Dateline: Dec. 9, 2008, Washington, D.C., former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron are summoned before Congress to explain documents released by the House Committee on Oversight and Government Reform that suggest the agency chiefs disregarded staff recommendations to avoid risky lending practices. Across town at the National Press Club, former U.S. Department of Housing and Urban Development (HUD) secretaries Jack Kemp and Henry Cisneros call for fair housing enforcement to be stripped from HUD’s purview, arguing that the department has conflicts of interest impacting its enforcement record. That poor record, Kemp and Cisneros say, is tacitly fueling the foreclosure fire and promoting racial segregation via federal housing policy. Up the street, at the headquarters for the National Association of Home Builders, association president and CEO Jerry Howard announces an $11.5 million budget cut and the elimination of 52 positions.

In case you missed it, Dec. 9 offers a microcosmic view of one of the country’s most critical and pervasive realities: The health of housing in America sucks. In 2008, the number of single-family home foreclosures hit 2.2 million, according to the Washington, D.C.-based Mortgage Bankers Association. Despite measures to contain the crisis—including passage of the $700 billion economic bailout bill in October—credit markets remain virtually frozen. Meanwhile, U.S. employers responded to the economic crisis by shedding 12 million positions, and consumer confidence plummeted to an all-time low in October before rebounding slightly following Barack Obama’s election to the White House.

Home foreclosures are one of the most visible symbols of the economy’s collapse and are expected to remain top of mind in 2009. In announcing Shaun Donovan as the secretary of HUD, President Obama pointed at the one in 10 families currently enduring mortgage distress and commented that “to end this economic crisis, we must end the mortgage crisis where it began.” For many, that may signal a shift in policy, as ushered in by Donovan. Lauded by many in the industry, Donovan brings hands-on multifamily experience from his tenures both as the HUD deputy assistant secretary for multifamily during the Clinton administration and as commissioner of the New York City Department of Housing Preservation and Development, where he was responsible for executing Mayor Michael Bloomberg’s plan to build and preserve 165,000 housing units for half a million New Yorkers. Donovan’s appointment has multifamily policy watchers hopeful that affordable housing, the low-income housing tax credit (LIHTC) markets, the future of government mortgage agencies Fannie Mae and Freddie Mac, and even green building will figure largely into the first significant changes to American housing policy in the 21st century.

Long-Term Care: Agency Reform

Whether dealing with HUD or Fannie and Freddie, most believe the administration’s first order of business should be a sweeping overhaul. “Right now, we need housing—multifamily and single-family—as priority No. 1 and not the same-old, same-old, just-put-somebody-in-place approach,” sums up Guy Rankin, director and CEO of the Harris County Housing Authority, a HUD success story that oversees some 1.1 million residents in the Houston metro area. “The director needs to be one of the most innovative executives in the housing industry that we have ever seen. He needs to essentially Hope VI all of HUD—rebuild it from the ground up and from the inside out so HUD is sitting at chair No. 4 or No. 5 and not chair No. 13 at the back of the cabinet.”

In addition to Cisneros’ and Kemp’s disapproval of fair housing enforcement practices at HUD, the agency continued to face criticism regarding its accounting practices and allegations of political cronyism under the Bush administration, culminating in the April 2008 resignation of HUD secretary Alphonso Jackson. According to “What The Next President Should Know About Housing and HUD,” a policy paper developed by MFE’s sister publication Affordable Housing Finance and endorsed by Cisneros and industry leaders such as National Multi Housing Council president Doug Bibby and Harvard University’s Joint Center for Housing Studies director Nicolas Retsinas, giving HUD an “extreme makeover” must be the country’s chief housing policy line item.

Specifically, the paper recommends that more decision-making be delegated to HUD field offices, staff levels be increased, and training efforts improved. The paper additionally calls for an empowered inspector general to quickly curb waste and cronyism. “It is very hard for any politician to step in and fix the problems that other politicians have created,” says the paper’s primary author Andre Shashaty, who expects the Obama administration to address the foreclosure crisis first. “The low-income housing tax credit [program] and affordable housing as a whole have got to be higher on the agenda than it was during eight years of the Bush administration. It can’t be worse.”

