Subcommittee on Housing and Transportation

Hearing on "Affordable Housing Production and Working Families."

On behalf of the 205,000 members of the National Association of Home Builders, I want to thank you for inviting us to speak about the housing affordability issues facing our country. My name is David Curtis, and I am a builder from Wilmington, Delaware. I currently serve as Executive Vice President of Leon N. Weiner & Associates, Inc., a Wilmington-based home building, development and property management firm. The Weiner organization and its affiliates have developed and constructed more than 4,500 homes and 9,000 apartments as well as several hotels, office buildings and retail facilities.

The Center for Housing Policy released two reports recently as part of a series the Center is publishing concerning the housing needs of America's working families. The first, "Paycheck to Paycheck: Working Families and the Cost of Housing in America," was published in June 2001. The most recent report, "Housing America's Working Families: A Further Exploration," was released in March 2002.

These reports focus on the characteristics and housing cost burdens of working families, defined as those earning between the equivalent of a full-time minimum wage job ($10, 712) and 120 percent of area median income. The Center is focusing on this group because there are signs of persistent and worsening housing affordability for them in all parts of the country, including cities, suburbs and rural areas, despite general economic prosperity.

Workers in municipal jobs, such as teachers and police officers, and in the services sectors, such as janitors, licensed practical nurses and salespeople, fall into this group of people and are a large and growing component of many local economies. The growth in such jobs, however, is not matched by the growth in the supply of affordable housing, creating an increasingly difficult situation for both renters and homeowners.

According to the March 2002 report, in 1999 there were 13 million American families that had a critical housing need, which is defined as paying more than 50 percent of their income for housing or living in severely inadequate housing. This is a decline of less than one percent from 1997. The proportion of low- to moderate-income working families with critical housing needs rose from 23 percent in 1997 to 29.4 percent in 1999, going from 3 million to 3.9 million families.

For low- to moderate-income working families experiencing critical housing needs, eight out of 10 pay more than 50 percent of their income for housing. The other 20 percent of these families live in severely inadequate housing. And the problems of low- and moderate-income families with critical housing needs are geographically widespread -- 1.7 million of these families reside in central cities, 1.5 million live in the suburbs and another 656,000 live in non-metropolitan areas.

The report also states that housing cost burdens overall are worsening, with 38 percent more renters and 22 percent more homeowners having a critical housing need in 1999 compared to 1997.

The June 2001 report conducted an in-depth look at rental and homeowner affordability for low- and moderate-income working families, using five typical service-related occupations in 60 different metropolitan areas. The report finds that in not one of these areas could renters afford a two-bedroom unit without paying considerably more than 30 percent of their income for rent, and often two earners in the household were required to pay for housing costs. On the homeownership side, the report found that unless a household had two earners, it would not be able to purchase a median priced home in two-thirds of the metropolitan areas examined. The report points out that many of these households will be forced to remain renters for the indefinite future, putting further pressure on the affordable rental housing stock.

The Joint Center for Housing Studies of Harvard University’s "The State of the Nation’s Housing" 2001 report had similar findings regarding increasing housing affordability stresses low- and moderate-income families. This report also discusses the imbalance between the supply of affordable units and the growing demand for them. The report states that although 1.6 million rental units were constructed during the 1990s, 1.25 million units were removed.

The "State of the Nation’s Housing" report also points out that the limited production of units affordable to low- and moderate-income households is likely to cause the critical housing needs problem to spread further to moderate-income families. While federal housing programs, such as housing vouchers and tax credits, can provide housing for very low-income households and still be profitable to owners, the report states that increasing land costs have made rental units for moderate-income households barely profitable.

The report concludes by saying that housing affordability, which is already a critical problem for very-low and low-income households, is beginning to affect more moderate-income households, too, and that it is likely to worsen over the next decade. The report cites the growing pressure to restrict growth and land development, exclusionary zoning practices, and high land costs as hampering the production of new affordable units and that these factors will make it increasingly difficult to help even moderate-income families.

