Over the past year, the Enterprise policy team conducted independent research and met with dozens of housing policy experts, affordable housing advocates, real estate investors and other key stakeholders to identify the long-term policies necessary to address America’s rental housing crisis. Much of this work builds on the findings of the Bipartisan Housing Commission’s final report, Housing America’s Future: New Directions for National Policy, which was published in February 2013.
The team concluded that any long-term strategy for housing policy in the U.S. must have four core components:
Below are specific policy recommendations within each category, along with initial estimates of the cost and impact of each proposal (where available). For a full summary of the platform’s recommendations, see Appendix A.
The Section 8 Housing Choice Voucher program serves 2.1 million households and is America’s primary tool for helping low-income renters remain stably housed while renting apartments in the private market. While the program has been largely successful in helping low-income families find decent, stable and affordable housing, more must be done to ensure that recipients have access to communities with good schools, jobs and other opportunities. In 2014, nearly 60 percent of families with children receiving a voucher lived in a neighborhood with a poverty rate of more than 20 percent, while 14 percent lived in a neighborhood with a poverty rate of more than 40 percent. Similarly, in 2008 only one in four families with children receiving a voucher lived near an elementary school that ranked in the top half of the state.
Certain program rules seem to encourage voucher holders to live in higher-poverty neighborhoods. HUD limits the total amount of rental assistance that a family can receive by establishing fair market rents for a particular area. Under current rules, these market rents are set for each metro area, even though there are significant disparities in the cost of living within each metro. For example, rents in wealthier neighborhoods of Manhattan or West Chester County in New York are significantly higher than those in the Bronx, but the neighborhoods are subject to the same rent limits for administering the Section 8 program.
HUD is currently testing so-called “small area fair market rents” in certain cities, which would set market rents at the zip code level instead of the metro level. When small-area rent limits were tested on a pilot basis in Dallas, studies found that voucher holders were able to move to neighborhoods with 17 percent less violent crime and poverty rates that were two percentage points lower, all while bringing down the total cost of the program.
When structured properly, the use of small-area fair market rents has the potential to open up certain low-poverty neighborhoods to voucher holders. At the same time, however, there is risk of exacerbating disinvestment in higher-poverty neighborhoods by reducing rents in those areas below the level at which responsible landlords can reasonably operate and maintain the existing stock and create new housing. Local benchmarks should be carefully calibrated to ensure that the value of each voucher accurately reflects the cost of living in that community, especially in gentrifying neighborhoods where rents are rapidly changing. In addition, any expansion of small-area fair market rents should be phased in over a period of several years to minimize any negative impact on lower-cost neighborhoods within the metro area, while providing flexibility for gentrifying neighborhoods.
In addition to this change, HUD can further encourage access to high-opportunity neighborhoods by changing the way they oversee the voucher program’s administration at the local level. The Center on Budget and Policy Priorities recently proposed several other administrative changes, including:
These changes should be informed by the results of HUD’s “Moving to Opportunity” demonstration, which helped families receiving federal rental assistance move from high-poverty neighborhoods to lower-poverty neighborhoods. A recent evaluation of the demonstration found that children who moved into high-opportunity neighborhoods at a young age saw their lifetime earnings increase by about $302,000 compared to similar children who stayed put, alongside significant mental and physical health benefits. The researchers concluded that the additional tax revenue from these earnings alone would completely “offset the incremental cost of the subsidized voucher.”
In addition to these changes at the federal level, local housing authorities and community-based nonprofits play a key role in improving location outcomes for voucher recipients. As part of a 1995 settlement with HUD over segregation in public housing, Baltimore’s Housing Mobility Program provides long-term counseling, financial education and other resources to minority families with housing vouchers hoping to move to a low-poverty neighborhood in or near the city. A key component of the Baltimore program is voucher mobility, which makes it easier for a family to move across jurisdictions. The nonprofit Inclusive Communities Project operates a similar counseling program in the Dallas region, which helps voucher holders find housing in nearby Collin, Denton, Tarrant, Rockwall, Ellis and Kaufman counties. In Chicago, the housing authority’s Regional Housing Choice Initiative provides counseling and financial incentives for voucher holders to move to neighborhoods with better schools, employment opportunities and lower crime rates. A recent analysis of the Chicago program showed that children in participating families attended significantly better-performing schools and increased their reading scores by an average of 14 percentage points after the move.
Other housing authorities have partnered with local school districts to improve education outcomes for voucher recipients. For example, a school district in Tacoma, Washington, is working with its local housing authority to reduce school mobility rates among its lowest-income students. The housing authority provides rental assistance vouchers, on-site counseling and other services to eligible families that commit to live within the attendance area of McCarver Elementary School, an area of the city that has experienced particularly high rates of family mobility and homelessness. The pilot is still underway, but initial assessments have shown that the program has resulted in fewer suspensions, better attendance, increased parent engagement and signs of both academic and behavioral progress for participating students.
The Fair Housing Act of 1968 generally prohibits discrimination in the sale and rental of housing, but the law does not apply to discrimination against renters based on the source of their income. For example, in most states a landlord can choose not to offer a unit to a low-income family simply because they have a Housing Choice Voucher. According to the Urban Institute, local studies in New York City, New Orleans and Washington, D.C., have found that many landlords discriminate against voucher holders by either imposing additional conditions or simply rejecting their applications.
At least 13 states and several cities and counties have passed laws that prohibit discrimination based on source of income, which have proven to improve acceptance rates and location outcomes for voucher recipients. We encourage more states and municipalities to enact similar bans and incentives to expand access to high-opportunity neighborhoods for voucher holders. In addition, Congress should consider expanding the Fair Housing Act to prohibit landlords from discriminating based on the source of an applicant’s income.
he Low-Income Housing Tax Credit, also known as the Housing Credit, has financed virtually all of the country’s affordable housing construction since the mid-1980s. The program is an undeniable success story in public-private partnership, helping to build or preserve nearly 2.8 million homes that are affordable to low-income renters. However, due to a variety of constraints – including higher land costs and “not-in-my-backyard” objections from current residents – it is often comparatively difficult for developers to build Housing Credit properties in certain high-cost neighborhoods, which typically provide better access to jobs, good schools and public transit.
Even though it is a federal tax credit, the Housing Credit program is almost entirely administered by state housing finance agencies, meaning it is mostly up to the states to decide where developments are built and under what terms. For this reason, the location of Housing Credit properties varies widely from state to state. Nationwide, roughly one-third of Housing Credit units in metropolitan areas are located in low-poverty neighborhoods, meaning census tracts with poverty rates below 10 percent. In Arizona, however, just 2 percent of Housing Credit properties are located in low-poverty neighborhoods, while in neighboring Nevada the number is 40 percent.
In administering the Housing Credit program, it is crucial for each state to balance the allocation of credits to both high-opportunity neighborhoods and distressed communities. This often requires specific provisions that encourage development in more affluent neighborhoods in the state’s Qualified Allocation Plan (QAP), which lays out the basic rules and guidelines for allocating credits. For example, Massachusetts and Texas each provide bonuses to developments in areas identified as opportunity neighborhoods, while Mississippi and Illinois provide a scoring preference to developments in counties with the high median incomes. Other states, such as Pennsylvania and Connecticut, prioritize developments that are located near certain amenities, such as employment centers and transit.
Congress can also play a crucial role in strengthening the Housing Credit. In many high-cost markets, it is nearly impossible to provide housing that is affordable to extremely low-income families without significant operating subsidies beyond the Housing Credit. At the same time, many low-income families earning between 60 and 80 percent of AMI are not eligible for Housing Credit apartments, yet have very limited affordable housing options in high-cost areas.
Congress should provide additional flexibility to states to achieve a more diverse mix of incomes in Housing Credit properties. Rather than maintain a single across-the-board income limit of 60 percent of AMI, which is the current law, developments could be targeted such that some apartments are available to low-income households earning up to 80 percent of AMI, so long as a certain percentage of the units in the property are affordable to extremely low-income families. The overall average income limit would still be required to remain at or below 60 percent of AMI. By allowing this income averaging in Housing Credit properties, states will have the flexibility to serve more extremely low-income tenants paying lower rents, since the higher rents paid by the higher-income tenants would help maintain the financial feasibility of the development.
Over the past 40 years, more than 500 localities have enacted some form of inclusionary zoning to encourage or require market-rate developers to help expand the local supply of affordable housing. Under a typical inclusionary zoning rule, in order for a developer to receive the necessary approvals and permits to begin construction, they must agree to set aside a certain percentage of the units in a new or rehabilitated development for low- and moderate-income renters.
