert the absence of a nexus
sufficient to support regulation between their businesses and the
gentrification difficulties projected. In addition, linkage is challenged as ultra vires the
standard zoning enabling act,
n207 and as an unconstitutional taking of private property without just
compensation. The latter view has been given considerable force by the recent
Supreme Court decision in Nollan v. California Coastal Commission,
n208 holding that government regulation of beachfront property was excessive and
amounted to an impermissible taking.
n209 Justice Scalia, for the majority, stressed the need for a closer examination
of the connection between expressed public purposes for land use regulation and
the means of achieving the articulated goal.
n210 Thus, the municipality must prove both a legitimate purpose and an acceptable
means for achieving it.
n211 Many linkage programs would not pass muster under this test.
B. The Role of Citizen-Initiated Community Development
The role of voluntary organizations in the formulation of
housing policy reached a height in 1911, when the National
Housing Association (NHA) was formed.
n212 The NHA faded from importance during the Depression, however, as the federal
government adopted many of the programs it advocated.
n213 Today, modern community organizations can look upon the years since that time
and call upon a rich history of struggle for civil rights and for community
empowerment in the context of federal
n214 and model cities programs,
n215 as well as battles against urban renewal,
housing segregation, and environmental pollution. These organizations, having
survived program cutbacks and political repression during the Nixon
administration, emerged sophisticated and energetic.
1. Community development organizations -- The pre-Nixon generation of
community development corporations was exemplified by such major organizations
as the Bedford-Stuyvesant Restoration Corporation (BSRC).
n217 The BSRC placed community activists in collaboration with professionals
familiar with the complex maze of federal and private financing techniques.
n218 In association with organizations of this stature, voluntary community
organizations such as churches, block clubs, and settlement houses began to
experiment with nonprofit sponsorship of low and moderate income
When austerity emerged as national policy in the late 1970's, the high level of
technical and political capability that community organizations had developed
was very useful in their efforts at self help. On shoestring budgets,
neighborhood organizations embarked on projects providing all manner of
community services -- health care,
housing, child care, surplus food, small parks, and community cleanup.
n219 Some projects succeeded; others failed. Community organizations also battled
with downtown interests
[*770] over highways, pollution, and
gentrification. Some organizations won; others lost. The most adaptable of these
organizations survived and continued their work despite the lack of federal
"second generation" community development organizations are smaller, leaner, more indigenous, and
more in tune with the specific agenda of their local communities than their
predecessors, which were more closely tied to downtown and the corporate
sector. Weaned from the need for large federal subsidies,
n221 able to depend to a large extent on volunteers,
n222 these organizations are free to protect their communities in ways never
possible under the antipoverty program, the Model Cities, or the Community
Development Corporation (CDC) statutes. In this respect, second generation
community development organizations resemble the early self help groups of the
late nineteenth century, which were knit together by ethnicity or religious
belief. Many are surprisingly sophisticated in their technical knowledge of
housing and community development, from financing to environmental issues.
n223 The work of these second generation community development corporations has
been aided by, among others, the Local Initiatives Support Corporation (LISC)
of the Ford Foundation and James Rouse's Enterprise Foundation.
[*771] On the national level, such organizations have also united to lobby the
federal government for accountability in
housing and community development.
2. The community reinvestment movement -- Second generation CDC's have had
considerable success in shaking loose funds and technical assistance from local
financial institutions, especially with the assistance of the Community
Reinvestment Act of 1977 (CRA).
n226 Use of the CRA requires a good deal of financial sophistication, a
sophistication that a number of these organizations have also developed over
The CRA requires banks to meet all service needs extant in the community in
which they function. For example, if savings deposits are accepted, mortgages
must be accepted as well. Banks are prohibited by law from defining community
service areas in such a way as to exclude minority or low income neighborhoods.
Banks and other financial institutions can lose important privileges if they
disobey the law, and periodic review of institutional activity provides a time
and a place at which community advocates can exert pressure to see that the law
n227 This review and enforcement process considers complaints made by citizens who
feel that they have been disserved by illegal bank practices. Complaints are
also heard whenever banks apply for exercise of various privileges under the
banking laws. To anticipate community objections, many banks have begun
[*772] to develop affirmatively community reinvestment projects in conjunction with
local community development organizations.
Although federal enforcement of the CRA has been lax under the Reagan
administration, hopeful signs of state-level innovations in the CRA arena are
beginning to surface. State CRA's might flourish regardless of the tenor of
housing policy. State CRA's have been passed to structure state government
negotiations with out-of-state banks seeking entry into their jurisdictions.
Massachusetts has its own state CRA, for example.
n229 Local governments are able to use the CRA inventory of tools to monitor
lending, challenge financial institutions, and develop reinvestment programs,
and they can condition local subsidies to businesses and financial institutions
upon performance and community reinvestment. They have not moved aggressively
in this area, however, perhaps out of fear that financial institutions will
leave the vicinity.
In summary, the federal government is withdrawing from subsidizing
housing for all citizens, regardless of income, and directing capital expenditures to
"competitive" industry instead. As the federal government recedes from the picture, the
housing policy has shifted to state and local government and to the efforts of
private, nonprofit community organizations and corporations. As the Reagan
administration comes to a close, certain limited options may reemerge at the
national level, however.
IV. Towards a New National
Generally speaking, the problem of affordable
housing for the 1990's is what it has been since the 1930's -- the gap between
people's incomes and the cost of
housing. Because the economic
[*773] class structure of our society is not likely to be dramatically reworked, it
is doubtful that we will see an increase in the size of the group capable of
renting or buying decent, safe
housing without benefit of subsidy. By the same token, because the
housing industry is unlikely to be dramatically restructured through use of modular
housing, the price of constructing and rehabilitating
housing will probably not decrease. The
housing finance industry is unlikely to prove capable of providing construction and
mortgage loans at significantly lower interest rates without regulation or
subsidy or both. Local governments are unlikely to give up growth controls
without a fight, though the Supreme Court's recent landmark decision in First
Evangelical Lutheran Church v. Los Angeles County
n231 may make such growth controls less stringent.
In a time of national austerity and a correlative indifference to the problems
of minorities and the poor, only modest undertakings can be contemplated.
Which of the varying social problems of low, moderate, and middle income
persons that are related to the lack of affordable
housing have the highest priority? Which should be sacrificed if their inclusion in a
policy package for affordable
housing pushes the total cost too high?
n232 With respect to the issue of affordable
housing considered in isolation, how far can subsidies be stretched? How many
households should be served, at what income levels, and at what level of
expenditure for each?
Whatever the answers to these questions may be, it is clear that a substantial
infusion of funds would be necessary to significantly increase the availability
housing, a particularly difficult endeavor, politically and economically, in an era of
extraordinary structural budget deficits. The first order of business is not
to increase the availability of such
housing, but to preserve the affordable
housing that presently exists. This priority has been made more difficult by the
policy of the Reagan administration to use
housing as the principal target for domestic spending cuts.
The next order of business is to begin a process of experimentation, backed
with sufficient funding, to develop a range of
housing alternatives wide enough to suit the variety of markets and communities where
housing is needed. Such alternatives
[*774] would present different mixtures of participation by federal, state, and local
governments, combined with participation by civic and community organizations.
Once such models have been developed, the funds necessary to support them must
be provided by reducing expenditures on other federal budget items or by
raising new federal revenues, or perhaps both. The following is an overview of
pending legislation, a presentation of some models available for addressing the
problem at the state and local level, and a discussion of possible funding
mechanisms at the federal level.
A. New Legislation
Two recently passed pieces of legislation address the
n234 The first focuses on the crisis in the S
& L industry. The second directly tackles some significant
1. The Competitive Equality Banking Act of 1987
n235 -- The FSLIC has been taxed severely by the increase in S
& L failures caused by disintermediation and deregulation. A very important
federal legislative initiative regarding home ownership has therefore been the
recapitalization of the FSLIC through the Competitive Equality Banking Act of
1987. The new law authorizes $ 3.75 billion in new borrowing authority per
year to refinance the FSLIC.
n236 In the FSLIC's fifty-three year history, public funds have never been used to
The FSLIC bailout was considered particularly necessary because of the economic
recession in western farm and oil states that reduced the value of real estate
underlying regional S
& L's mortgage portfolios.
n238 The FSLIC currently uses yearly assessments on member S
& L's deposits to insure the $ 890 billion worth of deposits in all three
& L's. Its reserves are now only $ 1.9 billion -- $ 23 billion below the amount
needed to close the more than 300 insolvent S
& L's across the country.
n239 Because the FSLIC does not have the money to shut these S
& L's down and pay off their depositors, the S
& L's remain in operation -- taking the system six million dollars in the red
The Act originally authorized the spending of five billion dollars over two
years, but the price tag was increased in response to the worsening condition
of the S
n241 In response to pressure from industry representatives who argued that S
& L's damaged by local recessions will recover in time,
n242 however, the law also limits the ability of the FHLBB to close down failing S
& L's in states such as Texas, in which regional recessions are in progress.
n243 The FSLIC will also be given greater discretion to refuse to classify S
& L's as
"troubled" or to restructure bad loans.
n244 Moreover, an appeals procedure will be established for thrifts that dispute
FSLIC appraisals of their assets. These various limitations on FHLBB power
will reduce short-term outlays (as the fund must be drawn upon to finance the
closing of an S
& L and the bailing out of its depositors), but long-term costs could increase
& L's that fail in the future will have become that much more damaged in the
n245 On the other
[*776] hand, healthy S
& L's that desire to leave the FHLBB system must wait a year to do so.
n246 This may restrain the larger S
& L's from leaving the system to escape increased FSLIC fees.
Housing and Community Development Act of 1987 -- Congress recently passed a major
housing bill -- the
Housing and Community Development Act of 1987. Unlike
housing bills cleared by the House in the past, the Act cleared the Senate due to the
new Democratic majority.
n248 In today's budget-cutting atmosphere, the passage of a
housing bill that did no more than retain existing funding levels would be a major
achievement. Voting patterns made it unlikely that Congress could have
overriden a veto of a stronger bill.
The Act warrants examination as it addresses a number of important issues that
will no doubt be addressed again in 1989 if political administrations change.
n250 The most important of these issues include: preventing the displacement of low
[*777] from existing subsidized projects,
n251 Community Development Block Grants (CDBG),
n252 and public
The Act requires that mortgagors under HUD-subsidized programs such as section
221(d)(3) and section 236 notify HUD and the tenants at least one year before
prepaying the mortgages and freeing themselves from income ceilings for project
n254 It also creates a new direct loan program to prevent default in less
successful section 221(d)(3) and section 236
housing projects. It also provides for nearly 40,000 section 8 subsidized
Under the Act, seventy-five percent of CDBG funds are to be used for the
benefit of low and moderate income persons. No CDBG funds are to be used for
projects that displace low and moderate income persons; citizens must be
permitted to participate in all phases of a project, at all levels, and plans
would be required from localities to ensure such participation. The funding
level of the CDBG program is scheduled by the Act to continue at three billion
n255 Finally, the law requires that any economic development initiatives undertaken
with CDBG funds must consider the needs of low and moderate income persons, and
must not be used for displacement.
The Act provides $ 1.5 billion for operating subsidies to public
housing projects. It will also build 5000 units of public
housing and provide five million dollars for child care in public
n257 New construction will be permitted to replace demolished units, but HUD will
have discretion to substitute section 8 existing
housing certificates for demolished units as well. In the House committee's view,
housing has become more important as privately constructed assisted
housing has come to seem less viable.
[*778] B. Towards an Omnibus
Housing Act of 1989
The legislation will stem the worst of the decline in federal involvement in
housing, but will still fall short of what is necessary to stabilize the market for
housing. Thoroughgoing reform and a restructuring of federal
housing policy effort is needed, not only to repair the damage done during the last
seven years but also to orient national
housing policy to modern realities. These realities include a structural budget
deficit, caused by our unwillingness to cut both domestic and defense spending
or increase taxes, either of which is necessary to tame the deficit; imbalances
in our international trade and financial positions, including a decline in
"competitiveness"; and shifting demographics in our population.
The Senate Banking,
Housing, and Urban Affairs Committee, now under Democratic control, is a prime location
for new federal initiatives in affordable
housing. Under the leadership of Senator Alan Cranston, the committee has scheduled
hearings to be held in February 1988, in preparation for major
n259 At present, the committee is taking scrupulous care to avoid giving the
impression that they favor a particular approach, as they wish to create a bill
that will achieve the broadest possible consensus on
housing direction for the nation. This approach will ensure the development of a bill
that is likely to pass. It will also create a
housing consensus that should assist the Democratic party in the 1988 national
elections, and create a network of
housing thinkers and doers set to implement whatever recommendations are finally
accepted. Thus, the result of the 1973 Nixon moratorium on new
housing production -- the shattering of a preexisting bipartisan coalition for
housing -- may finally be reversed.
[*779] The committee is looking for a bill that will articulate a clear set of themes
of manageable proportions. Clearly, the proposals coming out of the committee
will not accept the severely reduced funding levels for
housing established by the Reagan administration as their base line, and will go
beyond vouchers and tinkering with the FNMA.
n261 By the same token, the themes of the new legislation will be clearly
distinguished from the initiatives associated with past Democratic
administrations. It is unlikely that we will again see a program at the scale
of section 236 or section 8 new construction without a significant tax
increase. Further, the states will be encouraged to maintain the expanded role
that they have undertaken during the Reagan years, even though the federal
government's role in
housing policy will increase relative to its role under the present administration.
C. Some Models for Affordable
There are a variety of models for the development of affordable
housing. Most require that both the supply of
housing and the demand for it be subsidized to close the gap between income and
affordability. A full discussion of any specific model is beyond the scope of
this Article, but three models will be summarized below.
n262 The first two depend upon public or community
[*780] initiatives. The third depends more directly upon the private sector.
1. Community development or local public
housing? -- The first model is the community development,
"sweat-equity project," in which the cost of
housing is reduced by nonunion labor, less expensive materials, and the use of
housing stock that has been reclaimed at low cost from properties foreclosed for
failure to pay local property taxes or federally subsidized mortgages, or
n263 Such projects have in the past been undertaken under the aegis of the
Community Development Corporation Act
n264 or the Urban Homesteading Program.
n265 They are also envisioned to be part of programs such as the Nehemiah
[*781] Because these projects involve existing
housing, growth controls should not add to their cost. Interest rates for construction
loans will be high, but construction costs can be substantially reduced using
the methods specified. Assuming that the type of properties specified should
be available to community organizations at little or no cost, interest rates
for funds to finance the purchase of such properties will not be as large a
factor. The higher the return that federal and local governments seek to gain
by transferring such properties, however, the more the interest rates for funds
to finance purchases will add to the overall cost of such
n267 Even so, project purchase and construction costs can be reduced by below
market interest rate funds available through state issuance of mortgage revenue
bonds (the income from which is deductible for federal income tax purposes).
The second model is public
housing or assisted
housing developed by state or local government, without direct federal financing or
subsidy on the supply side and without federal constraints as to design and
location. The principal contribution of the federal government in the
development of such
housing is to provide tax exemption for the income from mortgage revenue bonds.
