Financing for Low-Income Housing at Risk

With 78 million US residents `shelter poor,' the need for affordable housing is immense. But advocates lament that dollars to fund projects are dwindling.

AFFORDABLE housing advocates, who for years have lamented declining funding from Washington, are now concerned that banks are tightening credit. Corporate dollars may be at risk as well. Typically, financing from all three sources is needed to build or to buy and rehabilitate an apartment building for low-income residents.

A commercial bank provides the developer with a first mortgage for one-third of the project's purchase and rehab cost. State or federal dollars finance another third with a no- or low-interest second mortgage. And corporations make a cash equity grant that they can credit against their income tax.

Last Friday a score of members of National People's Action met with Alan Greenspan, chairman of the board of governors of the Federal Reserve, and Senior Deputy Comptroller of the Currency J. Michael Shepherd to complain that the intense scrutiny of commercial real estate loans is slowing the development of affordable housing. The members represented neighborhood organizations in Atlanta, Boston, Chicago, Milwaukee, New York, Pittsburgh, and San Antonio.

``We got a friendly hearing,'' says George Stone, a former Chicago housing official now working with neighborhood development groups. ``I'm not sure we had any breakthroughs.''

Both men told the group that they recognized the potential problem and would try to address it.

Meanwhile, the recession could curb corporate participation in equity funds for low-income housing. Businesses might have less cash to invest and less profit to be taxed, reducing the need for a tax credit.

Beyond that is the question of whether Congress will renew the tax credit program when it expires at the end of the year. The budget agreement Congress and the White House negotiated last fall will make that difficult.

The need for affordable housing is a national dilemma that is immense and still growing, by most accounts.

Housing is considered affordable if it costs the occupants a third or less of their combined incomes. If it costs them more, they are considered to be ``shelter poor.''

Millions are shelter poor

In the United States, 78 million residents - 32 percent of the population - are shelter poor, the Economic Policy Institute in Washington reported last summer. Those families ``face so great a squeeze between inadequate incomes and high housing costs that, after paying for their housing, they are unable to meet their nonshelter needs at even a minimum level of adequacy.''

And that's not even counting the homeless.

The number of shelter poor increased 42 percent between 1970 and 1987, the institute found. Renters, 36 percent of all households, accounted for two-thirds of the increase. More than 42 percent of renters were shelter poor in 1987, the institute reported.

It's not only these families whom low-income housing projects serve, but the larger community. Rehabs attract attention, displace criminal activity, build pride and stability, and prompt a ripple effect of spending on improvements to neighboring buildings by their owners.

South Chicago's Sutherland Hotel, a legendary jazz spot which fell on hard times when whites fled the neighborhood as blacks moved in, reopened last summer as single-room occupancy apartments.

The rehab is ``a springboard for the neighborhood,'' says co-manager Stan Ratcliff. ``If we survive, other developers will come in.''

Perhaps the most noteworthy detail about the Sutherland project is that no federal money was used. But then, not much is available.

Housing programs `gutted'

During the 1980s, President Reagan ``systematically gutted'' federal housing programs, Mr. Stone says. Appropriations dropped from $32.2 billion in 1978 to $9.8 billion in 1988, an 80 percent decline when adjusted for inflation. The fairness of that has been questioned by affordable housing advocates in several ways.

For instance, the Low Income Housing Information Service, a public policy organization in Washington, notes that households with an annual income above $50,000 get two-thirds of the benefit of the homeowner's mortgage interest deduction allowed by the federal income tax. That provision costs the US Treasury $53 billion - more than five times what Washington spends on affordable housing.

In 1980 the federal government spent $1 on housing for every $7 it spent on the military, writes Les Brown, of the Chicago Coalition for the Homeless, in ``The Chicago Affordable Housing Fact Book.'' The ratio last year was $1 to $44.

``You can continue baying for more money, or you can cut costs,'' says William Higginson, president of the Chicago Equity Fund.

