A favorite tactic for zealots on the right and the left is to try to disguise their ideology and values as economic necessity.[ii]

Financial pressures seem to be leading the U.S. to make a fundamental change in the way the government does business.  The Great Recession, beginning late 2007 and presumably ending in 2009 , created a set of massive government initiatives.  We are familiar with the TARP (or the bank rescue) and ARRA (or stimulus) and various other small business, Medicaid, teacher and local government rescue efforts.  These efforts, coupled with the Obama Administration’s expansion of Medicare, created a shift in budget priorities.  Intentional or not, new programs create new constituencies.  Once spending starts, businesses and local governments invest precious resources to wade through typically complex federal programs.  With resources invested, pressure builds to maintain those programs.  This continuing pressure looks to some like a potential ongoing demand for massive federal spending.

The fiscal year 2010 federal budget was in excess of three trillion dollars with a deficit of about $1.3 trillion.[iii]  The fiscal year 2011 budget was even larger, though the deficit projections shrunk slightly.[iv]  These deficits are of historic significance both as a percentage of gross domestic products (“GDP”) as well as a total dollar number.  Indeed, these budget deficits as a percentage of GDP rival deficits the U.S. ran during World War II.[v]  So we see an economic downturn, the likes of which we haven’t seen since the 1930s, and government spending response, the likes of which we haven’t seen since the early 1940s.  In addition to the sheer magnitude of this spending, and with no hint of a financial problem, concerns begin to rise about the United States’ continued ability to borrow.

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On September 21 the Federal Reserve Board (FRB) announced that it would undertake further monetary stimulus in an attempt to revive the staggering economy. The FRB made the announcement after their Federal Open Market Committee (FOMC) meeting, one of eight such meetings held each year to set monetary policies in accordance with the FRB’s “dual mandate” of fostering maximum employment and price stability. To achieve these goals, the Board has a number of policy tools at their disposal, aimed at lowering long- and short-term real interest rates, rates on U.S. Treasury securities of varying maturities, and conventional mortgage rates. Since December 2008, the central bank has purchased $2.3 trillion in longer-term Treasury securities, agency debt, and mortgage-backed securities in an effort to lower longer-term interest rates, including mortgage rates.

Their most recent action is called “Operation Twist,” named after the dance “The Twist”, a dance popular when an operation of comparable mechanics was first (and last) utilized by the central bank. Under Operation Twist, the FRB will purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and sell an equal amount of Treasury securities with remaining maturities of 3 years or less by the end of June 2012. In their notes, the FRB says Operation Twist is an effort to push long-term interest rates down and encourage lending, especially when it comes to home loans. By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates.

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A month and a half after the S&P downgrade, it’s easy to forget the political turmoil that captured the nations attention. In this story, Justin Walker of Rainbow Housing Assistance Corporation, reminds us of the very real consequences of political brinksmanship, an apt reminder as the super committee begins to deliberate and as we continue our investigation of congresses continued attempts to deal with the country’s debt:

On the evening of Friday August 5, long after the markets had closed, the news wires were just starting to come alive. Smart phones and computer screens alike all flashed the breaking news that the credit rating agency Standard & Poor’s has stripped the United States of its top-tier AAA credit rating. The move came just days after President Obama signed into law the Budget Control Act of 2011, a down-to-the-wire deal passed by Congress that allowed the Treasury to immediately take on more debt to pay its bills. No one is entirely sure what would have happened if Congress had not passed the bill and the U.S. was forced to default, but everyone was in agreement that they would rather not find out.

On Saturday the 6th, the Treasury immediately fired back with an entry in their blog entitled Just the Facts: S&P’s $2 Trillion Mistake, but the damage had already been done. Sunday evening trepidation about what lie ahead was widespread and the global stock markets did not disappoint. The week of August 8th saw some historic, stomach-turning swings up and down, each day painting a different picture about the downgrade’s impact. Though still a few months off from the legislation’s initial cut of $44 billion in fiscal year 2012, pundits and economists are already tossing around phrases such as “double-dip recession” and “economic slowdown”. But for many Americans, the recovery was not impactful enough to consider this anything other than an extension of an era, a bad situation getting worse, if you will.

