Tag Archives: low-income

The Community Reinvestment Act: Guilty of What?

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Ray Brescia recently posted the final version of The Community Reinvestment Act: Guilty, but not as Charged to SSRN. The article wades into a seemingly technical debate that has extraordinary political and ideological implications: did misguided liberal policies push financial institutions to engage in the risky lending practices that led to the financial crisis. I never gave this argument much credit because the supposed chain of causation seemed too attenuated to me. Nonetheless, the debate has had legs among some policy analysts. The article generally agrees with my own — admittedly impressionistic — views of the matter. It also argues that the CRA needs to be modernized to reflect how mortgage credit is extended in the 21st century. The abstract reads,

Since its passage in 1977, the Community Reinvestment Act (CRA) has charged federal bank regulators with “encourag[ing]” certain financial institutions “to help meet the credit needs of the local communities in which they are chartered consistent with safe and sound” banking practices. Even before the CRA became law – and ever since – it has become a flashpoint. Depending on your perspective, this simple and somewhat soft directive has led some to charge that it imposes unfair burdens on financial institutions and helped to fuel the subprime mortgage crisis of 2007 and the financial crisis that followed. According to this argument, the CRA forced banks to make risky loans to less-than creditworthy borrowers. Others defend the CRA, arguing that it had little to do with the riskiest subprime lending at the heart of the crisis.

Research into the relationship between the mortgage crisis and the CRA generally vindicates those in the camp that believe the CRA had little to do with the risky lending that fueled these crises. At the same time, recent research by the National Bureau of Economic Research attempts to show that the CRA led to riskier lending, particularly in the period 2004-2006, when the mortgage market was overheated.

This paper reviews this and other existing research on the subject of the impact of the CRA on subprime lending to assess the role the CRA played in the mortgage crisis of 2007 and the financial crisis that followed. This paper also takes the analysis a step further, and asks what role the CRA played in failing to prevent these crises, particularly their impact on low- and moderate-income communities: i.e., the very communities the law was designed to protect. Based on a review of the best existing evidence, the initial verdict of not guilty – that the CRA did not cause the financial crisis, as some argue – still holds up on appeal. At the same time, as more fully described in this piece, an appreciation for the weaknesses inherent in the law’s structure, when combined with an understanding of the manner in which it was enforced by regulators, lead one to a different conclusion; although the CRA did not cause the crisis, it failed to prevent the very harms it was designed to prevent from befalling the very communities it is supposed to protect.

The defects in the CRA that emerge from this review, in total, suggest not that the CRA was too strong, but, rather, too weak. They also point to important reforms that should be put in place to strengthen and fine-tune the CRA to ensure that it can meet its important goal: ensuring that financial institutions meet the needs of low- and moderate-income communities, communities for which access to capital and banking services on fair terms is a necessary condition for economic development, let alone economic survival. Such reforms could include expanding the scope of the CRA to cover more financial institutions, creating a private right of action that would grant private and public litigants an opportunity to enforce the law through the courts, and having regulators enforce the CRA in such a way that will put more pressure on banks to modify more underwater mortgages.

I doubt that this article will be the final word on this topic, both because the existing empirical work seems inconclusive and also because the topic is one that has important ideological implications for the right and the left (‘government caused the financial crisis’ versus ‘corporate greed run amok caused the crisis’). Nonetheless, this article provides a thorough critique of one of the leading empirical studies of the topic.

Housing Policy and Justice

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John Infranca has posted Housing Resource Bundles:Distributive Justice and Federal Low-Income Housing Policy to SSRN. The abstract reads,

Only one in four eligible households receives some form of rental assistance from the federal government. Nonetheless, there is no time limit for the receipt of this assistance; individuals can continue to receive benefits as long as they satisfy eligibility requirements. In addition, individuals who do obtain assistance frequently have higher incomes than those denied it. Beyond simply providing housing, federal rental assistance is enlisted to serve a myriad of additional policy goals — including furthering economic integration and providing access to better neighborhoods — that can exacerbate inequities between those who receive benefits and those denied assistance. These broader objectives often increase the cost of housing assistance and reduce the number of households served.