By not using federal money, the Sutherland's developer avoided the Davis-Bacon law requiring payment of union-rate wages, which would have added 15 to 30 percent to the cost of the job.

But Mr. Higginson adds: ``It's just not possible to produce affordable housing without some form of free money,'' meaning a low-interest second mortgage from a government body.

In the Sutherland's case, the Illinois Housing Development Authority provided that part of the financing through its new Illinois Affordable Housing Trust Fund. Jennifer Miller, manager of community development for the fund, calls its $13 million ``a noble effort'' that still falls $20 million short of demand.

But Ms. Miller admits that, though developers apply for money for projects, they won't know until the doors open if they will have tenants. ``Not a lot of market studies are done in low-income neighborhoods. The difficulty is, how much can [tenants] pay?''

``To date we have not had that problem'' of scarcity of tenants. But the absence of market research is ``not a good or rational way to approach'' developing projects of several million dollars. ``Yes, it's scary. Yes, that's what's happening,'' Miller says.

The Chicago Equity Fund (CEF) also participated in the Sutherland by making a grant that the developer used as equity. Chicago-area companies like Amoco, Sara Lee, and Quaker Oats invest in the fund in $500,000 blocks. They will get up to 115 percent of their money back as a tax credit. But the payback depends on such things as the developer meeting his leasing schedule and renting to people who meet the government's low-income criteria.

``There's the risk,'' Mr. Higginson says. ``The whole return is speculative.''

The CEF has raised $40 million since it was formed in 1985 and participated in 90 projects worth $150 million and totaling 3,000 apartments. Last year Higginson raised $9 million. He aims for $10 million this year. As for the recession, ``we'll see,'' he says, adding that its impact isn't uniform and that some companies are doing well.

Of greater concern to housing advocates is a banking credit crunch, the cause and prevalence of which are matters of some debate.

Both banks and neighborhood development groups agree that from the start of the white flight to the suburbs in the 1960s, lenders were guilty of redlining - refusing to make capital available to neighborhoods in transition that the banks perceived as risky.

Alarmed by the deterioration this starvation of capital caused, neighborhood groups analyzed the lending-pattern data that banks were forced to publish under the Community Reinvestment Act (CRA), and proved that redlining was taking place.

In Chicago, using the CRA as leverage, the groups pried loans out of major banks - which developed into a reliable and profitable business segment for the banks. ``Once we got our feet wet, we found out that we actually had the same agenda for the city,'' David Paulus, senior vice president at First National Bank of Chicago, says of the bank's meetings with neighborhood groups in 1984 that led to its establishment of a neighborhood lending program.

The trust that was established turned out to be a two-way street. First Chicago went to the neighborhood groups for help in getting Chicago's groundbreaking school reform program adopted.

Slowdown in funding

But neighborhood groups are again becoming suspicious as they try to get to the bottom of a recent slowdown in project funding and a downgrading of existing loans.

Depending on whether housing advocates or bank officials are asked:

* Downgrading of low-income housing loans at First Chicago occurred either because of the bank's own internal review or was prompted by examiners of the Office of the Comptroller of the Currency which regulates federally chartered banks.

* First Chicago is the largest bank in the city and the largest provider of community development money. Its neighborhood lending program either has stopped processing new applications or ``has never been more alive and vital.''

* A slowdown in processing last fall was caused either by city bureaucrats, or by First Chicago, or by the recession causing investors to lose interest in low-income housing and bring fewer deals.

* Some projects are having a hard time finding tenants. Either demand for low-income apartments is peaking or demand is still vast, but the management is asking too high a rent or isn't advertising effectively.

* Downgrading the loans at First Chicago increased the paperwork and drove costs into the red. If that continues over the long term the bank would have to stop issuing those loans or else the bank would continue making such loans because its future is tied to Chicago's and such loans are an investment in the city's future.

``Our purpose in talking to the regulators,'' says Mr. Stone, the former Chicago housing official, ``is to remove the regulators as an excuse, if it's really a change in bank policy.''