How do government regulations affect opportunities to build new homes? Some of the effects of regulation are discussed in this part of the dialogue....
A-I think even more than builders, property owners need and want less regulation.
Q-Did you happen to see the photograph distributed by the Associated Press in June 1991, featuring a young couple and their five-week-old son? The young family had been evicted form a townhouse near Miami, along with about seventy other homeowners because their houses were judged incapable of withstanding the area's hurricanes.
A-You would think the county's standards would have been enforced before the subdivision was occupied. I can't understand how building regulations can be enforced after-the-fact without negligence on the authority's part. Unless the developer was shown to have acted fraudulently, I would think the city would have some reimbursing to do if they go ahead and order the homes demolished as the news report suggested.
A-After Hurricane Hugo hit the east coast, about 50 North Carolinians and 151 property owners in South Carolina found they were restricted in their rebuilding efforts.
For instance a hotel owner was told he must relocate his swiming pool farther inland which would mean eliminating parking spaces inviolation of his city's strict regulations. To comply with city regulations he would have to eliminate the swiming pool which he believes would cost him 40 percent of his business.
Q-He's damned if he does and damned if he doesn't.
A-Unfortunately it is generally the small or medium sized property owners who are most punished by government regulations. Generally big businesses and wealthy owners have the resources and or the land to conform to just about anything government's came dream up, smile cheerfully to appease the activists, and get on with their business.
Q-There have been lots of suits by property owners all over the country who believe their rights are being violated by so many government mandates.
A-That's very true. Massachussetts has a Wetlands Protection Act under which two property owners were denied the ability to rebuild seawalls to protect their homes and of course they brought suit.
Kenneth Healing purchased 2.5 acres in Tuna Canyon in the Santa Monica Mountains in California over ten years ago in order to build a home. The Coastal Commission had refused to issue Mr. Healing a building permit until a land use plan had been developed for the area which has now been designated "environmentally sensitive". Finally the powers-to-be decided Healing couldn't build on his lot, period.
The Coastal Commission advised Mr. Healing to sell his lot to a professional developer who could get credits for not building on environmentally sensitive land. The credits would be useful to a developer in his attempts to obtain permission to build elsewhere.
Instead Mr. Healing is suing the Coastal Commission hoping to get just compensation for the depreciated value of his property due to the Commision's ruling that it remain in its undeveloped state permanently.
Q-Florida property owners not only have to conform to federal environmental laws but it has its own, frequently overlapping and contradictory environmental regulations to contend with. One pundit gave the Florida definition of "wetlands" as any place a bird could land and get its feet wet.
A-Florida encouraged development for so many years that it is hard to get long term residents, and especially established builders, to accept all the new restrictions. The wide spread practice of making developers donate acres of their land for public purposes in order to get permits to build, is I believe blackmail, but it has been widely accepted by those in the industry and the public in general.
For example, not long ago a developer had to set aside 600 acres for a preserve for the gopher tortoise, which is not an endangered species, and this, even though only three were sighted on a proposed 4,800 acre development.
Q-Butterfly and other insect sightings have also been known to either halt a project or increase its cost in California.
A- There are numerous examples where a builder has made a request to build, say 100 homes, and ended up with permission for only 60. That means 40 families that could have had housing will not and the buyers of the 60 homes will have to pay more than they would have otherwise.
Q-But as you've said, developers pass their costs on to buyers of new homes and that raises the property values of existing homes which suits most owners just fine.
A-Unfortunately, as I've also pointed out before, it makes it harder for newcomers to get that first home. People are beginning to be concerned that all the fees and planning charges are going to add anywhere from $5,000-$10,000 to the cost of a new home in Florida whereas Jack Kemp has been giving speeches as HUD Secretary accompanied by a magnificent chart that shows all the fees, regulations, stipulations, donations and so forth that add a whopping $40,000 to the cost of a new California home.
Q-Some people say the fees are so excessive in California and Florida because both states have caps on property taxes and this is just another way to collect revenue from property owners.
A-Collecting money seems to be what government does best.