Tax-exempt status for state mortgage revenue bonds is essential if the states
are to raise the money necessary to execute such projects.
[*782] 2. The mixed income private development -- The third model is the mixed
housing development, constituted as a rental, cooperative,
n270 condominium, or land trust, in which middle income persons are given
incentives to purchase or rent in proximity to low and moderate income persons
for a kind of
n271 A variation on this theme is the
"linkage" program, in which commercial, office, or market rate
housing development subsidizes low and moderate income
housing through transfer payments or by incorporating low and moderate income
housing units into the development project itself.
This model is based on the assumption that federal support for single family
home ownership must be reconsidered in light of the fact that the cost of
housing drastically inflates the price of
housing for all Americans, whether they own or rent.
[*783] People are willing to pay inflated prices for
housing because a large portion of these funds -- interest payments -- are
tax-deductible. Federal tax deductions for home mortgage interest payments
constitute the single largest federal
housing subsidy. At an annual cost of thirty-one billion dollars, it dwarfs public
housing, AFDC, and all assisted
housing programs combined. This subsidy is a target for budget-cutting to finance
n273 and to obviate the need for a tax increase.
n274 Rather than simply diverting these funds to defense spending, however, the
funds could be used to finance a program of tenure conversion that could be
structured to encourage many Americans to pay rent to cooperatives, at a lower
price than they now pay for owner-occupied or rental
housing, while generally reducing the overall market price of
Tax deductions for mortgage interest on private, owner-occupied homes could be
phased out over a period of four years, with a tax-free rollover of equity in
an owner-occupied home to membership in a cooperative chartered under certain
regulations of federal, state, and local governments. The cooperative could
qualify as a tax-free exit from home ownership if it demonstrates adherence to
housing laws and provides for a certain stipulated mix of income classes -- perhaps
five percent very low income, ten percent low income, twenty-five percent
moderate income, and the remainder middle income or above. These percentages
need to be made more specific to parallel the percentage of the population
accounted for by each of these groups. A goal for each cooperative might be to
absorb a number of persons from each income group roughly corresponding to the
percentage of the population represented by each income group in the standard
metropolitan statistical area in which the cooperative was located. Rents
could be paid by each tenant on a sliding scale according to income. Section 8
[*784] vouchers could make up the difference between thirty percent of the tenant's
rent and the contract rent at the cooperative.
The cooperatives could be apartment buildings, public
housing projects, renovated factories, vacant schools, or collections of single family
homes. They could be in urban or rural areas; they could be new construction
housing (brought up to certain minimum standards by rehabilitation, if necessary).
Rehabfilitation and new construction would be financed partially by the
thirty-one billion dollar tax subsidy, partly by low income
n275 and partly by mortgage revenue bonds.
n276 Using tax-foreclosure and federal mortgage-foreclosure properties, the subsidy
of low income units by middle income renters (already in practice in such
states as New Jersey),
n277 mortgage revenue bonds,
n278 and low income
n279 and eliminating costly owner-occupied
housing, the real price of
housing could decrease for all Americans.
For those present owners who wish to own property regardless of the tax
consequences, this proposal should allow them the advantages of an interest in
their homes -- a long-term lease with a cooperative, with representation on the
cooperative's board -- at a lower monthly after-tax payment than their present
monthly mortgage note. The solution presented, of course, is not
"socialism" in any form, but rather private, cooperative ownership.
n280 In addition, the benefits possible as a result of
"mainstreaming" low and moderate income families -- in terms of lessened social
[*785] disorder, reduced problems of school desegregation, and the like -- could be
D. Some Alternatives for Financing Affordable
It is important to bear in mind that none of the models sketched in the
previous section are susceptible to universal application. The sweat-equity
project is only viable in low and moderate income communities in which
significant community spirit, and probably a vital and long-standing community
organization, are present. The local public
housing and/or assisted project can only develop in areas where racial and ethnic
polarization is not severe, and/or where there is a very special type of civic
and political leadership for the municipality as a whole and possibly for the
Because of the diversity of models for the development of affordable
housing which are likely to emerge, it is best that the federal government provide
long-term demand-side funding to shore up local supply-side initiatives,
n281 occasionally making special supply-side grants to facilitate the development
of these various alternatives in the localities to which they are best suited.
n282 A National
Housing Trust Fund, modeled with the experience of the National Corporation for
Housing Partnerships, the Neighborhood Reinvestment Corporation,
n283 and the Neighborhood Development Demonstration Program,
n284 would be a useful vehicle through which to funnel such monies.
n285 Perhaps a national competition could be instituted, in which funds would be
allocated to the best demonstration projects in the first instance,
[*786] in hope of stirring the creativity necessary to address the problem of
housing in its many dimensions.
n286 Here the experience of Urban Development Action Grants
Housing Development Action Grants
n288 could provide useful guidance.
n289 In the alternative, the financing program could be modeled after the Community
Development Block Grant Program, basically adopting the CDBG formula for
distribution of funds.
In the area of market rate
housing, sufficient funds would have to be voted to enable the FHLBB to close
financially ailing S
& L's. It is apparent that the funds approved by the new FSLIC Recapitalization
law are insufficient to achieve this objective. Healthy S
& L's would be deregulated and required to merge with the FDIC, and the FSLIC
would be closed. Future financing for market rate
housing would be confined to federal income tax deductions for cooperative mortgage
interest payments, grants authorized to mixed income multifamily developments
Housing Trust Fund, and secondary mortgage market activity by the FNMA and the FHLMC.
The GNMA might also have a role to play in selling mortgages used to finance
some of the projects described in Section IV(B), above.
Housing as a Social and Community Responsibility
The cost of capital for financing home ownership and for developing multifamily
housing remains a significant problem that limits private, community, and government
[*787] developing affordable
housing. Nonetheless, federal, state, and local government, and voluntary community
organizations still have important roles to play in facilitating the
development of affordable
housing for all segments of the population. Because of budget cuts and a decline in
the international competitiveness of our economy, the federal government is
unlikely to be able to do very much without drastically cutting defense
spending or raising taxes. Defense spending is a function of cultural
imperatives and the world balance of peace; taxes, once lowered, are unlikely
to be raised again. Tax revenues to subsidize the development of low and
housing could be generated, however, by eliminating the deduction for home mortgage
interest payments, thus discouraging private home ownership, a wasteful use of
social capital. This subsidy is larger than the cost of all other
housing programs, including public
housing, combined. Perhaps a transition provision could subsidize the homeowner's
transition to the rental or cooperative market.
At the local level, the consequent rise in demand for cooperative and rental
apartments among middle class persons leaving home ownership could be used to
"set-aside" programs that would provide a certain minimum percentage of low and moderate
income units in each new or substantially rehabilitated middle class
multifamily building. Such requirements could also moderate trends toward
wholesale displacement of less affluent persons when erstwhile home owners
flood the rental market. States could facilitate this process by explicitly
adopting legislation authorizing linkage techniques, and by providing
housing mortgage finance funds to subsidize the development of new mixed income rental
facilities. These funds could be generated from the sale of mortgage revenue
bonds, the interest from which would remain tax deductible.
Community organizations might have a role to play in
housing development strictly for low and moderate income people, though
"mainstreaming" of these groups through linkage and set-aside programs is much to be
preferred. Perhaps those organizations that have developed capability in
producing low and moderate income
housing could form joint-ventures with market rate builders to develop mixed income
projects, lending their special expertise. Another important role for
community organizations is on the demand side of the
housing equation. Community organizations can make a real difference by engaging in
economic and community development that raises the real and effective incomes
of low and moderate income persons, not only by providing jobs but also by
providing low cost, subsidized services
[*788] such as day care, transportation, health care, and assistance in public school
curricula and instruction.
housing is local, and
housing markets are local, policy coordination at the national level is still
necessary, if only to even out the differences in resources and responses of
the various states. The challenge to federal policy is to draft
housing legislation that is flexible enough to allow a variety of models to flourish
but strict enough to ensure that each state and community makes a real
commitment to the development of affordable
housing. The themes sketched in this section of the Article -- a diversity of
supply-side programs, coupled with federal subsidies on the demand side -- are
likely to be some of the themes pursued in any new legislation. Still to be
explored are the relations between the problems of affordable
housing and the welfare system on the one hand, and the tax system on the other. One
important initiative may be for the staffs of the tax,
housing, and human resources committees in both the Senate and the House to begin a
dialogue with one another, to identify areas of overlap and areas of possible
Regardless of changes in political direction and administration that may occur
on the national level, an important lesson of the Reagan years is the
significant role that state and local governments and voluntary organizations
can play in the development of affordable
housing. The problem of affordable
housing has a national as well as a local dimension, but it is the local level at
which many of the most intractable aspects of the problem -- problems of
building and infrastructure deterioration, class and ethnic antagonism, and
wasteful, exploitative practices of public and private institutions -- are
confronted. The local level properly remains the focus, even if a change in
national administrations should make that a matter of choice rather than
n1 The New Deal was ushered in at a time when the Depression had pushed the
number of unemployed to 15 million people. National Ass'n of Home Builders,
Housing America -- The Challenges Ahead 30 (1985) [hereinafter NAHB].
Before the New Deal, it is difficult to discern any coordinated national
housing policy. At the state and local level,
housing policy was primarily a subset of community development policy. Organizations
such as the New York Society for Improving the Conditions of the Poor and
individuals such as Jacob Riis brought the conditions of tenement dwellers to
public attention before the turn of the century. Welborn,
Housing and Community Development, in Congressional Research Serv., Library of
Congress, House Comm. on Banking, Fin.
& Urban Affairs, 98th Cong., 1st Sess.,
Housing -- A Reader 151, 151-52 (Comm. Print 1983) [hereinafter
Housing -- A Reader].
At the national level, federal activity included an 1892 study of slum
conditions in cities with populations over 200,000; a substantial public
housing effort to provide shelter for shipyard and defense plant workers during World
War I (all of the produced units were sold to the private sector at the close
of the war); and the construction by the Hoover administration's Reconstruction
Finance Corporation of a 1573-unit low income apartment complex called
"Knickerbocker Village" in New York City on the eve of the New Deal. D. Judd, The Politics of
American Cities 260-61 (2d ed. 1984). The Hoover administration also sponsored
the Federal Home Loan Bank Act, Pub. L. No. 72-304, 47 Stat. 725 (1932)
(codified as amended at
12 U.S.C. §§ 1421-1430, 1430b-1440, 1442-1449 (1982
& Supp. IV 1986)), shoring up savings and loan institutions that specialized in
financing home mortgages for the middle class. See D. Judd, supra, at 129.
The New Deal approach to low income
housing was crafted out of the work of the
Housing Division of the Public Works Administration (PWA) (using low interest federal
loans to induce the private sector to engage in renovation, slum clearance, and
construction of low income
housing) and the United States Emergency
Housing Corporation (USEHC) (directly financing and constructing low income
housing beginning in 1933, then working through locally chartered public
housing authorities to avoid federal exercise of the power of eminent domain). Id. at
261-62. The United States
Housing Act of 1937, Pub. L. No. 75-412, 50 Stat. 888 (codified as amended at
42 U.S.C. §§ 1437-1437n (1982
& Supp. III 1985)), designed to build low income
housing and clear slums through a combination of federal funding, local public
housing authority (LPHA) sponsorship, and private enterprise, was the cornerstone of
housing policy for the poor. D. Judd, supra, at 262. Between 1937 and 1945, the
Housing Administration, created by the 1937 Act, and its successor, the Federal Public
Housing Authority, constructed almost 170,000 units of low income public
housing. Id. at 264. The New Deal approach to middle income
housing is set forth infra note 4.
n2 See NAHB, supra note 1, at 30 (more than 1.5 million home mortgage
foreclosures and defaults).
n3 In 1940, crowding was defined as more than 1.5 persons per room. Milgram, The
Rationale for Assisted
Housing -- A Reader, supra note 1, at 98, 99.
n4 Federal policy for protecting and then promoting middle class
housing centered on the insulation of home mortgage financing from commercial lending.
Housing Finance: Development and Evolution in Mortgage Markets, in
Housing -- A Reader, supra note 1, at 45, 48. Although the Federal Deposit Insurance
Corporation (FDIC) was set up to protect investments in commercial banks, and
the Federal Reserve Board was set up to stabilize the entire financial system,
the role of savings and loan institutions (S
& L's) in home mortgage financing was sheltered by a special subsystem, under
the general stewardship of the Federal Home Loan Bank Board (FHLBB). The FHLBB
was created by the Federal Home Loan Bank Act, Pub. L. No. 72-304, 47 Stat. 725
(1932) (codified as amended at
12 U.S.C. §§ 1421-1430, 1430b-1440, 1442-1449 (1982
& Supp. IV 1986)), and had power to both fund and regulate the activities of the
& L's. See Miles, supra, at 48.
The FHLBB, initiated not by Roosevelt but by Hoover, was initially capitalized
at $ 125 million. This sum financed the establishment of the FHLBB and twelve
regional banks as a reserve system for the S
& L's. NAHB, supra note 1, at 30. Federally chartered S
& L's received significant capital incentives and tax deductions in exchange for
their pledge to make home mortgage lending a substantial part of their
portfolio. Id.; see Home Owners' Loan Act of 1933, Pub. L. No. 73-43, 48 Stat.
128 (codified at
12 U.S.C. §§ 1424, 1461-1462, 1464-1466a, 1468 (1982
& Supp. IV 1986)).
The New Deal broadened and strengthened this financial system by adding
insurance for S
& L depositors, whose deposits gave S
& L's the funds needed to engage in mortgage lending. This insurance fund, the
Federal Savings and Loan Insurance Corporation (FSLIC), was established by the
Housing Act, Pub. L. No. 73-479, tit. IV,
§§ 401-407, 48 Stat. 1246, 1255-61 (1934) (codified at
12 U.S.C. §§ 1724-1730 (1982
& Supp. IV 1986)). The Federal
Housing Administration (FHA), established by the National
Housing Act, Pub. L. No. 73-479, tit. I,
§§ 1-5, 48 Stat. 1246, 1246-47 (1934) (codified at
12 U.S.C. §§ 1701-1703, 1705 (1982
& Supp. IV 1986)), promoted and insured long-term, low interest home mortgages,
steering home mortgage finance away from the short-term balloon note
instruments that had precipitated a rash of foreclosures in the opening days of
the stock market crash. Miles, supra, at 48. The Federal National Mortgage
Association (FNMA), established in 1938 by the FHA pursuant to its delegated
authority under the 1934 Act, acted as a
"purchaser of, and thus a guaranteed source of funds for, any FHA-insured loan
made by private lenders." Id. at 48. This basic system was significantly modified in 1944 when the
Veterans' Administration guaranteed no-down payment loans made by mortgage
lenders to veterans. NAHB, supra note 1, at 32; Miles, supra, at 48.
n5 United States
Housing Act of 1937, Pub. L. No. 75-412, 50 Stat. 888 (codified at
42 U.S.C. § 1437-1437n (1982
& Supp. III 1985)); see infra notes 78-92 and accompanying text.
n6 Today's standards of
housing habitability are higher than those of the 1940's. For
housing to be considered habitable today, it must include hot as well as cold running
water, be in a better condition of repair and less crowded (one person per room
rather than 1.5 persons per room). By these higher standards, 5.3 million
households in 1983 occupied
housing that was substandard due to plumbing or state of repair, and 1.5 million
additional households occupied
housing that was substandard due to overcrowding. Milgram, supra note 3, at 99-100.
