The federal government is the largest source of funding for affordable housing. Federal subsidy programs can provide funds for the construction or preservation of rental housing, rental assistance to tenants or funds to facilitate homeownership. The U.S. Department of Housing and Urban Development (HUD), U.S. Department of Agriculture (USDA), U.S. Department of Veterans Affairs (VA) , the Internal Revenue Service (IRS) and the U.S. Department of the Treasury all play important roles in providing funding for housing programs. Most HUD programs focus on affordable rental housing, though some programs can be used to assist both renters and homeowners. The Federal Housing Administration (FHA) within HUD provides low down payment mortgages for homeownership as well as for multifamily lending products. The IRS administers the mortgage interest deduction, which is a key program supporting homeownership at the federal level. The IRS and Department of Treasury administer the Low- Income Housing Tax Credit, the primary rental housing production program for the federal government. USDA programs support affordable rental housing and homeownership. The VA provides supportive services in partnership with HUD in the HUD-VASH program, providing housing vouchers to homeless veterans. The VA also provides home loans to veterans and offers other homeless assistance to veterans.
Federal funding for affordable housing is incredibly important given that in 2014 the number of cost-burdened renters—those paying more than 30 percent of their income for housing—reached a record high of 21.3 million. Federal funding is also insufficient to meet the need; only one in four households eligible for federal rental housing assistance receive it.
Low-Income Housing Tax Credit
The largest source of federal funding for new development of affordable rental homes is actually provided not by HUD but through the Low-Income Housing Tax Credit (LIHTC) administered by the Internal Revenue Service as part of the tax code. The LIHTC provides a dollar-for-dollar reduction in federal income tax liability up to the maximum value of the credit, which is typically passed on to investors in exchange for upfront capital used to cover development or acquisition and rehab costs. The Low-Income Housing Tax Credit program has produced over 2.8 million units of housing. Unlike public housing and properties that receive project-based assistance, discussed below, families that live in tax credit units are expected to pay a flat rent irrespective of their incomes. LIHTC is unique among federal housing programs in that the private sector and states are the primary actors. States and investors provide the monitoring and oversight, not HUD. The program provides a financial return to investors, and advocates of the program cite this independence and business approach as strengths of the program that make it efficient and well-run.
There are two types of Low-Income Housing Tax Credits: allocated 9 percent credits and 4 percent credits that accompany tax-exempt bond financing. These credits provide a tax credit on the qualified basis of an eligible property for 10 years. In most states, competition for 9 percent credits has traditionally been very strong; during the economic downturn, the market for tax credits suffered. However, the market for LIHTC has recovered strongly, and competition is again heavy for tax credits in most states. Four-percent credits, by contrast, are awarded automatically to qualifying projects that receive tax exempt bond financing.
Housing Choice Vouchers (formerly known as Section 8 vouchers or tenant-based housing vouchers) allow families to select rental homes of their choice, generally in the private market, and use the voucher to make up the difference between what they can afford and the actual rent charged by private landlords (up to a specified rent ceiling). The voucher program is the single largest federal housing subsidy program today for low-income families. It is administered at the local level by public housing authorities (PHAs) and other state or local agencies, with oversight by HUD. Roughly 2.2 million families in the United States have housing vouchers. The wait list for housing choice vouchers can be years long, and many PHAs have closed their wait lists.
PHAs also have the option to convert HCVs into project based vouchers. These project-based subsidies reduce the operating costs of specific housing developments for a specified period of time, up to 20 years. This program continues to operate at the discretion of local PHAs and is subject to various statutory limits; one limit is that public housing agencies can use up to 20 percent of the funds in its HCV program to provide project-based assistance plus an additional 10 percent of its vouchers to assist certain types of households (formerly homeless people, veterans, persons with disabilities or elderly persons) or in areas where vouchers are difficult to use. PHAs are also not required to use their HCV funds for project based vouchers. Among other things, project based vouchers can be used to allow a modest portion of a Low-Income Housing Tax Credit development to serve extremely low-income families. Unlike project-based Section 8, project based vouchers can support new construction projects.
Project-based rental assistance (PBRA) Section 8 is the largest program that provides rental assistance to privately owned projects. Eligible residents make rent payments that are equivalent to about 30 percent of their household income, and HUD pays the balance of the contracted rent directly to the landlord. When the family moves, the subsidy remains with the unit. The federal government no longer funds the construction of new project-based Section 8 developments, but the program continues to provide affordable homes for about 1.5 million households through ongoing rental assistance.
Section 202 Supportive Housing for the Elderly Program
The Section 202 Supportive Housing for the Elderly Program was created to fund nonprofit organizations to develop and operate housing for very low-income adults over the age of 62. Currently, there are approximately 400,000 Section 202 units. Congress stopped providing funds for Section 202 construction in 2011, so no additional units have been created since then. The need for senior affordable housing is increasing, making the preservation of existing Section 202 units essential. Additionally, through HUD, the program funds service coordinator positions in 202 developments and is exploring housing and service models that utilize service coordinators to enhance the ability of residents to age in place. This 202 Demonstration program will include setting aside units for the elderly in HUD-assisted multifamily housing, including LIHTC developments. The Notice of Funding Availability was released and HUD received a large number of applications; as of July 2016, awards had not been announced.