Q-I understand the Institute for Policy Studies in Washington D.C. would like to see the federal government provide funds to build 200,000 new units and rehabilitate 400,000 older units for low-income people on an annual basis.
A-I heard that. A few years ago their idea was estimated to cost $24 bilion a year, but we know how cost estimates grow! Of course there is a stipulation that the housing never fall into private, i.e. for profit, hands; it would have to be operated by non-profit or tenant co-ops. Since there would be no mortgages, tenants' rental payments would cover taxes, maintenance and upkeep.
Q-Wouldn't the Cranston bill affect this?
A-At the heart of the Cranston bill is a grant program known as HOP (Housing Opportunity Partnerships) which also contains provisions to extend community development programs, rental assistance and other help for the homeless. It would give federal dollars directly to states and local governments so they can meet local housing needs. They would have to match the federal dollars but could use the money to get private financing and work with local non-profit community housing programs. The Cranston bill is supposed to bring California 40,000 new low-income housing units.
Q-I heard an estimate in early 1991 that one out of every five businesses connected to the building industry would go broke before the industry picked up and that to try and keep that from happening in his back yard, a lumber company and a building supplier in Minneapolis each set up financing arms to loan money to local builders.
A-Apparently fifty percent of the construction financing in Minneapolis came from building suppliers in 1991. The savings and loans had about $36 billion in construction loans in 1988 and thanks to the crisis in that industry, construction lending had dropped to $2.5 billion by 1990. Builders were looking for replacement money and were even turning to equity partners--offering business losses to doctors, attorneys and other highly paid professionals.
Q-How much does a family need to be making to finance the purchase of a median priced home today?
A-That obviously depends on the part of the country, but generally speaking, at the end of 1990 a family with a median income of $35,353 had 113.4% of the income needed to qualify for conventional financing to buy a home costing $92,800, which was the national median.
Q-What about FHA and VA--the non-conventional government financing?
A-In 1990 congress passed new housing legislation hoping to slow down FHA losses approximating $7 billion. More than half the 1989 loses involved the public-private coinsurance program. The Government Accounting Office reported, at the end of May 1991, that FHA's mortgage insurance program for multi-family dwellings sustained losses of $3.5 billion in 1989 and the single-family program suffered $400 million in loses.
Add to that loses from previous years and the loses for 1990 and 1991 which have not been counted yet and it's apparent that agency has a whooping problem! As for the VA programs, in 1989 that agency was losing a billion dollars a year.
The FHA has always been more flexible. For the past twenty years it hasn't had control of financial auditing and with over 60 programs to restructure it is at last beginning to have access to solid financial information.
Q-I thought I heard the FHA was considering a zero down payment program.
A-They were. I think it was Senator Don Nickles of Oklahoma who said we haven't learned a thing from the savings and loan fiasco. There we expanded the government guarantee on deposits from $40,000 to $100,000 and it became a gigantic taxpayer liability and now there is a clamor to expand the FHA's mortgage guarantee program to much higher amounts even though it is common knowledge that mismanagement prevails throughout the agency.
Q- Solvency and reform should be on the agenda for FHA, not expansion!
A-You're right. A recent Senate approporiations bill was suppose to remove the current FHA mortgage guarantee ceiling of $101,250 and increase it to ninety-five percent of the median home price in higher-cost areas. This would have almost doubled FHA exposure in skyrocketing markets where median home prices sometimes exceed $200,000 as in parts of California and Hawaii. Actually I think it was a Nickles' compromise that placed the FHA loan-guarantee ceiling at $124,875.
Q-To get the government to guarantee a loan for that amount is a terrific deal!
A- Sure, unless it is so generous it attracts insubstantial buyers and taxpayers end up making good on the debt. Remember who was left holding the bag and is now bailing out the depositors of the insolvent savings and loans thanks to those wonderful government guarantees. On the bright side, a raise of the ceiling by $23,625 was better than a floating cap, but still there should have been a restriction not a raise!
By the way, the before-compromise version you mentioned I recognize as part of the Cranston-D'Amato bill which did call for a drastically reduced downpayment which would have undoubtedly increased the risk of default. And guess who will be saddled with a tremendous financial burden if home buyers default?
