Larry A. Rosenthal

English

Research Papers in Economics

T
he  US  housing  affordability  crisis  afﬂicting  our 
highest-cost  metropolitan  areas  is  a  dilemma  of 
national  dimension.  But  dreams  of  a  national 
housing safety net—akin to the socialized programs 
familiar  in  Europe  and  elsewhere—have  long  since  faded 
away. In the face of perennial shortfalls in federal subsidy 
and oversight, local government’s role in the promotion of 
affordable housing has evolved considerably, both in terms 
of leadership and policy innovation. Indeed, local initiative 
is increasingly making the difference between areas making 
real progress on their housing problems and those just tread-
ing water.
A number of local functions in housing are organic in 
nature,  part  of  the  customary  ambit  of  city  and  county 
governance within federal-state civics. Beyond their role as 
administrators of supply- and demand-side subsidies, local 
authorities engage in a variety of everyday policymaking af-
fecting housing markets and household welfare, including 
rent control, property taxes, land use plans and zoning regu-
lations, and infrastructure provision, to name just a few. 
Augmenting these traditional areas of local policy, addi-
tional responsibilities once managed in Washington have 
been devolved to the states. For more than a generation, the 
political vanguard has championed shrinking of the federal 
role in addressing social needs, arguing that local authorities 
are more able to shepherd resources, assess need, and ﬁnesse 
political obstacles. Local prerogative dictates outcomes for 
the  Low-Income  Housing  Tax  Credit,  HUD’s  HOME, 
CDBG, homeless-aid and other federal funding.
Innovations in Housing Policy
The Evolving Role of Local Government
By Larry A. Rosenthal, JD PhD 
Executive Director, Berkeley Program on Housing and Urban Policy
Lecturer, Goldman School of Public Policy, UC Berkeley
. . . local initiative is increasingly 
making the difference between areas 
making real progress on their housing 
problems and those just treading water.
In this decentralized context, the downside is that there 
is great variation in energy and vision among jurisdictions, 
with some localities underperforming on measures of ser-
vice delivery or housing stock enhancement. But with the 
emphasis on the local role, there is room for the cultivation 
of a thousand ﬂowers blooming, and there are numerous 
examples of creative, progressive local initiatives in housing. 
The balance of this article surveys some interesting mecha-
nisms in the ﬁeld: 1) private activity bonds, 2) community 
land trusts, 3) down payment assistance, and 4) promotion 
of inﬁll development. Each features opportunities for mu-
nicipal leadership in addressing urgent housing need. 
Private  activity  bonds,  mortgage  revenue  bonds,  and 
mortgage credit certiﬁcates. States and local jurisdictions 
can raise funds through the sale of tax-exempt Private Activ-
ity Bonds (PABs), which may be used to ﬁnance affordable 
multifamily developments or provide funds for low- and 
moderate-income homebuyer assistance. PAB funds can also 
be used for other public needs such as airports, sewers, in-
dustrial parks, and student-loan programs. States are allotted 
a debt limit for such bond issuances; the limit set in 2002 
for all purposes under this mechanism was the larger of $225 
million or $75 per state resident, and these amounts have 
since been adjusted for inﬂation annually. 
PABs  comprise  an  important  funding  stream  for  local 
community  development.  During  the  1990s,  housing  ac-
counted for nearly half of all PAB issuances by dollar val-
ue. PABs help lower interest costs relative to those offered 
through private commercial ﬁnancing. Developers often re-
ceive funds through a competitive application process, and 
PAB proceeds are typically used in conjunction with other 
public and private housing ﬁnancing programs such as Low 
Income Housing Tax Credits. 
Two additional ways of spending PAB debt allocations 
offer alternatives to traditional project funding. Mortgage 
revenue  bonds  support  local  programs  providing  below-
market-rate mortgages to qualifying households. Mortgage 
credit certiﬁcates (MCCs) allow low-income homeowners to 
claim tax credits against their mortgage interest payments. 
9 September 2005Unlike the mortgage-interest deduction, which reduces the 
amount of income on which the homeowner pays taxes, 
MCCs reduce the homeowner’s federal tax bill directly, gen-
erally by around 15 percent. 
In California, MCCs represent one of the largest state 
housing  subsidy  programs  in  terms  of  dollar  value,  with 
$4.1 billion allocated during the 1990s. Localities apply to 
participate in the program, receiving allocations of award-
able credits from the state and then granting those credits to 
