Tag: affordable housing

HUD’s ‘Wastelands’

A year-long investigation by the Washington Post into the Department of Housing & Urban Development’s HOME affordable housing program uncovered systemic waste, fraud, and abuse. The tale is yet another example of why the federal government should extricate itself from housing policy and allow the states to chart their own course.

The piece is lengthy and should be read by interested readers in its entirety, so I’ll just excerpt the Post’s findings:

  • Local housing agencies have doled out millions to troubled developers, including novice builders, fledgling nonprofits and groups accused of fraud or delivering shoddy work.
  • Checks were cut even when projects were still on the drawing boards, without land, financing or permits to move forward. In at least 55 cases, developers drew HUD money but left behind only barren lots.
  • Overall, nearly one in seven projects shows signs of significant delay. Time and again, housing agencies failed to cancel bad deals or alert HUD when projects foundered.
  • HUD has known about the problems for years but still imposes few requirements on local housing agencies and relies on a data system that makes it difficult to determine which developments are stalled.
  • Even when HUD learns of a botched deal, federal law does not give the agency the authority to demand repayment. HUD can ask local authorities to voluntarily repay, but the agency was unable to say how much money has been returned.

In a Cato essay on HUD community development programs, I cite similar examples of HOME funds being wasted. And an essay on HUD scandals shows that mismanagement and corruption in federal housing programs is hardly new. Indeed, a follow-up story from the Post that focuses on related affordable housing shenanigans in the DC area explains that housing speculators who bilked HUD in the 1980s are involved in the current troubles:

All three were convicted in a scheme in the 1980s that involved getting straw buyers to purchase properties in the District at inflated prices using fraudulent appraisals. HUD backed the loans and ultimately lost millions of dollars. The Post called it the largest real estate fraud of its kind in the city’s history; about 30 people were convicted.

The response from Congress to the Post’s expose isn’t any more surprising than the findings: it’s time for a probe! This is where members of Congress point the finger at everybody else except themselves, promise to “fix” the problems, and pay lip-service to the concerns of taxpayers.

From the statement issued by Senate Banking Committee chairman Tim Johnson (D-SD) and ranking member Richard Shelby (R-AL):

We are deeply concerned by these reports, particularly at a time when so many Americans are in need of affordable housing. Many communities across the country have successfully used HUD programs to create vital housing opportunities for their citizens. However, the Department of Housing and Urban Development, like any government agency, has a duty to safeguard taxpayer funds. The Committee takes its oversight responsibilities very seriously, and we plan to get to the bottom of this issue.

Republicans are having a difficult time naming federal programs to abolish, while Democrats would have us believe that only the federal government can take care of the “less fortunate.” For Republicans who are serious about spending cuts, HUD’s latest black eye offers an opportunity to challenge the existence of federal housing programs. For Democrats, well, perhaps one or two will start to question the sanctity of these programs.

Short-Sighted Rules for Affordable Housing

The state of Maryland wants more people to have affordable housing – at least if they’ve already got it. Concerned that the owners of mobile home parks might sell the land for other uses, “affordable housing advocates” succesfully lobbied Maryland legislators this year for

legislation that, they say, discourages owners of mobile-home parks from selling their properties. If the landowner does sell, it provides the homeowner with some protection.

Under the law, which was passed earlier this year, a mobile-home park owner who wants to sell and change land use must give written notification to the residents and provide displaced homeowners with a relocation plan and relocation assistance that equals 10 months’ worth of rent. The legislation applies to mobile parks with more than 38 sites.

Now the first thing to be said about this is that it is theft. That’s become so common in legislatures that we’ve become accustomed to it. But we shouldn’t lose sight of what happened here: Some people spent their own money to buy land. They rented that land to people with mobile homes, who knew that they were not buying the land, they were just renting a place to park their mobile homes. (The word “mobile” might be a tipoff that they’re made to move.) And then the government took away the owner’s right to change the use of his land. The owner could still sell it, of course, as long as he gives written notification of his plans, provides the renters with a “relocation plan,” and pays them 10 months’ rent to leave his land. That’s a huge burden; the government has simply appropriated much of the value of the owner’s land.