Given increasingly limited resources and the growing demand for rental assistance, difficult decisions must be made regarding how to satisfy a range of conflicting programmatic goals. Although for at least four decades legal scholars, economists, public policy experts, and politicians have denounced the inequities in existing housing policy, no one has provided a detailed analysis of the specific ways in which this policy departs from norms of distributive justice and of how it might be made more equitable. This Article moves the conversation beyond simply decrying existing inequities and instead carefully analyzes federal housing policy in light of specific theories of distributive justice. Drawing on the philosophical literature, it evaluates the specifics of existing policies, and their distributional impacts, in light of five theories of distributive justice. It then proposes a new structure for federal rental assistance, which would allow recipients to choose among a set of “housing resource bundles.” This approach will not only satisfy the most salient understandings of distributive justice, but will also advance the concerns that underpin other distributive justice theories and allow federal housing policy to more effectively embrace a plurality of programmatic goals.

I was particularly intrigued by one (modest?) proposal:

A commitment to distributing all federal housing assistance to provide for equality of resources would demand that the housing resource bundle approach be put in place for all citizens. Each individual would be limited in the total amount of housing assistance they could receive during their lifetime. All citizens would receive an equal sum of housing resources, either through direct rental assistance or a deduction of mortgage interest (or some combination). This would result in a substantial change in the allocation of resources, resulting in a more equitable distribution of all federal housing assistance. (62-63)

This proposal highlights the extent to which federal housing policy heavily favors upper-income households which benefit greatly from the mortgage interest deduction. The proposal also highlights a limitation of the article.  While it it makes clear that housing policy violates norms of distributive justice, it does not chart a practical course to achieve political change in an environment where the mortgage interest deduction is one of the most heavily protected federal tax expenditures. That being said, the article helps to clarify what is at stake in debates over federal housing policy and provides some intellectual clarity for those who study it.

Here Comes The Housing Trust Fund

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HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)

The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)

Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction.  Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.

So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.

While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..

Who Benefits from the Low Income Housing Tax Credit?

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HUD’s Office of Policy Development and Research has released a report, Understanding  Whom  the  LIHTC  Program  Serves: Tenants  in  LIHTC  Units  as  of  December  31,  2012. By way of background,

The Low-Income Housing Tax Credit (LIHTC) Program provides tax credits to developers of affordable rental housing. The tax credits are provided during the first 10 years of a minimum 30-year compliance period during which rent and income restrictions apply. The LIHTC Program, although established in the U.S. Internal Revenue Code (IRC), is structured such that state-allocating agencies administer most aspects of the program, including income and rent compliance, with the Internal Revenue Service (IRS) providing oversight and guidance. Local administration allows states to address affordable housing needs specific to their populations. (1)

 Here are some findings of note:

  • Approximately three-fourths of reported households include disability status for at least one household member.
  • 36.4 percent of reported LIHTC households had a least one member under 18 years old.
  • Nearly 33 percent of reported LIHTC households have an elderly member, and 28.6 percent of reported LIHTC households have a head of household at least 62 years old.
  • The overall median annual income of households living in LIHTC units was $17,066, ranging from $8,769 in Kentucky to $22,241 in Florida. By comparison, the median income of HUD-assisted tenants was $10,272 in 2012.
  • Approximately 60 percent of reported households nationwide had incomes below $20,000.
  • The study found that approximately 39 percent of all LIHTC households paid more than 30 percent of their income for rent, thus making them housing cost burdened. Ten percent of all LIHTC households faced a severe housing cost burden, paying more than 50 percent of their income towards rent.
  • In 23 states, HUD was able to collect some data on the use of rental assistance in LIHTC units, which can eliminate cost burden for households who have it. Approximately half of reported households receive some form of rental assistance, with the greatest use in Vermont (64 percent) and least use in Nevada (23 percent).

The Housing and Economic Recovery Act of 2008 requires that this information be collected on an ongoing basis. It should be of great value as policymakers formulate federal housing policy for low-income households going forward.