Signs indicate this shift may happen sooner than we think. Multifamily attention has been in high gear at Fannie Mae and Freddie Mac, the government-sponsored mortgage agencies that were brought under a $200 billion Treasury Department conservatorship Sept. 8 to ensure financial solvency. At the time of the takeover, the GSEs had combined losses of $14.9 billion and concerns about their ability to continue to raise capital and debt threatened more disruption in the foundering housing market. Even as subprime lending and the resulting foreclosure crisis threatened most of the agency’s core business units, multifamily lending has continued to shine for both Fannie Mae and Freddie Mac. Fannie Mae, in particular, expects 2008 multifamily lending volumes to surpass 2007’s record year of $60 billion.

Still, worries persist that the agencies’ broader woes could have an impact on their multifamily lending businesses, particularly from a total dollar volume and cost standpoint. “The conservatorship created a total debt ceiling that Fannie and Freddie can incur,” complains Jeff Friedman, chairman, president, and CEO of Richmond Heights, Ohio-based REIT Associated Estates Realty Corp. “The debt ceiling has to be lifted on the agencies so they can continue to provide long-term financing to qualified borrowers.”

Friedman, a GSE borrower for 30 years, says for every 25-basis-point increase in agency debt on a multifamily property with 95 percent occupancy, he has to raise the rent $11 per unit. With an average 200-basis-point jump since the conservatorship was announced, that’s $88 per unit, which Friedman says is impossible in the current economy. “Our average rents are $843 a month, and we are lucky in this environment to get 3 percent rent growth,” he says. “That’s $25 per month. The government must recognize that it needs to do what it can without jeopardizing economic balance sheets.”

Primary Care: LIHTC

In addition to improving the cost and availability of debt via the GSEs, most policy watchers think the federal government needs to take action to improve affordable housing finance. The recession, which effectively sucked away corporate profits, took with it any semblance of interest in the LIHTC program. In particular, longtime LIHTC buyers Fannie Mae and Freddie Mac have virtually abandoned the market, leaving LIHTC credits currently fetching historically low prices.

Affordable housing developers argue that few projects pencil out to that type of financial underwriting and suggest that the government might be willing to offer additional corporate incentives to make the tax credits more attractive to investors. Common solutions include shortening the maturity period of the tax credits and offering a five-year “look back” that would allow corporations to apply the credits to prior year tax burdens. “The LIHTC markets are clearly in the doldrums and need to be made more robust, even as the debt markets are addressed,” says Steve Ryan, a partner at San Francisco-based real estate law firm Cox, Castle, and Nicholson. “You can work around the edges of housing policy, and that’s great, but until you address those two things, it is going to be difficult to get things back to where they need to be. Whether that means letting people carry back the credits or shortening the credit period from 10 years to five years. Those are easy, quick things that I would be telling the government to do right now.”

Others suggest the Fed take even more direct measures. “Instead of a tax credit, it would be equity in the form of a direct federal appropriation but still run the same way through the state housing finance agencies,” offers Julie Gold, president of Denver-based Mercy Housing. “It might be a reduced program, but it is still an answer to what we are going to do with all of the folks who are being foreclosed upon and need affordable rental housing.”

One item to watch for in 2009: Fannie Mae’s backlog of developed tax credit projects, which the agency could try to sell for much-needed cash. Those seasoned credits would directly compete with projects yet to break ground, which affordable housing advocates find troubling. “For an investor, those projects would be more attractive from a risk standpoint, and there is a push by developers to have Fannie Mae hold off on that,” says Laura Archuleta, president of Irvine, Calif.-based affordable housing developer Jamboree Housing. “Not only was Fannie Mae half of the LIHTC market, but to then [dilute the market] with seasoned tax credit projects would really harm our investment climate for next year.”

Preventative Medicine: Codify Green

As if rebuilding a cabinet department and ensuring the financial solvency of the country’s two largest mortgage companies wasn’t enough, policymakers are likely to turn a critical eye toward green building. Some localities are already offering expedited permitting and entitlement processes for projects with a demonstrable green focus, and the National Association of Home Builders’ National Green Building Standard is expected to be embraced into building codes once the standard emerges from the ANSI certification process.

Codifying some type of green building standard would be one way to ensure a more holistic approach to sustainability among developers who have yet to see any serious financial incentives for going green. “Whether it is transit-oriented, green building, or higher density, there are no incentives,” says Rohit Anand, managing partner and residential practice group leader at Boston, Mass.-based architectural firm Cubellis. “It’s just not there to the extent that a developer can make it work.”