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There is no getting around it; the federal budget appropriations process is messy. Despite comparisons, our nation’s budget is not analogous to a family budget that you or I would prepare. At billions of dollars in size, hundreds of pages in length, its own office within the White House, and a committee in each chamber of Congress – it stands alone. Not to mention that its lack of passage brought the federal government within hours of shutting down this April. However, given its integral role in the country’s operations the constant attention that it is receiving on Capitol Hill is warranted. Regardless of party affiliation, there is broad agreement that the next budget address the need for deficit reduction and more revenue generation. Elected officials disagree on how to get there, but the end goal is the same: a more financially stable country.

Efforts to do so have seen proposals where “everything is on the table” and demands for deep cuts across the board have been made; this includes the operating budget for the U.S. Department for Housing and Urban Development (HUD). HUD submits its own budget proposal, the President does the same, and finally Congress determines the final allocations. For comparison’s sake, the enacted budget for HUD in FY10 was $43.5 billion (National Low-Income Housing Coalition, 2011) and the agency has requested $47.9 billion (HUD, 2011) for FY12; FY11 was omitted due to the lack of a budget through Congress. Though these appear to be large figures, when looked at in the context of the entire budget, perception shrinks them considerably. President Obama’s proposed budget includes a request for $41.7 billion for all housing assistance programs, which works out to 1.59% of the nation’s total budget for FY12 (Office of Management and Budget, 2011).

The pie chart for how HUD allocates their funds is refreshingly simple. Though there are only three slices nearly three-quarters (72%) of their budget goes toward rental assistance, and of those HUD-assisted households, 72 percent of them are classified as “extremely low-income” meaning that they fall below 30% of area median income (HUD, 2011).
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Most underwriters evaluate proposed affordable housing development projects for factors such as visibility, access, topography, environmental characteristics, and proximity to local amenities. Yet many underwriters overlook crime when evaluating development proposals. Certainly, an underwriter would be remiss to overlook the existence of a scrap yard, an active rail line, or an environmental hazard near the subject property. But why overlook crime? The existence of sexual predators, child molesters, rapists, and murderers in proximity to a proposed $10 million project housing families with small children is certainly as important of a consideration as the distance to the nearest grocery store, bank or pharmacy.

Because of this, the evaluation of crime is identified as a best practice for National Council for Affordable Housing Market Analysts (NCAHMA) members. Indeed, it is a required element for all NCAHMA members issuing reports for tax credit allocation purposes. NCAHMA is a membership organization that sets industry standards for real estate market research. The Council has created and refined guidelines to ensure that market studies are sufficiently thorough to assure a comprehensive evaluation as required by Section 42 of the IRS Code. Many state agencies have adopted NCAHMA guidelines as part of their market study requirements.

North Carolina

Although the state of North Carolina commissions market analysts to look at each application, the State has not adopted NCAHMA guidelines. Instead, site evaluations are conducted by the housing finance agency itself. Each applicant is awarded a site score with a maximum of 100 points. Over the past three years, no application with a score below 58 has received a tax credit allocation.

According to Scott Farmer (NCHFA Director of Rental Investment), site scores are awarded on the basis of the following criteria(taken from the 2011 QAP, p10-11):


• Trend and direction of real estate development and area economic health.
• Physical condition of buildings and improvements in the immediate vicinity.
• Concentration of affordable housing, including HUD, Rural Development, and tax credit projects as well as unsubsidized, below-market housing.


• Land use pattern is residential in character (single and multifamily housing).
• Effect of industrial, large-scale institutional or other incompatible uses, including but not limited to: wastewater treatment facilities, high traffic corridors, junkyards, prisons, landfills, large swamps, distribution facilities, frequently used railroad tracks, power transmission lines and towers, factories or similar operations, sources of excessive noise, and sites with environmental concerns (such as odors or pollution).
• Extent that the location is isolated.

(iii) AMENITIES (MAXIMUM 40 POINTS) Availability, quality and proximity of the following: grocery store(s); basic shopping / general merchandise; pharmacy; community/senior center; public park or library; access to public transportation; other beneficial services or amenities.


• Adequate traffic safety controls (i.e. stop lights, speed limits, turn lanes, lane width).
• Degree of negative features, design challenges or physical barriers that will impede project construction or adversely affect future tenants; for example: power transmission lines and towers, flood hazards, steep slopes, large boulders, ravines, year-round streams, wetlands, and other similar features (for adaptive reuse projects- suitability for residential use and difficulties posed by the building(s), such as limited parking, environmental problems or the need for excessive demolition).
• The project would not be visible to potential tenants using normal travel patterns.