But there’s an obvious long-term consequence here, too, one that the Washington Post didn’t get to in its 1000-word story. What’s going to occur to a landowner as she reads this story? She’s going to think, if I allow anyone to park a mobile home on my property, I’ll be permanently harnessed to that tenant, like a medieval serf. So maybe I’d better not rent any space to a mobile home owner. But then she’s going to think a bit further: What about other kinds of affordable housing? If I build inexpensive apartments or bungalows, and rent them to people who need affordable housing, will the state of Maryland decide that I shouldn’t be allowed to change the use of the land or sell it? After all, wealthy Montgomery County, Maryland – which doesn’t have many mobile homes – does have a 20-page handbook of rules and restrictions for any owner who might want to convert an apartment building to condominiums, including the county’s right to buy the land and a guarantee of lifetime tenancies for low-income elderly tenants. William Tucker pointed out in a 1997 Cato paper how rent control laws usually had to be followed by condo conversion restrictions, as building owners tried to find some way to make a profit on their buildings. And then of course the whole series of attempts to “protect” affordable housing leads to housing shortages and sky-high rents.

If you want people to supply affordable housing, it’s probably a good idea not to pile taxes, restrictions, and threats of confiscation on the backs of those who do.

Cisneros Rewriting HUD History

In a recent speech to real estate interests, former Clinton HUD secretary Henry Cisneros preposterously claimed that the recent housing meltdown “occurred not out of a governmental push, but out of a hijacking of the homeownership process by some unscrupulous interests.”

The only criticisms Cisneros could muster for the government’s housing policies over the past 20 years were that regulations weren’t tough enough and it should have focused more on rental subsidies.

The reality is that Cisneros-era HUD regulations and policies directly contributed to the housing bubble and subsequent burst as a Cato essay on HUD scandals illustrates:

  • Cisneros’s HUD pursued legal action against mortgage lenders who supposedly declined higher percentages of loans for minorities than whites. As a result of such political pressure, lenders begin lowering their lending standards.
  • On Cisneros’s watch, the Community Reinvestment Act was used to pressure lenders into making more loans to moderate-income borrowers by allowing regulators to deny merger approvals for banks with low CRA ratings. The result was that banks began issuing more loans to otherwise uncreditworthy borrowers, while purchasing more CRA mortgage-backed securities. More importantly, these lax standards quickly spread to prime and subprime mortgage markets.
  • The Clinton administration’s National Homeownership Strategy, prepared under Cisneros’s direction, advocated “financing strategies, fueled by creativity and resources of the public and private sectors, to help homebuyers that lack cash to buy a home or income to make the payments.” In other words, his policies encouraged the behavior that he now calls “unscrupulous.”
  • Cisneros’s HUD also put Fannie Mae and Freddie Mac under constant pressure to facilitate more lending to “underserved” markets. It was under Cisneros’s direction that HUD agreed to allow Fannie and Freddie credit toward its “affordable housing” targets by buying subprime mortgages. Fannie and Freddie are now under government conservatorship and will cost taxpayers hundreds of billions of dollars.

Cisneros now serves as the executive chairman of an institutional investment company focused on urban real estate. Might that explain why Cisneros is now a fan of subsidizing rental housing?

“Unscrupulous” would be a good word to describe the millions of dollars Cisneros has made in the real estate industry following his exit from government.

From the Cato essay:

In 2001, Cisneros joined the board of Fannie Mae’s biggest client: the now notorious Countrywide Financial, the company that was center stage in the subprime lending scandals of recent years. When the housing bubble was inflating, Countrywide and KB took full advantage of the liberalized lending standards fueled by Cisneros’s HUD. In addition to the money he received as a KB director, Cisneros’s company, in which he held a 65 percent stake, received $1.24 million in consulting fees from KB in 2002.