Specific inclusionary zoning rules vary from city to city. For example, New York City has for years had a voluntary inclusionary zoning program that offers density bonuses to participating developers. Mayor Bill de Blasio recently proposed a citywide mandatory policy for all new developments in areas that are rezoned. Chicago has a citywide program that is mandatory for all developments that meet certain thresholds. In other cities, developers have the option to either set aside affordable units or pay into an affordable housing fund.
Research shows that well-designed inclusionary zoning initiatives can significantly improve access to low-poverty neighborhoods for low-income families – often with little to no additional subsidy. In a recent study of 11 jurisdictions with inclusionary zoning policies in place, more than two-thirds of the affordable units created through the policy were located in high-opportunity neighborhoods. We encourage more jurisdictions to establish similar inclusionary zoning rules that fit the development patterns and affordable housing needs of the local community.
A significant portion of homes built through inclusionary zoning rules are located in high-opportunity neighborhoods
While zoning is typically a local issue, it’s worth noting that some states, such as Arizona and Oregon, have laws that essentially ban local inclusionary housing rules. We urge all states to remove these and any other impediments to the development of affordable housing at the local level. In addition, some states have put in place laws that supersede exclusionary zoning rules at the local level. For example, Massachusetts state law allows developers to override local zoning bylaws in order to increase the stock of affordable housing in areas where less than 10 percent of the housing stock is deemed affordable.
In addition to inclusionary zoning rules, jurisdictions should take a careful look at other local regulations – including land use restrictions, building codes, parking minimums and permitting and approval processes – to ensure that they do not unnecessarily delay or restrict the development of new rental housing or increase costs throughout the development process. According to a 2003 study from the National Bureau of Economic Research, these and other land-use regulations imposed regulatory taxes of at least 10 percent in some of the country’s most expensive cities, including New York, San Francisco, Los Angeles, Boston and Washington, DC. Another study in 2008 found that, for areas that have seen an increase in job opportunities, cities with high levels of local regulation tend to see a smaller increase in the housing stock, greater house price appreciation and lower employment growth compared to low-regulation cities.
Estimated regulatory tax on housing costs due to local land-use regulations
In January 2014, Enterprise and the Urban Land Institute’s Terwilliger Center for Housing released a report entitled Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals, which offers concrete policy recommendations to support the cost-effective development of affordable rental housing while maintaining appropriate standards for quality, durability and livability. The report offers a set of recommendations for state and local policymakers, including:
Public investments in transit can help to catalyze regional growth and improve access to employment, education and health care services, especially for lower-income residents who tend to rely on public transportation. However, without careful planning these investments can also push up rents and home prices in neighborhoods near new transit lines, which could decrease affordability for low- and moderate-income residents. A study from the Dukakis Center at Northeastern University found that, in a majority of neighborhoods that received new transit service between 1990 and 2000, median incomes, housing costs and levels of in-migration increased relative to the rest of the metro area. For example, growth in housing costs outpaced the surrounding area in about three-quarters of the neighborhoods that received new transit service during that time period.
Changes in neighborhoods gaining new transit access between 1990 and 2000
Equitable transit-oriented development (eTOD) seeks to create housing and transportation options for residents of all income levels, typically through the construction or preservation of affordable rental housing near public transportation. Several factors make eTOD difficult to achieve in certain markets, including:
While most policy decisions related to eTOD are made at the state, regional or local level, the federal government also plays an important role. For example, the Federal Transit Administration (FTA) supports local transit capital projects through the Capital Investment Grant program. In 2013, the FTA adopted a new evaluation framework that creates incentives for a range of transit-supportive elements, including affordable housing. We urge the FTA and other federal agencies to pursue further ways to better integrate local housing needs into any federally-supported transit project.
When people think of rental housing, they tend to think of large multifamily buildings in dense urban areas. In reality, more than 80 percent of the nation’s rental housing is located in smaller buildings with fewer than 20 units, and more than half of America’s renters live in single-family homes with fewer than five units. The stock of single-family rental has increased dramatically in recent years, as millions of foreclosed homes have been converted to rental properties.
Smaller apartment buildings tend to be older and command lower rents compared to larger multifamily buildings, making them a critical source of unsubsidized affordable housing. However, these buildings are often owned by individuals or small-scale mom and pop investors, who often have trouble accessing capital to refinance, recapitalize or rehabilitate their properties. In addition, the relatively small mortgages on these properties – usually below $3 million – make it very difficult for lenders to originate them profitably after accounting for personnel, legal and other transaction costs. Due to the slim margins, the loans tend to be originated by smaller local banks with limited access to the secondary mortgage market, which makes it difficult to provide long-term, fixed rate loans.
Enterprise strongly supports public policies that seek to preserve this crucial stock of naturally affordable rental housing, especially in high-opportunity neighborhoods and gentrifying areas. For example, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, recently set annual goals for Fannie- and Freddie-backed lending to affordable small multifamily properties. In addition, the Federal Housing Administration recently launched a new risk-sharing insurance product to help owners recapitalize or rehabilitate their small multifamily buildings, so long as they keep rents affordable to low-income families.
After decades of underinvestment, many of the country’s 1.1 million units of public housing are in need of significant capital investment. According to HUD, the aging stock has a backlog of at least $25.6 billion in unmet capital needs , and an estimated 10,000 public housing units are lost entirely each year to obsolescence and decay.
Preserving at-risk public housing must be a key component of federal housing policy. But we need to think beyond the current funding model, which has allowed hundreds of thousands of units to wither in a state of disrepair. HUD’s Rental Assistance Demonstration (RAD) allows public housing authorities to convert dilapidated projects into privately financed, government-subsidized properties, using the Section 8 program to preserve long-term affordability. By altering the source of the rental subsidy, participating authorities can attract outside sources of financing. Some of those sources are public, such as the Low-Income Housing Tax Credit, while others are private.
Several local housing authorities see RAD as a promising tool for preserving at-risk public housing while deconcentrating poverty in their most distressed neighborhoods. For example, with support from Enterprise Community Partners, the city of San Francisco is working to rehabilitate over 4,500 distressed public housing apartments through RAD, using a combination of Low-Income Housing Tax Credits, debt financing, grant support and project-based rental assistance. According to the San Francisco Housing Authority, the RAD program allows for the city to make the necessary capital investments over a period three years, while it would take more than 50 years to raise the necessary funds through the public housing program.
Congress initially authorized local housing authorities to convert 60,000 units under RAD, but HUD has so far received applications to convert over 190,000 units. At the urging of hundreds of public housing authorities and other stakeholders through the Enterprise-led Raise the Cap Coalition, Congress in 2014 increased the cap to 185,000 units, which covered the current backlog of applications in the pipeline. As a next step, Congress should remove the unit cap altogether.
We believe that RAD has the potential to preserve most, if not all, of the country’s at-risk public housing stock. However, the highest-need properties that require significant rehabilitation will need significant capital subsidies from the federal government. According to our preliminary estimates, it would require roughly $15-20 billion in federal support — or about $3-4 billion annually for the next five years — to support RAD conversions that address the capital backlog for the entire public housing stock.
In addition to the public housing stock, there are 1.3 million units of privately owned affordable rental housing supported with Section 8 project-based rental assistance (PBRA). Under the PBRA program, a property is partially funded by the federal government through a long-term contract with the owner, through which HUD covers a portion of the monthly rent over a certain period. According to the Urban Institute, about one-third of existing PBRA units are at risk of losing their affordability status due to contracts that are set to expire in the coming years. Preservation of all existing PBRA units, specifically by renewing rental assistance contracts when they expire, must be a key priority for federal housing policy. After all, it is significantly cheaper — somewhere between one-half and two-thirds the cost — to preserve an existing affordable property than it is to build a new one.
Another 450,000 affordable rental units are supported through the Department of Agriculture’s Section 515 Rural Rental Housing program. The Section 515 program provides long-term, low-interest and highly leveraged loans — covering between 95 percent and 105 percent of a project’s development costs — to support the construction of affordable rental housing in rural communities, along with ongoing rental assistance to keep the units affordable to very low- and extremely low-income households. Most of the country’s Section 515 stock was built in the 1970s and 1980s, and three-quarters of outstanding loans are expected to mature in the next 10 years. Many of the units in properties with maturing loans are at serious risk of being lost due to either obsolescence (in weaker markets) or conversion to market-rate housing (in stronger markets). We encourage the USDA to develop new tools to support the cost-effective rehabilitation and preservation of all at-risk Section 515 units.
