CD Policy Midterm

Insights from Desmond article on subsidies for low-income renters vs owners (and the challenges that low-income renters face compared to higher-income owners who have the benefit of the mortgage interest deduction)

Home owners can take their mortgage interest payments and use that to reduce their taxable income. Higher mortgages get a bigger benefit. MID IS a housing policy and IS a government subsidy that highly favors wealthy. it is popular but costly to USFG. This does not apply to renters, encourages higher home prices by having people buy higher priced homes. Struggling households often spend 50% or more on rent - many low income renters receive NO subsidy, hard to accumulate wealth, continuing wealth disparities, leading to wealth disparities between certain populations, largest subsidy for homeowners - regressive

Bernanke speech on the importance of a holistic approach to community development that goes beyond just providing affordable housing – and examples of holistic approaches in the speech

Emphasized a holistic approach. - importance of community, no top down. the challenge is coordinating the organizations and resources. East Lake is an example of a holistic approach, but examples like this are uniques because they rely on an enthusiastic leader to coordinate the players. East Lake is centered around a charter school, has mixed income housing, ymca, other orgs that focus on wealth building.

Insights from Braunstein testimony on the types of entities covered by CRA, what they are required to do to comply, the penalty for non-compliance, the purpose of CRA, and some of the policy challenges in implementing CRA under the current regulation that may require modernization to the regulation

1977 in response to neighborhood discrimination - any federally insured bank must help meet the needs of the communities where they accept deposits. (Does not apply to CUs, investment banks). Noncompliance (anything under satisfactory) - block merger. Modernization needed - online lending. Exams are very subjective and qualitative — another call for modernization. Depending on the size of the bank, their lending and cd investments and services will be included.

FDIC Chairman Gruenberg remarks on CRA, including the key objectives of the of the banking agencies in issuing a final rule to address challenges with the existing regulation

• more explanation of eligible activities - need benchmarks

• LMI communities still facing shortfalls

• thresholds to include online lending

• redo s,m,l thresholds

2023 Rule

• standardized data driven benchmarks,

• Make CRA more understandable and accessible to the public

• Encourage more community development - can get credit for investments, loans and services, recognized activities in rural areas

• 4. Tailor requirements to bank size: Apply different evaluation and reporting requirements based on bank size, business model, and local market conditions.

• Take into account mobile banking

Insights from Bhutta and Canner article on whether CRA had a role in causing the subprime lending crisis in 2007-2008 (and why or why not)

Using data of subprime loans from HMDA, found no difference between CRA and non-CRA reg banks. 6% of sub prime loans originated by CRA eligible banks. Highrer priced loans went to mid to high borrowers

(2) main things - elibility and

morgage and finance companies, not banks did the majority of subprime lending

• timing - no CRA changes during 05-0

• Default rates comparable across income levels of neighborhoods - using ZIP code

Basic info on what a CDFI is and the types of CDFIs

Loan funds, banks, credit unions, venture capital firms. Community development financial institutions certified by the CDFI Fund within the Treasury. Certain requirements, commitment to serving low income people and or other target markets, TA, accountability, nongovernmental (except for native), lending staff test.

Insights from the Bernanke speech, including on the challenges facing CDFIs

• After 08, rise in delinquency rate, due to closing businesses, smaller donor bases, etc.

• As banks pull back in response to risk, the demand for CDFI services increases

• higher cost of capital, philanthropies pulling back as their endowment suffered losses, states and local also pulling back, less bank support in loans and partnerships

• LIHTC partners pulling back as the value of the tax credits decreased

• Funding and over reliance on a few funding sources - proposed solution FHLB, secondary markets, individual donors through notes

Insights from the Brunsch piece on Native CDFIs, including some of their challenges

• federal trust responsibility - USFG has a responsibility to provide for Native nations - trust

• Spread out populations, low housing stock and existing businesses, physical infrastructure lacking

• Lakota Funds - increase individual financial capacity before business - credit coaching and matched savings accounts

• Different credit models - credit score did not determine, length of employment did

• Specialized products - leasehold on the land

Insights from case study on CDFI loan funds, including how non-profit loan funds differ from regulated banks and whether loan funds compete with banks

• nondepository, unregulated, not insured by US Gov

• TA - support to get the borrower credit ready

• Get capital from a variety of sources usually at below market rates

• lend smaller amounts

• they do not compete because they serve different needs, max from LF usually too small for bank

• Can be supported by SBA - guarantees

• Banks may partner - ex - NMTC

• CRA credit, BEA, CSR

Basic overview of how the LIHTC program works, including what it is used for, the role of investors, and the role of state housing finance agencies, and how tax credits are allocated to states

Allows investors to directly reduce their tax liability. The IRS grants the tax credit authority to state housing finance agencies, credit then goes to developers who sell them to investors. This gives developers the needed cash for the project and corporations reduce their taxes. This usually covers 60% of costs, but it allows developers to borrow less and have a positive cash flow.

Benefits of LIHTC

Poltical support from industry and housing advocates, quality housing, lots of units and longer affordability period to stay competitive.