When Cisneros stepped down from Countrywide’s board in 2007, he called it a “well-managed company” and said that he had “enormous confidence” in its leadership. Clearly, those statements were baloney—Cisneros was trying to escape before the crash. Just days before his resignation, Countrywide announced a $1.2 billion loss, and reported that a third of its borrowers were late on mortgage payments. According to SEC records, Cisneros’s position at Countrywide had earned him a $360,000 salary in 2006 and $5 million in stock sales since 2001.

Guess Who’s Behind the New Fire-Sprinkler Mandates

California just adopted effective next year a requirement that all new one- and two-family dwellings include indoor sprinkler systems. Other states are debating similar mandates, spurred by changes to national building code standards. Earlier legal mandates have required the inclusion of smoke alarms and carbon monoxide alarms, but the cost of those devices is relatively minor, whereas full-blown sprinkler systems add measurably to the cost of a new home, as well as posing challenges in such areas as maintenance, aesthetics, and risk of property damage through accidental activation.

It will surprise not a single reader of these columns, I suspect, to learn that the fire sprinkler industry has been a major force in pushing the new mandate. As for the opposition, home builders have managed to mount a bit of resistance – New Jersey, for example, saw the current depressed state of the residential construction business as reason to postpone its mandate for a year. But the builders are pretty much on their own in the fight, since future buyers of new homes are a group with no organized political presence whatsoever.

Real estate blogger Christopher Fountain writes that he’s “never heard of a home buyer voluntarily ordering this equipment when building a house, so it sounds to me like one more instance of people who know better dictating to those who don’t.” Exactly. A South Carolina paper quotes a state official as saying if buyers feel priced out of the new home market by the cost of the mandate, they have other ways to save money “such as choosing less expensive flooring or countertops, or not installing yard sprinklers”. Easy to make someone else’s budget decisions for them, isn’t it? And shouldn’t the “affordable housing” community be taking more of an interest?

Zoning vs. Families

Back in 1996 George Liebmann wrote in Regulation about how “Zoning makes it more difficult to keep aged parents close by and care for them.” He recommended that “Duplex homes and accessory apartments should be permitted in all new residential construction. Housing options such as these allow elderly persons to live near their adult children without intruding on their children’s privacy.” (“Modernization of Zoning,” pp. 71, 75)

Now the Washington Post reports

The Rev. Kenneth Dupin, who leads a small Methodist church [in Salem, Virginia], has a vision: As America grows older, its aging adults could avoid a jarring move to the nursing home by living in small, specially equipped, temporary shelters close to relatives.So he invented the MEDcottage, a portable high-tech dwelling that could be trucked to a family’s back yard and used to shelter a loved one in need of special care.

Skeptics, however, have a different name for Dupin’s product: the granny pod.

Protective of zoning laws, some local officials warn that Dupin’s dwellings – which have been authorized by Virginia’s state government – will spring up in subdivisions all over the state, creating not-in-my-back-yard tensions with neighbors and perhaps being misused….

the nation’s elderly population is set to double in just 10 years as more and more baby boomers hit retirement age. Surveys by AARP and others also show that large majorities prefer to live in their own homes or with loved ones rather than in retirement communities.

But local officials think their zoning rules are more important than keeping families together.  They fume that allowing such small structures for grandma would “turn our zoning ordinance upside down.” And what’s more important, saving money and keeping grandma near her family or strict adherence to zoning regulations? Local officials think the choice is clear.

In this case, though, state officials disagreed. Virginia just passed a law “that supersedes local zoning laws in the state and allows families to install such a dwelling on their property” – but only “with a doctor’s order.” They couldn’t just allow families to choose a living arrangement that suits them. No, a doctor has to authorize it.

It’s sort of like medical marijuana – a slight increase in freedom, but also an increase in the medicalization of normal individual decisions.

Earmarkers vs. Bureaucrats: Taxpayers Lose Either Way

One of the justifications members of Congress offer for earmarking is that the Constitution gives the legislative branch the “power of the purse.” Congressional earmarkers often denigrate the executive branch’s inability to effectively allocate funds. But just because the federal bureaucracy does an abysmal job of spending taxpayer money, it doesn’t mean lawmakers would do any better.