qualifying households. By law every dollar of PAB proceeds 
utilized in this fashion must be granted in the form of issued 
MCCs; program administration must be ﬁnanced through 
fees collected from applicants and participating mortgage 
lenders. Successful MCC programs depend in large part on 
the initiative and foresight of local agencies, which advertise 
them both to homebuyers and the networks of private lend-
ers needed to package the subsidy within complex afford-
able-mortgage transactions.
Nationally only about 75 percent of the potential dollar-
value for housing and other purposes is placed in eligible 
bonds at the state level under the pertinent provisions of 
federal tax law. Given the bond capacity that is left on the 
table, local government initiative is needed toward increas-
ing the portion of debt limit used for multifamily develop-
ment and mortgage assistance programs.
Down payment assistance programs. Local governments 
are also increasingly providing down payment assistance to 
ﬁrst-time homebuyers, which can be particularly important 
in areas where median house values place ownership out of 
reach for many families. In addition, the beneﬁts of down 
payment assistance policy often are concentrated among mi-
norities, thereby helping to close the homeownership gap.
While several localities have provided down payment assis-
tance for years, the concept received a substantial boost with 
the enactment of the American Dream Downpayment As-
sistance Act of 2003. The Act authorized $200 million annu-
ally to be administered via the states and other participants 
in HUD’s HOME Investment Partnerships Program. 
Several different models of down payment assistance ex-
ist. Funds are provided to qualifying households either as 
loans or grants, or both: hybrid programs gradually forgive 
loaned amounts over time so long as the borrower avoids 
default. The lender’s security interest may even be allowed 
to dissolve entirely, once a ﬁve- or ten-year “recapture” pe-
riod expires. In San Diego, for example, families earning 
below 80 percent of the area median income can receive 
grants of up to $15,000 toward a down payment or closing 
costs. The grant is “recoverable,” meaning that if the buyer 
sells within six years, it needs to be repaid. Localities may 
also target down payment assistance funds toward speciﬁc 
groups within the moderate-income workforce, such as local 
workers, teachers, nurses, and public-safety personnel. 
State housing ﬁnance agencies are also important down 
payment  assistance  providers.  The  California  Housing 
Finance Agency, for example, operates several such programs, 
from those requiring junior loans funded by local agencies 
(sometimes  including  redevelopment  agencies)  to  those 
directly  funding  100  percent  of  needed  home-purchase 
ﬁnance. The City of Honolulu offers a ﬁfteen-year, zero-
interest loan that will fund up to $25,000 of the purchase 
price for ﬁrst-time homebuyers.
Community land trusts. Housing units and the land par-
cels bearing them are actually separate ﬁnancial assets, even 
though they are typically bought and sold as if indivisible. 
“Community land trusts” (CLTs) purchase and hold the land 
asset in trust for the beneﬁt of low- and moderate-income 
households. Such trusts can be public, private or nonproﬁt 
entities. By removing land cost from sales and rental transac-
tions, CLTs reduce rent and home prices.
A key issue in operating CLTs lies in characterizing the 
ownership interest of the occupying household. That inter-
est can comprise absolute fee-simple title to the structure, 
but need not. Ownership can be framed as a “life estate” 
enduring for as long as the household-head lives, or as a 
series of renewable long-term lease arrangements. The right 
to occupy the CLT’s land is conferred through separate lease 
instruments. Even though the land asset cannot be deployed 
as collateral by the “owner”-occupant, the value of the col-
lateral can still secure the loan, with the trust serving as co-
mortgagor or guarantor, barring state law impediments.
As the land’s owner, the trust beneﬁts most directly from 
any appreciation in land value. CLTs are structured to pro-
vide a fair, but only modest, return on homeowners’ invest-
ments. Therefore, CLTs cannot quite reproduce all the asset-
building beneﬁts of traditional homeownership models. But 
10 September 2005this private sacriﬁce contributes to the long-run beneﬁt of 
later occupants and, more generally, the public’s interest in 
maintaining affordable inventory at sufﬁcient levels. In that 
respect, CLTs echo the public-trust justiﬁcations for conser-
vation and farmland trusts familiar in the environmental 
ﬁeld.
The California Community Foundation has recently es-
tablished the Community Foundation Land Trust (CFLT) in 
Los Angeles, where in many areas high land costs and specu-