No two communities are the same, and each distressed neighborhood faces a unique set of social and economic challenges, from growing poverty and high unemployment to poor performing schools and blighted streets. While solutions must be tailored to the specific needs of the community, there is a significant need for better communication across cities, with a focus on state and local policies that have proven to work. In addition, overstretched budgets at all levels of governments can make matters worse, leaving cities without the tax base or resources to provide the necessary public services and social programs.
In 2014, Enterprise and our partners joined the White House and HUD to launch the National Resource Network (NRN), a consortium of experts that is providing cross-cutting technical assistance to help turn around dozens of the country’s most economically challenged communities. Over the next three years, the NRN will help 80-100 cities build the capacity to rethink the delivery of basic services, reform key spending areas and invest in social equity and economic recovery. The NRN provides three core services:
In addition to the NRN, HUD supports local nonprofits through the Section 4 Capacity Building for Community Development and Affordable Housing program. The Section 4 program ensures that community-based organizations have the ability to attract resources to create and sustain jobs, increase housing production and preserve the vitality and affordability of existing housing developments nationwide. Since 1993, Enterprise has distributed over $125 million in Section 4 support to more than 1,250 community development organizations throughout the country. Over the past decade, Section 4 grants have created or preserved over 89,000 homes and attracted over $14.5 billion in investment for low-income neighborhoods and communities across the country. We encourage Congress to significantly expand annual allocations to these programs to reach as many communities as possible.
The federal government can further help to build local capacity by better coordinating grant resources across sectors. One promising approach is the federal Promise Zones initiative, which was launched in 2013 to promote cross-sector, inter-agency investments in America’s most distressed neighborhoods. The program is a collaboration between local policymakers and several federal agencies — including the Departments of Education, Housing and Urban Development and Justice —t o identify high-poverty communities for focused public and private investment that target job creation, the development of affordable housing, improved educational outcomes and other goals. Among other benefits, areas designated as Promise Zones receive on-the-ground technical assistance from federal staff and priority status in accessing certain federal resources, including:
So far the federal government has designated 13 Promise Zones, including communities in dense urban areas, suburbs, rural areas and tribal lands. While it is too early to assess the program’s overall impact, the first round of Promise Zone initiatives has shown promising signs of progress. For example, according to the White House, the Los Angeles Promise Zone has used its Promise Neighborhoods grant to increase college preparedness among high school graduates by 63 percent. The San Antonio Promise Zone has used its funding from the Promise Neighborhoods and Choice Neighborhoods programs to increase the local high school’s graduation rates from 46 percent to 84 percent.
According to the Federal Reserve, only about 2 percent of the country’s housing stock is considered long-term vacant, meaning the property is nonseasonal and has been vacant for an unusually long period of time, typically because of abandonment. However, the stock of abandoned properties is highly concentrated in a small number of neighborhoods: about one-tenth of all Census tracts account for about 40 percent of all long-term vacant properties in the U.S. Communities that have experienced long-term economic stagnation or decline (such as Detroit), areas that have experienced a natural disaster (such as New Orleans) and areas that were hit hard by the recent foreclosure crisis (such as Las Vegas) have particularly high levels of blight and abandonment.
Top 10 metro areas with the highest vacancy rates for nonseasonal housing
Abandoned properties are more than just eyesores — they’re often also magnets for vandalism, arson, drug trafficking and other criminal activity, often resulting in a drop in property values throughout the neighborhood. According to the Center for Community Progress, even a single abandoned property on a block can have a ripple effect on the local economy, including:
Many states and local governments have responded to blight problems by creating land banks, which are government entities or nonprofit organizations that are focused on the conversion of vacant and abandoned properties into productive use. Land banks acquire vacant properties — often through an agreement with the city after the owner fails to pay their property taxes — and works with the local community to make the most of the asset, given local needs and market conditions. Sometimes this means selling the property to a homebuyer who will fix it up, other times it means rehabilitating the property and renting it out, and other times in means demolishing the property and replacing it with a new structure, a park, a garden or another community asset. As of 2014, at least 10 states and over 120 municipalities had established land banks.
Of course, land banking is just one of many possible solutions to neighborhood blight and abandonment. In Philadelphia, for example, the local horticultural society has contracted with the city government to green unused vacant lots by removing trash, laying topsoil, planting seed and trees and installing fences, all at a modest cost of about $1 per square foot. Studies found that greening a single vacant lot in a neighborhood can increase the value of surrounding houses by 20 percent, while leading to significant drops in gun violence and vandalism. Enterprise strongly supports state and local neighborhood revitalization and blight clearance efforts that are tailored to the specific needs of the surrounding community and reflect the local housing market.
The New Markets Tax Credit (NMTC) was designed to attract private investment in low-income communities where capital doesn’t naturally tend to flow. Since its enactment in 2000, the program has helped to develop or rehabilitate more than 100 million square feet of residential and commercial real estate and created nearly 750,000 jobs, all while leveraging $8 in private investment for every $1 from the government. Research shows that the NMTC has generated more federal tax revenue than the credit costs, essentially paying for itself.
The program allows individual and corporate investors to reduce their federal income tax burden in exchange for a qualified equity investment in a community development entity (CDE), which uses that money to fund businesses and real estate projects in underserved communities. At least 85 percent of those investments must be in neighborhoods with a poverty rate of at least 20 percent or a median income that’s below 80 percent of the area median. In practice, the communities receiving NMTC investments are even more distressed than required by law, with poverty rates over 30 percent and incomes below 60 percent of the area median.
Because of scarce resources, there is a very high level of competition for NMTC allocations. In 2013 developers and community groups submitted nearly $26 billion worth of applications for $3.5 billion in credit authority. We estimate that for every one project that received a credit allocation that year, there were at least nine fundable projects that were rejected.
Despite a proven track record of success and broad bipartisan support, the NMTC program is at serious risk today. The program has yet to be made a permanent part of the tax code, leaving lawmakers to extend and fund the program on an annual basis. While Congress has extended the program each time it expired, lawmakers have continually failed to renew the program on a long-term or permanent basis. This uncertainty deters forward-looking investors from committing capital and discourages CDEs from undertaking long-term approaches to addressing community revitalization. There is also a need to increase funding levels, as the current allocation falls far short of need. For these and other reasons, in 2015 bipartisan legislation was introduced in both the House and the Senate to permanently extend and strengthen the NMTC with an allocation of $5 billion per year.
In addition to these immediate improvements, stakeholders and policymakers have offered several other proposals for improving the NMTC. For example, the Congressional Budget Office (CBO) recently recommended requiring CDEs to invest 100 percent of their qualified equity investments into low-income communities, instead of the current requirement of 85 percent. The CBO also recommended reworking the awarding process to place greater emphasis on a CDE’s community impact, which is evaluated along with its management capacity, capitalization and business strategy.
Community development financial institutions (CDFIs) are federally certified financial institutions that direct at least 60 percent of their lending activities to low-income neighborhoods. In 2014, CDFIs made over 28,000 loans or investments totaling nearly $3 billion, financing nearly 10,000 small businesses and more than 25,000 housing units.
CDFIs raise capital from several sources, including banks, foundations, individuals, religious institutions and government agencies. Many high-capacity CDFIs also offer fixed-income investment products to individual and institutional investors. For example, the Enterprise Community Impact Note is a fixed-income security that delivers a competitive rate of return to investors while primarily financing housing and community development projects in lower-income neighborhoods. According to analysis from ImpactUs, a soon-to-be-launched Enterprise-supported web platform for community investment products, at least 28 large CDFIs are currently raising investment capital through securities, with a combined $2.4 billion in offerings and $688 million in debt outstanding.
Under current law, any interest earned through an investment in a CDFI is taxed at the same rate as interest earned in a savings account, certificate of deposit or corporate bond, which typically have no obligation to produce clear social benefits. If investments like the Impact Note were subject to a lower tax rate or received some other tax benefit, it would meaningfully expand investor interest, leading to more private investment in low-income communities.
Certain states already grant preferential tax treatments to investments in CDFIs and other eligible community development organizations. South Carolina offers a 33 percent credit against state tax liabilities for each dollar invested or donated to state-certified CDFIs and community development corporations. In California, investors receive a tax credit worth 20 percent of their investment into CDFIs and other entities that are part of the California Organized Investment Network (COIN).
Congress should establish a nonrefundable federal tax credit worth a certain percent of an investment made into eligible securities offered by certified CDFIs and other community investment entities. The tax credit could either apply to the total value of the investment or the annual interest earned by the investor. Either way, the tax benefit should be spread out over a certain timespan — likely 5 years — to encourage investors to hold the investment for longer periods of time. Here’s how the proposed Community Investment Tax Credit could flow to investors:
More research is necessary to determine the appropriate value of the Community Investment Tax Credit, the type of securities that should be eligible for the credit, the period over which the credits can be claimed and other key details of the proposal. As a general rule, the value of the credit should be set against some benchmark, with the goal of aligning the financial return of a typical CDFI-related security with that of a more mainstream security.