The number of homeless persons has been estimated at between 250,000 and
3,000,000 people. See infra note 165 and accompanying text.
n7 Approximately 9.7 million households paid more than 30% of their income for
shelter that was not crowded or otherwise substandard. Milgram, supra note 3,
n8 The percentage of income spent on
housing has risen steadily since World War II for all families regardless of income.
Id. at 100-01. In 1950, 30.8% of renters paid over 25% of their income in
rent. In 1980, 32.7% of such households paid at least 35% of their income in
rent. Moreover, 51.6% had rent-income ratios greater than 1:4. Id.
n9 Middle income households are finding it increasingly difficult to purchase
housing because of rising construction and capital costs. See generally infra notes
20 and 51-67 and accompanying text. Conditions for renters have also worsened.
See generally infra notes 147-60 and accompanying text. On the problems of
homelessness, see infra notes 165-74 and accompanying text.
Housing: An Overview, in
Housing -- A Reader, supra note 1, at 12, 15. A larger, more concentrated industry
can achieve economies of scale and other efficiencies. See NAHB, supra note 1,
n11 See generally Saltojanes, Inflation in
Housing Costs, in
Housing -- A Reader, supra note 1, at 32, 34-37.
n12 Id. at 34.
n13 See id.; NAHB, supra note 1, at 117-18.
n14 NAHB, supra note 1, at 16; Saltojanes, supra note 11, at 35; see NAHB, supra
note 1, at 116-19.
n15 Schussheim, supra note 10, at 15. To the contrary, extensive use of the new
technologies is positively associated with large-scale builders, a concentrated
industry, and a relatively homogeneous range of consumer preferences for
The National Association of Home Builders divides builders into three groups:
large developers (100 dwelling units per year or more), medium builders (26-100
units per year), and small builders (less than 26 units per year). Large
developers build on a large scale, using assembly line technology and less
skilled workers. In 1982, they built 9.7% of the
housing in the United States (up from 7.4% in 1978). Medium builders, who build on
their own land and sell to the public, built 17.6% of the
housing in 1982, down from 19.7% in 1978. NAHB, supra note 1, at 111. Small builders
engage primarily in remodeling, rehabilitation, and subcontracting to the
larger builders, especially for site preparation. See id.
The large multifamily developers have significantly increased their activity in
the United States, but so have the small general contractor/subcontractors.
The middlerange general contractors are the ones being squeezed out; they are
not large enough to compete for capital or utilize economies of scale to match
the large builders, yet are not flexible or versatile enough to compete for
remodeling or subcontracting work with small builders. Id. at 111-12. On the
whole, the industry is much less concentrated than other large American
industries, and certainly less than its Japanese counterpart, for example.
Sheridan, Made in Japan, Builder, Jan. 1986, at 228-33. The likely result of
the varying factors affecting the organization of production and the cost of
materials is a mixture of craft work and assembly line techniques, and a
stabilizing of the cost of construction. Schussheim, supra note 10, at 15.
n16 Schussheim, supra note 10, at 15.
n17 Id. at 15-16.
n18 Exclusionary zoning drives up the price of land, making it difficult to
produce an affordable
housing package, closing suburban
housing and land markets to low and moderate income families. See Davidoff
& Davidoff, Opening the Suburbs: Toward Inclusionary Land Use Controls,
22 Syracuse L. Rev. 509, 519 (1971).
In contrast, positive action by state and local legislatures can harness the
development process itself to actually reduce the cost of
housing. See McDougall, From Litigation to Legislation in Exclusionary Zoning Law,
22 Harv. C.R.-C.L. L. Rev. 623, 630-31, 635-39, 642-50 (1987) (set-aside techniques); see also discussions of
"linkage" techniques infra notes 200-11 and accompanying text.
n19 NAHB, supra note 1, at 111.
n20 See Saltojanes, supra note 11, at 35.
n21 See infra notes 272-74 and accompanying text.
n22 For an overview of federal
housing policy, see Fernslere, Tuttle, Kessler, Kogan, Simons
& Walsh, Historical Perspectives, Current Trends and Future Roles in
Housing and Community Development,
16 Urb. Law. 683, 687-90 (1984); Nolon, Reexamining Federal
Housing Programs in a Time of Austerity: The Trend Toward Block Grants and
14 Urb. Law. 249, 253-57 (1982). See also Bender, Federal Budget Cuts in
Housing: Is There No Place Like a Decent Home?,
10 J. Legis. 457, 457-67 (1983).
n23 On rental versus home ownership in federal policy, see Hoeflich
& Malloy, The Shattered Dream of American
Housing Policy -- The Need for Reform,
26 B.C.L. Rev. 655, 657-59 (1985).
n24 Other supply-side subsidy methods include: federal purchase of privately
originated mortgages; below market interest rate mortgages achieved through
direct federal loans or payment of all or part of the debt service on a private
loan; financing based on tax exempt bonds; and tax savings to
housing investors through rapid depreciation or
housing tax credits." Milgram, supra note 3, at 104-06.
n25 Miles, supra note 4, at 45.
n26 On October 24, 1929 --
"Black Tuesday" -- prices on the New York Stock Exchange collapsed, leading to an economic
downturn that caused unemployment to increase from 3.2% to 23.6% by 1932. D.
Judd, supra note 1, at 128. The average income of employed persons decreased
42.5% from 1929 to 1933. Id.
Financial panics drastically curtailed lenders' ability to hold deposits,
prompting drastic disintermediation. Outstanding mortgages (often with terms
as short as five years) were called in to cover withdrawals, precipitating
foreclosures. Because private mortgage insurers at the time could not cover
foreclosure losses of that magnitude, they also went under. Miles, supra note
4, at 47-48. Twenty-five percent of all homes were foreclosed in 1932, and
more than 1000 homes were lost daily in early 1933. D. Judd, supra note 1, at
n27 Milgram, supra note 3, at 98.
n28 The FHLBB was established by the Federal Home Loan Bank Act, Pub. L. No.
72-304, 47 Stat. 725 (1932) (codified as amended at
12 U.S.C. §§ 1421-1430, 1430b-1440, 1442-1449 (1982
& Supp. IV 1986)), and along with its 12 regional banks constituted a reserve
system for the Nation's S
& L's. The system required restructuring and recapitalization by the time of
the New Deal, primarily because it was not undertaken in the context of overall
economic reform. NAHB, supra note 1, at 31; Miles, supra note 4, at 48; see
supra note 4.
n29 NAHB, supra note 1, at 31. Federally chartered S
& L's were set up by the Home Owner's Loan Act of 1933, Pub. L. No. 73-43, 48
Stat. 128 (codified at
12 U.S.C. §§ 1424, 1461-1462, 1464-1466a, 1468 (1982
& Supp. IV 1986)), and depositors' accounts therein were insured by the FSLIC
under the National
Housing Act, Pub. L. No. 73-479, tit. IV,
§ 401-407, 48 Stat. 1246, 1255-61 (1934) (codified at
12 U.S.C. §§ 1724-1730 (1982
& Supp. IV 1986)). As of 1982, there were 3300 such institutions. Miles, supra
note 4, at 56; see supra note 4.
n30 See supra note 29.
Housing Act, Pub. L. No. 73-479, tit. I,
§ 1, 48 Stat. 1246, 1246 (1934) (codified at
12 U.S.C. §§ 1701-1703 (1982
& Supp. IV 1986)). The Federal Home Owners Loan Corporation (HOLC) was created
as a subsidiary of FHLBB with an initial capitalization of $ 400 million. The
HOLC enabled debtors to transform their obligations from the popular short-term
balloon note devices (rarely covering more than 50% of the purchase price of
the home), to the long-term, low interest, low down payment instrument that was
the cornerstone of New Deal home ownership policy. The HOLC received $ 2.0
billion in lending authority to purchase delinquent mortgages, and thousands of
home owners were saved from foreclosure of their houses. During the HOLC's
most active period, it held 15% of all mortgage debts. When the HOLC was
dissolved in 1951, it showed a $ 14 million profit. NAHB, supra note 1, at 31.
n32 Conventional lenders require private mortgage insurance (PMI) on any home
mortgage transaction in which the loan to value ratio is greater than 90%. One
hundred and twenty-one billion dollars of such insurance was in force in 1982
alone. Miles, supra note 4, at 61.
n33 Pub. L. No. 78-346, 58 Stat. 284 (codified as amended at
38 U.S.C. § 693 (1982)).
n34 Pursuant to Truman's Reorganization Plan No. 3, July 27, 1947, the FHA became
a department of the HHFA. Reorg. Plan No. 3 of 1947, 3 C.F.R. 1071
(1943-1948), reprinted in 5 U.S.C. app. at 1037 (1982), and in 61 Stat. 954.
The HHFA itself was raised to cabinet level as the Department of
Housing and Urban Development in 1965 by the Department of
Housing and Urban Development Act, Pub. L. No. 89-174,
§ 3, 79 Stat. 667 (1965) (codified at
42 U.S.C. § 3531 (1982)).
n35 A key factor in this spurt of
housing development was the National
Housing Act of 1949. NAHB, supra note 1, at 32.
n36 Racially restrictive covenants preceded exclusionary zoning, which developed
after judicial enforcement of restrictive covenants was declared an
unconstitutional state action under the fourteenth amendment by the Supreme
Shelley v. Kraemer, 334 U.S. 1 (1948).
n37 Blacks were denied FHA insurance for mortgage loans in inner city
neighborhoods, leading not only to minority concentration but to neighborhood
deterioration. The FHA claimed that the influence of blacks made the
neighborhoods too risky for investment. Private lenders, loath to lend in
these areas in any event, were even less likely to do so without FHA insurance.
See R. Shiffman, Citizen Involvement in
Housing and Community Development 6 (Nov. 16, 1985) (unpublished paper).
n38 This spurt resulted from returning veterans' demand for family space;
productive capacity developed for war, newly devoted to peacetime purposes,
which led to new jobs and increased
housing needs; banks' need for new investment opportunities; and defense department
directions to protect essential industry from nuclear attack by dispersal
beyond the urban perimeter.
Id. at 8-9. The shift of industry was also facilitated by new technology mandating spread
out factories for assembly line techniques. Population increases followed the
decentralization of industrial jobs to the suburbs. D. Harvey, Social Justice
and the City 61 (1973).
Ironically, by the 1970's, fuel shortages and new technology permitting
personnel and productive capacity to be protected from nuclear attack combined
to reverse the centripetal force attached to these factors. R. Shiffman, supra
note 37, at 8. Recentralization will make metropolitan areas less dependent on
imported oil, for example. The civil rights movement also removed some of the
racial barriers and tension that made urban living unpalatable a generation
before. Id. at 8.
n39 See, e.g.,
Metropolitan Hous. Dev. Corp. v. Village of Arlington Heights, 558 F.2d 1283 (7th Cir. 1977).
n40 The FHA insures mortgage pools as well as individual mortgages. Under such
arrangements, the payment rate and principal amount, in addition to the
mortgage, are insured. Miles, supra note 4, at 61.
n41 Investors are provided with a certificate guaranteeing participation in a
percentage of the value of the pool and the income generated by it. Miles,
supra note 4, at 51-52.
n42 Id. at 46.
n43 Id. at 50.
n44 The FNMA guaranteed the purchase of any FHA-insured loan, thus contributing to
uniformity of clauses in mortgage instruments. Id. at 48. The FNMA was
chartered pursuant to the Act of July 1, 1938, Pub. L. No. 80-864, 62 Stat.
1206 (codified as amended at
12 U.S.C. §§ 1713, 1716-1721 (1982
& Supp. IV 1986)) (replacing the former National Mortgage Associations created
by the National
Housing Act, Pub. L. No. 73-479, tit. III,
§§ 301-308, 48 Stat. 1246, 1252 (1934) (originally codified at
12 U.S.C. § 1716)).
n45 Miles, supra note 4, at 49. The FNMA was federally chartered as a mixed
public-private company, using separate accounts to segregate its
"special assistance" functions for subsidized
housing from its more profitable secondary mortgage market operations. Id. The
reorganization was accomplished pursuant to the
Housing Act of 1954, Pub. L. No. 83-560, 68 Stat. 590 (codified as amended at
12 U.S.C. § 1703 (1982
& Supp. IV 1986)). Miles, supra note 4, at 49.
n46 See Miles, supra note 4, at 50-51. The FNMA was partitioned into the FNMA and
the GNMA to facilitate a rationalization of the secondary mortgage market,
particularly with respect to the activities of S
& L's and mortgage bankers. The
Housing and Urban Development Act of 1968, Pub. L. No. 90-448, tit. III,
§§ 301-318, 82 Stat. 476, 505-513 (codified in scattered sections of 12 U.S.C.),
accomplished the split. In 1974, the GNMA itself was altered; it became
authorized to purchase $ 7.5 billion worth of mortgages to pump capital into
housing market via a
"tandem plan" that survived until 1980. Milgram, supra note 3, at 105-06. For a general
discussion of GNMA securities, see Fernslee, supra note 22, at 698-99.
n47 NAHB, supra note 1, at 34-35.
n48 Emergency Home Finance Act of 1970, Pub. L. No. 91-351, tit. II,
§ 201, 84 Stat. 450, 450 (codified as amended at
12 U.S.C. § 1717 (1982
& Supp. IV 1986)).
housing that did not exceed a $ 100,000 purchase price. Id.
n50 The FHLMC is a
"pooling" mechanism, buying conventional mortgages and issuing securities based on its
n51 R. Montgomery
& D. Mandelker,
Housing in America: Problems and Perspectives 268 (2d ed. 1979).
n52 Mortgage bankers originated FHA- and VA-approved mortgages and sold them to
the FNMA. They thus used the secondary market as a partial buffer against
fluctuating interest rates. S
& L's, in contrast, tended to hold their mortgages and service them rather than
resell them on the secondary market. S
& L's resorted to the secondary market only to replenish reserves. Miles, supra
note 4, at 50-51. They also generally dealt in conventional rather than FHA or
VA loans, which limited their access to the secondary market. Id. at 50.
n53 Interest rates have fluctuated partly by design, as the Federal Reserve Board
tightens and loosens monetary policy by increasing and decreasing the discount
rate (the interest rate the Board charges on loans to financial institutions).
Interest rates have been decreased to stimulate the domestic economy and
increased to stimulate foreign investment. Paradoxically, the former strategy
is needed to get the economy out of a slump, but the latter is necessary to
finance our trade and budget deficits as long as the economy is in a slump.
