How CDFIs can help fix America's housing affordability crisis

LAKE FONG/BLOOMBERG NEWS

It's no secret that our nation faces a massive housing affordability crisis. With soaring rents and home prices shutting the door to homeownership for moderate- and middle-income families, this has truly become an emergency. Historically, community development financial institutions have played only a small role in housing finance outside of a few large entities supporting traditional affordable housing projects. However, current circumstances have created an opportunity for CDFIs to significantly impact the housing crisis through new and innovative approaches.

Experts have identified exclusionary, single-family zoning as a major impediment to increasing the housing supply and reducing costs, and in many places reforms to such zoning have either been implemented or are under consideration. In California, where the organizations we lead are based, legislators have passed a series of laws in recent years designed to make it easier to build "missing middle" housing — developments of between two and 10 units that can significantly expand the supply of both rental and for-sale housing that working families can afford. A number of these reforms in California and around the country — for example, in Chicago, Rhode Island and Hawaii — have focused on accessory dwelling units, or ADUs, which offer great opportunities to make more efficient use of land that previously was allocated for low-density, and thus inherently more expensive, single-family homes.

ADUs and other middle-density developments not only offer better affordability than single-family homes, but they can also create other benefits as well, such as reducing sprawl, traffic and transportation-related greenhouse gas emissions.

While increasing the number of such developments can greatly help renters, we shouldn't lose track of their ability to also create more affordable homeownership opportunities. Homeownership remains one of the main ways most Americans build wealth, but single-family homeownership is far out of reach for an increasing number of Americans, especially Black and Latino families who, on average, have less wealth and lower incomes than whites. Middle-density, for-sale housing is the most cost-effective way to increase homeownership in these communities.

Despite the crucial zoning and land-use reforms we've seen, progress in building more middle-density housing is slowed by a lack of financing, often leaving more affluent homeowners or buyers as the only ones able to take advantage of the zoning changes. CDFIs can bridge this gap by financing these projects themselves and showcasing their potential to commercial lenders.
  

Historically, CDFIs' housing work has focused on traditional multifamily apartment buildings financed through the Low-Income Housing Tax Credit programs. However, they have proven to be highly successful at addressing market gaps in traditional lending for other types of socially beneficial endeavors. CDFIs have greatly helped meet the needs of small-business and microenterprise owners throughout the U.S. — small entrepreneurs who also face structural hardships in accessing capital from traditional bank lenders. As a part of the federal government's response to the COVID-19 pandemic, Congress directed $12 billion into small businesses throughout the country via the CDFI industry.  

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Despite their success in small-business lending, CDFIs have not played a meaningful role in creating new financing solutions for any type of middle-density housing. Out of more than 100 certified CDFIs based here in California, none have an explicit focus specifically on ADUs or "missing middle" unit developments.

And right now, there is a gap in financing availability for these sorts of developments that CDFIs are well positioned to fill.

According to a recent white paper by Enterprise Community Partners, "There is a consensus among housing developers and experts that inadequate access to financing is one of the prominent challenges to developing smaller-scale multifamily housing." That same report also found that these financing challenges primarily stem from the scale of development and the fact that "these developments are often pursued by small-scale developers," who are more likely than larger ones to struggle to meet the capital and underwriting requirements of commercial lenders. It also noted, "Under some circumstances, loan underwriters will deem underwriting loans for [smaller scale] development to not be cost effective, especially when the cost of fixed loan originating expenses, such as dedicated personnel and legal fees, outweighs the projected financial return on originating a loan." 

According to the White House, "While the federal government currently offers a range of financing options for large multifamily development, market gaps exist for the construction and rehabilitation of single-family homes, 2-4-unit properties, ADU construction, manufactured and modular housing delivery, and smaller multifamily properties. Financing for these housing types has the potential to boost supply in constrained markets, and create location-efficient, modest density that can improve labor market outcomes and reduce greenhouse gas emissions."

The legal basis for greatly increasing the number of multifamily dwellings for both rental and purchase now exists in many places, and interest is growing. Filling in the current financing gap can help make this type of housing real on a scale capable of easing our housing affordability crisis. The field urgently needs the flexibility and creativity that CDFIs bring to small-business lending to make that dream a reality.