Affordable housing takes center stage

With rising rates, elevated home prices and scarce inventory, 2023 has been a challenging year to increase affordable housing options. But innovative new programs and approaches are being developed that can improve the outlook even in a difficult economic environment. HW Media brought together these affordable housing experts to talk about the innovative solutions that can move the needle on affordable housing.

Diego Sanchez: Looking at the news over the past six months, unfortunately the story for affordability has not been a great one. Home prices are up 40%-50% in the past few years, mortgage rates have doubled in the past year, inventory is flirting with all-time-low levels. What is the good news on affordability?

Michelle Boyd: It’s not good. I think the COVID-19 pandemic helped wake up the common person to understand housing costs and racial inequity. The recent rising interest rates have really helped underscore the housing supply shortage. We got to this point from several decades of underbuilding housing in most major job centers across the country — where people actually want to live. But, you asked me about good news. I think some of the good trends that we are starting to see have really been about zoning and confronting the fact that most of the country has a history of exclusionary zoning. That means zoning in ways that only promote single-family development with large lot sizes. We are starting to see bright spots across the country. In places like Minnesota and Oregon, these paradigms of how we think we have to build our cities are being challenged. We need to think through how we can build more cities into our current urban landscape. In California, we’ve focused on second units on properties, otherwise known as accessory dwelling units (ADU). We’ve continued to tweak the law to the point that now there are some cities — like LA — that have 20,000 ADU permits. So that is really starting to come to fruition. There have also been changes in the law that allow the state to have more legal ability to hold cities accountable for how much zoning they’re building. Specifically, this can help incentivize and force more housing production in higher income areas that may be closer to downtown job centers.

Faith Schwartz: I think, clearly, we have a big effort by the government — more than we’ve ever seen before — to make affordable housing a top priority for the administration. That puts a lot of force and power into HUD, Ginnie Mae and FHA for the government to help the industry move forward.

Laurie Goodman: Yes, home prices are up 40%-50% over the last couple of years, taken as a whole. But, they’re actually down these last six months or so. Interest rates have hit a high of around 7%, and those have come down a bit. Inventory levels have hit bottom, yes, they are low in any sort of reasonable historical framework. But, it is important to realize, that as bad as affordability has gotten, wages have also gone up a fair amount.

I would expect that we’ll see wage growth outpace home price appreciation. Even if you think that home prices are going to be flat over the course of 2023, wages are going up. Wages and salaries are going to continue to grow, so I think we’ve seen the worst in terms of affordability.

Let’s talk interest rates. Yes, we’ve had huge increases in interest rates in the past year. But it is important to realize that mortgage spreads are unusually wide. Mortgage rates are determined by the 10-year treasury rate and mortgage spreads. It is very possible that you actually have spreads contract to more normal levels so that mortgage rates fall over the course of the next year.

Jim Gray: I agree with Faith that the change in the administration is hugely good news. We now have people with an understanding of the markets. I think people are starting to see that there really is a lot more that can be done when you make minimal changes in the credit box that Fannie Mae and Freddie Mac have so much power over.

The biggest challenge is helping people understand that the kinds of things we’re talking about in affordable housing have no connection to the 2008 foreclosure crisis. There are so many opportunities to make small changes and reach markets that are slightly less profitable for GSEs but plenty credit worthy.

Diego Sanchez: What can an independent mortgage bank (IMB) do when it comes to moving the needle on affordable housing?

Jodi Hall: Well, it does seem like we have very little control over affordable housing. We can’t impact the available inventory, home starts, builder red tape or incentives. But, the things that we can control include impacting interest rates, largely the cost of doing business.

A single loan rose to $11,000 on average, that’s the cost to originate. That cost gets passed on to the consumer. To keep prices down, we, as lenders, must be extremely strategic in vetting the vendors and resources we use to create those loans. Our challenges have been furthered by the aggressive increase from FICO on credit scoring models and the aggressive increase of verification of employment in the last two years.

What we can do, is drive down costs by implementing technology that drives things through the system much faster, have hard conversations with our vendors to decrease costs and educate both homebuyers and referral partners on programs to get people into homes.