NAHB appreciates that Congress and the Administration must reconcile significant demands on the budget every year, but especially this year because of the need to expand homeland security and defense in light of the September 11 attacks. That being said, we believe there are a number of steps that can be taken to improve existing housing programs to produce more affordable rental housing and to help low- and moderate-income households become homeowners. However, we also believe that it is necessary to consider some new programs as well, particularly related to multifamily rental housing, because if we continue to delay addressing current needs, it will be even more difficult to resolve these problems in the future.

Layers of excessive and unnecessary regulation imposed by all levels of government -- federal, state and local -- can add 20 to 35 percent, or thousands of dollars, to the cost of a new home, making it difficult or even impossible for families to achieve homeownership or find affordable rental housing. The housing industry needs sensible, appropriate, and balanced regulations and guidelines at all levels of government. NAHB believes the elimination of unnecessary barriers to the production of affordable housing should be a critical element of our national housing policy.

It is NAHB's position that federal agencies (with some limited exceptions) should be required to conduct a housing impact analysis for any new proposed and final rule, if that rule will have an economic impact of $100,000,000 or more on housing affordability. Agencies should be required to prepare an initial housing impact analysis for each proposed rule and have it published in the Federal Register at the same time as the proposed rule, including an invitation to the public to comment. The initial impact analysis should contain a description of the reasons an agency is taking the action; the objectives and legal basis for the rule; and, an evaluation of the extent to which the rule would increase the cost or reduce the supply of housing or land for residential development. The initial analysis should also include a citation of any federal rules that may be duplicative or conflict with the proposed rule.

Each final housing impact analysis should contain a statement of the need for and objectives of the rule; a summary of the significant issues, analyses and alternatives to the proposed rule raised during the proposed rule public comment period; a description and estimate of the extent to which the rule will impact housing affordability or an explanation of why no such estimate is available. The agency should be required to make the final housing impact analysis available to the public and to publish it in the Federal Register.

We also believe that, no later than one year after enactment of the housing impact analysis requirement, the Secretary of HUD should publish model initial and final housing impact analyses in the Federal Register. The model analyses should define the primary elements of housing impact analyses to instruct other agencies on how to implement the requirement.

NAHB believes that housing impact analyses will greatly help in reducing the number of regulatory barriers to the production of affordable housing, and we urge you to consider it as an important element of future housing policy.

As we discussed earlier, despite the nation's general prosperity, there continues to be a critical shortage of affordable rental housing for both low- and moderate-income households. NAHB believes that the establishment of a new rental housing production program that produces 60,000 to 70,000 units annually should be a top housing priority for the Administration and Congress this year. As described in the reports we cited, there is a need for a new multifamily rental housing production program that would meet the affordable housing needs of households with incomes between 60 and 100 percent of area median income (AMI), America's "working poor." These households are not eligible for housing assistance through most current federal housing programs.

NAHB has developed an approach different from several current proposals, including the new HOME production program contained in H.R. 3995. Our program is designed to produce mixed-income housing, which has proven to provide greater financial stability and community acceptance than developments that concentrate very-low and low-income households. The program focuses primarily on the working poor, although a portion of each property (up to 25 percent) is reserved for very-low and extremely low-income households.

There are several ways in which this program could work. Our proposal relies primarily on the low interest rates available through Government National Mortgage Association (Ginnie Mae) guaranteed lower floater securities, which carry very low rates of interest. The securities could be issued by a variety of entities, including developers, private lenders, housing finance agencies, and local governments. Ginnie Mae would guarantee the timely payment of principal and interest to investors, which would further lower financing costs. Underlying loans could be backed by the Federal Housing Administration (FHA) or the Rural Housing Service (RHS), or could be conventional loans (use of the latter would require a change in Ginnie Mae’s charter).

Interest rate subsidies or buy-downs could be employed to achieve additional affordability. To further reduce debt coverage requirements, developers may also use sources of equity and soft-second debt such as tax credits, HOME, the Federal Home Loan Bank System’s Affordable Housing Program and state housing trust funds.

