WASHINGTON — Bank regulators and lenders are taking a heightened interest in affordable housing as the market has dried up in major cities across the country.
The tight lending environment has created a vicious cycle for many families in recent years. Since many cannot qualify for credit, they've been forced into the rental market, where supply is low and rents are skyrocketing in cities like Los Angeles, San Francisco and Miami. That has in turn made it difficult for low- to moderate-income families to save enough to buy a home under more restrictive credit standards.
In response, some bank regulators are looking into new affordable housing programs to get people back into single-family homes while also exploring ways to grade banks for multifamily developments based on their Community Reinvestment Act scores.
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"The regulators in general have started raising the bar when it comes to evaluating institutions, specifically our community development efforts," said Jim Poznik, community development lending and investment director at the $71 billion-asset Huntington Bancshares in Columbus, Ohio. "Around two years ago, if you had community development lending you either got a 'neutral' or 'positive' grade for handling it well. Now, the regulators will evaluate you either as 'negative,' 'neutral' or 'positive.' "
This is good news for cities like Los Angeles, which in late 2014 was deemed by Zillow as the most "unaffordable city" after it found that renters needed nearly 48% of their household income to pay the median rental rates. On top of that, the city can't keep up with new demand for affordable units while current units are being replaced by new developments catered to the high-end market. Despite the brewing public-private partnerships, however, there are a limited amount of tax incentives (designated by the states) that would encourage more low-to-moderate-income and mixed-income projects.
"We're the No. 1 most unaffordable city in regards to rental [affordability] … we're the most overcrowded city as far as housing" and "13,000 people become homeless every month here," said Larry Gross, executive director for the Coalition for Economic Survival, a grass-roots nonprofit in Los Angeles focused on low- and moderate-income needs. "It's not a crisis. It's a catastrophe."
Nationwide, 52.3% of renter households are "rent burdened," meaning they spend more than 30% of their household income on gross rent, according to the Federal Reserve Bank of Richmond. It's particularly burdensome in states like California, Florida and Hawaii.
Demand has also spiked to historically high levels as renter households rose by more than 26% to 43 million in the 10 years ended with 2015 — the largest growth rate in any decade in recent history, according to a report the Joint Center for Housing Studies of Harvard University released in December.
If rents and income grow in line with inflation, it's projected that the severely burdened rental households will jump 11% from 11.8 million in 2015 to 13.1 million in 2025, according to a separate report by Enterprise Community Partners and the Joint Center for Housing Studies.
"Overall, we have an affordable rental housing crisis," said Josh Silver, senior adviser at the National Community Reinvestment Coalition. "We need to open up that credit box for home mortgage lending and on the rental side, we need to accommodate the expanding supply and increase" the primary tax incentive.
The main source of public funding for affordable housing is the Treasury Department's Low Income Housing Tax Credit program. But those subsidies are set to expire on nearly 60% of the 2.2 million privately owned and federally assisted units in 10 years, according to the Joint Center for Housing Studies. That means some of those units are at risk of being removed from the affordable housing system.
At the same time, regulators and many lenders say they are making greater efforts to step up financing in affordable housing.
Comptroller of the Currency Thomas Curry said the issue is vital. During an interagency conference on the Community Reinvestment Act in Los Angeles this month, Curry announced new incoming interagency guidance that would allow banks to use other options for property valuations if that property had no recent comparable sales. That followed guidance the OCC gave last year that allowed banks to exceed the loan-to-value cap requirements if it was for a revitalizing an area and met certain conditions.
"In recent months, the Office of the Comptroller of the Currency has worked with stakeholders to identify several ways to promote safe and sound lending to support community revitalization … Such steps are important examples of how agencies can spur lending in safe and sound ways," Curry said in an emailed response to American Banker. "Revitalizing America's communities is a personal priority for me, and national banks and federal savings associations play an important role in that process. The best solutions come from open dialogue among all of the stakeholders — regulators, community leaders, advocates, and bankers."
On Thursday, the OCC joined Detroit Mayor Mike Duggan, along with housing groups and lenders, including Huntington, to launch a mortgage program that would give borrowers the full amount needed to purchase and renovate a home in need of rehab if it was undervalued as a result of foreclosure or a cash-only sale. It is the first program of its kind that the OCC has joined, and many of the participants said they are hopeful it can be a model for the nation.
"We have highlighted ways national banks and thrifts can use low-income housing tax credits to provide a significant source of financing for affordable multifamily housing and worked to clarify guidance providing CRA consideration for investments in affordable multifamily housing in underserved and rural areas," Curry said.
Still, many groups said more can be done to generate public and private financial support; and beyond what lenders are required to do in order to get a good CRA score or a tax credit.
"Without a doubt it's the CRA regulation that drives a substantial amount of activity by the banks and other regulated institutions when it comes to putting capital in the affordable housing space," Poznik said. "There's a lot of [capital] that wants to come into the affordable housing market to invest but there's only a finite amount of tax credit that each state has to allocate and it's a pretty fixed number."
Consumer groups and even lenders also acknowledge that improvements and updates could be made to the CRA that specifically address the development and investment of affordable housing projects. For example, examiners could take into greater consideration the areas where the bank lends that are beyond its branch footprint.
Many note that the reinvestment act was enacted in 1977, well before online lending and mobile banking became a core business function. As a result, grades largely center on branch locations. But consumer groups said implementation of the law needs to be modernized.
The regulators "punted on the idea of redefining the assessment areas in CRA." It "doesn't recognize where banks are doing a tremendous amount of business; it only recognizes where they're actually located," said John Taylor, president and chief executive of the reinvestment coalition. "It's a total undermining of both the intent, spirit and actual reason CRA came to be."
Many bankers agree that assessment areas could be expanded. At the very least, they've said that more rural areas should be taken into consideration for credit. Some lending groups also wanted to see more uniform examinations of the CRA at the interagency level.
"We'd like to see greater consistency and training of examiners across individual agencies and all the regulators — so their examiners are more consistent in their training and examination," said Joe Pigg, senior vice president and senior counsel at the American Bankers Association.
Some challenges also result from how regulators score the CRA. The biggest part of the score is focused on branch locations and mortgages, which can easily be pulled in aggregate thanks to the Home Mortgage Disclosure Act. But that is not the case with the community development and investment side of the CRA, which doesn't have a publicly accessible aggregate database.
Even though regulators, lenders and community groups recognize the need for more affordable housing, most of the programs are also done individually, which makes it harder to address the issue head-on nationwide.
Fannie Mae, Freddie Mac and the Federal Housing Administration have each recently launched or expanded programs to encourage financing in the affordable housing space. Agencies including the Federal Deposit Insurance Corp. have also done housing forums with other federal and local agencies in areas like Detroit, Tampa and Cincinnati.
"You go from city to city and state to state, and lot of the affordable housing development is somewhat of a grass roots effort," Poznik said. "Ultimately, everybody agrees there's a need for more affordable housing. It's just a matter of how to harness the resources."