Berry, Greenspan -- A Man Aware of Feasibility, Wash. Post, June 14, 1987, at
D1, col. 4, D3, col. 1. Sharp declines in the dollar exchange rate on the
international market in April 1987 led to surges in long-term interest rates
and caused the Fed to tighten monetary policy. See id. at D3, col. 2. A
dollar declining in value on the international market, combined with high
interest rates, creates inflation (inflation might reduce the trade deficit,
however). Id. at D3, col. 4 (quoting Alan Greenspan, Chairman, Federal Reserve
n54 The depositors abandoned the S
& L's because of higher rates available from instruments such as money market
mutual funds. See Meyerson, Deregulation and the Restructuring of the
Housing Finance System, in Critical Perspectives in
Housing 68, 70-71 (R. Bratt, C. Hartman
& A. Meyerson eds. 1986).
n55 Miles, supra note 4, at 49. On September 25, 1966, deposit rate ceilings --
one-half percent higher than federal reserve rates for commercial banks -- were
introduced by the FHLBB. Act of Sept. 21, 1966, Pub. L. No. 89-597, 80 Stat.
823 (codified as amended in scattered sections of
12 U.S.C. & 29 U.S.C.) (Regulation Q).
n56 The money market certificate, a 26-week, $ 10,000 certificate with interest
rates pegged to six-month U.S. treasury bills, was introduced in 1978 to
compete with money market mutual funds. Miles, supra note 4, at 52. The All
Savers Certificate, featuring tax exemption for interest payments up to $ 2000,
was introduced in 1980 to facilitate S
& L's competition for savers' deposits. Unfortunately, the certificate's
one-year term meant that deposits would not be available long enough to cover
home mortgage lending.
I.R.C. § 128 (1986); Miles, supra note 4, at 52. Accounts permitting a negotiable order of
with-drawal (i.e., interest bearing checking accounts), were authorized by the
FHLBB on December 1, 1980. Id. at 53.
n57 The federal law setting maximum permissible interest rates was also repealed.
Meyerson, supra note 54, at 74.
n58 Variable rate mortgages were authorized on July 1, 1979. Miles, supra note 4,
at 53 n.24. Renegotiable rate mortgages were authorized on April 30, 1980.
Id. By 1974, the FHA was authorized to offer graduated payment mortgages -- the
size of monthly payments, low at the start, and increasing to a higher level
that remains steady over the life of the mortgage. NAHB, supra note 1, at 35.
Adjustable rate mortgages were authorized in April 1981. Miles, supra note 4,
at 53 n.24. Balloon note mortgages were authorized in October 1981. Id.
Balloon note mortgages are reminiscent of the type that brought the industry
down in 1929. When banks refused to refinance the balloons, mortgagees
responded with default, and the banks responded with foreclosure.
n59 Depository Institutions Deregulation and Monetary Decontrol Act of 1980, Pub.
L. No. 96-221, 94 Stat. 132 (codified as amended in scattered sections of
12 U.S.C. & 15 U.S.C.); see also Garn-St Germain Depository Institutions Act of 1982, Pub. L.
No. 97-320, 96 Stat. 1469 (codified in scattered sections of
11 U.S.C., 12 U.S.C.,
15 U.S.C., 20 U.S.C.
& 42 U.S.C.).
n60 See, e.g.,
Biscayne Fed. Sav. & Loan v. FHLBB, 572 F. Supp. 997, 1009 (S.D. Fla. 1983).
n61 Miles, supra note 4, at 54; see also Meyerson, supra note 54, at 70-72.
n62 See infra notes 234-47 and accompanying text.
n63 Miles, supra note 4, at 58.
n64 Such securities are being issued by the FNMA, the GNMA, and the FHLMC. There
is talk of establishing private secondary mortgage institutions, but securities
of secondary market institutions have typically not been attractive on the
market without some form of government guarantee. Miles, supra note 4, at 52.
Housing Starts Fall Again in May, Wash. Post, June 17, 1987, at F3, col. 1, F3, col.
1; see also supra note 53.
In the short term, the situation has been partially alleviated by the Federal
Reserve Board's (Fed) loosening of the money supply. This helps by bringing
down interest rates, but brings about more inflation. Such measures by the Fed
cannot continue if the value of the dollar keeps falling relative to the
currency of other developed nations, however. See supra note 53.
n66 Schussheim, The Reagan Approach to
Housing, in Congressional Research Service Paper 87-142s, Feb. 23, 1987, at CRS-4.
n67 Meyerson, supra note 54, at 92-93. See also infra notes 144-45, 175-85 and
accompanying text for a discussion of the severe overextension of the Federal
Savings and Loan Insurance Corporation resulting from widespread S
& L failures.
n68 The annual cost of mortgage interest deductions alone is nearly $ 30 billion
per year. The cost was $ 29.3 billion in fiscal year 1981, for tax savings to
22 million income households. By fiscal year 1983, the total cost had
increased to $ 36.1 billion. Nine-tenths of these savings go to households
with incomes over $ 20,000 per year. Milgram, supra note 3, at 107-08.
n69 R. Montgomery
& D. Mandelker, supra note 51, at 254.
n70 Breaks in the chain occur because of submarkets that are racially and/or
economically segregated. Most new
housing since World War II has been constructed in the suburbs, virtually inaccessible
to the poor. Id. at 47.
n71 For the Census Bureau, typical
"very low income persons" belong to four-person households with incomes that are 50% or less of the
median income for the Standard Metropolitan Statistical Area (SMSA) in which
"Low income persons" are in four-person households with incomes that are between 50% and 80% of the
median income for their SMSA, and
"moderate income persons" are in four-person households that have incomes that are between 80% and 100%
of median income for their SMSA.
"Middle income persons" are in four-person households with incomes higher than 100% of SMSA median
income, with the average income of a four-person family in this category being
about 120% of SMSA median income. In 1983, 22.9 million people -- 27% of all
households -- had very low income, 15.5 million (18%) had low income, and 8.8
million (10%) had moderate income. Forty-five percent of the population is
middle income or higher according to these statistics, a somewhat reassuring
figure until we note that the national median income is only $ 27,500. Thus
55% of the population makes less than $ 27,500 per year. See generally
National Ass'n of Home Builders, Low-
Housing 1-2 (1986) [hereinafter NAHB II].
n72 Pub. L. No. 86-372,
§ 202, 73 Stat. 654, 667 (codified at
12 U.S.C. § 1701q (1982
& Supp. IV 1986)).
Housing the Urban Poor: Urban
Housing Assistance Programs, in
Housing -- A Reader, supra note 1, at 114, 116 [hereinafter Milgram,
Housing]; Milgram, supra note 3, at 105-06.
Housing, supra note 73, at 115-16. For example, new construction is required for large
families or the handicapped, or for developing integrated
housing in segregated areas. Id.
n75 Id. (e.g., the only economically feasible development sites in a particular
municipality for low income
housing might lie in a black neighborhood).
Housing and Urban Development Act of 1968, Pub. L. No. 90-448, 82 Stat. 476 (codified
as amended in scattered sections of
5 U.S.C., 12 U.S.C.,
15 U.S.C. & 42 U.S.C.), introduced a program of mortgage amortization subsidies that greatly
expanded the opportunities of low and moderate income people to rent and own
housing. The 1968 Act amended the
Housing Act of 1949 to create
§ 235 homeownership
(12 U.S.C. § 1715z (1982)) and
§ 236 rental programs
(12 U.S.C. § 1715z-1 (1982)). For further discussion, see infra notes 93 and 102-07 and
n77 See generally supra note 1.
n78 United States
Housing Act of 1937, Pub. L. No. 75-412, 50 Stat. 888 (codified at
42 U.S.C. § 1437 (1982)).
n79 R. Shiffman, supra note 37, at 5-6; see supra note 1.
Housing, supra note 73, at 121.
n81 Legislation was opposed by the Chamber of Commerce, realtors, home builders,
and savings and loan institutions, which called instead for
housing certificates. See D. Judd, supra note 1, at 263.
n82 See, e.g.,
United States v. Certain Lands, 78 F.2d 684 (2d Cir. 1935).
n83 Initially, the United States
Housing Authority lent the construction funds; now the Department of
Housing and Urban Development does so. Milgram,
Housing, supra note 73, at 121.
n84 Id. at 121-22. Public
housing is now financed by
n85 In 1984, outstanding federal obligations in this regard amounted to $ 20
billion. Id. at 122. Local authorities also make payments by waiving property
n86 Id. at 123. To this day, however, the private homebuilding industry is
reluctant to support subsidized or public
housing and considers the FHLBB system and federal tax incentives to be the prime
focus of its
housing policy. See Will Emerging Consensus Policy Be Enough to Restore
Housing as a National Priority?,
Housing Aff. Letter, Mar. 27, 1987, at 1, 2 [hereinafter Emerging Consensus Policy].
n87 The result of the federal income ceilings was to make public
housing strictly lower class
housing, a departure from the European model and a measure that doomed American public
housing to become sites of concentrated social problems. D. Judd, supra note 1, at
& n.21. Milgram,
Housing, supra note 73, at 123.
n88 For a general discussion on the selection of tenants for public
housing, see Comment, Public
Housing: Choosing Among Families in Need of
77 Nw. U.L. Rev. 700 (1982).
n89 D. Judd, supra note 1, at 276 (income limits and urban renewal relocation
policies combined to make public
housing a racially segregated institution for low income black and hispanic families);
see also Milgram,
Housing, supra note 73, at 123-24 (at worst, public
housing was populated by criminals and drug addicts; at best, by
"undisciplined, fatherless families" with little income and social problems including joblessness, poor education,
and poor health).
housing has languished since the Nixon administration, when public
housing starts declined from 104,000 in 1970 to only 19,000 in 1974. D. Judd, supra
note 1, at 277.
Housing, supra note 73, at 124. Note that over 700 public
housing units in the country receive no subsidy whatsoever. Telephone interview with
Roberta Youmans, Attorney for National
Housing Law Project, Washington, D.C. (Sept. 13, 1987) [hereinafter Youmans Interview].
n92 Youmans Interview, supra note 91.
n93 Ironically, subsequent efforts by the federal government to back out of direct
housing production led to supply-side programs that were less government-intrusive but
much more costly.
These efforts were presented programmatically as amendments to the National
Housing Act of 1949.
Housing for Moderate Income and Displaced Families
The requirements to be eligible for insurance under this act included that the
mortgage be executed by a mortgagor which was a public body or agency,
cooperative, limited dividend cooperative, private nonprofit corporation, or
other mortgagor approved by the Secretary.
12 U.S.C. § 1715l(d)(3) (1982
& Supp. IV 1986).
The mortgage also was required to bear interest at a rate to be agreed on by
the mortgagor and mortgagee and to provide for payment, repairs, payment of
taxes, foreclosure proceedings, etc. The interest rate was to be not lower
than three percent per year or the annual rate determined by the Secretary.
§ 1715l(d)(5) (1982
& Supp. IV 1986).
§ 235 Home Ownership for Lower Income Families
This section simply established a program of home ownership assistance by
making mortgage amortization payments to mortgagors on behalf of home owners
who qualified for assistance. Id.
§ 1715z(a)(1) (1982). Assisted home owners paid a minimum of 20% of their
income for mortgage amortization. Id.
§ 1715z(c)(1) (1982
& Supp. IV 1986). Mortgage amortization payments to mortgagees on behalf of the
home owner covered the difference between amortization at the FHA-insured
interest rate and the amortization at an interest rate of one percent. Id.
§ 1715z(c)(2) (1982). Preference was given under the section to families likely
to be displaced without such assistance. Id.
§ 1715z(a)(1) (1982).
§ 236 Rental and Cooperative
Housing for Lower Income Families
To reduce rentals for lower income families, this provision authorized the
Secretary to make mortgage amortization payments to mortgagors holding
mortgages meeting the requirements of the section. These payments were made on
behalf of owners of rental
housing projects designed for lower income tenants. Id.
§ 1715z-1(a) (1982
& Supp. IV 1986) Assisted renters paid the owner a minimum of 25% of their
income for rent. Id.
§ 1715z-1(f)(1) (1982). Mortgage amortization payments to mortgagees on behalf
of the landlord covered the difference between amortization at the FHA-insured
interest rate and amortization at an interest rate of one percent. Id.
n94 Pub. L. No. 86-372, 73 Stat. 654 (codified as amended at scattered sections of
12 U.S.C. & 42 U.S.C.).
§ 202, 73 Stat. at 667-69 (codified at
12 U.S.C. § 1701q (1982
& Supp. IV 1986)). The nonprofit corporations acted as sponsors and
subcontracted the actual construction and financial packaging to developers.
The section 202 program is the only survivor of Reagan's decimation of HUD's
housing program. See generally R. Shiffman, supra note 37.
n96 This moratorium was part of Nixon's
"Phase 3" austerity campaign to cut the federal budget. See
Pennsylvania v. Lynn, 501 F.2d 848, 851 n.6 (D.C. Cir. 1974);
Weems v. Pierce, 534 F. Supp. 740, 741 (C.D. Ill. 1982). The moratorium was overturned by court order with respect to
§ 202 was revived by Congress, and
§ 23 was replaced by
§ 8 rental
housing assistance through the 1974
Housing Act. NAHB, supra note 1, at 5.
n97 A portion of
§ 8 funds was correspondingly earmarked for
housing. Housing and Community Development Act of 1974, Pub. L. No. 93-383, tit. II,
§§ 201-213, 88 Stat. 633, 653-76 (codified as amended in scattered sections of
12 U.S.C. & 42 U.S.C.); Milgram,
Housing, supra note 73, at 126. For a discussion of the
§ 8 program, see infra note 132 and accompanying text.
Housing Act of 1961, Pub. L. No. 87-70, tit. I,
§ 101, 75 Stat. 149, 149-54 (codified as amended at
12 U.S.C. §§ 1715l, 1715n, 1720 (1982
& Supp. IV 1986)). Section 101(a) added
§ 221(d)(3) to the National
Housing Act (codified at
12 U.S.C. § 1715l(d)(3) (1982
& Supp. IV 1986). Before the 1961 Act, moderate income persons fell into the
20% gap between public and private
housing. See supra note 86 and accompanying text.
Housing, supra note 73, at 125.
12 U.S.C. § 1715l(d)(5) (1982
& Supp. IV 1986); see Milgram,
Housing, supra note 73, at 126.
n101 NAHB, supra note 1, at 33.
n102 Pub. L. No. 90-448, 82 Stat. 476 (codified as amended in scattered sections of
5 U.S.C., 12 U.S.C.,
15 U.S.C. & 42 U.S.C.).
n103 The Kerner Commission declared that lack of affordable
housing was one of the key factors in the riots of the 1960's. National Advisory
Comm'n on Civil Disorders, Report of the National Advisory Commission on Civil
Disorders 80-81 (1968).
n104 Pub. L. No. 90-448, tit. I,
§ 101(a), 82 Stat. 477 (1968) (adding
§ 235 to Pub. L. No. 75-13, tit. II, 52 Stat. 8, 9-23 (1938) (codified as
12 U.S.C. § 1715z (1982
& Supp. IV 1986)); see supra note 93.
n105 Pub. L. No. 90-448, tit. II,
§ 201(a), 82 Stat. 498 (1968) (adding
§ 236 to Pub. L. No. 75-13, tit. II, 52 Stat. 8, 9-23 (1938) (codified as
12 U.S.C. § 1715z-1 (1982
& Supp. IV 1986)); see supra note 93.
n106 See supra note 96.
n107 Pub. L. No. 93-383, tit. II,
§§ 201-213, 88 Stat. 633, 653-76 (codified as amended in scattered sections of
12 U.S.C. & 42 U.S.C.). Section 236 mortgages for multifamily
housing have been further leveraged by the activities of the GNMA on the secondary
mortgage market. For a discussion of the role of the GNMA vis-a-vis other
secondary mortgage market institutions such as the FNMA and the FHLMC, see
supra notes 46-50 and accompanying text. See also
Fox v. HUD, 532 F. Supp. 540, 541-42 (E.D. Pa. 1982).