We recommend testing this proposal with an initial allocation of $50 million, which would generate up to $500 million in new investment capital if applied as a 10-percent tax credit. If the tax credit proves to increase investor interest in securities offered by CDFIs — and if the CDFIs prove capable of deploying that capital effectively to communities — Congress should consider making the Community Investment Tax Credit a permanent part of the U.S. Tax Code.
Over the past decade, the global market for “impact investing” – investments made with the intention to generate measurable social and environmental impact alongside a financial return — has grown in both scale and prominence. In the U.S., profit-seeking investors are working with public and private partners to address some of the most pressing issues facing distressed communities — from poor health and education outcomes to a lack of quality, affordable housing.
While the term impact investing is relatively new — it was coined in 2007 — the underlying concept of public-private partnerships is anything but. For decades, America’s community development sector has functioned through a public-private model, with private investors, government agencies and local nonprofit organizations working together toward shared goals with mutual accountability. Public policy plays a key role in making these partnerships possible. For example, the federal government facilitates the flow of private capital into distressed and underserved communities through an array of policies, including tax incentives like the Low-Income Housing Tax Credit and the New Markets Tax Credit, regulatory requirements like the Community Reinvestment Act and capacity building programs like the Section 4 Capacity Building for Community Development and Affordable Housing program.
By continuing to grow and improve the broader market for impact investing in the U.S., we have the opportunity to unleash significant private investment into communities that have long suffered from disinvestment and neglect. But that will require a thoughtful, comprehensive policy strategy from the federal government. Notably, when researchers at the Global Impact Investing Network (GIIN) and J.P. Morgan asked impact investors to identify the government policies that would be most helpful in accelerating the growth of the impact investing market, they identified subsidies to improve an investment’s risk/return profile — either through credit enhancement or tax credits — and clearly-defined regulations as the highest priorities.
Perceived helpfulness of various policies for accelerating impact investing
In 2013, Enterprise co-founded the Accelerating Impact Investing Initiative (AI3), a cross-sector coalition of investors, researchers, philanthropic organizations, practitioners and policy experts working to develop public policies to improve and expand the market for impact investments in the United States. Together with our partners, including Pacific Community Ventures and Harvard’s Initiative for Responsible Investment, over the past year we have identified a set of specific policy changes that could meaningfully expand the market, including:
Ten years ago, as Hurricane Katrina tore through the Gulf Coast, the nearly 900 apartments that made up the Lafitte public housing complex in New Orleans’ historic Treme neighborhood were evacuated. With the exception of a handful of apartments, the buildings would never re-open.
When the Gulf Coast office of Enterprise, Providence Community Housing and L+M Development Partners took on the task of rebuilding Lafitte and other properties in the surrounding neighborhood, the goal was to provide opportunity for all former Lafitte residents to return to a strong and vibrant community. Building quality and affordable homes was an essential first step, but we knew it wouldn’t be enough. We needed to connect those homes to other opportunities for a better life — stable jobs, quality health care and, for the neighborhood’s youngest residents, a good education.
With crucial support from the federal, state and local governments, as well as private investment made possible by those public resources, Enterprise and our partners are working to transform the neighborhood around Lafitte into a community of opportunity. Together we have completed the development of nearly 600 homes that are energy-efficient and built to sustain another storm. Providence re-opened an adjacent community center with an afterschool program for neighborhood children and job readiness programs for adults focused on health-related fields. When complete, Faubourg Lafitte will include 1,500 homes, including a one-for-one replacement of all 900 subsidized apartments and the development of an additional 600 for-sale and market-rate rental homes.
At the same time, the broader Treme neighborhood surrounding Faubourg Lafitte is undergoing a dramatic transformation. Soon two new hospital campuses will open within walking distance of Faubourg Lafitte, providing an estimated 8,000 jobs. A new state of the art charter school recently opened in the neighborhood, as well as a new 3.1-mile public park providing recreation space and walking or bicycle access from Faubourg Lafitte to jobs in the French Quarter. Treme is also home to ReFresh, a new fresh food retail center which includes a Whole Foods, a nutritional center and a café that provides life skills and employment training for disconnected youth.
Faubourg Lafitte is an example of a successful public-private partnership and a sustained, coordinated and comprehensive investment into a deeply impoverished neighborhood. And that investment is already paying dividends, with over $4 billion of public and private investment taking place in the surrounding community.
Even in the wake of the worst foreclosure crisis since the Great Depression, sustainable homeownership remains a key pathway to building wealth and providing financial stability for lower-income working households. Unfortunately, our country’s primary policy tools for supporting homeownership — the Mortgage Interest Deduction (MID) and the Property Tax Deduction (PTD), which combined cost taxpayers about $100 billion each year — are woefully inefficient and ineffective. There are six basic problems with these tax policies:
More than three-quarters of the benefits of the MID and PTD go to higher-income households, even though these households make up a relatively small portion of the U.S. population
Once the “third rail” of housing subsidies, reforms to the MID and other tax subsidies to homeowners have been embraced by Republicans and Democrats in several recent tax reform efforts, in part because its cost is so high and its shortcomings are so glaring. In recent years, dozens of researchers, policy analysts, academics and other experts have offered promising ideas for reforming the MID. While the details vary, the proposals fall into three general categories:
Regardless of the specific approach, we believe that any effort to reform the MID and PTD must follow four guiding principles:
Projected costs and impacts for different options for reforming the Mortgage Interest Deduction
As discussed above, the Housing Credit is the country’s primary tool for creating new affordable rental homes. However, as demand for rental housing has skyrocketed in recent years, the amount of Housing Credits available to states has not kept pace. Developers requested more than $2.4 billion in Housing Credits from state allocating agencies in 2013, over three times the available authority, according to the National Council of State Housing Agencies. As a result, each year many viable projects that would serve low-income families in need are turned down because of scarcity of tax credits, not because of the applicant’s qualifications or the community’s needs.
The Housing Credit is also the country’s main tool available to preserve the aging federally assisted housing stock, which places additional pressure on limited program resources. According to the Joint Center for Housing Studies, an estimated 2.2 million assisted rental units will reach the end of their mandatory affordability period over the next decade, many of which are at risk of being converted to market-rate housing or removed from the housing stock altogether. About 1.2 million of those at-risk units are in properties developed by the Housing Credit.
Over the next decade, 2.2 million government-assisted rental units will reach the end of their mandatory affordability period
According to our analysis, in order to keep up with rising demand, preserve at-risk affordable housing and make a meaningful dent in the existing affordable housing supply gap, annual allocations to the Housing Credit must at least double. If phased in over a period of several years, we believe that there will be sufficient demand among developers and investors for these additional Housing Credits.
There is already broad, bipartisan support for an expansion of the Housing Credit. The Joint Center for Housing Studies recently called the Housing Credit a “critical source of investment capital,” and added that “competing demands — for new construction as well as for preservation — have put the tax credit program under extreme pressure and raised the question of whether it ought to be expanded.” Recognizing the growing need for affordable rental housing, the Bipartisan Policy Center’s Housing Commission in 2013 proposed increasing Housing Credit resources by 50 percent over current funding levels.
More recently, President Obama’s proposed fiscal year 2016 budget also included a provision that would significantly expand the Housing Credit by allowing the program to take advantage of existing unused resources. The White House proposal would permit states to convert up to 18 percent of their private activity bond volume cap into Housing Credit allocation authority, which would result in a roughly 50 percent increase in Housing Credits for states that are able to and choose to convert the full amount. However, the amount of unused volume cap varies by state, and some states may elect not to convert the full 18 percent (or any volume cap at all) for a variety of reasons. While this proposal would provide states unprecedented flexibility to more effectively meet local needs, it is not a viable long-term substitute for new Housing Credit allocation authority.
To enable the industry to cultivate investor demand for additional Housing Credits, we recommend that allocations be raised 50 percent in the first year and 10 percent each year for five years. Once fully phased in, we expect a doubling of the Housing Credit to help build or preserve up to an additional 80,000 rental homes each year, each of which is affordable to low-income families for a period of at least 30 years. Once fully phased in, we estimate that this expansion will cost the government an additional $7-8 billion annually in foregone tax revenues.