Q-Obviously the 1990 legislation didn't slow any losses.
A-There are many ways to cut losses. Starting July 1, 1991 people who buy homes using FHA-backed mortgages are going to have to start paying an annual premium for mortgage insurance.
Q-Since the default rate has been so high, those premiums probably will be too.
A-And that's not all; these new home buyers will have to pay substantially higher closing costs.
Q-That should knock a lot of people right out of the market and also hurt the economy.
A-You're right. The Mortgage Bankers Association claimed the new FHA rules could wind up reducing home sales by as many as 200,000 a year. That could be a real blow to an already weakened housing industry.
Q-How large a share of the country's mortgage market belongs to the FHA?
A-About fifty percent. The silver lining here is that these new rules may reduce the FHA's share of the U.S. mortgage insurance market while saving taxpayers from the risk an expansion posed. Besides I believe it is wrong in principle to have a government entity competing with private mortgage insurers---who just happen to be solvent!
Q-Why are private mortgage insurers solvent when government insures are in such financial straits?
A-For one thing they have higher downpayment requirements.
I just don't understand how anyone can justify to average American workers the fact that their tax dollars are being used to guarantee mortgage on $200,000 homes?
Q-What is the extent of the federal government's liability as regards home loans?
A-Are you ready for this? The federal government already guarantees more than $900 billion worth of mortgages. I guess so many people stand to benefit that nobody is going to try and stop it even though they'll all be screaming bloody murder when the system collapses.
Q-You're right. It looks like the stage is set for a repeat of the savings and loan disaster.
A-There is a fiscally sound alternative to FHA and VA if you believe the federal government has a role to play in helping lower-income Americans achieve the American Dream of home ownership.
Q-Recognizing your preference for a limited role for government in domestic policy, are we to understand this is a plan you would endorse?
A-It is indeed, unless opponents can point out pitfalls that are not yet apparent to me or there is a better alternative that would somehow preclude this proposal.
A-It's called the HOME program, an acronym for Home Ownership Made Easier and I first heard about it a couple years ago. As far as I know, the plan originated with the Chicago-based National People's Action, a consumer advocacy group for lower-income people, and the Mortgage Insurance Companies of America (MICA).
The idea is simple. Potential home buyers would contribute savings into a participating bank or other lending institution and according to the income of the saver, the federal government would match those deposits at a rate varying from $1.50 to $4 per savings dollar.
The funds would have to accumulate for a minimum of three years in order to vest fully. If the funds were withdrawn to buy a house after only one year, only 25% of the federal portion of the savings account could be used. After two years 50% of the federal portion would be available and after three years 100% could be used.
At any rate the savings would have to be used to purchase a house within seven years or all the federal money would be forfeit and savers would receive only five percent interest on their own funds. This would be true if the funds were withdrawn for any reason other than to purchase a house.
Q-How would anyone know what the funds were used for once they were withdrawn?
A-Participating savers would receive a certificate which, when presented to a lender, could be applied to the down payment, closing costs or to reduce the mortgage interest rate.
Q-Kind of like food stamps.
A-Right.
Q-It seems to me that would cost the federal government a lot of money it can't afford.
A-We're not talking about a subsidy. The federal matching funds would convert into a second mortgage or deed of trust secured by the subject property. The government could sell those seconds with the highest interest rates to private investors and would receive steady interest from the loans it keeps.
Q-Did the proponents of this plan figure out who would be helped by it and to what extent?
A-Realizing, first of all the inaccuracies of estimates based on fluctuating house prices in various parts of the country, and on fluctuating interest rates, estimates were made back in July 1989 and you can take them for what you think they're worth.
At that time estimators claimed that a fully vested savings certificate used to buy down the mortgage rate would allow a family with an annual income of $14,400 to consider buying a house in the $46,000-$47,000 range rather than having to consider only houses under $31,000 as they would have been forced to do without the "certificate". For higher-income families earning $23,000 a year, their home choices would expand from a choice of homes under $50,000 to homes under $65,000.