Proceeding in the public sector, and without the desirable portfolio of the
FNMA and the FHLMC, the GNMA sought to make its loans more attractive on the
secondary market by pooling them and issuing so-called
"pass-through" certificates, or
"Ginnie Maes." Ginnie Maes carry a full faith and credit federal guarantee that debt service
payments will be met in a timely fashion, regardless of the fate of the primary
mortgage investments underlying the security. Investors take no responsibility
for origination, servicing, or risk of loss. The Ginnie Maes are actually less
risky than the underlying primary loans, and the Ginnie Maes have become fairly
attractive on the securities market despite relatively low yields. See
generally Miles, supra note 4, at 88.
Housing, supra note 73, at 128 (federal budget outlays increased to $ 1.0 billion by
1972 and were increasing at the rate of $ 0.5 billion per year).
n109 Only 59,000 new units were constructed under section 235, for example. Id. at
n110 See Administration
Housing Moratorium Comes Under Fire, 29 Congressional Quarterly Inc., 1973 Almanac
428, 430 (quoting James T. Lyon, Secretary of the Department of
Housing and Urban Development).
n111 On federal subsidies to middle income
housing (including tax subsidies) and tax treatment of low income
housing development, see Hoeflich
& Malloy, supra note 23, at 659-63. See also discussion of low income
housing tax credits infra note 118.
n112 Schussheim, supra note 10, at 21 (in 1982, the average tax reduction for
middle income home owners in the $ 20,000 to $ 30,000 income range was $ 600,
but $ 3500 for taxpayers with incomes over $ 100,000). Only 37% of American
households itemize deductions, while 67% are owner-occupiers. B. Bartlett,
Federal Income Tax Reform: Resuming the Battle 11 (Report of Heritage Found.
Dec. 30, 1986). It has been estimated that removal of all special tax breaks
for homeownership would allow for a 10% across the board reduction in tax
rates. Thus the majority of owner-occupiers would benefit by elimination of
the deduction rather than being hurt by it. Id.
n113 Home ownership is treated for tax deductions as if it were a business but not
treated as a business when it comes to taxing its value. The key is to
recognize that the enjoyment of owner-occupied
housing is, in effect, the enjoyment of value created by ownership. Elsewhere in the
tax system, value created by ownership of a business asset is taxed at ordinary
income rates. The Tax Code presently makes interest paid for money to buy a
home deductible from taxable income, just as a business might deduct similar
interest payments used to purchase a business asset. Although the income of
such a business would be taxed, however, the enjoyment-value, or
"imputed income" generated by ownership of a home, is not taxed. Gravelle, Tax Subsidies to
Housing 1953-83, in
Housing -- A Reader, supra note 1, at 73, 73; see, e.g., B. Bartlett, supra note 112,
at 10-11 (deduction for home mortgage interest encourages excessive home
ownership at the expense of using capital for business investment, thereby
reducing United States productivity and international competitiveness).
n114 Note that the Tax Reform Act of 1986 has initiated a schedule by which capital
gain rates will be increased steadily over the next three years, a policy which
will deleteriously affect investment in
housing and business assets alike. Pub. L. No. 99-514, 100 Stat. 2085, 2216-19
I.R.C. 1(j) (1986)); see also Schussheim, U.S.
Housing: Problems and Prospects, in Report Prepared for the Subcomm. on
Housing and Urban Affairs of the Senate Comm. on Banking,
Housing, and Urban Affairs, Jan. 29, 1987, at CRS-9 (Congressional Research Paper).
n115 Gravelle, supra note 113, at 87-88.
n116 Increases in corporate taxes resulting from the Tax Reform Act of 1986 will
simply restore the corporate share of federal taxes to their pre-Reagan levels
-- 13% of all taxes. Corporate taxes made up only 8.5% of all tax revenues in
1985. Low Income Hous. Information Serv., Low Income
Housing Round-up, Jan. 1986, at 3. In the 1950's and 1960's, corporate taxes made up
20% of all federal taxes, and even after a round of corporate tax cuts, held at
15% of all federal taxes. Id.
n117 Independent Retirement Accounts (IRA's) in particular are attractive
alternatives to investment in owner-occupied
housing, although at the same time they are ironically regarded by S
& L's as a source of funds for mortgage lending. Gravelle, supra note 113, at
n118 Changes in tax laws inhibiting low income
housing development are contained in the Deficit Reduction Act of 1984, Pub. L. No.
98-369, tit. I,
§ 111, 98 Stat. 494, 631-32 (1984) (codified at
I.R.C. §§ 168(j), 7701(e) (1986)). See Comment, Low-Income
Housing Under the New Conservatism: Trickle Down or Dry Up?,
26 Santa Clara L. Rev. 461, 462 n.8 (1986). For example, the rapid depreciation write-offs provided by
§ 167(k) of the Internal Revenue Code of 1954 to investors in low income
housing projects, such as those developed under
§ 221(d)(3) and
§ 236 of the National
Housing Act of 1934, have been drastically limited.
I.R.C. § 167(k)(2) (1986). Under the old law, investment vehicles called real estate
syndications were assembled to insulate limited partners from development risk
while allowing pass-through of tax write-offs. These vehicles were very
popular in the days of high tax rates. The program was phased out then
temporarily revived in 1980 by the Accelerated Cost Recovery System (ACRS).
ACRS was established to restore tax shelter syndications as a way of developing
low income rental
housing, but this (as well as other
"passive" losses) was drastically cut by the Tax Reform Act of 1986. See
I.R.C. § 167 (1986). Surviving tax incentives are low income
housing tax credits, id.
§ 42, and tax-exempt mortgage revenue bonds, id.
§ 143. See Callison, New Tax Credit for Low-Income
Housing Provides Investment Incentives,
66 J. Tax'n. 100 (1987).
The new low income
housing investment tax credit of the Tax Reform Act of 1986 is focused on making a
stricter correlation between the subsidies given and the number of units in a
project that house low income tenants. Specifically required by the act are:
(1) a minimum number of units in a project that houses low income tenants, (2)
a limited rent to be charged to those tenants, and (3) a direct relation to be
established between the subsidy given and units available.
The credit itself is a general business credit to be claimed in equal amounts
over a tenyear period. The amount equals the product of the taxpayer's
qualified basis in the property and the applicable credit rate. The qualified
basis is determined by multiplying the eligible basis of the property by the
lesser of the fraction of the number of low income units in the project over
total units or the amount of floor space of low income units over the floor
space of all units. This computation provides a basis that directly relates
the credit given to the amount of space occupied by the low income tenant.
The applicable credit rate is a more complex determination. Depending upon
whether the project is federally subsidized or not, the credit rate is
determined such that the aggregate credit amounts to a percentage of the basis
attributable to low income units. For nonfederally subsidized projects the
percentage is 70% and for federally subsidized projects the percentage is 30%.
I.R.C. § 42 (1986); infra note 275.
n119 President Reagan's commitment to maintain defense spending and lower taxes,
despite his severe slashing of domestic programs, has created a monumental
deficit in the American economy -- the National Debt has climbed to one
trillion dollars since he took office in 1980. The
housing budget has taken the biggest cuts, reduced by 50% from its 1979 level. Every
housing program conceived since 1933, with the exceptions of public
housing and section 202
housing for the elderly and handicapped, has been eliminated. Emerging Consensus
Policy, supra note 86, at 1. Current thinking on Capitol Hill, as evidenced by
the revised Graham-Rudman-Hollings Balanced Budget Law signed into law by the
President on September 29, 1987, holds that to balance the budget without
raising taxes, both defense and domestic spending must be cut; if only one is
cut, taxes cannot be cut as well. The result of this formula, at the very
least, is that even though tax rates are unlikely to be raised again, tax
loopholes will be closed and tax deductions reduced or eliminated.
n120 A Heritage Foundation report demonstrates that only a small percentage of home
owners actually itemize. See B. Bartlett, supra note 112. The top tax bracket
decreased from 89% for 1954 to 70% in 1966 and to 50% in 1981. Gravelle, supra
note 113, at 83.
n121 Gravelle, supra note 113, at 92.
n122 The average American earns less than $ 27,500 per year (55% of the
population). See supra note 71.
n123 The new tax code significantly increased the highest standard deduction from $
3760 in 1987 to $ 5000 in 1988. The law also pegs the deduction in future
years to inflation, so it will rise steadily.
I.R.C. § 63(e)(2)(A) (1986).
n124 Even before these changes, taxpayers making $ 100,000 per year or more seemed
to benefit most from the deduction for mortgage interest payments. Schussheim,
supra note 10, at 21. Changes effected by the Tax Reform Act of 1986 will make
it less attractive as a tax matter for even middle income persons to own their
own homes. See, e.g., supra note 123 (increase in size of standard deduction
when coupled with a decrease in overall tax rate reduces the marginal utility
of itemizing deductions rather than choosing a standard deduction). Deductions
for home mortgage interest payments are the largest single item deduction for
most taxpayers. Many middle income persons cannot afford home ownership
without a tax subsidy attached. The presence or absence of mortgage interest
deductions is dispositive in the decision to own or rent. Gravelle, supra note
113, at 92-93.
n125 See supra notes 111-12 and accompanying text.
n126 For a discussion of
housing leasing, see infra note 130 and accompanying text. For a discussion of
housing, see infra note 132 and accompanying text.
Housing assistance payments are direct cash transfers targeted to low income
individuals. Milgram, supra note 3, at 109. Moderate income persons have been
excluded from such transfers in the name of efficiency even though the
transfers are less costly than supply-side subsidies. The only programs aimed
at moderate income consumers were the supply-side programs of the 1960's and
early 1970's --
§§ 221(d)(3), 235, 236. See supra note 93.
n127 See infra notes 129-30 and accompanying text.
n128 Devices to bolster buying power usually take the form of a supplemental
payment made to the tenant's landlord, but in some cases payments are made
directly to the tenant. Such transfer payments have been increasingly targeted
to the low end of the lower income spectrum, however, to reduce the number of
subsidized persons and, hence, the costs. Combinations of all methods --
supply- and demand-side -- are often needed to reach lower income individuals.
Housing, supra note 73, at 116-17. For example,
§ 236 supply-side subsidies and
§ 8 demand side subsidies are often combined. Id. Because of the time involved
housing construction and rehabilitation, and in locating suitable units in the
housing production tends to lag behind capital authorizations -- in some cases for
several years -- creating the well-known
"pipeline" effect. See id. at 120.
n129 See, e.g.,
Daniels v. HUD, 518 F. Supp. 989 (S.D. Ohio 1981).
Housing, supra note 73, at 126-27 (discussing
§ 23 public
housing leasing program created by the
Housing and Urban Development Act of 1965); see also id. at 127 (HUD ruling counting
newly constructed units as
"existing" for the purposes of the subsidy enabled
§ 23 to be used as a means of supply-side
housing production). One hundred seventy thousand units were built under this ruling
§ 23 was suspended under the Nixon moratorium. NAHB, supra note 1, at 34.
Section 23 was replaced by
§ 8 rental
housing assistance through the 1974
Housing Act. For a description of
§ 8, see infra note 132.
n131 The Rent Supplement Program is codified at
12 U.S.C. § 1701(s) (Supp. IV 1986). Rent supplements were 40-year contracts, later converted
to the so-called
"deep subsidy program" for projects built pursuant to a
§ 236 contract after August 22, 1974. See
12 U.S.C. § 1715z-1(f)(2) (1982). For a good summary of the Rent Supplement program, see
Allen v. Pierce, 689 F.2d 593, 594-95 nn.1-4 (5th Cir. 1982).
Section 236 projects also benefited from some operating subsidies (supply
side). See, e.g.,
Allen, 689 F.2d at 595 n.2 (considering the
"troubled projects" operating subsidy,
12 U.S.C. § 1715z(1)(a) (1982)). Those projects that could not be saved by rent supplements,
deep subsidy, or operating subsidy were foreclosed. See supra note 129 and
accompanying text; see also
Ferrell v. Pierce, 743 F.2d 454 (7th Cir. 1984) (describing HUD programs to avoid
"precipitous" foreclosure of
§ 236 project by mortgagees, to take assignments of
§ 236 project mortgages from mortgagees, and to make temporary assistance
payments to mortgagees on a
§ 236 project mortgagor's behalf).
n132 Pub. L. No. 93-383, tit. II,
§ 8, 88 Stat. 633, 663 (codified at
42 U.S.C. § 1437f (1982
& Supp. III 1985)). Under
§ 8, HUD is authorized to make payments to owners and prospective owners of
existing dwellings to assist lower income families in finding a place to live.
Section 8, an amendment to the United States
Housing Act of 1937, is essentially designed as an adjunct to or substitute for public
housing. Section 8 was a very successful program, producing more low income
housing in five years than public
housing has produced in 40 years. 50th Anniversary of the 1937
Housing Act: History as Inspiration for the Future,
Housing Aff. Letter, June 19, 1987, at 9, 10 [hereinafter 50th Anniversary]; see supra
notes 97, 126, and 130. For further discussion of
§ 8, see Landrieu
& McGrew, HUD: The Federal Catalyst for Urban Revitalization,
55 Tul. L. Rev. 637 (1981).
n133 This decreased the LHA's role a step beyond
§ 23 leasing, in which the LHA, not the subsidized family, entered into a lease
with the owner. Interview with Diane Dorius, Chief Counsel, House Committee on
Housing, and Urban Affairs, Washington, D.C. (July 27, 1987) [hereinafter Dorius
Interview]. The subsidy was the difference between the contract rent and 30%
of the tenant's income.
42 U.S.C. §§ 1437a(a), 1437f(c)(3) (1982
& Supp. III 1985); see also
Johnson v. Sound View Apartments, 585 F. Supp. 559, 560 n.1 (S.D.N.Y. 1985).
n134 Advance commitments for subsidy payments could be used by developers seeking
conventional financing or financing by state
housing mortgage finance agencies (such as those existing in Virginia). See, e.g.,
Atkins v. Robinson, 545 F. Supp. 852 (E.D. Va. 1982). Such projects, however, were never favored over
§ 8's existing (or even substantial rehabilitation)
housing programs (subsidies for one million units of existing and substantially
housing, out of a total of 2.2 million units, were planned as of 1984). Milgram,
Housing, supra note 73, at 131. Both existing and rehabilitation programs have the
virtue of recycling existing
housing stock and allegedly broadening consumer choice. Id. Section 8 existing and
substantial rehabilitation programs have allegedly operated to discourage
dispersal of low income and minority tenants outside of their existing
communities, however. See, e.g.,
Huntington Branch, NAACP v. Town of Huntington, 689 F.2d 391 (2d Cir. 1982).
"Very low income" refers to persons whose income is 50% or less of the median income for the
standard metropolitan statistical area. See supra note 71.