Challenges of LIHTC

Complex and inefficient, preserving affordability after 15-30 years, challenges during financial crisis - corporations do not want tax credits when they are unprofitable such as during a crisis - reduced crisis

Your view on LIHTC compared to the other models of subsidized housing we have covered in class

• higher quality than government built and managed homes

• hard to preserve affordability

• overreliance on private industry and their demand for tax credits

• incusionary zoning, sec. 8, government housing projects

• Proj based sec 8 and sec 8 vouchers - help the tenants pay their rents and allows them to choose a building. For Vouchers, there is an underutilization problem. Sec 8 proj - 30% of peoples income, LIHTC based on ami, proj can retain affordability and create new developments Sec 8 deeper affordability

Tax exempt bonds, including how they work and motivation for investors to invest in them

• Loan from the public to finance the building of essential things

• set amount for the investor of principal and returns. The interest is not taxed - incentive for people to invest in them

• with the tax exempt piece, the returns could be comparable to private investment options

• there is the possibility of loosing principal

Block grants, including limitations and benefits as well as how funds are distributed between states and large cities/counties

• not for a specific use like categorical grants

• it is formula based and distributed to big cities and counties with some amount going to states to be suballocated.

• It must benefit 80% AMI or lower

• Positives - mayors know more about local needs, not application based that would go to the richest most resourced localities, takes away the time and resources needed to evaluate applications

• Negatives - less targeted than categorical grants, assumes that local officials know what they are doing.

Inclusionary zoning, including how they work and pros and cons

Sets specific rules related to the % of a new building that has to be affordable - usually 10%. - can do a carrot or stick approach - carrot - do it and we will relax other zoning rules, such as height limits. stick - you must do this to develop here. Pros - free affordable housing, public is not opposed because they do not necessarily know who the affordable rentger is. Cons - developers think its a tax.

Downpayment assistant programs, including who they benefit and whether they help a community provide more affordable housing

• helpful when the median home price is out of reach

• Usually go to minority homeowners which can help close the wealth gap, can also go to local workforce such as teachers, nurses, etc, younger households and those without equity but sufficient income

• Loan, grant, or hybrid

• CA and HI were discussed as examples

• Demand side, not supply side so it does not create more affordable homes, can increase prices, may be captured by sellers

Eliminating single-family zoning, including why single-family zoning is considered problematic and insights from the assigned readings on how this type of zoning was eliminated in Minneapolis

Problems with single family housing zoning - stemming directly after redlining was outlawed, keeps neighborhoods segregated, keeps housing stock low and prices high.

Arguments to eliminate - racial justice and diversity, climate by reducing commutes and building green new construction, increase affordability - taking the pressure off of older housing stock, increasing supply overall

How it was eliminated - incremental change - ADUs, electing younger more progressive councilmembers, coalition building - included YIMBY as well as civil rights groups from the beginning, labor unions community buy in and listening - surveys, city halls, made adjustments

Tax increment financing (TIF), including why a locality would utilize this tool, how it works, and pros and cons

How it works

• uses anticipated increases in property taxes to finance projects - public investment spurs private development and increases property values and therefore taxes

• based only on the area where the project is- establishing a TIF district - local gov

• establish a baseline of property values and revenue

• locality funds the improvement - could be done through bonds

• Direct increases towards the project - either direct or paying off debt

• End tif district

Why you would use

• Self financing

• targets certain areas

• encourages public-private partnerships

• allows cash flow against anticipated increase

• can expand the tax base

Disadvantages of TIF

• May have occured othersie

• Those taxes not used for schools and other things

• Risk - if the property does not increase as projected there may be a repayment gap

• Gentrification

• Developers and owners may benefit more

• Political accountability difficult

• Competition between localities

Key takeaways on rural economic development based on the assigned reading on this topic, including challenges facing rural areas and strategies that could be promising in addressing these challenges

Challenges

• overreliance on a few industries

• infrastructure limitations

• institutioonal capacity

• skilled workforce - limited education and training opportunities

• isolation - distance between businesses people and edu

• less political power

• fragmentation - local gov and orgs may tackle issues individuall

• Strategies to overcome

• Regional collaboration - pool resources, expertise, capacity

• Strengthen urban and rural connections - recognize the interconnectedness and support businesses educ, and other organizations working together so rural areas can participate in regional economies, make sure rural areas are represented in regional politics

• Industry cluster

• Support existing businesses already in rural areas

• Infrastructure such as broadband and job training

Key takeaways from the case on the Connecticut economic development strategy, including what the strategy was at a high level and how it sought to turn around the State’s economic development challenges

• 80s-90s sharp job losses in manufacturing and defense and they relied heavily on these, high costs, increased competitiveness, fragmentation

• Created Connecticut Economic Conference Board - gov and economists

• CERC began advertising the state, and new tax incentives sought to attract manufacturing businesses

• Tax cuts and investment in training

• Cluster focus - study on which were most competitive - each own task forces - implemented their plans - ex grant to implement a training program for manufacturing

• Gov created council as well - marketing campaign to attract and retain talent

• Not just about attracting new business - building and improving the overall interconnected economy, leveraged non gov partnerships,