The site score is the first of several threshold tests that each application must meet in order to be considered for an award of tax credits. You will note, that the criteria for awarding site scores contains no mention of crime. In addition, the NCHFA Market Study guidelines contain no mention of crime.

Our Investigation

Given the fact that NCHFA does not look at crime when scoring potential development sites, we conducted our own investigation to account for crime in the vicinity of the proposed properties in the 2011 LIHTC application cycle. Specifically, we looked to see whether there were any registered sex offenders living within 1000 feet of any proposed development with a site score of 58 or more.

The Four Properties

Our investigation identified four applications that met these criteria:

Property Name: Winslow Pointe
 901 Hooker Road, 
Greenville, NC 27834
Sex Offender Distance: 276 ft
Offenses Committed: Indecent Liberty Minor
Site Score: 72
Total Units: 84
Project Type: Family
Tax Credits Requested: $1,077,000
Total Development Cost: $10,774,429

Property Name: Sunset Place Apartments
 726 Sunset Avenue, Asheboro, NC 27203
Sex Offender Distance (2 offenders): 402 ft, 688 ft
Offenses Committed: Sex Exploit Minor 3RD Degree (X3), Attempted Rape or Attempted Sex Offense (1ST,2ND DEGREE) (X2)
Site Score: 72
Total Units: 84
Project Type: Family
Tax Credits Requested: $648,261
Total Development Cost: $5,893,698

Property Name: Orchard Ridge
 2177 Russ Avenue, Waynesville, NC 28786
Sex Offender Distance: 590 ft
Offenses Committed: Sexual Offense with Certain Victims (X5)
Site Score: 60
Total Units: 40
Project Type: Family
Tax Credits Requested: $ 588,162
Total Development Cost: $5,289,441

Property Name: Freeman Place Apartments
 100 and 200 Manchester Street SE ,Wilson, NC 27893
Sex Offender Distance (2 offenders): 393 ft, 722 ft
Offenses Committed: Indecent Liberty Minor, Rape 2nd Degree (X2)
Site Score: 58
Total Units: 60
Project Type: Family
Tax Credits Requested: $647,360
Total Development Cost: $6,996,328

The existence of sexual predators, child molesters or rapists, in proximity to a proposed $5-10 million affordable housing project with small children is a problem.  In our opinion, NCHFA is negligent in not accounting for this in their site scoring. We recommend that they begin to look at crime – especially sex crimes – on or near proposed developments in the 2012 application cycle. We also recommend that they adopt NCAHMA guidelines as part of their market study requirements. In doing so, the State can be assured that they have a clear picture of potential crime risk on proposed developments.

Article Image courtesy of Flickr user alancleaver_2000



A) In general Notwithstanding any other provision of this section, the housing credit dollar amount with respect to any building shall be zero unless—

(iii) a comprehensive market study of the housing needs of low-income individuals in the area to be served by the project is conducted before the credit allocation is made and at the developer’s expense by a disinterested party who is approved by such agency,

Section 42 of the IRS Code


What, exactly, does it mean to be a “disinterested” market analyst? Most everyone would agree that it precludes a market study from being provided by an equity partner affiliated with the developer. But is this all that the term means? The purpose of this article is to answer this question.

Let’s assume that a market analyst has been engaged by a for-profit developer for tax credit allocation purposes. Let’s also assume that after evaluating the developer’s proposed project, the analyst came to the conclusion that there is no market for the proposed development. The market analyst breaks the bad news to the developer. The developer wants the analyst to alter his conclusions, showing that his project is, in fact, feasible. In an effort to accomplish this, the developer offers the market analyst equity in his project, contingent on a favorable opinion.

Clearly, should the market analyst modify his conclusions to accommodate the developer, he is no longer acting as a disinterested analyst and his report no longer satisfies the “disinterested party” requirement of Section 42 of the IRS code.

Now assume that instead of offering equity, the for-profit developer offers the analyst future work to alter his conclusions, showing that the developer’s project is, in fact, feasible. Again, should the market analyst modify his conclusions to accommodate the developer, he is no longer acting as a disinterested party and his report no longer satisfies the “disinterested party” requirement of the IRS code. Although the analyst does not have an equity interest in the project, modifying his report accommodates the developer’s interest, namely to earn a development fee.