Location, Location, Location of NYC Affordable Housing

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NYU’s Furman Center has released a white paper, Housing, Neighborhoods, and Opportunity: The Location of New York City’s Subsidized Affordable Housing. The report opens,

Rent burdens for low- and moderate-income renters continue to grow in New York City, inviting calls for more affordable housing. While the primary goal in developing affordable housing should arguably be to provide safe housing at a reasonable cost so that households have more residual income available for food, medicine, transportation, and other essential goods, housing programs also take people to particular neighborhoods. New York City neighborhoods provide widely varying access to services and opportunity. Thus, city policymakers need to pay attention not only to the number or quality of subsidized, affordable units produced, but also to the characteristics of the neighborhoods where those units are built. (1)

In order to provide some data about that, the paper examines where 235,000 units of subsidized rental housing are in New York City. Unsurprisingly, many of the units are in neighborhoods like Upper Manhattan, the South Bronx and Central Brooklyn where land costs were historically low.The paper studies important characteristics of neighborhoods where the subsidized housing stock is located: isolation from the rest of the City; student performance; public amenities like parks; public safety; poverty; and housing cost. It also looks at how these characteristics have changed in the 2000s.

One key finding from the report that will be of interest to those who think about how New York City is changing over time: tens of thousands of properties have opted out of affordability restrictions, particularly in more expensive neighborhoods like Manhattan below 96th Street, and it looks like tens of thousands more will opt out over the next decade.

As the Mayor’s team develops its affordable housing strategy of building and preserving 200,000 units of affordable housing, this report presents some sobering data on the affordable housing challenges that the City faces. My takeaway is that the City should be doing more to encourage housing construction more generally to increase the overall supply, in addition to subsidizing affordable housing directly. Subsidies will never create enough units on their own to house all of the people who call and want to call NYC “home.”

Catalyzing Savings

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The Consumer Financial Protection Bureau has announced a Project Catalyst  Pilot to Promote Regular Saving Behavior Among Prepaid Card Users.The pilot involves an American Express product, a prepaid card with a saving feature.

The CFPB’s research study associated with this pilot will explore two major research questions:
1.  Can certain strategies encourage or support regular consumer saving behavior?
2.  Is saving behavior associated with better outcomes for consumers, particularly for
     low-income and underserved consumers?
Within these broad questions, the research goals for this project are to:

>  Gain insight into consumer saving behavior and identify practices that promote saving behavior among prepaid card users

>  Evaluate the impact of saving on consumer wellbeing among prepaid card users (2)

I have been critical of some of the CFPB’s financial literacy initiatives, but this seems like a good one. What is important about this pilot study is that it is not just evaluating whether consumers respond to the product in the expected way — save more, for instance — but whether it has longer-term and more significant effects. Does it help consumers develop saving habits in other contexts? Do those saving habits lead to better outcomes in housing and consumer credit contexts? These are really important questions. If the pilot study helps to answer them, it will be of great value.

Lawyering up for Housing Affordability

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The New York City Independent Budget Office issued an estimate of the cost of providing “free legal representation to individuals with incomes at or below 125 percent of the federal poverty level who are facing eviction and foreclosure proceedings in court . . ..” (1) The IBO nets the cost of this proposal against the potential savings that the City would reap by reducing admissions to homeless shelters. The IBO concludes that this proposal would have a net cost of roughly 100 million to 200 million dollars.

The IBO notes that “there are benefits to reducing evictions that extend beyond the city’s budget, such as the potential for reducing turnovers of rent-regulated apartments, which would slow rent increases for those units, as well as avoiding the long term physical and mental health consequences associated with homelessness.” (1-2)

Seems to me that this is money well spent in 21st century New York City. Market forces are such that landlords can frequently raise rents significantly whenever a tenant leaves.  Unscrupulous landlords harass their tenants in a variety of ways in order to encourage them to leave sooner.  This might be done through the abuse of legal process, with a landlord trying to evict a tenant multiple times when the tenant has not violated the terms of the lease. Or it might be done through improperly maintaining the property, for instance, cutting off the water repeatedly. In either case, though, tenants are being subject to a lot of illegal behavior in this hot real estate market.

Housing court is a mess for both tenants and landlords, but typically only landlords have lawyers to help them navigate it. This proposal would even the field a bit. Mayor de Blasio’s affordable housing goals would be greatly augmented by this proposal.

Perhaps housing court reform should also be put on the table so that these cases are adjudicated equitably, but that is a topic for another day . . ..