Washington loves acronyms and there will be no shortage of them this year. Three of the most important components of housing policy lead the agenda in 2018. Here are my thoughts on each of them.
The Low Income Housing Tax Credit (LIHTC) is the most successful and effective affordable housing production tool in U.S. history. It has consistently enjoyed bipartisan support since its adoption in the 1986 tax reform bill, and has produced over three million units of affordable rental housing located in every state in the nation. When the Trump administration and congressional Republicans issued their Unified Framework in September, it made clear that “it explicitly preserves business credits in two areas where tax incentives have proven to be effective in promoting policy goals important in the American economy: research and development (R&D) and low-income housing.” Yet when the House Ways and Means Committee voted out its tax reform bill, later passed by the full House, it eliminated private activity bonds and the 4% credit, an essential component of LIHTC that could have cost one million units of affordable housing.
Corporate tax rate reduction further depreciated the value of the 9% credit by 20 percent. This latter point could have been mitigated by passage of the Affordable Housing Credit Improvement Act of 2017 which was authored by Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Senator Maria Cantwell (D-Washington), but it was not included in the House bill or Chairman Hatch’s own version. When the tax bill was signed by President Trump in December, as many as 235,000 affordable housing units were lost. Fixing this – and reeducating members of Congress on the tremendous value of the LIHTC as an effective public-private partnership—will be one of NHC’s top priorities. We have been working closely with the ACTION Campaign, and will augment our involvement with our own direct advocacy.
As many of you have heard, the US Treasury Department has been working on a major initiative on modernization of the Community Reinvestment Act (CRA) of 1977. The CRA was enacted in response to concerns over disinvestment in low-income communities and redlining, the practice of avoiding investment in minority neighborhoods. As Americans continued to leave cities for new suburban “bedroom” communities, there was a growing disparity between where banks raised their deposits and where they invested, particularly in housing and mortgage finance. While laws like the Fair Housing Act of 1968 prohibited discrimination, Congress sought to incentivize banks to invest in the communities where their branches were located. A high CRA rating was intended to provide that incentive.
Over 40 years later, the landscape of banking and investment in the United States has changed in major ways, but the CRA has remained essentially unchanged. Interstate banking, mortgage securitization, internet and mobile banking and the resurgence of America’s cities are just a few of the major changes we have seen in the past four decades. Given these fundamental changes, the Treasury Department committed in its June 2017 report to the president, “A Financial System That Creates Economic Opportunities – Banks and Credit Unions,” to “comprehensively assess how the CRA could be improved” through solicitation of input from stakeholders, including banks, regulators and consumer and affordable housing advocates.
Treasury staff has met with over 90 stakeholders, from large banks to local advocates and everyone in between. Last week, Buzz Roberts from the National Association of Affordable Housing Lenders (NAAHL), an NHC member, and I sat down with the Treasury team to discuss several areas they are examining, including the treatment of naturally occurring affordable housing (NOAH) and the capital treatment of affordable rental investments under the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR). Our impression coming from that meeting and other conversations is that the Treasury report:
- Is unlikely to recommend any change to the CRA statute, focusing instead on how to modernize the regulations, guidance and procedures so it better reflects changes in banking that have occurred in the past 40 years, but particularly since the advent of interstate and internet banking;
- Is likely to advocate for greater flexibility for banks to address performance issues that result in downgrades over the course of their assessment period, so they are incentivized to make changes quickly and are not unduly penalized for non-material violations that fall in the purview of other regulators; and
- Will almost certainly note the strong support for CRA across the political spectrum, and among both regulated entities and advocates.
Finally, Congress and the administration are expected to take another run at reform of Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) that have been in conservatorship for nearly ten years. While the GSEs didn’t cause the crisis, their legal structure and consolidation of their customer base contributed to their failure to mitigate it, ultimately costing taxpayers billions of dollars. Many other factors also contributed to the housing crisis, and blame is well distributed in any thoughtful, fact-based analysis. However, fear of lost market share prevented the GSEs from playing the most important role envisioned in their charters: the preservation of liquidity in the capital markets.
NHC supports reform of the U.S. mortgage finance system with a limited, explicit and appropriately compensated government role that encourages private capital participation to ensure reliable access to long-term, fixed-rate single-family mortgages and financing for rental housing nationwide, including support for the production and preservation of affordable housing, a Duty to Serve requirement in the secondary mortgage market and appropriate funding for the National Housing Trust Fund and the Capital Magnet Fund. Any new system must include access to affordable and sustainable mortgage credit to broadly serve homeownership-ready borrowers through a variety of public and private channels, including addressing the homeownership gap for communities of color and the impact of student loan debt on homeownership. And Congress must sustain, strengthen and modernize FHA’s capacity and flexibility to meet the nation’s housing financing needs while protecting the taxpayer’s investment.
In my first meeting with the staffs of Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.), I made clear that we are prepared to work with them to help ensure that these priorities – which I believe they share – are met, and that any legislation adopted by Congress not have unintended consequences that could cripple housing markets. When it comes to housing finance reform, two things are clear:
- The law of unintended consequences will not be repealed. We have to be very careful that we not trade one flawed system for another; and
- The most powerful lobbyist in Washington is Inertia, LLC. Doing nothing is not an option. We must address this issue.
Several thoughtful analyses on GSE reform bill have been written recently. A couple that I found particularly useful were Mortgage Bankers Association president David Stevens’ blog post, “An Open Mind on GSE Reform,” and this white paper prepared by the Federal Housing Finance Agency for congressional staff, entitled “Federal Housing Finance Agency Perspectives on Housing Finance Reform.”
If 2017 has taught us anything about housing policy, it is that everyone for themselves has served none of us well. I’m looking forward to working with our diverse membership to ensure that we effectively defend and invest in #OurAmericanHome in 2018, as we have here at NHC since 1931.