Now let’s assume that the market analyst is working for a non-profit developer who offers the analyst future work to alter his conclusions. The non-profit’s interest is philanthropic, not economic. Again, should the market analyst modify his conclusions to accommodate the non-profit developer, he is no longer acting as a disinterested party and his report no longer satisfies the “disinterested party” requirement of the IRS code. Modifying his report accommodates the developer’s philanthropic interest.

Now let’s assume that a for-profit developer hires the market analyst who, after he has completed his research, comes to the independent conclusion that the developer’s project is perfectly feasible. The developer is pleased with the analyst’s work and offers him several other projects. Has the analyst violated the “disinterested party” provision on the IRS Code? No, not at all. This is because the analyst’s conclusions were his own conclusions, regardless of what his client’s interest may be.

Here’s the point: Being disinterested is not a function of who the client is, what the client’s interests are, or whether the client offers additional work. Instead, “disinterested” means that the conclusions are entirely the analyst’s conclusions.  In short, disinterested means independent.

The National Council of Affordable Housing Market Analysts (NCAHMA) recently adopted a code of ethics which spell out the analyst’s duty to be a disinterested, independent and unbiased professional. The code of ethics were carefully crafted to assure that the analyst always operates in conformance with IRS requirements. Users of market studies should look for the NCAHMA certification to be sure that reports were completed in conformance with Section 42 of the IRS Code.

State housing finance agencies have been known to engage analysts, pressuring them to deliver predetermined results in an effort to avoid litigation from developers and/or to streamline the underwriting process. Again, it does not matter who the client is or what the client’s interests may be, should a market analyst modify his conclusions to accommodate the state, he is not acting in a disinterested, independent and unbiased manner. Users of state-ordered market studies are advised to look for a NCAHMA certification to make sure that reports satisfy the requirements of Section 42 of the IRS Code.


Jeffrey B. Carroll is President of Allen & Associates Consulting. Mr. Carroll has over 20 years of real estate consulting experience. Since 1988, he has performed over 2,000 market study, rent comparability study, appraisal, environmental assessment, capital needs assessment, and utility allowance assignments throughout the country for affordable multifamily properties. Read more about the author here…


A response to Joel Kotkin’s Why Affordable Housing Matters

Mr. Kotkin’s position is simple. Affordable housing leads to demographic and economic growth. This growth is a good thing. Land use restrictions lead to un-affordable housing and denser development (which he pleasantly refers to as “cramming”). These restrictions (and the people that support them) are bad things:

More recently, “smart growth” has been bolstered by claims, not always well founded, that high-density development is better for the environment, particularly in terms of limiting greenhouse gases. Fighting climate change (aka global warming) has given planning advocates, politicians and their developer allies a new rationale for “cramming” people into more dense housing, even though most surveys show an overwhelming preference for less dense, single-family houses in most major markets across the English-speaking world.

I do not take issue with the statistical findings supporting the correlation between housing-affordability and demographic growth, or with connecting more restrictive land use policy to less affordable housing. Where I do take issue, is Mr. Kotkin’s simplistic stance that growth is good, land use restrictions are bad, and that urbanists supporting “smart growth” are misguided.

His belief that these advocates for “smart growth” are misguided stems from the following two claims. First, contrary to what urbanists would have you believe, higher housing prices in “superstar cities” are more a reflection of restrictive land use than the relative “attractiveness” of these cities. Second, the environmental benefits of the dense development incentivized by land use restrictions are overstated.

In defense of the first claim, he cites, “a general trend of migration from high-end, unaffordable markets to less expensive regions”, driven by restrictive land use policy and a preference for affordable single-family dwellings. While I acknowledge that many of the rapidly growing regions in the US are regions with more affordable housing (and generally a lower cost of living), I do not think you can so easily dismiss the notion that denser, high-cost cities may have more to offer their populations.

Looking at the top 50 cities on the Mercer 2010 Quality of Living Survey, one will find many of the high-cost cities mentioned by Mr. Kotkin (London 39; New York 49; Sydney 10; Toronto 16; Melbourne 18; Adelaide 32; Perth 21). Furthermore, Australia, which Kotkin cites as a prime example of the ills of land use restrictions, holds six of the top 50 spots. Strangely, none of the cities noted as bastions of affordability grace the top 50.