lative investment are driving up home prices. CFLT aims to 
acquire sites for development to be placed in trust, and will 
add two features to the standard community land trust mod-
el. First, the foundation will serve as private custodian of 
the land, providing long-term stability relatively unaffected 
by the changing local political climate. The second element 
involves a wealth-creation mechanism for buyers through 
accelerated debt reduction. Land cost often approaches 40 
percent of the total construction cost in Los Angeles; in re-
moving such costs from the equation by ﬁnancing the land 
through a ground lease, homeowners can pay off in ﬁfteen 
years what would have taken thirty had they purchased the 
land as well. The accelerated debt reduction schedule also 
allows homeowners to build equity more quickly than under 
standard mortgage terms. CFLT is the ﬁrst land trust in the 
nation to incorporate this kind of wealth creation-mecha-
nism within its land trust model. 
Promoting inﬁll development. Local government acts as 
the gatekeeper for development generally, exercising consid-
erable discretion over the grant and denial of applications 
for residential building permits. Expensive and delayed ap-
proval processes eventually contribute toward the runaway 
prices observed in the highest-cost metropolitan areas. But 
city planning agencies can work aggressively to leverage costs 
and delays in permit approvals as a means to increase af-
fordable housing in already developed neighborhoods, or to 
promote economic development within enterprise zones. 
Such “inﬁll promotion” policies offer expedited permit re-
view, reduced permit fees, and other preferences for afford-
able housing built in speciﬁed, distressed neighborhoods. 
Additionally, height restrictions, density limits, parking re-
quirements, minimum setbacks and sidewalks, and impact 
fees can all be negotiated—or even forgiven entirely—as a 
means of encouraging the production of affordable housing 
units. In turn, more efﬁcient use of land and densiﬁcation 
of existing neighborhoods effectively eases price pressures in 
high-cost areas and can increase housing options near transit 
centers and encourage community revitalization.
The City of Phoenix, Arizona established its “Inﬁll Hous-
ing Program” by ordinance in 1995. An inventory showed 
that approximately 121 square miles of vacant land suitable 
for residential development existed within the urban area. 
Building on this vacant land would accommodate nearly 
500,000 new residents and would help to control sprawl, 
trafﬁc congestion, and air pollution. The program focuses 
on encouraging single-family construction for homeowner-
ship on vacant or underutilized parcels. To qualify, parcels 
must be located within 1,000 feet of existing housing and 
within 500 feet of buildings with median ages over 20 years. 
By meeting these and other criteria, developers get certain 
water and sewer fees waived, are considered for city contri-
butions toward needed off-site improvements, and receive 
expedited staff attention, including support at hearings be-
fore appeals boards and the city council.
The federal government has reduced its spending on hous-
ing and urban development substantially since the 1970s. 
HUD’s budget has rebounded somewhat since reaching its 
modern  nadir  during  the  Reagan  Administration,  but  its 
overall spending authority is still less than half what it was 
thirty years ago. If national resources can simply be main-
tained at current levels over the next decade or so, that out-
come would be a substantial political achievement. 
Under these circumstances, it will only become more criti-
cal for local governments – as well as advocates and builders 
in private and nonproﬁt housing industries – to be as efﬁ-
cient and creative as possible in addressing dire problems of 
affordability in high-cost areas. The approaches described in 
this article are parts of a diverse and growing policy toolkit 
used by local and state leaders. Perhaps most important in 
this effort is the full exploitation of off-budget resources pro-
vided by the capital markets via tax-credit and tax-expendi-
ture incentives. No less imperative is the appropriate reform 
of local regulatory and political barriers standing in the way 
of proposed construction. 
11 September 2005
 . . . it will only become more critical 
for local governments – as well as 
advocates and builders in private and 
nonproﬁt housing industries – to be 
as efﬁcient and creative as possible in 
addressing dire problems of affordability 
in high-cost areas.

Innovations in housing policy : the evolving role of local government

http://www.frbsf.org/publications/community/investments/0508/innovations.pdf

Innovations in housing policy : the evolving role of local government

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