The only federal budget dollars required would be for any credit subsidy needed for Ginnie Mae’s participation, interest rate subsidies or buy-downs, and a marginal increase in the cost of rental assistance vouchers for those units serving very-low and extremely-low income households. The program would require only a small amount of federal government subsidy per development and would provide for ongoing maintenance and future capital improvements by building in adequate reserves from monthly cash flow at a level sufficient to rehabilitate the development in year 20. A minor modification to the existing voucher program rent payment standard would ensure that very-low and extremely low-income households could be served. The program would work in all areas of the country, including urban and rural areas.

The program also provides incentives to owners through deferral of profits and by making the recognition of any gains contingent on property performance (both financial and physical) throughout the 40-year period that the units must be held in the affordable housing stock. There should be no exit tax on non-cash appreciation of the property when an owner sells the property. However, if the property is sold after 40 years, 50 percent of the equity appreciation should be returned to the federal government to produce additional affordable housing.

The program could be administered by state housing finance agencies, which already administer the tax credit program, HOME, CDBG and other housing loan and grant programs. Centralized administrative elements could be handled by HUD, which already performs similar functions for many of the programs listed above.

In looking at how a new production program might work, NAHB believes we need to tackle affordability problems at all income levels. We urge you to take a close look at our proposal as you consider how to address this issue.

NAHB is a strong supporter of the FHA multifamily mortgage insurance programs. We have worked with HUD and Congress over the years to bring improvements to the programs, which are critical to addressing the nation's affordable housing needs.

NAHB applauds Congress and HUD for increasing the FHA multifamily mortgage loan limits by 25 percent last year. The increase has already assisted in opening up markets previously unable to use the programs because the loan limits were too low. However, NAHB believes that, without an indexation for inflation, any gains realized from the 25 percent increase will be quickly lost.

We believe that the FHA multifamily mortgage loan limits should be indexed to inflation, as measured by the annual construction cost index published by the Bureau of the Census of the Department of Commerce. Indexing the loan limits will help stabilize the programs and give builders and lenders confidence that they will be able to use the programs in their communities every year, even as construction and land costs rise over time.

NAHB also strongly believes that housing needs in high-cost markets where the base loan limits are too low must be addressed. Currently, the law gives the Secretary of HUD the discretion to increase the base limits by up to 110 percent in geographic areas where construction costs are very high. The Secretary is also able, at his discretion, to approve an increase of up to 140 percent for individual projects in high-cost areas. However, there are a number of high-cost urban markets, such as New York, Boston, San Francisco, Chicago and Los Angeles, where construction costs are significantly higher than in other areas of the country, and the high-cost factors have not been sufficient to allow use of the FHA multifamily mortgage insurance programs. NAHB conducted an analysis of those five high-cost urban areas, which demonstrates that, even with the recent 25 percent increase and current high-cost factors, costs exceed the current limits.

NAHB supports an increase in the maximum high-cost factor from 110 percent to 140 percent in geographic areas and an increase the high-cost factor from 140 percent to 170 percent on a project-by-project basis. NAHB believes that indexing the loan limits to inflation and increasing the high-cost factors together will greatly improve effectiveness of the FHA multifamily mortgage insurance programs. Markets previously unable to use the program would be able to start increasing the supply of much-needed new affordable housing for low- and moderate-income families.

NAHB is also recommending some improvements to the FHA single family mortgage insurance programs that increase the efficiency of FHA’s programs and enable these programs to make homeownership attainable for more families.

The FHA simplified downpayment procedure was first implemented as a successful pilot for residents of Alaska and Hawaii, and then was expanded nationally three years ago via a series of temporary extensions. The most recent extension of the authority for the simplified method of calculation is scheduled to terminate on December 31, 2002.

Senate Banking Committee Chairman Paul Sarbanes (D_MD) recently introduced S. 2239, the "FHA Downpayment Simplification Act of 2002," and this legislative provision is also contained in H.R. 3995. NAHB supports making the simplified downpayment calculation method permanent and urges Congress to enact this measure.