Housing, supra note 73, at 131. Half of these units are occupied by the elderly.
n137 See, e.g.,
City of New Haven v. United States, 809 F.2d 900 (D.C. Cir. 1987) (suit to reverse President's impoundment of
§ 8 funds).
n138 Dorius Interview, supra note 133.
Housing, supra note 73, at 134-37.
Housing vouchers are a direct payment to tenants to augment their bidding power for
housing. Without rent control and
housing code enforcement, however,
housing vouchers can cause rents to increase and quality to deteriorate -- people
simply pay more for the inadequate
housing in which they already live. Fair
housing regulation is also necessary to ensure that vouchers do not perpetuate
housing segregation. See id. at 135, 137.
An experiment by the Equal
Housing Access Project in 1984 found that large minority families had particular
difficulty in finding suitable
housing with vouchers. Youmans Interview, supra note 91.
n140 In 1982, the President's Commission on
Housing articulated the analytical framework of Reagan's agenda: (1) fiscal
responsibility and monetary stability, (2) deregulated
housing markets, (3) reliance on the private sector, (4) minimize federal intervention
on the local level, (5) stay in the business of
housing the poor, (6) direct programs toward people rather than structures (demand
subsidy rather than supply subsidy), and (7) assure maximum
housing choice. The President's Comm'n on Hous., Report of the President's Commission
Housing xviii (1982) [hereinafter Commission Report].
The 1977 annual
housing survey reported that more than 62% of very low income renters paid more than
30% of their incomes for rent while only 19% occupied substandard
housing. Commission Report, supra, at 11; see also Milgram,
Housing, supra note 73, at 136.
n141 See Milgram,
Housing, supra note 73, at 137, for a discussion of
housing development block grants.
Housing development block grants are similar to community development grants, but are
used to finance new construction or substantial rehabilitation of residential
n142 The President's Commission on
Housing recommends the consumer-oriented
housing assistance grant as the cornerstone of the Reagan administration
housing policy. Nolon, supra note 22, at 250; see also supra notes 139-40.
housing is a misnomer describing
housing that is government assisted through indirect subsidies, such as tax deductions
for home mortgage interest and the operation of such agencies as the FNMA on
the secondary mortgage market.
n144 This particular mortgage device was initiated during the Depression under the
Roosevelt administration as a way of preventing the financial crises occasioned
by shortterm mortgages with balloon notes, which had contributed to the stock
market crash when banks refused to refinance them. A complex administrative
and regulatory structure was set up to facilitate financial recovery and
stability, the most important institutions being the Federal Home Loan Bank
Board and the Federal Savings and Loan Insurance Corporation. See supra note 4
and accompanying text. The FSLIC has been tapped to the limit by recent bank
failures and a law was recently passed to recapitalize the FSLIC as a
consequence. See infra notes 235-47 and accompanying text.
n145 See, e.g., Depository Institutions Deregulation and Monetary Decontrol Act of
1980, Pub. L. No. 96-221, 94 Stat. 132 (codified in scattered sections of
12 U.S.C. & 15 U.S.C.); Garn-St Germain Depository Institutions Act of 1982, Pub. L. No.
97-320, 96 Stat. 1469 (codified in scattered sections of
11 U.S.C., 12 U.S.C.,
15 U.S.C., 20 U.S.C.
& 42 U.S.C.). Deregulation means S
& L's act more like mortgage bankers or commercial banks. Deregulation means S
& L's will use insured funds in risky ventures and also means that S
& L's will be competing for business with some of the
housing firms upon whose credit they must pass. NAHB, supra note 1, at 62; see also
supra notes 56-67 and accompanying text.
n146 Federal policy in the tax and program financing areas is being based upon the
assumption that other lenders -- mutual savings banks, commercial banks, life
insurance companies, mortgage pools, and secondary market facilities -- will
take a larger role in
housing finance, filling the
"credit gap." Meyerson, supra note 54, at 85-86. But see supra note 65 and accompanying
n147 This is particularly true after the demise of tax syndications premised on the
"passive" losses. See supra note 118 and accompanying text.
n148 See, e.g., Jordan, Settlement Reached In Arlandria Suit, Wash. Post, June 16,
1987, at B1, col. 6 (describing the settlement reached between developers
renovating low income
housing for resale at market rents and the low income tenants they threatened to
displace in the Arlandria Neighborhood, in Alexandria, Virginia. In this
Arlandria dispute, HUD agreed to furnish 348
§ 8 vouchers and certificates and the city agreed to furnish between $ 300,000
and $ 500,000 in rent subsidies. The developers, John Freeman and Conrad
Cafritz, in an out of court settlement, agreed to set aside 68 apartments in
the 275-unit complex at issue where the rent subsidies could be used. For a
reported opinion on plaintiff's standing, see
Brown v. Artery Organization, 654 F. Supp. 1106 (D.D.C. 1987).
n149 Mariano, HUD Will Delay Its Loan Sales, Wash. Post, June 2, 1987, at D7, col.
n150 See infra note 184; see also
Brown, 654 F. Supp. at 1117.
n151 HUD is proceeding to sell $ 500 million worth of low income rental
housing mortgages at discounts as great as 20% off unpaid balances. Some of the
mortgages in question are federally insured loans that HUD took over after the
property owners defaulted, and others are loans made by the Department in order
to sell properties it had taken back after previous defaults. In most cases,
low income residents of the buildings will not be protected against rent
increases after the sales. Mariano, supra note 149, at D7, col. 3.
n152 The House Subcommittee on
Housing and Community Development urged the GNMA to refrain from selling subsidized
mortgages until a solution to the problem of tenant displacement has been
found. Four hundred ten million dollars of
§ 221(d)(3) mortgages was involved. Hovic Panel Backs Delay in GNMA Loan Sale,
Housing Aff. Letter, May 1, 1987, at 8.
n153 One such lawsuit was brought by the National
Housing Law Project (NHLP) in the United States District Court for the Northern
District of California, asking the court to issue a temporary restraining order
preventing the evictions. Sale of the mortgages would have removed the
buildings from HUD's regulatory oversight and tenants would have lost important
protections that they now enjoy because of federal involvement with the
property. Telephone interview with Catherine Bishop, Attorney for the National
Housing Law Project, Washington, D.C. The NHLP successfully sued for a restraining
order in federal district court in California.
Walker v. Pierce, 665 F. Supp. 831 (N.D. Cal. 1987).
n154 Dorius Interview, supra note 133.
n156 See supra note 139.
n157 Present provisions in the H.R. 4 conference bill require 15-year contracts for
§ 8 certificates under the HUD Loan Management program, prohibiting the use of
vouchers under the program. Further Progress Made in Resolving Issues,
Housing Aff. Letter, Oct. 23, 1987, at 5, 6.
n158 See supra note 89.
Housing Aff. Letter, July 24, 1987, at 8.
n160 The option of tenant management and ownership of existing public
housing may be worth pursuing. The
Housing and Community Development Act of 1987 conceives of a public
housing sale program whereby a residential management corporation (RMC) may purchase
housing units as co-ops or under other ownership forms. The RMC would first have to
demonstrate its ability to manage the property for at least three years, with
resale price restrictions required. Public
housing projects could also simply be converted to tenant management, with RMC's
receiving operating subsidies and modernization funds ordinarily available to
housing authorities. The decreasing viability of privately owned, assisted
housing has increased the importance of the existing public
housing stock that provides shelter for 1.35 million families. P. Clay, At Risk of
Loss 15 (1987).
n161 For a brief overview of federal
housing policy in the early 1980's, see Brownstein
& Love, Cracks in the Foundation of Federal Assistance to
10 J. Legis. 297 (1983); Special White Center Project, Federal Budget Cuts in
Housing: Is There No Place Like a Decent Home?,
10 J. Legis. 457, 467-69 (1983).
n162 NAHB, supra note 1, at 37; see supra note 139.
n163 Interest rates, which spiraled upward in the early 1980's, have already begun
to rise again as the value of the dollar falls against the currency of
healthier economies. For a discussion of the economic changes of the 1980's,
see Comment, supra note 118, at 462-67 (1986). See also supra notes 51-67 and
n164 Mariano, supra note 149, at D7, col. 3.
n165 Compare the figures of the Center for Creative Non-violence, approximately 3
million people, with HUD's estimate of 250,000 people. House Committee on
Gov't Operations, The Federal Response to the Homeless Crisis, H.R. Rep. No.
47, 99th Cong., 1st Sess. 7 (1985) [hereinafter Homeless Report].
n166 Other factors include massive deinstitutionalization of mental patients as
part of a community
"mainstreaming" effort that never got off the ground, rising inflation and unemployment,
social service cutbacks, and the Reagan administration's aggressive trimming of
social service eligibility lists. In the last 20 years, hundreds of thousands
of patients have been deinstitutionalized to receive treatment from community
mental health centers. These facilities have not materialized in sufficient
numbers to accommodate the need, often as a result of community opposition.
Many deinstitutionalized patients reach the streets with no shelter, job
training, or counseling services. Id. at 4. The National Institute of Mental
Health estimates that 50% of the homeless may have severe mental disorders.
Inflation and unemployment were partially caused by historic transformations in
American industry and the economy. Unemployment soared between 1979 and 1983
from 5.8% to 9.5%. Business movements into high technology have transformed
industrial workers into unskilled people in need of retraining. From 1970 to
1980, 38 million jobs were permanently lost due to deindustrialization of our
economy. Id. at 5.
Some of the cutbacks in social services eligibility lists were achieved by
reexamining client eligibility in programs such as social security insurance,
disability insurance, Aid to Families with Dependent Children, and food stamps.
According to the Congressional Budget Office, the poverty rate in 1982 was 15%
-- its highest in 18 years -- up from 11.4% in 1978; this added approximately
eight million people to the ranks of the poor. Budget reductions, plus the
removal of beneficiaries through aggressive eligibility rechecking, pushed many
poor people out into the streets. The absence of a fixed address can, in
itself, result in disqualification from some social programs. The lack of a
place to prepare food and the chaotic lifestyle of the homeless can also
complicate securing federal assistance. Id. at 6, 20.
§ 8 Leased
§ 101 Rent Supplements, and
§ 236 Rental
Housing are examples of programs that have been cut or eliminated during the first
seven years of the Reagan administration. Dorius Interview, supra note 133.
housing operating subsidies and
§ 202 loans for the elderly and handicapped are prime candidates for keeping
poor people from becoming homeless. Homeless Report, supra note 165, at 22.
Yet, while homelessness increased, HUD appropriations dropped from $ 1.3
billion in 1979 -- four years after
§ 8 was adopted -- to $ 636 million in fiscal year 1984. Id. at 23.
n168 See supra note 18.
n169 Conversion of single room occupancy (SRO) hotels to condominiums is a direct
link to homelessness and
gentrification. Homeless Report, supra note 165, at 6. The National
Housing Law Project estimates that 2.5 million dwelling units have been lost due to
revitalization projects. An additional 500,000 units are lost every year due
to conversions, abandonment, inflation, arson, and demolition. Id. at 3; see
also Tuttle, Jacobs
& Stipp, Recent Developments in
Housing and Community Development,
17 Urb. Law. 797, 801-02 (1985).
n170 A District of Columbia City Council member has urged landlords of subsidized
housing units to slow their evictions of undesirable tenants. The number of homeless
in the city increased 500% in 1986, from 39 to 245 families. Wheeler, City
Landlords Urged to Slow Eviction Rate, Wash. Post, June 2, 1987, at B2, col. 1.
n171 Homeless Report, supra note 165, at 23.
n172 Id. at 28-29. Some activity is ensuing at the local level.
n173 For example, the Alexandria City Council recently approved a city-funded
n174 For more on the role of local government, see Fernsler, Tuttle, Kessler,
& Walsh, Historical Perspectives, Current Trends and Future
Housing and Community Development,
16 Urb. Law. 683, 690-94 (1984) [hereinafter Fernsler
Housing, supra note 73, at 114.
n176 R. Shiffman, supra note 37, at 3.
n177 Id. at 4-5; 1926 N.Y. Laws 823.
n178 Veterans' Farm and Home Purchase Act of 1943,
Cal. Mil. & Vet. Code §§ 984-987.12 (West 1955) (current version at
§§ 985-987.31 (West Supp. 1987)) (establishing bond financing to enable veterans
to acquire farms and homes); R. Shiffman, supra note 37, at 4.
n179 D. Judd, supra note 1, at 133-34.
n180 See, e.g., Welborn, supra note 1, at 151-52 (citing an 1856 report of the New
York Society for Improving the Conditions of the Poor, which detailed the
negative impact of slums and slum life on the surrounding community); see also
D. Judd, supra note 1, at 33-34 (noting community-wide dangers of fire,
pestilence, disease, lack of safe water supply, and lack of sanitation in
crowded, low income, immigrant neighborhoods of large cities during the
n181 Welborn, supra note 1, at 152. The United States
Housing Act of 1937, Pub. L. No. 75-412,
§ 10(a), 50 Stat. 888, 891-92 (codified at
42 U.S.C. § 1437h (1982)) required a unit of slum
housing to be eliminated for each unit of public
housing created. This connection, however, was made partly to appease private
housing suppliers who feared government competition. D. Judd, supra note 1 at 264.
n182 Pub. L. No. 81-171, 63 Stat. 413 (codified in scattered sections of
12 U.S.C. & 42 U.S.C.).
n183 The 1954 amendments to the 1949 Act provided that slum prevention could be
pursued by redeveloping deteriorating areas and conserving areas in danger of
Housing Act of 1954, Pub. L. No. 83-560, tit. III,
§ 311, 68 Stat. 590, 626, repealed by
Housing and Community Development Act of 1974, Pub. L. No. 93-383, tit. I,
§ 116, 88 Stat. 633, 652 (codified at
42 U.S.C. § 5316 (1982)).
Gentrification is a term used in land development to describe a trend whereby previously
"underdeveloped" areas become
"revitalized" as persons of relative affluence invest in homes and begin to
"upgrade" the neighborhood economically. This process often causes the eviction of the
less affluent residents who can no longer afford the increasingly expensive
housing in their neighborhood.
Gentrification is a deceptive term which masks the dire consequences that
"upgrading" of neighborhoods causes when the neighborhood becomes too expensive for either
rental or purchase by the less affluent residents who bear the brunt of the
Business Ass'n v. Landrieu, 660 F.2d 867, 874 n.8 (3d Cir. 1981).
n185 Welborn, supra note 1, at 152; see, e.g.,
Otero v. New York City Hous. Auth., 484 F.2d. 1122 (2d. Cir. 1973) (contesting racial quotas restricting the number of blacks and hispanics in an
housing project as attempt to
n186 Pub. L. No. 93-383, 88 Stat. 633 (codified in scattered sections of
12 U.S.C. & 42 U.S.C.).
housing for the poor was linked to community development and economic opportunity, so
as to create an attractive environment for the return of the middle class.
Welborn, supra note 1, at 155.
n188 The Community Development Block Grant Program consolidated all federal
programs such as urban renewal, model cities, and the like, and increased the
power of localities to employ federal funds for community redevelopment. The
categorical grant programs that CDBG replaced entailed a much greater degree of
federal intervention and control. Model cities, urban renewal, and other such
categorical grant programs were administered directly by the local office of
HUD, not local government officials. For a discussion of community development
block grants, see Williamson, Community Development Block Grants,
14 Urb. Law. 283 (1982).
n189 By requiring local governments to study and honor their
housing assistance needs, the HAP requirement of the 1974
Housing Act instituted a limitation on local autonomy.