Q-How could a family with only $14,400 in income have any savings?
A-That bothered me too. But the incentive to home ownerhip would lead to sacrifices, not unlike those made by our immigrant forefathers. People are good at this, if the stakes are high enough. What people don't like is tightening their belts while Uncle Sam wastes their dollars. The belt tightening required here would pay off big and in a tangible way. Remember, the lower the saver's income, the greater the matching funds.
If the family making only $14,400 a year were to trim $60 a month from its already admittedly tight budget the federal government would add $2,880 a year in matching funds. That would give them at the end of just one year, a housing certificate worth $3,600.
Q-Let me go over that real slowly: sixty dollars a month for twelve months equals $720, matched at the highest rate of four to one . . .
A-Because an income of $14,400 would put them in the lowest-income category and therefore entitled to the highest matching funds.
Q-So 4 times $720 equals $2,880 in government funds added to the families own savings ($720 + $2880) gives them the $3,600 value of their one year certificate. That's some incentive!
A-The one flaw in the proposal is the cost in time and money for administration and the possibilities for fraud and showing favoritism that another government bureaucracy entails. I would only go along with this if it replaced some of the other money-losing bureaucracies.
Q-In otherwords, you might like to see HOME replace FHA, for instance.
A-You've got it.
Q-It seems to me it has the same strengths and weaknesses of the other federal loan guarantee agencies i.e. making housing more affordable for low-income citizens without costing the government money but with the risk of default if the new home owner fails to make all his mortgage payments. What's the big deal?
A-The biggest deal is that HOME encourages savings and it tests the resourcefulness, determination and staying power of a buyer before the government acquires a position as a secondary lender on the property. As a member of the National People's Action put it, "It demands that buyers have a real equity stake in their home."
Q-It sounds like the Michigan state program.
A-Only the Michigan proposal, at least when I read about it, had no limits on the price of the prospective home purchase or on the income of the prospective buyer.
Q-I wonder how the the National Association of Home Builders (NAHB) feels about these proposals.
A-I can imagine they would favor anything that would lead to actual construction. I know the NAHB backed the original Cranston mortgage give aways we just talked about.
Besides the benefits from the FHA, they also would like to see an increase in the availability of variable-rate mortgages, perhaps an expansion of the VA loan guarantee program, adequate funding for the Farmers Home Administration (FmHA), increase federal funding and tax incentives for the construction of low-income and rental housing, including $4 billion in block grants to states and localities and $656 million to fully fund the McKinney Act, that potpourri for the homeless.
Q-I'm getting to be a whiz at senate bills; I even remember one which passed on March 31, 1987 requiring the VA to turn over forclosed VA homes to veterans service organizations and other non-profit organizations so that they might be used to shelter homeless veterans and their families. It was suppose to cost $34 million in FY1989. Do you know the bill I'm talking about?
A- I can't help you with that one.
A-While we're on the subject of government housing programs let's not foget HUD. HUD lost $4 billion in 1988. There is little flexibility in old HUD programs. HUD---for those not familiar with all of government's acronyms is the Department of Housing and Urban Development.
A-Speaking of acronyms--the acronym HOPE (Home Ownership & Opportunity for People Everywhere) is HUD Secretary Jack Kemp's pet project and is the part of Cranston's legislation designed to facilitate the purchase of public housing by tenants.
Q-What do you think of HUD's private war on poverty?
A- Only a few years earlier Mr. Kemp would have been the first to tell you that every study over the past fifteen years has proved that the private sector is more cost-effective than direct government involvement.
It is no secret that HUD's past and present attempts to address housing issues have been, and continue to be, both costly and ineffective. But Mr. Kemp doesn't want HUD to be the Department of Vacant Housing so its new theme will be home ownerhip and empowerment.
Q- Even though Mr. Kemp agrees with his good friend, Robert Woodson, president of the National Center for Neighborhood Enterprise, that poverty is a community problem, not a housing problem?
A-He's wisely using his power as head of HUD and has focused that agency on making people self-sufficient with a kind of operation boot strap.