In addition to the tax credits themselves, Housing Credit properties require additional sources of funding, such as grants or rental assistance, in order to be financially viable or achieve a level of affordability that’s deeper than the program’s minimum requirement. Historically, this gap financing has been provided by programs like the HOME Investment Partnerships Program, through which the federal government issues grants to states and local governments to meet their affordable housing needs. Approximately one in four developments financed with Housing Credits use HOME dollars. However, federal funding to HOME has been cut by more than 50 percent since 2010, forcing local policymakers and developers to do more with less. For these reasons, any expansion of the Housing Credit must be accompanied by additional federal resources for gap financing. Once fully phased in, we estimate that a doubling of the Housing Credit will require an additional $3-4 billion each year in gap financing, provided either from a significantly expanded HOME program or another source.
As part of any significant expansion of the Housing Credit program, Congress should also put in place strong protections to ensure that current Housing Credit properties remain affordable for the long term. While all Housing Credit properties are required to remain affordable for at least 30 years, after that point these properties are vulnerable to conversions to market-rate rentals. In addition to enforcing the existing affordability requirements, Congress should consider extending the requirements beyond 30 years. State and local policymakers can also create incentives — such as tax benefits, operating grants or low-interest loans for renovations — for owners of Housing Credit properties to keep existing Housing Credits units affordable beyond the current required affordability period.
According to the National Apartment Association, it costs the typical landlord about $370 each month just to maintain an apartment — and that’s before accounting for upfront development costs and ongoing mortgage payments. Realistically, it’s practically impossible for a landlord to charge less than $500 per month for a typical apartment without taking a loss. Even at that break-even price, a family would have to make at least $20,000 per year to afford rent on that apartment, based on widely accepted standards of affordability. The unfortunate reality is that very few households earning below that amount – including elderly or disabled adults on fixed incomes, full-time workers earning at or near the federal minimum wage and single parents who can only work part time – will be able to make rent on a privately owned and financed apartment without some sort of assistance.
For decades, federal rental assistance programs – and the Section 8 Housing Choice Voucher program in particular – have proven to be effective in keeping low-income households stably housed, even those that are at serious risk of becoming homeless. According to initial findings from HUD’s Family Options Study, which tracked certain outcomes for families with children living in homeless shelters, families with Section 8 vouchers were more than twice as likely to remain stably housed and avoid a foster care placement compared to families leaving shelter without a voucher, among other positive outcomes.
Families leaving homeless shelters with a Section 8 Voucher achieved far better outcomes than families without a voucher
Despite these results, due to rising demand and a series of budget cuts, federal funding for rental assistance programs covers only a small fraction of the people who need it. HUD estimates, that the number of very low-income renters who qualify for rental assistance subsidies increased by 18 percent between 2003 and 2013, while annual funding to HUD’s primary rental assistance programs has stayed relatively flat. Today only 23 percent of households who are eligible for federal rental assistance actually receive it.
As the number of extremely low-income renter households has risen in recent years, federal spending on rental assistance has decreased
That’s one reason why the Bipartisan Policy Center’s (BPC) Housing Commission proposed an ambitious expansion in federal rental assistance, with a particular focus on households with the greatest needs. The commission recommended establishing Section 8 vouchers as an entitlement for all extremely low-income households, essentially putting rental assistance on par with Medicaid, food stamps and public education. According to the BPC report, taking into account reasonable participation rates and other assumptions, this change would provide economic stability to an estimated 3.1 million renter households that are currently unassisted, the vast majority of which are housing insecure today. The expansion would cost the federal government an additional $22.5 billion annually – above the $19 billion spent on Section 8 each year.
The Children’s Defense Fund recently recommended an alternative approach to expanding Section 8 as part of its plan to end child poverty in the U.S. The CDF proposed guaranteeing access to rental assistance vouchers for all families below 150 percent of the poverty line, as well as families for which fair market rent exceeded 50 percent of their income. According to the CDF’s estimates, which were prepared in collaboration with the Urban Institute, such an expansion would help improve the housing security of an additional 2.6 million families, at an additional cost to taxpayers of $23.5 billion each year. The report said that this change “would have the largest impact” of all of the recommendations in their plan, reducing child poverty by 20.8 percent and lifting 2.3 million children out of poverty.
As part of any significant expansion of the Housing Choice Voucher program, Congress should consider granting local housing authorities more flexibility to make the most of available subsidy dollars. Given scarce resources and long waiting lists, some housing authorities may determine that it makes more sense to offer a less generous form of rental assistance which would be available to more eligible families who might not need a means-tested voucher to remain stably housed. For example, Project Independence, a recent pilot initiative focused on low-income renters living with HIV and AIDS in Alameda County, California, offered a flat subsidy that varied by household and bedroom size but was not pegged to income. For example, a single person in a one-bedroom apartment would receive a subsidy of just $225 per month. According to an independent evaluation of the program, participants in Project Independence were paying 68 percent of their monthly income on rent before receiving the subsidy, and with the subsidy they were paying 42 percent. Two years later, 96 percent of participants were still in rental housing, compared to just 10 percent of the comparison group (who did not receive assistance).
(( Mary K. Cunningham, Josh Leopold, Pamela Lee, A Proposed Demonstration of a Flat Rental Subsidy for Very Low Income Households, The Urban Institute (February 2014): http://www.urban.org/uploadedpdf/413031-a-proposed-demostration.pdf ))
In 2008, Congress established the Housing Trust Fund and the Capital Magnet Fund to promote the production and preservation of affordable housing for lower-income families. The Housing Trust Fund is intended to support state and local efforts to build affordable rental housing and provide homeownership opportunities for very and extremely low-income families, while the Capital Magnet Fund helps community development financial institutions (CDFIs) attract private funds to finance their affordable housing activities.
As originally envisioned, both funds would receive funding through a modest assessment on the ongoing business of Fannie Mae and Freddie Mac, but federal regulators suspended those obligations when the GSEs were put into conservatorship in August of 2008. In 2015, however, Fannie and Freddie began contributing money to the two funds, which is expected to generate up to $400 million for the programs each year. Sixty-five percent of that funding will go to the Housing Trust fund, while the remaining 35 percent will go to the Capital Magnet Fund.
Seven years after conservatorship began, the future of Fannie and Freddie is largely uncertain, as the companies have been at the center of a high-stakes debate over the future of housing finance in the U.S. and the appropriate role of government in the housing market. In the 113th Congress alone, four different bills were introduced to wind down the mortgage companies and establish a new system of housing finance in the U.S.
To meet the growing needs of low-income renters and homeowners, we recommend expanding the Housing Trust Fund and Capital Magnet Fund as part of any housing finance reform effort. Instead of the current arrangement – which funds the programs through a 4.2 basis-point assessment on new loan purchases by Fannie and Freddie – Congress should establish an annual assessment of at least 10 basis points on all outstanding mortgages that are backed by the federal government. This would include all securities backed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as any private entities that replace them in the future system. Notably, three of the four housing finance reform bills introduced in the 113th Congress would have significantly expanded funding for the Housing Trust Fund and Capital Magnet Fund.
We estimate that a 10 basis point annual assessment would generate about $18 billion for the programs over the first five years and roughly $6 billion per year after that. Based on reasonable assumptions of per-unit cost, once fully phased in we expect that this level of funding to the Housing Trust Fund will help build or preserve about 60,000 affordable homes each year, most of which are affordable to extremely low-income families. Based on data from the initial round of funding to the Capital Magnet Fund in 2010, we expect that the expanded resources to that program will produce about 165,000 affordable rental homes each year for low-income families.
In 2012, the Center on Budget and Policy Priorities (CBPP) proposed a new federal tax credit program that would provide a deep housing subsidy to extremely low-income renters without the need for additional subsidy. Similar to the Housing Credit, the proposed “Renters Credit” program would be administered by states, with the goal of ensuring that eligible households pay no more than 30 percent of their monthly income on rent. CBPP offered three different ways that the subsidy could flow to renters:
We believe that this is a promising idea that is worth further research and consideration. In particular, we believe that a new Renters Credit could potentially be used to provide a deeper level of subsidy for properties financed using Housing Credits. Under the current rules of the Housing Credit, owners have to charge rents that are affordable to families earning either 50 percent or 60 percent of the area median income – depending on the number of affordable units in the property – and ensure that a low-income family resides in the apartment. As one example of how the program could work, state housing finance agencies could allocate additional Renters Credits to owners who charge rents that are affordable to families earning 30 percent of the area median income. Such a program would work within the existing framework of the Housing Credit, leverage private capital and provide a slightly shallower subsidy compared to vouchers, which means a relatively low cost to taxpayers.
The federal government alone spends $265 billion each year on Medicaid, the country’s primary health insurance program for low-income families and individuals. That’s roughly five-times what the government spends on all affordable housing programs targeted to low-income people.
The federal government spends five-times more on Medicaid than it does on affordable housing programs targeted to low-income households.