The strength of the Mutual Mortgage Insurance Fund has improved each year since 1998 when this provision was temporarily enacted. This procedure actually offers a simplified method of maximum mortgage calculation. The simplified method results in greater loan-to-value ratio loans than permitted under the previous calculation method.

The simplified calculation multiplies a loan-to-value percentage times the lesser of the appraised value or the sale price. By contrast, the former system required that the acquisition cost first be determined, then two calculations were performed: one in which the acquisition cost was multiplied by a tiered series of percentages, and a second in which the appraised value was multiplied by a factor. Under the former system, the maximum mortgage was the lesser of the two products.

NAHB supports a technical change in the National Housing Act, which would make hybrid adjustable-rate mortgages (ARMs) available at competitive rates and terms for FHA borrowers who otherwise would not be able to obtain funding under conventional hybrid ARM programs.

The FHA-insured ARM has been a valuable tool for expanding homeownership opportunities. Last year, FHA obtained authority to insure a hybrid ARM, a mortgage that has a fixed rate of interest in the early years of the loan before switching to annual adjustments over the mortgage's remaining term. Unfortunately, the current law caps the initial adjustment for FHA-insured 5-1 hybrid ARMs to one percent, which makes the FHA-insured hybrid 5-1 ARM less attractive to investors than conventional hybrid ARMs that carry a two percent initial adjustment cap. This means that, under normal market conditions, lenders will not offer FHA-insured hybrid ARMs due to unfavorable pricing in the secondary market. A change in the interest rate adjustment limit, therefore, is needed to allow FHA to offer a product that is attractive to secondary market investors.

NAHB urges Congress to repeal the increase (from six to nine percent) in the Government National Mortgage Association (Ginnie Mae) guaranty fee, which is scheduled to take effect in FY 2004. A guaranty fee increase of even three basis points would represent a heavy tax on affordable housing and would decrease homeownership opportunities for thousands of families each year. The increase would be passed along in financing charges, generally to borrowers who could least afford additional mortgage financing costs. There is no financial basis for a guarantee fee increase because Ginnie Mae operates at a profit and has done so throughout its existence.

The Low Income Housing Tax Credit Technical Advice Memoranda

NAHB believes it is essential that Congress modify the Low Income Housing Tax Credit (LIHTC) program in order to ensure its continued existence. The LIHTC program has provided a key part of the financing for nearly all of the affordable rental housing built in the last decade. The credit provides equity financing that reduces lower mortgage amounts, providing reduced debt service and, therefore, more affordable rents for households with incomes at or below 60 percent of area median income.

In October 2000, the Internal Revenue Service (IRS) issued five technical advice memoranda (TAMs) that threaten the ability of the LIHTC program to continue to provide affordable housing. The TAMs take aggressive positions aimed at reducing the eligible basis, which lowers the amount of tax credits or equity financing a project receives. The TAMs have the effect of reducing credits for many projects by 25 percent or more. In addition, uncertainty over future IRS actions is reducing the prices paid for the credits, further reducing the effectiveness of the LIHTC program.

NAHB supports legislation that would provide certainty for tax credit allocations. In the House, Representatives Nancy Johnson (R-CT) and Charlie Rangel (D-NY) sponsored H.R. 3324, and the Senate companion legislation S. 2006 is sponsored by Senators Bob Graham (D-FL), Orrin Hatch (R-UT), Jim Jeffords (I-VT), Robert Torricelli (D-NJ) and John Kerry (D-MA). This bill introduces the concept of "development cost basis" and then specifically identifies costs that qualify as includable in basis. The identified costs are: site preparation costs, state and local "impact" fees, reasonable development fees, professional fees related to basis items, and construction financing costs (but not financing costs to acquire land). This legislation will ensure that quality affordable housing will be maintained and that investor and lender confidence will be restored. This will increase private investment and allow more housing to be built for each tax credit dollar.

NAHB believes a new program is needed to create homeownership opportunities for low- and moderate-income individuals who currently lack decent housing opportunities. Therefore, NAHB supports the creation of a housing tax credit called the "Renewing the Dream" homeownership tax credit that is included in the Administration’s FY 2003 budget. The proposal, modeled after the Low Income Housing Tax Credit program, is designed to encourage new construction and substantial rehabilitation of homes for sale to low- and moderate-income families in economically distressed urban and rural areas.