Q- Wasn't Jack Kemp one of those people who claimed that the 2.2 million housing starts in 1979 were a major cause of our inflation?
A- Not Kemp. In fact he thought it was stupid to slow down the growth in housing in an attempt to control inflation. He generally disagrees with the Club of Rome scenario which talks of limits.
Jack Kemp is an optimist who doesn't believe that poverty is a necessary condition of human life. He favors the continuation of the investment tax credit and likes the idea of using the tax code as a tool for social manipulation.
Kemp would rather use the tax code than direct subsidies to provide housing for low income citizens. I heard him say once, "Instead of redistributing bread, we need to create bakeries."
He would like to see the capital gains tax reduced as a means of increasing new wealth as opposed to maintaing old. He would eliminate capital gains in all enterprise zones and doesn't favor the two year limit on capital gains.
I remember a member of the audience at some conference wanted Secretary Kemp to encourage the government to ground lease some of its property, claiming it would be good for developers, consumers and taxpayers since it would raise revenue which could be used to further reduce public debt. The questioner said he spent four years trying to get the National Forest Service to lease some of its land and was finally turned down.
His point was the government lost the opportunity to pick up a lot of money. More evidence of inefficiency, poor management, lack of prioritizing and just plain waste!
Q-What was the Secretary's response to leasing government land to increase revenue?
A-That's the funny thing---I don't remember!
Q-What do you think about those who want to stop the Japanese from buying up the U. S. land?
A-I think their fears are exaggerated and they don't really understand the situation.
Land in some parts of Tokyo cost upwards of $20,000 a square foot. The 100 year mortgage has been instituted in Japan, which means the house and the mortgage is passed on from one generation to another.
The Japanese were loaded with cash in the late 1980s due to two things. First, the Group of Five monetary accords in 1985, in an effort to combat the U. S. trade deficit, doubled the dollar-to-yen ratio, suddenly giving the yen twice as much purchasing power in the United States.
Secondly, real estate markets in Japan skyrocketed because the government interfered in the Japanese economy and in an attempt to encourage spending put a 20% tax on the interest earned on Japanese savings. The interest paid on savings in Japan had been running 4% to 5% behind the interest paid in the U.S. until a couple years ago and that had encouraged the Japanese to invest their savings here.
No big conspiracy, only individuals attempting to do what is in their best interest.
In the eighties the Japanese added a confiscatory short-term gains tax in an attempt to slow down the speculative real estate market. Then in the nineties the Japanese government considered a national property tax as a way to bring the price of real estate in large cities within the reach of the average Japanese.
However special interest groups gutted the proposal by having it apply mainly to corporations, exempting property valued at less than $7.5 million, exempting all residential and farm land and land for hospitals, schools and other public uses and for the remaining, mostly commercial properties, the tax starts at a low .2 percent of the assessed value.
Q-It's no wonder the Japanese looked outside of their own country to purchase real estate; to the U.S. and especially their neighbor, Hawaii. Hawaii has become a real political hot-bed.
A-That's true and in large part due to Sandra Day O'Conner's handling of the Hawaiian Land Case.
The U.S. Supremem Court ruling in Hawaii Housing Authority vs. Midkiff was intended to help ordinary people become landowners by striking a blow at concentrated land ownership. Instead it made existing and already well-to-do home owners even more wealthy and opened the Hawaiian housing market to cash rich foreigners.
Q-Who were the original big landowners?
A-The bulk of private land in Hawaii belonged to the descendents of the first Big Five missionary clans who settled and developed the islands during the 19th century. Six large owners still hold 37.5 percent of the land. Dwellings were leased, not sold. During the late 1960s the Legislature passed the Fair Housing Law which allows the State Housing Authority to use its eminent domain powers to force the sale of lots in any area where enough tenants request it. The large estates contended that the law merely took land away from one owner and gave it to another without a legitimate public purpose.
In 1984 the Supreme Court decided that the leasehold system bordered on feudalism and that Hawaii was within its rights in trying to destroy an oligopoly (the court's word).
Q-Everyone knows Hawaiian homes are the most expensive in the nation.