Housing and Community Development Amendments of 1978, Pub. L. No. 95-557,
§ 103(d), 92 Stat. 2080, 2083 (codified as amended at
42 U.S.C. § 5304 (1982
& Supp. III 1985)). As such, the HAP became a bone of contention among local
government, the federal government, and fair
housing advocates, as difficult issues of
housing need identification and resource allocation were confronted in the context of
overall community development. See, e.g.,
NAACP v. Town of Huntington, 668 F. Supp. 762 (E.D.N.Y 1987).
n190 Welborn, supra note 1, at 156.
n191 HUD regulations require spatial deconcentration of the poor. See, e.g.,
24 C.F.R. § 881.206(c) (1981). For a discussion of HUD spatial deconcentration policy and its
gentrification, see Note,
Gentrification, Tipping and the National
11 N.Y.U. Rev. L. & Soc. Change 255 (1982-1983).
Housing and Community Development Act of 1974, Pub. L. No. 93-383,
§ 213, 88 Stat. 633, 674 (codified at
12 U.S.C. § 1439 (1982)). Entitlement cities and small cities are no longer required to
formulate HAP's at the present time. Youmans Interview, supra note 91.
Housing and Urban-Rural Recovery Act of 1983, Pub. L. No. 98-181, tit. III,
§ 301, 97 Stat. 1155, 1196 (codified at
42 U.S.C. §§ 1437(d), 1437o(a)(i)(B) (1982
& Supp. III 1985) and at 24 C.F.R. 850 (1987)).
"Rental rehabilitation" grants are also authorized by
42 U.S.C. § 1437o (Supp. III 1985).
Housing and Community Development Act of 1987 provides $ 150 million for
housing development action grants in fiscal year 1988. A program entailing further
Housing Development Block Grant, is now contemplated by the administration. Local
government recipients would be subject only to outstanding law regarding fair
housing, environmental protection, and the like. Block grants could not support new
construction without being leveraged by debt financing, however. See Milgram,
Housing, supra note 73, at 133.
n195 50th Anniversary, supra note 132, at 10.
n196 H.R. Rep. No. 122, 100th Cong., 1st Sess. 35 (1987) [hereinafter H.R. 4 Rep.].
n197 See Fernsler, Tax-Exempt Financing for
Housing -- HUD and Local Governments in Joint Venture with Public and Private Owners
11 Urb. Law. 429 (1979) (discussion of state use of tax-exempt financing).
n198 Id.; see also NAHB, supra note 1, at 36. The attractiveness of these bonds as
sources of development capital increased dramatically in the context of the
rising mortgage rates in the late 1970's.
n199 At present, sunset legislation terminates mortgage revenue bonds in 1989.
26 U.S.C.A. § 143(a)(1)(B) (West 1987).
n200 The basic analogy is to subdivision exactions. See McDougall, The
15 Rutgers L.J. 667, 686 & n.149 (1984).
n201 The plan is administered by the San Francisco Office of
Housing Production Programs in the Department of City Planning. Lewis, San
Francisco's Bold Attempt to Regulate Growth, Wash. Post, June 13, 1987, at E1,
n202 In Santa Monica, developers are required to contribute up to 12% of project
replacement costs for affordable
housing, transit, employment, and community amenities such as day care. Keating,
Linking Downtown Development to Broader Community Goals, Am. Plan. A.J., Spring
1986, at 133, 136.
n203 Boston's program was initiated in 1983, modeled after San Francisco's
ordinance. The program is implemented by the Boston Redevelopment Authority.
Fees based on a project's square footage are paid monthly to a
housing trust fund for development of affordable
housing elsewhere; alternatively, the developer may provide the requisite affordable
units in lieu of paying his fees. Id. at 136-37.
n204 Precious, D.C. Seeks to Raise Hadid 'Linkage' Fee, Wash. Post, Nov. 14, 1987,
at E1, col. 6.
n205 See McDougall, Regional Contribution Agreements: Compensation for Exclusionary
60 Temp. L.Q. 665, 677 (1987).
Southern Burlington County, NAACP v. Mount Laurel Township, 92 N.J. 158, 456 A.2d 390 (1983). But see
Fairfax County v. DeGroff, 214 Va. 235, 198 S.E.2d 600 (1973).
n207 The Washington State Supreme Court struck down Seattle's linkage program as
unconstitutional on these grounds. See Keating, supra note 202, at 141 (citing
Hillis Homes v. Snohomish County, 97 Wash. 2d 804, 650 P.2d 193 (1982)); Note, Subdivision Exactions in Washington: The Controversy Over Imposing Fees
59 Wash. L. Rev. 289 (1984).
107 S. Ct. 3141 (1987).
Id. at 3150.
Id. at 3148.
n212 R. Shiffman, supra note 37, at 18.
n214 The antipoverty program attempted to foster maximum feasible participation of
the poor. The model, developed during the Kennedy administration, bypassed
local government, where Kennedy was not strong, and went directly to the inner
city communities where he was strong. R. Shiffman, supra note 37, at 11.
Inevitably, confrontations between local citizen groups and local politicians
resulted. These confrontations (and some scandals) facilitated the redirecting
housing resources; conceptions of how the funds should be used (from
"service") reflected the new reality. President Johnson's modification in 1966 -- the
Model Cities program ("demonstration cities") -- funded citizen groups with federal dollars that were channeled through
local governments. Id. Johnson, unlike Kennedy, was connected with regular
party leadership and big city mayors. Id.
n215 The goal of the model cities program was to coordinate development under the
wide variety of categorical grants available at the time -- jobs, health,
housing, and urban redevelopment. NAHB, supra note 1, at 34.
n216 Before the struggles against urban renewal, the poor had been wards of
political machines or supplicants for private charity, relinquishing control
over their own lives in exchange for aid. Some tenement movements antedate
this period, however. R. Shiffman, supra note 37, at 300.
n217 Sviridoff, Urban Neighborhoods -- Past, Present and Future, Youth Pol'y, Sept.
1987, at 3, 5-6. The new approach envisioned active community participation in
the planning, sponsorship, development, employment, and construction phases of
development projects. R. Shiffman, supra note 37, at 23.
n218 Sviridoff, supra note 217, at 5-6.
n219 Telephone conversation with Alice Shabekoff, Director of the Community
Information Exchange, Washington, D.C. (Nov. 11, 1987) [hereinafter Shabekoff
n220 R. Shiffman, supra note 37, at 22; Svirodoff, supra note 217, at 7 (noting
that diminution of federal role has pressed the private sector and state and
local governments into service with spotty but promising results).
n221 Fee for service contracts from local municipalities provide some measure of
support, though this is hardly a
"subsidy." R. Shiffman, supra note 37, at 28.
n222 The Comprehensive Employment Training Act bridged the distance between
complete federal subsidy and the volunteer model. See id.
n223 Shabekoff Interview, supra note 219; see also Mott, The Neighborhood Movement
at a Crossroads, Youth Pol'y, Dec. 1986, at 3, 5. Community organizations
demonstrate an increased sophistication and willingness to deal with city hall
(necessary for development permits, CDBG funds, tax-foreclosed properties, and
the like), and a heightened ability to tap banks and corporations for small
loans for the residential and commercial revitalization of their neighborhoods.
n224 Rouse's well-known entrepreneurial efforts include Baltimore's Inner Harbor,
Boston's Faneuil Hall, and New York's South Street Seaport. See Guenther, Real
Estate, Wall St. J., Vov. 26, 1986, at 23, col. 1. Rouse has also been
involved with Washington, D.C.'s Jubilee
Housing (a community-based nonprofit
housing developer). See, e.g., NAHB II, supra note 71, at 87:
Founded in 1982 by James Rouse, The Enterprise Foundation provides funding and
technical assistance to local nonprofit
housing corporations for rehabilitating or constructing
housing for households with incomes of $ 10,000 or less. It is currently working with
49 groups in 23 cities to help the local groups formulate city-wide solutions
housing problems. In doing so, it seeks models of
housing finance and community development that can be replicated elsewhere.
See also Cohen, Captain Enterprise, Baltimore Mag., Apr. 1987, at 78
(chronicling James Rouse's entry into low income
housing development after retiring from large-scale commerical development).
The Local Initiatives Support Corporation was founded in 1980. LISC's
"goal is to draw private sector financial and technical resources into the
development of deteriorated communities. LISC works through a network of Area
Advisory Committees that help to select projects for investment and to raise
additional funds for local projects." NAHB II, supra note 71, at 87-88.
n225 Kromkowski, Neighborhood Activism: Remembering Geno Baroni, Youth Pol'y, Dec.
1986, at 7.
n226 Pub. L. No. 95-128, 91 Stat. 1111 (codified at
12 U.S.C. §§ 2901-2905 (1982)).
n227 Federally chartered S
& L's must make public the sites where they lend for home purchase and
12 U.S.C. § 2801-2811 (1982
& Supp. IV 1986). The statute's effectiveness has been reduced, however, as S
& L's leave the
housing mortgage business and their place is taken by mortgage banking corporations
that do not require capital transfers from the federal government and hence are
not covered under the statute. The
Housing and Community Development Act of 1987 expands coverage to include such
institutions. Blakely, House Panel OKs $ 17.7 Billion
Housing Plan, 45 Cong. Q. Weekly Rep. 843, 843 (1987). Amendments to the bill when it
was in conference provided for a permanent extension of HMDA coverage of
private mortgage companies that were affiliates of bank and S
& L holding companies (about 2000 institutions), lowering of the company income
threshold at which an institution was required to report under HMDA, and the
inclusion of commercial lending practices within the purview of the Act. Id. at
n228 The community reinvestment plans thus generated amount to over $ 3 billion
worth of development. C. Bradford, Neighborhood Reinvestment: The Legacy and
the Challenge 17 (Nov. 25, 1985) (unpublished paper) (copy on file with U.
Mich. J.L. Ref.). Such figures account for actual reinvestment and do not
include reverses in capital flow due to changes in everyday bank practices.
Id. Such lending also increasingly covers commercial and economic development
as well as residential development. Id. at 18. In Chicago, three banks loaned
$ 55 million for commercial and business development. Id.
In addition to banks, companies such as Aetna and Allstate have gotten
involved, financing the development of
housing, commercial properties, and light industry. Id. at 19. Amoco and Sohio
organized programs in the wake of concern over abusive practices in pricing
home heating fuel. Id.
n229 Id. at 21.
n230 Id. at 22.
107 S. Ct. 2378 (1987) (holding ordinance prohibiting construction in a flood plain area a
n232 Milgram, supra note 3, at 111-13.
n234 In addition to the Competitive Equality Banking Act of 1987 and the
Housing and Community Development Act of 1987, the President has also signed into law
the Stewart B. McKinney Homeless Assistance Act, Pub. L. No. 100-77, 101 Stat.
482 (1987), authorizing one billion dollars for programs aiding the homeless.
n235 Pub. L. No. 100-86, 101 Stat. 552 (to be codified in scattered sections of
12 U.S.C., 15 U.S.C.
& 31 U.S.C.).
§ 302, 101 Stat. at 590 (to be codified at
12 U.S.C. § 1436). The money will be raised by means of a complex borrowing arrangement, whereby
the twelve regional federal home loan banks provide three billion dollars to a
new Financing Corporation, which will in turn use these funds to purchase $ 2.2
billion in zero-coupon treasury bonds with thirty-year payouts, (similar to
savings bonds, with interest deferred until maturity) and also issue $ 10
billion in bonds for sale to private investors. Id.
§ 302, 101 Stat. at 587. The bond debt will be serviced by member S
& L's through deposit levies assessed by the FHLBB and by about $ 800 million in
payouts from the treasury bonds. This recapitalization plan was adopted as an
alternative to a proposed savings and loan industry plan involving thinner
capitalization of the FSLIC and lower assessments on FHLBB member banks. The
conference committee considered this plan inadequate because insufficient funds
were provided to improve the FSLIC's condition. Blakely, Bailout of S
& L Insurance Fund Approved by Senate Banking, 45 Cong. Q. Weekly Rep. 473
(1987). The new law is also an alternative to a proposed FHLBB plan to borrow
$ 750 million from the United States Treasury to help deal with insolvent S
& L's and to pay off depositors. See id. at 473.
n237 Blakely, supra note 236, at 473.
n238 Blakely, Fight Brews Over Bailing Out Ailing Savings Insurance Fund, 45 Cong.
Q. Weekly Rep. 151 (1987).
n241 Blakely, Wright Reverses His Position, Backs Bigger S
& L Rescue Plan, 45 Cong. Q. Weekly Rep. 842, 842 (1987).
n242 Blakely, Proxmire Offers Comprehensive Banking Bill, 45 Cong. Q. Weekly Rep.
n243 Blakely, supra note 236, at 474.
n245 The effect of the new law remains to be seen. If interest rates continue to
rise, disintermediation and consequent S
& L failure will increase. The United States, because of low productivity and
savings rates has become both a debtor and a net importer nation. Foreign
investment is thus needed to finance both our trade deficit and our federal
budget deficit, and if the Federal Reserve keeps interest rates low by
loosening monetary policy, this financing source will diminish. Id.
Higher interest rates, on the other hand, reduce
Housing construction fell for the third consecutive month in May 1987, following
interest rate increases in April stemming from attempts by the Fed to stop the
decline of the dollar on the international market. Forecasts for
housing starts for 1987 thus had to be revised down to 1.6 million new units, a
decline of 200,000 units compared to the 1.8 million units built in 1986. Id.
Foreigners worry that a drop in the value of the dollar relative to their own
currencies will cause them to lose money. In April 1987, the Fed responded to
such fears by increasing interest rates, thereby making investments in the
United States more attractive. Berry, Appointment Draws Praise, Wash. Post,
June 3, 1987, at A1, col. 5, A8, col. 2. Higher interest rates provide a
cushion against losses due to a dollar devaluation. It will be very difficult
for the Fed to reduce interest rates without
"knocking the props out from under the dollar," however, and causing our currency to engage in
"free fall" on the international market. Crutsinger,
Housing Starts Fall Again in March, Wash. Post, June 17, 1987, at F3, col. 1.
n246 Competitive Equality Banking Act of 1987, Pub. L. No. 100-86,
§ 306(h), 101 Stat. 552, 602 (to be codified at
12 U.S.C. § 1730). Healthy S
& L's may qualify as commercial banks eligible to join the FDIC -- a healthy, $
18 billion insurance fund that charges much lower premiums than the FSLIC.
Blakely, supra note 238, at 152.
n247 The Competitive Equality Banking Act provides a
"grandfather clause" by which S
& L's leaving the system before March 31, 1987 do not pay exit fees. H.R. Conf.
Rep. No. 261, 100th Cong. 1st Sess. 157-58, reprinted in 1987 U.S. Code Cong.
& Admin. News 588, 626-27.
n248 133 Cong. Rec. H12,095 (daily ed. Dec. 21, 1987) (recording the vote in the
House on the bill passed in the Senate).
n249 Congress watered the bill down significantly to avoid a presidential veto.