A growing body of evidence shows that investments in quality and affordable homes can have profound effects on a person’s long-term health outcomes, from improved asthma to a reduced chance of cardiovascular disease. Providence Center for Outcomes Research & Education, with support from Enterprise Community Partners, recently studied the link between affordable housing and health care for Medicaid-eligible residents of Oregon, with a focus on families with children, elderly adults and people experiencing chronic homelessness. The study found that providing affordable housing with appropriate and integrated health services – including family housing, permanent supportive housing and housing plus services for low-income seniors – resulted in increased participation in primary care, fewer trips to the emergency room and lower health care costs.
Investments in affordable housing with integrated health services for Medicaid-eligible people helps to improve health outcomes and reduce costs to taxpayers
For this reason, several states are pursuing housing-focused investments to improve outcomes while reducing long-term costs to Medicaid. Oregon, with support from an innovation grant from the U.S. Department of Health and Human Services, is testing new ways to serve low-income seniors through investments in housing plus services as part of the state’s Medicaid expansion under the Affordable Care Act. In New York, the state legislature has appropriated funding to build permanent supportive housing for very low-income people, with hope that the investment will generate even bigger savings down the line through lower Medicaid costs. To help fund the project, the state applied for a waiver from HHS to invest some federal Medicaid dollars in the initiative, citing similar long-term savings for the federal government. That request was denied.
New York and Oregon are not alone. According to a recent study from the Corporation for Supportive Housing (CSH), at least three other states are planning to use Medicaid dollars to invest in affordable housing, and several other states are exploring new ways to better integrate housing-based health services for Medicaid-eligible populations.
We recommend that Congress urge HHS to work with interested states to pursue similar cost-saving investments. Specifically, Congress should mandate that HHS pursue a pilot with up to 10 states – on a volunteer basis – to pursue housing-focused investments using a blend of state and federal Medicaid resources. The initial pilot should target populations that are both key drivers of Medicaid costs and most likely to experience housing insecurity, including:
Specific investments in the pilot would be decided at the state level, in coordination with HHS’s Centers for Medicare and Medicaid Studies. As part of any pilot initiative, HHS should allow participating states to keep a portion of the cost savings for further investments in the initiative. In addition, both HHS and the state could partner with HUD and state housing finance agencies as appropriate to maximize the impact of their investments. For example, a recent study from the Lewin Group and LeadingAge found that seniors in HUD-assisted housing are more likely to receive both Medicare and Medicaid services, more likely to have a chronic health condition and more likely to have high health care costs than their peers in nonsubsidized housing. For that reason, a state and HHS might choose to focus a portion of its investments on seniors living in HUD-assisted housing.
This pilot would require a significant upfront investment from taxpayers, but we do not expect it to cost taxpayers anything in the long-run. Indeed, Congress should make clear in the authorizing legislation that this pilot is intended to reduce long-term spending while improving the health and other outcomes of low-income families.
More than a decade ago, Enterprise was one of the first organizations to recognize that low-income families have the most to gain from living in green and healthy homes. Research shows that investments in energy-efficient housing pays dividends in several ways, including lower monthly housing costs for tenants and owners, better health outcomes and fewer trips to the doctor for residents and reduced consumption of energy, water and other natural resources.
In 2004, Enterprise launched the Green Communities Criteria, a first-of-its-kind framework for sustainable building practices for the construction and rehabilitation of affordable rental housing. For the latest update released in 2015, Enterprise worked with the American Heart Association and other partners to incorporate building practices that promote long-term health for residents, resilient design features to maintain livable conditions during natural disasters, and crucial connections to transit and other opportunities. Today the criteria have been incorporated into the rules for allocating Low-Income Housing Tax Credits in 22 states, and several cities, such as New York, Cleveland and Washington, D.C., have integrated the criteria into local incentives or requirements for green building and retrofits. We encourage all state and local housing agencies to do the same. In addition, we encourage federal policymakers to incorporate green and resilient building standards into any major residential development funded with significant federal subsidies, such as funding from HOME Investment Partnership Program or Community Development Block Grants.
In addition to the criteria, Enterprise is committed to strategies that support healthy families and communities. This includes promoting physical activity, increasing access to nutritional food, reducing smoking and providing resident services and programming that promote health education and healthy behaviors.
Of course, not all public resources to support the construction, preservation and operation of affordable rental housing come from the federal government. According to the Center for Community Change, 46 states have created a total of 57 housing trust funds, which combined for $750 million to affordable housing initiatives last year. While the revenue source differs from state to state, the most common sources are real estate transfer taxes and documentary stamp taxes.
In addition, at least 73 cities across 27 states operate local housing trust funds to meet their local affordable housing needs, along with hundreds more scattered throughout Massachusetts and New Jersey. For example, the District of Columbia Housing Production Trust Fund is funded through a portion of deed and recordation tax receipts, as well as a percentage of any unreserved surplus in the city’s budget each year. In Seattle, voters have repeatedly approved “housing levies” to support affordable housing projects across the city. The latest levy, which was approved in 2009 with support from nearly two-third of voters, raised $145 million over seven years through a tax on homeowners in the city. And in San Francisco, taxpayers recently approved the issuance of up to $310 million in bonds to support affordable housing initiatives in the city, with the ability to fund the bonds through a modest increase in local property taxes if needed.
Enterprise strongly supports the creation of state and local housing trust funds and other permanent funding sources to support affordable rental housing. Of course, any local funding source should be carefully designed to reflect the community’s local housing market and housing needs of its residents. For example, cities with stronger housing markets might consider a fee on development or a real estate transfer tax, a city with a booming tourism industry might consider a dedicated hotel tax, and a city with a weaker housing market might consider a revenue source that’s entirely unrelated to real estate. At the state level, in addition to creating statewide funding sources, policymakers should ensure that current laws – such as limitations on taxes levied by local governments – do not create unnecessary barriers to local funding efforts. State lawmakers should also ensure that revenues intended for housing trusts are not swept for other purposes, except in extreme circumstances.
America’s low-wage workers, particularly those who rent their homes, face daily struggle just to make ends meet. Assuming a monthly rent of $900 – roughly the current median gross rent in the U.S. – a full-time worker needs to make at least $10.40 per hour just to avoid housing insecurity. In fact, according to the National Low-Income Housing Coalition, in no state can a full-time, minimum-wage worker afford a one-bedroom unit at fair-market rent.
The federal minimum wage has not changed since July 2009, and over that time it has lost more than 8 percent of its purchasing power due to inflation. As of 2014, 21 states and the District of Columbia had set minimum wages that were higher than the federal minimum, and 11 of those states adjusted the rate annually to keep up with inflation. Still, about half of all workers in the U.S. live in states where the minimum wage is $7.25 per hour.
According to the Congressional Budget Office, increasing the federal minimum wage from $7.25 per hour to $10.10 – as recently proposed by several members of Congress and the Obama administration – would benefit an estimated 16 million workers at virtually no cost to government. According to a different analysis from the Economic Policy Institute, almost a quarter of the workers who would benefit from such an increase are in families with incomes of less than $20,000 per year, while more than half are in families with incomes of less than $50,000.
The CBO report also estimated that such a change would lead to a slight reduction in total employment in the U.S., but it’s worth noting that economists are largely divided on the relationship between minimum wage levels and unemployment. According to Princeton’s Alan B. Kruger, widely considered to be one of the top researchers on issues related to the minimum wage, “research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”
The majority of families benefitting from an increase in the federal minimum wage earn less than $40,000 per year
Raising the minimum wage could also bring significant long-term benefits to the federal government – most notably its budget. In addition to increasing tax revenues among low-wage workers, every additional dollar of earned income decreases a low-income family’s reliance on government assistance programs, such as food stamps, Medicaid and Temporary Assistance for Needy Families (TANF). According to researchers at the University of California Berkley, low wages cost American taxpayers an estimated $153 billion each year in public support for working families – which essentially serves as a subsidy to large corporations and business owners who keep wages low.
The time has come for Congress, state legislatures and local governments to set minimum wages that accurately reflect the cost of living in that community. To be sure, there are many ways to calculate the local cost of living, and costs vary widely from state to state and city to city. But as a general rule – perhaps with certain exceptions for very high-cost cities – we believe that a full-time, minimum-wage worker should be able to afford fair-market rent on a one-bedroom apartment in the area in which she works without being housing insecure. Minimum wages should be carefully calibrated at the federal, state and local levels to reflect that broad principle.
As an example, consider Seattle, where fair market rent on a one-bedroom apartment is $1,150 per month, according to HUD. At that rent, a full-time worker would need to make at least $27,600 per year to avoid housing insecurity. Based on the general rule described above, the local minimum wage in that area should be at least $13.25 per hour. It’s worth noting that lawmakers in Seattle recently voted to raise the local minimum to $15 per hour by 2021.