Incentivized or not, Linda Bernhard recommends her clients apply and document higher levels of energy-efficient construction now, arguing that federal action and codification of one or more of the existing standards is inevitable. “I think the Obama White House has signaled an interest in ultimately focusing on green,” says Bernhard, who represents single-family, multifamily, and commercial developers as a lawyer, land use consultant, and managing director of Land Use and Regulatory Affairs at Loeb & Loeb in Los Angeles. “Five years down the road, if you have not done something green—whether it was required or not—you’ll have to address these energy issues.”

Ultimately, progressive policy changes, particularly as they apply to multifamily housing, might be on hold until the primary goal of righting the economy and halting the rampant pace of foreclosures is accomplished. Though optimistic, seasoned Washington players caution not to expect monumental policy shifts overnight. “From experience, changes in the administration are never better as much as they are different,” NMHC’s Bibby counsels. “There will be different challenges, and they will look at housing in different ways with different expectations. Governments all have their challenges—we just have to adapt.”


Permanent Trust

Schwarzenegger calls for permanent financing of the state’s affordable housing trust fund

California voters have long supported affordable housing, particularly when it comes to bond financing for large trust funds such as the $2.85 billion fund authorized by Proposition 1C in 2006 and the $2.1 billion in funds doled out under 2002’s Proposition 46. The only problem is that when the funds run out, affordable housing advocates are effectively back at square one, lobbying for new bond measures. With support from Gov. Arnold Schwarzenegger’s office, that could change if the state legislature adopts permanent financing “There is a huge push within the governor’s office to create a permanent source for a housing trust fund that I think we will see rolled out sometime in the first quarter,” says Laura Archuleta, president of Irvine, Calif.-based Jamboree Housing. “Obviously, it is a rough time to roll that out given California’s budget shortfalls. But it is a priority with direction from the governor’s desk straight to the housing and community and development director. We are looking forward to it.”

Archuleta says the permanent financing will likely be sourced from several avenues that could involve transfer, connection, and other entitlement and development fees, with the exact breakdown determined by the state legislature. “That’s a matter of narrowing down and quantifying what legislative changes need to take place for the trust fund to become permanently funded,” Archuleta says.


Time Out: Florida

Sunshine State creditors answer governor's call for temporary moratorium on foreclosures.

National policymakers searching for a way out of the foreclosure crisis might do well to keep an eye on Florida, where industry associations for the 312 banks and 188 credit unions reached a December 2008 agreement with Gov. Charlie Christ for a 45-day moratorium on primary residence foreclosures. Christ lobbied extensively for the moratorium. “I applaud these bankers and lenders for giving people hope during this challenging economic time,” Christ said in announcing the deal. “Struggling families should rest easier knowing that these lenders have heard the pleas of homeowners.”

Under the voluntary moratorium agreement, the Florida Bankers Association and the Florida Credit Union League asked members to voluntarily cease filing new foreclosure petitions and also halt the scheduling of foreclosure sales. Most banks are taking that volunteerism to heart. Marshall & Ilsley, for instance, extended the moratorium on its own foreclosures for a period of three months and will also apply the moratorium to foreclosures in other states where the bank does business, including Arizona, Indiana, Minnesota, Missouri, Nevada, and Wisconsin. According to the governor’s office, Florida had the nation’s third-highest foreclosure rate in 2008, with more than 166,600 households being impacted by foreclosure activities through the first three quarters of the year alone.


Lone Star Sustainability

Texas looks to incorporate green building into code revisions born out of Hurricane Ike.

Last year, in the throes of an economic recession and amidst the run-up to an historical presidential election, many Americans barely tuned into news regarding Hurricane Ike, the third most destructive hurricane in U.S. history, when it made landfall on Sept. 1, 2008. Large portions of Houston were without power for three weeks, and coastal areas such as Galveston, Texas, continue to rebuild in the wake of the storm. To ensure base thresholds to withstand future hurricanes, the Harris County Housing Authority is authoring a Category 3 protection code for the entire Texas Gulf Coast that it hopes to submit to the state legislature in the first quarter of 2009. In addition to storm protection codes modeled after those in North Carolina and Florida, HCHA is incorporating green building guidelines into its code revisions, according to HCHA CEO and director Guy Rankin.

While full details of the green standard are yet to be determined, Rankin is hopeful that sustainability features will be included by any code measures adopted statewide. “Texas may, for the first time, adopt a building code that is similar to Florida in its Category 3 protection, provides temporary last-resort refuge shelters for people unable to evacuate, and also mandates green building standards,” Rankin says. “It’s the most exciting thing that is going on this year in terms of new housing policy developments in Texas.”