Section 811 Supportive Housing for Persons with Disabilities
Initially part of the Section 202 program, Section 811 funds support the development and operation of supportive housing for severely disabled low-income households. In 2010, Congress made significant reforms to the program, creating a competitive Section 811 Project Rental Assistance (PRA) Program for state housing agencies, which replaced the capital advance program. State housing agencies apply to HUD for 811 funds that integrate permanent supportive housing by setting aside housing units in affordable properties funded through the Low-Income Housing Tax Credit program, HOME or other state, federal or local sources. Under the new program, state housing agencies partner with medical and service providers in order to provide service for low-income people with disabilities living in the integrated units.
Public housing is housing provided by local public housing agencies, overseen by HUD, that build and/or own and operate affordable housing developments. In general, residents of public housing pay 30 percent of their monthly income for rent, and waiting lists to get into a unit can be long. There are approximately 1.1 million units of public housing. The federal government no longer funds the development of new public housing, but existing developments continue to receive HUD subsidies through two funding streams: the Operating Fund, which helps to cover the gap between residents’ rent payments and the costs of operating the building, and the Capital Fund, which can be used for modernization and major repair needs. However, the backlog of capital needs for public housing is significant, last estimated at over $26 billion. A number of programs have been implemented to try to address some of the capital needs of public housing, including HOPE VI, Choice Neighborhoods and the Rental Assistance Demonstration program.
HOPE VI was created in 1993 as the Urban Revitalization Demonstration program, prompted by the conclusions of the National Commission on Severely Distressed Properties. Its central purpose was to redevelop distressed public housing (which the Commission referred to as “the national disgrace”) and break up concentrations of poverty by replacing the existing public housing with higher quality, mixed-income communities. The program provided funding to cover the capital costs involved in demolishing existing housing, fund Section 8 vouchers, and help support community development efforts like job training and day care.
The ultimate impact of HOPE VI has been mixed. Over its lifetime, hundreds of HOPE VI grants were made to dozens of communities, demolishing and rebuilding thousands of housing units. In terms of redeveloping public housing units, HOPE VI can be considered a success. However, there was no guarantee of a one-to-one replacement, leading to a net loss of public housing units for very-low income households. HOPE VI also displaced many families and had a low return rate.
Choice Neighborhoods Initiative
The Choice Neighborhoods Initiative (Choice) was introduced in 2009 to expand and build upon the original goals of HOPE VI. It continues its precursor’s mission of supporting the redevelopment of distressed public housing through the use of public-private funding partnerships. Where Choice diverges from HOPE VI is in funding for neighborhood improvement projects, such as transportation infrastructure, supportive services for residents, and development of commercial districts to also pursue a broader goal of neighborhood revitalization. Another significant difference between Choice and HOPE VI is that Choice requires one-for-one replacement of demolished public housing units, a reflection of the frustration that many groups had with HOPE VI’s impact on the reduction of public housing stock. It has so far received $722 million in funding since its initial authorization.
Rental Assistance Demonstration
The Rental Assistance Demonstration (RAD) is a voluntary demonstration project first authorized in the appropriations act for fiscal year 2012. Its purpose is to allow public housing agencies (PHAs) and owners of privately managed HUD-assisted housing to leverage Section 8 contracts to utilize private financing for capital improvements. The Demonstration was originally limited to 60,000 units, but this limit was increased in the fiscal year 2015 appropriations act to 185,000. This higher limit was reached in December of 2015.
In RAD, public housing units are redeveloped and converted to private rental units and the PHA contracts with the private buildings owners to rent the units to eligible households utilizing either project-based vouchers, (PBV) or project-based rental assistance (PBRA). Both of these conversions require that the building is owned by either a government agency or a nonprofit organization along with contracts (with required renewals) for 15-20 years for PBV or 20 years for PBRA. Once the properties are no longer owned and managed as traditional public housing, owners can then borrow against the properties. The money raised from this can be used to make capital improvements that would otherwise require an increase in funding appropriations.
The trend in all three of these programs (HOPE VI, Choice, and RAD) is a shift towards leveraging private capital for the redevelopment of federally funded affordable housing. This is meant to increase the resources available to maintain affordable housing while avoiding any increase in funding appropriations.
Mortgage Interest Deduction
Administered by the IRS, this federal income tax deduction for mortgage interest allows homeowners to deduct the amount of interest paid on their mortgage when they file their taxes to reduce the cost of owning a home. To obtain the benefits of the mortgage interest deduction, families have to earn high enough incomes to justify itemizing their deductions on their tax returns (as opposed to taking the standard deduction). For this reason, many low-income homeowners do not receive the benefit of the deduction.
Federal Housing Administration (FHA)
The federal government also supports homeownership through the Federal Housing Administration (FHA). The FHA is a mortgage insurer; it does not originate loans to homebuyers but instead insures loans made by private lenders. Typically, the agency serves borrowers that need low down-payment loans, such as first-time homebuyers and low- and middle-income families. FHA helps expand access to mortgage credit, and in times of economic downturn, the FHA also plays an important role by keeping mortgage credit flowing. Additionally the FHA provides mortgage insurance on mortgages to support multifamily development, including apartments, manufactured homes and hospitals.