Given variations in the cost of housing across the country, it is difficult to apply the same rule to the federal minimum wage. However, using as a proxy the country’s median gross rent of about $900 per month, we estimate that federal minimum wage should be at least $10.40. As mentioned above, increasing the federal minimum wage should have no meaningful cost to taxpayers – indeed it could lead to significant long-term savings through increased tax revenues and reduced spending on means-tested social programs.
In today’s digital world, access to high-speed internet is an essential part of economic opportunity, especially for students and job-seekers. According to the U.S. Census Bureau, about two-thirds of households earning less than $25,000 per year have a computer in their home, but less than half have an internet subscription. By comparison, about 90 percent of households earning more than $50,000 per year have an internet subscription.
To help close this digital divide, in 2015 HUD launched ConnectHome, an initiative to extend affordable broadband access to families living in federally-assisted housing. Through public-private partnerships with internet service providers, nonprofits and private businesses, ConnectHome will offer broadband access, technical training, digital literacy programs and devices for low-income families in 28 communities, selected through a competitive application process.
Enterprise strongly supports the ConnectHome initiative, and we urge Congress to fund similar efforts to expand access to affordable internet services for low-income families across the U.S., regardless of whether they live in HUD-assisted housing. The National Housing Conference’s Connectivity Working Group, of which Enterprise is a member, recently offered a set of policy recommendations to further improve broadband connectivity in affordable housing, including:
In addition to setting a minimum wage, the federal government supplements the take-home pay of low-income workers through the Earned Income Tax Credit (EITC). Since its creation in the 1970s, the EITC has proven to be one of our country’s most effective anti-poverty programs.
The EITC encourages work by providing a tax credit to eligible workers for every dollar of earned income up to a certain level. The credit’s rate and maximum value depend on the worker’s total income and family size. The tax credit is refundable, meaning if the total value of credit exceeds the worker’s total tax liability, the government cuts a check for the difference. According to several studies, the clear majority of EITC recipients use their tax refund to pay bills, including housing payments, utilities, health care expenses and paying off debts.
Despite its successes over the years, the EITC is far from perfect. For example, under current rules the maximum assistance allowed for childless adults – which make up 65 percent of housing insecure renters – is less than $500 per year, which is only enough to make modest improvements to a household’s overall economic security. In addition, an eligible family has to wait until the end of the year to receive their EITC benefits, forcing many families to incur costly debt in the later months of the year just to make ends meet.
Several changes to the EITC have been proposed in recent years, most of which aim to expand eligibility and total benefits received through the program. According to estimates from the White House, if Congress were to phase in the credit more rapidly, lower the eligibility age from 25 to 21 and raise the maximum credit for childless adults to $1,000 (along with other modest changes), it would help increase the earning power of 13.5 million low-income workers at an annual cost to taxpayers of about $6 billion per year.
As part of a broader effort to end childhood poverty in America, the Children’s Defense Fund also proposed a series of additional reforms to the EITC to better serve working families with children. Specifically, the CDF recommended increasing the rate at which the credit phases in (from a range of 34-45 percent to a range of 68-79 percent), while increasing the maximum credit for each household type. The Urban Institute estimates that such a change would increase EITC benefits to 7.6 million families at a cost to taxpayers of $8.2 billion per year.
Congress should also pursue alternatives approaches to paying out EITC benefits, such as quarterly installments throughout the year rather than a single lump sum. For example, over the past several years Chicago’s EITC Periodic Payment Pilot Project has been administering quarterly EITC payments to eligible families and comparing their economic stability to a control group receiving the standard EITC payment. Preliminary findings from the pilot show that families receiving quarterly payments were less likely to be financially stressed and more likely to increase their savings over the course of the year.
Another promising approach is the “Early Refund EITC” proposal, which was recently laid out by Sen. Sherrod Brown (D-Ohio). The new federal program would provide zero-interest, short-term cash advances to EITC-eligible workers to help cover the cost of monthly bills and promote financial stability throughout the year. The size of the advance would be capped at $500 and deducted from the lump sum EITC payment received at tax time.
In addition to these changes to the EITC, the Children Defense Fund recently recommended that Congress meaningfully expand the Child Tax Credit (CTC), which provides a $1,000 tax credit to families for each child under 17. Under current rules, the tax credit is only partially refundable, meaning that families need to make more than $16,000 to redeem the full benefit on their taxes. By making the CTC fully refundable, Congress can improve the financial stability of 8.2 million families with children, at a cost to taxpayers of roughly $12.2 billion per year. (( Children’s Defense Fund, Ending Child Poverty Now. ))
Many important financial benefits for low-income families are administered through the U.S. Tax Code, including the Earned Income Tax Credit. These tax benefits often involve complicated eligibility and other rules, but many low-income taxpayers lack the resources to pay for professional tax preparation services, which can cost up to $200.
In Cuyahoga County, Ohio, Enterprise co-leads the Cuyahoga EITC Coalition, a community effort to promote economic justice and improve lives through volunteer tax preparation assistance and one-on-one financial counseling. The Coalition offers high quality, free tax preparation services at 25 locations in the county from January to April each year. In 2015 alone, the Coalition served more than 13,700 low-income clients, resulting in $18.9 million tax refunds. Since 2005, the Coalition has saved taxpayers an estimated $18 million in tax preparation fees.
As a general rule of thumb, financial advisors recommend that families keep at least three months of rent and other household expenses as liquid savings, in part because it can take at least that long to find a new job after a sudden job loss. Unfortunately, millions of families – most of them low-income households –are falling woefully short of that goal. According to NeighborWorks America, more than one-third of Americans have no emergency savings—up from 29 percent a year ago—and another 25 percent only have enough saved to get by for a month or less if necessary. Half of all families who earn less than $40,000 per year have no emergency savings whatsoever, and a significant portion of these households likely have a negative net worth. Without adequate savings, low-income families often have no choice but to turn to expensive sources of short-term credit—such as credit cards, title loans or payday lenders – in times of crisis, or even just to make ends meet.
More than one-third of American adults have no emergency savings
The federal government has a long history of supporting savings and asset-building among low- and moderate-income families, but these programs are often tied to a specific long-term financial goals, not emergency savings. For example, since the late 1990s many banks and credit unions have offered Individual Development Accounts (IDAs), which are federally matched savings accounts that help people with modest means save towards purchasing a home, paying for college or starting a small business. Account holders who withdraw money for other reasons often have to incur penalties.
More recently, in 2014 the Treasury Department launched the MyRA program, a new form of government-backed Roth IRA account targeted to part-time workers and other employees who lack access to an employer-sponsored retirement savings plan. Retirement savers can also claim the so-called “Saver’s Credit” on their taxes, which is worth between 10 and 50 percent of a retirement plan or IRA contributions up to certain amount, depending on the saver’s income and filing status. There are no major federal policies that are designed to encourage unrestricted emergency savings among low-income people.
Despite the lack of federal support, many local nonprofits and private companies – including many credit unions, are testing and scaling innovative new ways of encouraging shorter-term savings that are not restricted to specific uses. Below are a few examples:
These initiatives have achieved different degrees of success, face different barriers to reaching scale and rely on different levels of public and philanthropic support. However, it’s clear that there is tremendous opportunity for more federal partnership to help identify promising models, test those models with rigorous evaluations and bring the most effective ideas to scale.
We recommend that Congress create a new federal fund – either as a new program run by the Treasury Department or an expansion of the Corporation for National and Community Services’ Social Innovation Fund – to support the development and expansion of new financial products that encourage unrestricted emergency savings among low-income families. The fund would provide competitive grants, low-interest loans and other forms of assistance to eligible nonprofits, private companies and state and local government entities with the most innovative ideas and a demonstrated need for federal support.
For products that have already proven to work in a cost-effective way, Congress should consider targeted policies that bring those products to scale. For example, inspired by the initial success of the SaveUSA pilot described above, in 2013 Rep. Jose Serrano (D-N.Y.) introduced the Financial Security Credit Act, which would provide an additional tax refund to eligible low-income families who agree to deposit all or part of their refund directly into an eligible savings account. Similar to SaveUSA, the new tax credit would focus primarily on fliers who claim the EITC or Child Tax Credit.