A-The median price of a single-family residence on Oahu is $363,000. Only 40% of the population own their homes compared with 60% on the mainland. The state has had a chronic housing shortage that goes back long before the mid-1980s.
Only 4% of the land is zoned for any kind of urban use even though the population more than doubled since WW II. In order to slow down immigration from the mainland, the state barred approval of any reclassifications of land from other uses.
When John Waihee became Governor in 1987, the ban was lifted but still local authorities have comprehensive land use regulation schemes and there is a coastal permit system. For a developer, clearing all licensing hurdles can take up to 10 years.
Q-If you had to sum it all up, what solutions would you advocate to make housing more affordable and therefore more plentiful?
A- First phase out rent control, reform building codes and make zoning laws more flexible. I would also urge government to encourage technological advances instead of blocking them. Simply permitting an owner to live over his own store is perhaps the cheapest form of subsidy.
We have inadvertently allowed government to gain too much control over private property rights in this country. Not that long ago, the idea that government has the right to grant property owners permission to use their property as they see fit would have been laughable.
Q-Why haven't any of these things been tried?
A-In 1988 the Reagan administration proposed cutting off federal housing aid to the more than 200 cities with rent regulations--but then retreated as it had with its proposal to do away with the corporate tax.
Ronald Reagan understood full well that an open market would reduce the cost of housing and provide more and better dwellings. Lower-income people would have the choice of low-rent privately constructed technologically innovative units or they could move into older units vacated by those who would move up and on once the inducement of artificially cheap rents was removed. And there would have been other benefits, or will be, if we can convince politicians to implement these recommendations.
Q-You mentioned other benefits?
A-Increased revenue to local governments, for one thing. Consider the loss of tax revenue due to the delapidated and abandoned housing units and depressed assessments due to rent control. Rigid building codes, a wariness to experiment with new developments and restrictive zoning laws are strong disincentives to the construction and renovation of low-cost housing. But the very greatest benefit in my mind would be to free citizens from government control of their property and their destinies.
Q-I guess that's the goal of most of the non-profits you've mentioned.
A-There's one I missed. Jubilee Housing has an approach to housing that Robert Woodson and Jack Kemp would appreciate. This volunteer group, based on christian principles, seeks "to meet social needs in ways that encourage self-development of persons instead of further dependency." The rents are low in the units it owns and manages and residents participate in maintenance and managment. The Jubilee group has related agencies to provide health care and help tenants acquire job skills, parenting skills and other education, as desired.
Q-Doesn't James Rouse have a connection to Jubilee?
A-Although I first learned of Jubilee Housing through my dear friend, Knox Banner, one-time president of the National Association of Housing and Redevelopment Officials and expert in low-income housing, it could be said that James Rouse is to Jubilee Housing what Jimmy Carter is to Habitat for Humanity. Both of these organizations, by the way, are, in my opinion, two of the best examples of privatized low-income housing in the country.
Q-Was Jubilee started by Mr. Rouse?
A-He certainly helped it get its wings. In 1973 members of a church in Washington D.C. needed help to purchase a couple of delapidated buildings that they intended to renovate and use to house the poor. Mr. Rouse borrowed the purchase money and at the end of three years and after more than 50,000 volunteer hours of work, the first 90 units of the Jubilee Housing Project were ready for tenants.
It is said that this project was the inspiration for Rouse's Enterprise Foundation which helps people gain the skills to finance, renovate and manage property at the lowest cost possible.
Q-I've heard that Mr. Rouse is an idealist.
A-I'm sure he is, as is Donald Terner at Bridge, and Kimi Gray at Kenilworth and Genevieve Brooks at Charlotte Gardens, and Macler Shepard at JVL and everyone who has ever gotten anything done (All these peoples' stories were discussed in other files).
A key is having faith in the goodness and abilities of people; people of all ages, nationalities, races, religions and economic status. We must recognize, as James Rouse said in an interview with journalist Claire Carter, "That poor people can live in a sense of community and well-being with the opportunity to fulfill themselves. . . it's absolutely do-able."