For example, the Nehemiah grant program is now a two year demonstration project
housing development provisions contain
"sunset" clauses that cause them to expire in two years. See
Housing Bill Approval Highlights 1987,
Housing Aff. Letter, Jan. 1, 1988, at 1, 2.
n250 See, e.g., Mariano, Cranston Pushes New
Housing Legislation, Wash. Post, June 27, 1987, at E1, col. 1, E2, col. 3.
n251 S. 825,
§§ 221-235, 100th Cong., 1st Sess., 133 Cong. Rec. H12,047, H12,066-68 (daily ed.
Dec. 21, 1987).
§§ 502, 509, 510, 133 Cong. Rec. at H12,081.
§§ 122, 123, 133 Cong. Rec. at H12,054-57.
Housing Community Development Act of 1987 requires that the administration sell
subsidized properties with restrictions that keep rents low. Id.
§ 181(F)(2), 133 Cong. Rec. at H12,064.
§ 501(a), 133 Cong. Rec. at H12,079.
§ 502(b), 133 Cong. Rec. at H12,080.
§ 118, 133 Cong. Rec. at H12,051.
n258 Dorius Interview, supra note 133.
n259 The ensuing description of the
housing initiatives being undertaken by Senator Cranston's committee is based on a
telephone interview with Donald Campbell, Senator Cranston's Chief of Staff for
Housing Issues, Washington, D.C. (July 30, 1987).
n260 Telephone interview with Professor Langley Keyes, Department of Urban
Planning, Massachusetts Institute of Technology (July 30, 1987) [hereinafter
Keyes Interview]. The Committee has issued invitations to organizations and
institutions in the fields of both market rate and assisted
housing to submit comments for a committee print that will be issued in September.
These comments will in turn supplement a series of twenty papers to be
delivered by various experts in a series of conferences to be held in October
1987 in Washington, D.C. The conference is being arranged by the Department of
Urban Planning of the Massachusetts Institute of Technology (MIT), and is being
funded by the Ford Foundation, the Robert Wood Johnson Foundation, and the FNMA
Foundation. In the meantime, James Rouse of the Enterprise Foundation and
David Maxwell of FNMA are pulling together a network of
housing developers, municipal officials, and low income
housing advocates to prepare recommendations based on the MIT papers. These
recommendations will focus on both market rate
housing affordability and the provision of low and moderate income
housing, and will be presented to the Committee in December. Id.
n261 Id. Senator Cranston favors legislation that will
expand homeownership, particularly for first-time and low-income buyers, and
"provide a stable environment for private investors, financial institutions" and others in the
housing industry . . . [New legislation] must also help low income Americans
housing" by preserving existing apartment buildings and providing
"construction incentives" for development of
housing for groups who need it most, such as the handicapped, elderly, and large
Mariano, supra note 250, at E2, col. 1.
n262 For a general discussion of
housing for the homeless, see Tuttle, Jacobs
& Stipp, supra note 169. See also Homeless Symposium,
31 Wash. U.J. Urb. & Contemp. L. 137 (1987).
The prime obstacle to the development of these models would be local building
codes and growth controls. Some companies might be interested in joint
ventures with Japanese
housing companies that have pioneered in this area, much as American automakers have
joint ventures with Japanese industrialists. According to Ed Quinn of the
Enterprise Foundation, the products of the Cardinal Company of Baltimore, Md.,
"state of the art" in manufactured
housing, and Cardinal is comparable to Japanese companies in capability. Telephone
interview with Ed Quinn, Enterprise Foundation (Aug. 3, 1987); see Peirce,
Filling the Vacuum in
Housing Policy, Wash. Post, June 20, 1987, at F11, col. 2 (summarizing the position of
James Rouse, who suggests that construction costs can be cut
"as much as forty percent" by eliminating architects and independent contractors, conserving usable
fixtures in rehabilitation, and utilizing prefabricated and builders' salvaged
materials. But see Lewis, The Challenge of Designing
Housing For Low-and Middle-Income Families, Wash. Post, Aug. 1, 1987, at E7, col. 1
(challenging Rouse's proposals for diminishing
housing quality). See also supra note 160 (discussion of tenant management and
ownership of public
n263 According to the National Association of Home Builders, these public-private
projects have succeeded where many 1970's federal projects failed:
One common feature is a high degree of tenant involvement, through sweat
equity, use of community-based tradesmen, orientation programs, and designs
that promote socialization and community involvement. Another feature . . . is
a departure from the middle-class standards that were characteristic of the
relatively expensive Section 8 construction in favor of the minimal amenities
viewed as necessary by low-income households.
NAHB II, supra note 71, at 86.
n264 Economic Opportunity Act of 1964, Pub. L. No. 88-452, tit. VII,
§ 701, 78 Stat. 508, 534, repealed by Omnibus Budget Reconciliation Act of 1981,
Pub. L. No. 97-35, tit. VI,
§ 683(a), 95 Stat. 357, 519 (codified at
42 U.S.C. § 9912a (1982)).
12 U.S.C. § 1706e (1982
& Supp. IV 1986).
n266 The distinctive feature of the Nehemiah Project is its large scale --
involving thousands of mass-produced homes, using cost-saving building design,
construction, and materials, on a large parcel of land available at little or
no cost from the municipal government. See NAHB II, supra note 71, at 94. The
Housing Community Development Act of 1987 proposes to duplicate the Nehemiah
experiment on a somewhat smaller scale so that the program is suitable for
small as well as large cities. The essential concept of a project large enough
to achieve significant economies of scale and
"turn a neighborhood around" remains, however. See H.R. 4 Rep., supra note 196, at 95-98; see also S. 825,
100th Cong., 1st Sess., 133 Cong. Rec. H12,047, H12,088-89 (daily ed. Dec. 21,
1987) (discussing tit. VI,
§§ 601-613 of the Act).
Some other examples of community-based projects include: (1) a $ 200 million
public-private partnership to renovate substandard
housing in Chattanooga, Tennessee, underwritten by Rouse's Enterprise Foundation,
Peirce, One City's Plan to Eliminate Slums, Wash. Post, June 13, 1987, at E4,
col. 2; (2) the community-based
housing supply program of the National Low-Income
Housing Coalition (a legislative proposal granting federal funds to community
organizations to finance technical assistance, start-up funding, seed-money
loans and grants, and advances for predevelopment costs), Low Income Hous.
Information Serv., Low Income
Housing Round-up, May 1987, at 2; (3) and the South Atlanta Land Trust (a community
organization acting as a broker for mortgage funds to renovate a depressed
inner city neighborhood, leveraging its activities with CDBG funds from the
City of Atlanta), Low Income Hous. Information Serv., Low Income
Housing Round-up, Dec. 1986, at 1, 5.
For a discussion of Tax Reform Act of 1986 restrictions on the activities of
charitable organizations that might affect the development activities of
community development corporations, see Comment, supra note 118, at 467-93.
n267 Some states are beginning to subsidize
housing more extensively rather than less. NAHB II, supra note 71, at 86 (describing
increased state subsidies including rehabilitation grants and loans, tax
incentives, mortgage insurance programs, and direct interest rate subsidies
such as the SHARP program in Massachusetts).
n268 According to a survey done by the National Association of Home Builders
housing projects are distinguished by a number of features including multiple layers
of subsidy from federal, state, and local governments and from private sources,
relaxation of restrictive regulations, use of innovative building techniques
(thanks to relaxed building codes) and more spartan designs. Such projects
cannot be duplicated on a large scale without significant infusions of federal
money. NAHB II, supra note 71, at 85-86. James Rouse's Enterprise Foundation,
however, has packaged low income
housing without federal subsidy that rents for $ 267 per month, including utilities,
affordable to a family of four earning $ 10,500 per year. Cohen, supra note
224, at 114.
n269 Note that counties and other subdivisions of state and local governments can
independently contract with HUD for the development of federally funded public
housing. See Fernsler
& Tuttle, supra note 174, at 687 (citing
Newbury v. Geauga City MHA, 732 F.2d 505, 510 (6th Cir. 1984)). For state use of tax-exempt financing, see Fernsler, supra note 197, at 429-34.
n270 For a discussion of cooperatives, see Tuttle, Jacobs
& Stipp, supra note 169, at 804-09. A variation on the cooperative is the
Housing (whether multifamily apartments, scattered-site single family houses, or
rowhouses) is owned by the MHA and the
"residents" receive a dwelling unit for life, which they can pass on to their children.
Residents pay a one-time entrance fee of approximately $ 2500, and pay the
equivalent of co-op lease and amortization charges during their tenure. The
fees are used as equity for the MHA to develop more properties. MHA's are the
brainchild of the Neighborhood Reinvestment Corporation (NRC). Members of its
Board of Directors include the Chairman of the FHLBB, the Secretary of HUD, and
the Comptroller of the Currency. Interview with Beverly Hiegaard, Field
Officer, Neighborhood Reinvestment Corporation, (Nov. 12, 1987) [hereinafter
Hiegaard Interview]. NRC's MHA demonstration was authorized by the
Housing and Community Development Act of 1980, Pub. L. No. 96-399, tit. III,
§ 316, 94 Stat. 1614, 1645.
n271 For a discussion of undesirable tenants'
"due process" rights to admission, see Williams, The Future of Tenants' Rights in Assisted
Housing Under a Reagan Voucher Plan: An Analysis of Section 8 Existing
Housing Cases, 23 Urb. Law. Ann. 3, 16-24 (1982).
n272 Each dwelling unit's price includes its potential as a tax shelter, whether
the purchaser can use it for this purpose or not. Owners can subsidize their
monthly payments by means of the deduction for mortgage interest. The
resulting inflated prices affect the entire
housing market. See Waite, The Shattered Dream of American
Housing Policy -- The Need for Reform,
26 B.C.L. Rev. 655, 656, 688-90 (1985). There have been alternatives suggested that would give persons seeking
housing the opportunity to afford it without the astronomical cost of a traditional
purchase. One such proposal is the long-term lease. See Waite, The Long-Term
Lease as an Alternative to Home Ownership: A Proposal, 15 Urb. Law. Ann. 199
Professor Waite suggests such a mechanism would be a positive response to the
financial, use, and social factors that are involved in purchasing property.
These leases would require some minimal level of rent stabilization that would
ensure the tenant some reasonable period of occupancy. The lease may also need
to provide for an increase in the rent over time to give the landlord incentive
to be a party to the lease. Id. at 202.
Other issues would require specific attention in order to make such an
agreement work. For example, the maintenance of the property might need to be
guaranteed by performance bonds, insurance coverage, and rights of inspection
by a designated third party. Id. at 203. Also, improvements made by a tenant
should be provided for in the lease to avoid materialmen's and mechanics' liens
held against the landlord. Id. at 204-05. In addition, legislation may be
required to relieve the landlord from an implied warranty of habitability. Id.
at 207. Such an alternative is advantageous both to the tenant and the
landlord by allowing the tenant a stable
housing payment schedule as well as giving the landlord the same security of having a
rental income for an extended period of time.
n273 Note the remarks of Representative Barney Frank (D. Mass.) regarding new
housing assistance legislation:
"It is extremely aggravating for us to sit here pitting one low income program
against the other, particularly when you look at the money we're wasting on
that stupid S.D.I. [Strategic Defense Initiative] program." Blakely, supra note 227, at 843.
n274 The I.R.S. has recently further restricted home mortgage interest deductions.
Harney, Mortgage Rule Changes, Wash. Post, Oct. 24, 1987, at E4, col. 1, E5,
n275 Low income
housing credits are provided by
I.R.C. § 42 (1986). See also Callison, supra note 118, at 100. See generally Sanders
& Roady, How the New Tax Law Changes the Operating Rules for Real Estate
62 J. Tax'n 22 (1985).
n276 In keeping with this approach, the savings and loan industry would be
gradually phased out and pension funds, insurance companies, corporations, and
state and local governments would take its place as the principal source of
nonfederal funds for financing the development of mixed income, multifamily
housing development. See Peirce, supra note 262, at F11, col. 2 (attractive financial
packages are created by blending below market rate loans, state subsidies,
support of investors, community development funds, backing by such
intermediaries as Rouse's Enterprise Foundation, and cheap acquisition of HUD,
VA, or tax-foreclosed properties).
n277 McDougall, supra note 205, at 677. Note that such linkage and set-aside
techniques might be jeopardized under the Nollan decision. See supra notes
208-11 and accompanying text.
n278 For state use of tax-exempt financing, see Fernsler, supra note 197, at
429-34. See also Note, Municipal Bonds -- North Carolina Enters
Housing Market -- In re
19 Wake Forest L. Rev. 931 (1983) (public purpose challenge to issuance of municipal revenue bonds for
developing moderate income
n279 See supra note 275 and accompanying text.
n280 The mutual
housing association model, discussed supra note 270, is now being used in affluent
communities such as Greenwich and Westport, Connecticut for the development of
housing (in such communities, the price of a new home is nearly $ 300,000). Hiegaard
Interview, supra note 270.
n281 See Nolon, supra note 22, at 275-82 (discussing
housing allowances and cash transfer payments).
n282 Vouchers could be provided for moderate income persons, see Hoeflich
& Malloy, supra note 23, at 685-88, while section 8 subsidies could be provided
to low income persons. Some changes in the federal tax system might also be in
order. Id. at 688-89; see also Williams, supra note 271, at 3-56 (discussing
42 U.S.C. § 8101 (1982); see also Miles, supra note 4, at 55-60. For a description of NRC, see
supra note 270.
42 U.S.C. § 5318 (1982
& Supp. III 1985).
n285 HUD Assistant Secretary Robert Demery recently mentioned that he:
envisions such a fund as the ultimate, long-term solution to spot shortages of
housing and increasing the number of poor families receiving
housing aid. Such a fund . . . would operate on the basis of a partnership between
the federal and state/local governments. Funding would have to be off-budget,
renewable and from a reliable source such as a fee or tax on property
transfers. . . . A public/private board would oversee the fund.
50th Anniversary, supra note 132, at 10.
n286 Peirce, supra note 262, at F11, col. 1. The objective here would be to
subsidize an experiment in order to encourage its duplication, but not overfund
it so that money takes the place of the initiative upon which the project was
based. It is a delicate balance. Keyes Interview, supra note 260.
n287 See Ellison, The Urban Development Action Grant Programs: Using Federal Funds
to Leverage Private Investment in Distressed Communities,
11 Urb. Law. 424, 424-28 (1979).
n288 See Nolon, supra note 22, at 257-74.
n289 See generally Hoeflich
& Malloy, supra note 23, at 684-85 (discussing federal coordination of national
n290 A proposed bill along these lines is presently being drafted for submission to
the Senate Banking and Urban Affairs Committee by the National Low Income
n291 For an interesting proposal regarding the involvement of the GNMA, see Mazer
& Clancy, GNMA Collateralized Municipal Bonds -- A Community Development Tool
for the Future,
11 Urb. Law. 416, 416-23 (1979).
n292 Keyes Interview, supra note 260.
Prepared: January 24, 2003 - 5:02:29 PM
Edited and Updated, January 25, 2003
Kristen A. Stelljes