In addition to the new fund, Congress should significantly expand HUD’s Family Self-Sufficiency (FSS) program, which allows certain recipients of federal rental assistance to put a portion of their monthly rent payments toward long-term savings. Under normal circumstances, tenants of public housing and recipients of Section 8 vouchers pay 30 percent of their monthly income toward rent – meaning when their income increases, so do their rent payments. Under the FSS program, when a tenant’s income increases, the difference between the new rent and the old rent is placed into an escrow account, which the tenant can access without restrictions after a certain period of time – typically five years. In order to access the money, the tenant has to accomplish a set of predefined goals by the end of the time period, such as maintaining steady employment and staying off of government assistance programs like TANF.
A 2011 HUD study of the FSS program found that families who successfully graduated from the program ended up with an average of $5,300 in savings, with 63 percent of enrollees either graduating or remaining in the program after four years. Despite these successes, the FSS program has remained relatively modest in size, mostly due to funding constraints. As of 2011, only about 47,000 voucher holders and 8,700 public housing residents participated in the program, representing a tiny fraction of the 3.2 million families who participate in the two housing programs.
Low-income families rely on credit scores for several essential economic activities, including getting a job, renting an apartment, opening a checking account, getting a credit card or taking out a loan to purchase a home, buy a car, pay for college or start a small business. Without a positive credit history – typically defined as a score in the mid-600s or higher – families are either charged exorbitant rates and fees or denied access to mainstream financial products altogether, leaving them with no choice but high-cost, often predatory options like payday lenders and title loans. According to the Urban Institute, more than 64 million Americans have no credit history, while more than half of all consumers have scores ranging from 500-650. Low-income families and families of color are especially likely to have poor or no credit histories.
About one-third FICO credit scores are below 650
As an essential first step toward solving this problem, national credit bureaus, including Experian, Equifax and TransUnion, should work with federal agencies, consumer groups and other stakeholders to update their credit scoring methodologies, with the primary goal of establishing a comprehensive and accurate picture of a low-income family’s creditworthiness. For example, a coalition led by the Credit Builders Alliance is currently working with the credit bureaus to include recurring monthly expenses, such as rent and utilities, as part of the credit reporting process. Research shows that adding this data can help almost three-quarters of families with no or sparse credit files obtain credit scores. According to a recent study by Experian, including rental data on credit reports improved scores for 95 percent of residents of subsidized housing, with an average increase of 29 points. Currently Fannie Mae, Freddie Mac and the Federal Housing Administration are studying the costs and benefits of incorporating similar payment data into their mortgage underwriting standards.
In addition to these near-term changes, Congress should pursue more proactive policies to help low-income borrowers establish and strengthen their credit histories. For example, Congress should meaningfully expand federal programs that provide low-income renters – especially those who hope to become homeowners in the future – with basic financial education, including strategies to build strong credit files. And through programs like the proposed fund mentioned above, Congress can help test and scale innovative financial products like the Prosperity SmartSave Card, which helps low-income families simultaneously build credit histories while accumulating emergency savings. The card, which was developed by Prosperity Works, rewards parents for on-time credit repayments and savings deposits by contributing money into their child’s savings account.
As mentioned above, sustainable homeownership remains a key pathway to the lower-income middle class for working families. Among other proven benefits, homeownership offers stable housing costs at a time of skyrocketing rents and is one of the few opportunities for lower-income families to build wealth over time.
That said, homeownership cannot be the only mechanism through which low- and moderate-income families build assets and achieve household stability. In a forthcoming report entitled Staying in Place to Get Ahead: Improving Renter Stability through Long Term Leases, Enterprise’s Andrew Jakabovics and Allison Charette offer one promising way to extend some of the benefits of homeownership to renters.
The authors propose a new “master lease” program through which a nonprofit organization would lease a certain number of units in one or several privately-owned multifamily properties. Through a contract, the nonprofit commits to paying the owner rent for the leased units for a fixed period of time – likely 7-10 years – at a level slightly less than market-rate, essentially taking on responsibility for the occupancy of these units. The nonprofit would then enter into subleases with tenants, offering longer terms and lower rents than the tenant would receive on their own. Annual escalations in rent payments would be baked into the contract, based on reasonable expectations for inflation and other factors. In addition to the base rent, the nonprofit would include a small additional payment– likely $25-$50 per month—into the rent charged, which would automatically be deposited into a savings account, perhaps with a percentage match.
Through this agreement, the tenant would be able to plan their long-term housing costs years in advance – much like a homeowner can – while gradually building up savings each month. The landlord would also see a benefit, since they would be protected against vacancy risk and turnover costs over the course of the contract. We look forward to working with our partners to further develop and potentially even pilot this proposal in the coming years.
During the most recent foreclosure crisis, lower-income homeowners – and people of color in particular – were disproportionately targeted for risky subprime mortgages, even when the borrower was eligible for a more conventional, lower-risk loan. According to the Center for Responsible Lending, during the housing bubble black and Latino borrowers with good credit were three times more likely to receive a subprime or high-interest mortgage compared to their white counterparts with good credit.
In the years since, the federal government has put in place helpful protections against predatory mortgage products, including mandatory “know before you owe” disclosures and regulations that require lenders to consider the borrower’s ability to pay back a mortgage before making the loan. But other predatory financial products – including payday loans, title loans, bail bonds and high-interest credit cards – continue to harm low-income communities across the U.S. For example, nearly one in four borrowers of payday loans rely on either public assistance or retirement benefits as an income source. These loans tend to be for small dollar amounts initially, but disguised interest rates and hidden fees often result in mounting debt for the borrower. According to the Center for Responsible Lending, the national average for fees charged on a payday loan is 391 percent.
Those costs increase exponentially when a borrower is unable to pay back the loan. ProPublica recently published a detailed analysis of racial and socioeconomic disparities in collection suits, in which a lender sues a borrower over the unpaid portion of a debt. According to the analysis, some states have put in place overly punitive legal systems that “can turn a $1,000 loan into a $40,000 debt” and “leave the debtor with a choice: endure garnishment in perpetuity or declare bankruptcy.” In more than half of U.S. states, creditors are allowed to garnish a quarter of a debtor’s after-tax wages as part of a court judgement, a policy that disproportionately affects lower-income households who can least afford such a massive cut in take-home pay.
More must be done to protect consumers – particularly low-income and minority borrowers – from these and other usurious loans. As a start, the federal Consumer Financial Protection Bureau should establish strong “ability to repay” rules – similar to the rules established for residential mortgages – for payday and title lenders. In addition, federal and state lawmakers should set sensible caps for the interest rates, fees and penalties charged to borrowers on all consumer credit loans, similar to the protections that are already in place for active-duty members of the military. As part of their analysis, ProPublica also offered a set reforms that could help fix America’s broken system for debt collection, including restricting the amount that can be garnished from a debtor’s wages or taken from a debtor’s bank account, cutting interest on judgements to a reasonable level and strengthening disclosures to debtors.
Due to the limited scope of this policy platform, the above proposals are just a sample of the broad policy changes that are necessary to improve the financial stability of low-income families. Other important policies include, but are not limited to:
“In some cities, kids living just blocks apart lead incredibly different lives. They go to different schools, play in different parks, shop in different stores and walk down different streets. And often, the quality of those schools and the safety of those parks and streets are far from equal – which means those kids aren’t getting an equal shot in life. That runs against the values we hold dear as Americans. In this country, of all countries, a person’s zip code shouldn’t decide their destiny. We don’t guarantee equal outcomes, but we do strive to guarantee an equal shot at opportunity – in every neighborhood, for every American.”
– President Barack Obama in his Weekly Address, July 2015
“A key tenet of the American Dream is that where you start off shouldn’t determine where you end up. If you work hard and play by the rules, you should get ahead. But the fact is, far too many people are stuck on the lower rungs … There are many factors beyond public policy that affect upward mobility. But public policy is still a factor, and government has a role to play in providing a safety net and expanding opportunity for all.”
– Speaker of the House Paul Ryan in Expanding Opportunity in America, July 2014
“A lot of our cities truly are divided. They have a lot of inequality that has only gotten worse … We need to think hard about what we’re going to do, now that people are moving back into and staying in cities, to make sure that our cities are not just places of economic prosperity and job creation on average, but do it in a way that lifts everybody up – to deal with the overriding issues of inequality and lack of mobility.”
– Democratic Presidential Candidate Hilary Clinton in Washington, March 2015
“We need to address the fact that we have 40-some-odd million people who feel trapped in poverty and do not feel like they have an equal opportunity to get ahead. And I don’t view that as a partisan issue or an electoral one. I think it goes to the heart of what it means to be America … I feel like the war on poverty has failed because it’s incomplete. I think we have to take the next step, which is to help people trapped with inequality of opportunity to have the opportunity to build for themselves a better life.”
– Republican Presidential Candidate Marco Rubio on Face The Nation, January 2014