The following example out of Florida illustrates why lawmakers are just as likely as bureaucrats to misspend taxpayer money. According to the St. Petersburg Times, a developer who has never had a successful project was able to convince four members of Florida’s congressional delegation into supporting a $500,000 earmark for a Tampa affordable housing project. The developer had already wasted $563,000 in federal and state taxpayer funds on housing projects that now “sit vacant and rotting.”

According to the article, suckering more money out of Congress was apparently pretty easy:

But the federal earmark process involves little vetting of recipients. So the four members of Congress didn’t know that Foster had never successfully completed a housing project. They didn’t know he exaggerated the involvement of his partners in the proposal he presented to them. They didn’t know he has a record of mishandling grants for much less ambitious projects. And they didn’t know his nonprofit has faced legal troubles, including IRS liens for unpaid payroll taxes.

The lawmakers, who represent Florida and the Tampa Bay area, say they made their decision based largely on information provided by Foster. Others say he never should have gotten a cent.

“I am flabbergasted that this guy’s getting another $500,000. That’s just insane,” said Craig Rothburd, an attorney working pro bono for the Hillsborough County Homeless Coalition. The coalition directed a $400,000 state grant to Foster to develop housing for homeless people. It is now suing Foster for fraud and breach of contract.

Might these lawmakers have put a wee bit more effort into scrutinizing the developer had the money been their own?

Regardless of whether federal funds are allocated by the bureaucracy or earmarked by politicians, both are spending other people’s money. Neither has the incentive to conduct the due diligence necessary to ensure that the money is properly spent. This is one reason why the federal government’s “affordable housing” efforts have been a failure.

Therefore, the question of whether the executive or legislative branch should have more control over spending is a secondary concern. The primary focus should be on efforts to restrict the government’s activities to the small number defined in the Constitution.

Obama’s Fannie and Freddie Amnesia

Peter Wallison calls attention to President Obama’s amnesia regarding events that precipitated Fannie Mae and Freddie Mac’s collapse. Writing in the Wall Street Journal, Wallison points out that in 2005 then-Senator Obama joined with his Democratic colleagues in stopping legislation that would have helped rein in the government-sponsored housing duo’s risky behavior:

The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs’ risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee’s action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

The president’s complicity in the housing collapse hasn’t stopped him from pinning the blame on Republicans, “special interests,” and Wall Street “fat cats.” As he does with other problems, the president blames everyone except himself and his party.

As I recounted in a Cato Policy Analysis, Fannie and Freddie epitomized the tawdry relationship between businesses that receive special federal breaks and policymakers. Democrats, including Obama’s chief of staff Rahm Emanuel, played a key role in facilitating Fannie and Freddie’s destructive activities. Emanuel, a then recent senior adviser to President Clinton, was appointed by Clinton to Freddie Mac’s board of directors, where he earned $320,000 in compensation and sold company stock worth more than $100,000.

Then there’s the current Office of Management and Budget director, Peter Orszag. In 2002, Fannie Mae commissioned a paper authored by Nobel Laureate Joseph Stiglitz, Jonathan Orszag, and Peter Orszag, who was then at the Brookings Institution. The study concluded that “the probability of default by the GSEs is extremely small.” Oops.

Given the company Obama keeps, it’s not surprising that the administration still hasn’t come up for a plan on what to do with Fannie and Freddie.

The administration has intentionally not incorporated Fannie and Freddie into the federal budget in order to hide the cost to taxpayers. And on Christmas Eve the administration quietly announced that the government would cover all of Fannie and Freddie’s losses beyond the original $400 billion limit through 2012. The Congressional Budget Office estimates that the final cost to taxpayers for bailing out Fannie and Freddie will approach that figure, although Wallison calls that projection “optimistic.”

See this essay for more on the problems the federal government causes in the housing market.