The proposed homeownership tax credit would provide an annual federal tax credit of $1.75 per capita or a minimum of $2 million per state. This credit would be allocated to developers that construct or rehabilitate owner-occupied homes in census tracts with incomes at or below 80 percent of area or statewide median income. Developers would be allocated tax credits through a competitive allocation process administered by state agencies. The credits would be claimed over a five-year period. Tax credits could be used for up to 50 percent of the development cost of each home and could be sold to investors to provide financing for the construction or rehabilitation of the homes.

Senators Kerry (D-MA) and Santorum (R-PA) have a legislative draft of the homeownership tax credit that will be introduced in the Senate soon. This legislation will significantly reduce the cost of homes for low-income individuals and provide the necessary financial incentives for builders to build and rehabilitate in low-income areas where costs are high. We urge you to support this proposal.

Two bills, S.677 and H.R. 951, entitled The Housing Bond and Credit Modernization and Fairness Act, have been introduced in Congress to address problems impairing the effective operation of the single family mortgage revenue bond (MRB) program administered by state housing finance agencies. The MRB program is an important source of mortgages for low- and moderate-income households, financing over 106,000 mortgages in 2000. Nationally, the average income among MRB purchases was $34,200 (approximately 68 percent of the national median income) and half the median income of conventional purchasers. In 2000, 21 percent of MRB purchasers were minorities; about 60 percent of the loans were in urban areas; and, 20 percent of the loans helped families in rural areas.

The bills include three provisions. First, the bills repeal the Ten Year Rule, which was enacted in 1988 and requires states to use MRB mortgage payments received after the original MRB has been outstanding for 10 years to retire the bonds rather than to make new mortgages. It is estimated that by 2005, state housing finance agencies will lose more than $12 billion -- 140,000 mortgages -- in mortgage authority because of the Ten Year Rule.

Second, the bills would provide an alternative means of establishing the MRB purchase price limit. Currently, the statute requires purchase prices to be no higher than 90 percent of the average area sales price. The current limits have not been raised since 1994, which is the last time the Internal Revenue Service (IRS) published safe harbor purchase price limits. Although state housing finance agencies are permitted to publish their own purchase price limits, many do not because of the difficulty of compiling accurate data. The bills would allow states to determine purchase price limits at levels three and one half times the MRB qualifying income.

Low Income Housing Tax Credit Program Income Limits

S. 677 and H.R. 951 also address an income-eligibility issue related to the Low Income Housing Tax Credit program. The bills would give state housing finance agencies the flexibility to use the greater of the area or statewide median income in determining qualifying income levels for tax credit developments located in rural areas. This change would help provide more affordable rental housing in rural areas, where incomes typically are too low to support the development of new rental housing.

In conclusion, Mr. Chairman, we believe that, in response to the identified housing needs of working families, measures are needed to increase the supply of affordable multifamily rental housing and to help low- and moderate-income families become homeowners. We believe that this will require the development of some new programs, particularly one designed to spur the production of rental units for working families in the 60 to 100 percent of median income range. While the FHA multifamily mortgage insurance programs are extremely important, these programs alone do not have the capacity to produce the number of units needed to meet current and future demand. The Low Income Housing Tax Credit program has done a good job of producing affordable rental housing for very low-income households, but there are no federal programs to assist working families whose incomes fall between 60 and 100 percent of median.

However, recognizing that resources will continue to be tight in the near future, we also feel it is important to improve the FHA multifamily and single family, Low Income Housing
Tax Credit and mortgage revenue bond programs. Since these programs have proven track records, Congress can be confident that the changes we are recommending will produce results immediately. Equally important is the need to eliminate unnecessary barriers and burdensome regulations that prevent the production of affordable housing -- we urge you to consider enacting a housing impact analysis requirement.

Thank you for the opportunity to be here today.

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