Perhaps the bigger problem with the article, is the claim that the environmental benefits of dense development are overstated. In support of this claim, Mr. Kotkin conveniently cites two article published on New Geography, a website of which he is Executive Editor.

One of these articles cites LA as a prime example of how density is not necessarily good for the environment. This article makes the claim that density leads to traffic congestion and this congestion is bad for the environment . The claims seems to make sense: “LA has bad traffic, congestions leads to more air pollution, stop and go car operations use more gas, etc…” Besides the fact that urbanists often cite LA as a pariah amongst large cities, a car-dependent anomaly begging for better transit, it is incongruent to equate air-quality to carbon output.

According to figures from a 2008 report by the Brookings Institution, LA ranks second out of 100 metropolitan areas in per capita carbon emissions (only Honolulu has a lower per capita carbon footprint). Even more so, (and perhaps shockingly) LA ranks fifth in per capita carbon emissions from highway traffic. In fact, many of the cities cited as examples of unaffordable housing, are both dense, and boast a low carbon footprint per capita (see table below). Those cities noted by Mr. Kotkin in his article for their affordability were less dense and faired less well in the carbon footprint category (see table below).

While this does not categorically prove the connection between land use policy, density, and environmental impact, it does show that Mr. Kotkin must do more to make his case against land use restrictions and the urbanists who favor them. Regulating development is a delicate balance between individual utility maximization and the negative externality of environmental harm. To ignore either side of the equation is not only lazy, but irresponsible.

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A personal account of alleged impropriety in the multifamily mortgage market

The recent release of the Financial Crisis Inquiry Commission’s (FCIC) final report has re-sparked the debate over the causes of the financial crisis. In particular, the report’s finding that Fannie Mae and Freddie Mac were not primary engines in the subprime crisis elicited a lengthy dissent from noted conservative thinker and FCIC member, Peter Wallison.

Mr. Wallison asserts that the, “sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans.” In particular, he points to, “policy [that] sought to increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards”

Much of the focus on the role of the GSEs in the crisis has been on mortgages for single-family homes, the associated underwriting practices, and the government policies surrounding those practices, but Freddie Mac also has a presence in the multifamily mortgage market. It is in this regard that I have come face to face the unethical behavior that leads to questionable underwriting.

The following link takes the reader to a redacted copy of a complaint I recently filed with the Federal Housing Finance Agency (FHFA) alleging that Freddie Mac and/or its affiliated lender pressured me to deliver predetermined conclusions in the valuation of a $5,680,000 affordable multifamily property:

Letter, FHFA, Revised 2011-01-26 (Redacted)

Because FHFA is the agency charged with providing “effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and Federal Home Loan Banks” it seemed appropriate that I refer this matter to them.

While this piece is not intended as a thorough analysis of Freddie’s underwriting standards, it is my belief that these situations occur all too often. Over the past few years, I have had several, similar experiences on HUD and Fannie Mae multifamily transactions and suspect I will be faced with similar requests in the future. As the role of Fannie and Freddie in causing the financial crisis continues to play out in the public forum, I will play my own personal part in keeping the GSEs honest by reporting any impropriety to the FHFA and publishing my complaints here.


by Stephen Smith, on December 28th, 2010 | Re-Posted from Market Urbanism

The views and opinions expressed in this piece reflect the author’s point of view and not necessarily those of Housing Think

Inclusionary zoning is a hot item among urban planners today, and is often seen as a solution to residential segregation and high housing costs. Exact implementations vary, but the general idea is that developers of multiunit housing projects are encouraged to set aside a certain percentage of their units, generally raging from 10-30%, but sometimes even more, as “affordable housing” units. In other words, some proportion of the units are under rent controls to the point where they must be rented (or sold) at a loss by the developer. Sometimes the schemes are voluntary and give developers density bonuses, sometimes developers can pay a fee instead of setting aside units. The exact proportion of units that must be set aside and loss developers take on each unit also varies. As you can imagine, I’m not in favor of this system, but it’s a complicated issue, so this is going to be a long article.

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DSHA QAP Comments by David Layfield

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