Chuck Iverson: The question certainly is, “What can we do?” not “What are all the challenges?” We have a lot of tools and resources available to us. Jodi made me think a lot about the value of IMBs in this distribution chain. Cost is the most difficult question to me. There really is no magical formula for us. Our approach is that we have to go out and compete. The price is the price. We are talking about getting a lower cost to the consumer. That forces compression and it forces innovation. It probably looks a lot better on the outside than the inside of an IMB. It is mindboggling to me, with all the implementation of technology and all the things agencies have done, how much more labor it takes to do a loan. If you look 20 years back, it costs more and is more complex to create a loan today than it used to be. But, the quality is much better now.

Diego Sanchez: What can we do in underserved communities and minority communities to expand reach and expand affordability?

Frank Fuentes: One of our mottos at New American Funding is to “mirror the community you serve.” In my experience, it all points back to that. Employ the individuals who are from the underserved markets, from loan officers to underwriters. Now, that is easier said than done. One of the toughest challenges in our business is recruiting that talent. One of the ways you start is by creating internal and external initiatives that work together. Other companies will create employee resource groups internally, but there’s no connection to sales, to the external.

A great example is the Latino focus initiative here at New American Funding. I personally spearheaded this for the past seven years alongside the president of our company. That was our first true initiative, established in 2013. Fast forward to 2016, and we began the “Dream Iniative” that was focused on Black homeownership. It started as an internal conference call and spun out into grassroots events, partnerships with minority trade organizations and blew up. But it all started with something small, among department heads of the company brainstorming about what was needed in the space. cable up to 100 AMI and in high cost areas, 120.

Diego Sanchez: What about Chuck and Jodi? Are there programs underway at your organizations that have a similar inspiration?

Jodi Hall: For Nationwide Mortgage Bankers, it happened the opposite way from what Frank described. It was an external initiative that started in 2019. We created a DBA — Americasa — that focuses on the Hispanic communities, and we brought branches to Nationwide Mortgage Bankers specifically to be in their communities and market Americasa. We’re playing catch up now, to get the internal marketing into the hands of the branches.

It really comes down to passion and perseverance. There are a lot of lenders out there with a vision, but it turns out to be a flash in the pan. It takes an organization that has a number of passionate individuals who are willing to do the work to bring that vision to fruition. There are a lot of people that don’t have that.

I think one of the most underserved communities in the U.S. is the rural community. They just have local credit unions and farmers banks that are physically in that community. They can only get 80% LTV, they have to have a very high FICO score and don’t have access to the affordable lending. There are other areas that different IMBs can focus on to serve a broader community. We need to collaborate on ideas that people are passionate about.

Diego Sanchez: Michelle, your organization makes a lot of investments into companies that are helping us solve all sorts of issues about affordability. Are there any investments that you’ve made, or that you’re planning to make, that are going to help us solve affordability issues on a national scale?

Michelle Boyd: That’s our goal! We select and look for businesses that we think have the potential for national influence. A common theme is models that are thinking about infill housing developments — a kind of smaller housing development that can fit into new zoning frameworks. We’re seeing a lot of those pop up in cities all across the country. One example in particular is co-op financing. It only used to be used in New York City and in Europe, but it has been retooled in a way that can work more broadly across the country.

Co-op financing provides a financing tool for six to 10 unit developments. Buyers would be provided a small unit plus shared spaces in a beautiful building. The financing schema makes it so that the dwelling is accessible to a low-wealth family at a moderate income level.

They can buy-in and get full access to the building that may appreciate over time. I point this out as an example because I think there are a lot of organizations trying to carve a way for renters to get access to some type of ownership stake within real estate. It may not be a traditional, 30-year mortgage or single-family home option, but it could be this co-op model in a community collective, or a landtrust model.

We’ve worked with a lot of amazing leaders, particularly leaders of color, who are thinking through this from a strong racial framework. There are people who haven’t had the chance to own land throughout the history of the U.S., so how can we build these financial models that create a more inclusive economy and more access to housing.

We’re supporting a couple of models like that, and I’m really excited about them.

Diego Sanchez: Is there anything specific being done to help with affordable housing for seniors?

Laurie Goodman: Most seniors want to age in place. Very few seniors have their houses fit for this stage of their life. It can be very cost effective to have medicare pay to install grab bars around your home so you don’t trip in the shower and that kind of thing. That can be done very cheaply assuming people want to age in place.

I think accessory dwelling units are another option for seniors. Expanding finances and eliminating zoning laws could make it more comfortable for seniors to age in place, because they can have someone who is in a different unit but still with them a lot of the time.

Diego Sanchez: Jim, I’d love for you to dive into some of the repercussions — positive and negative — of the administration change we’ve experienced recently. Housing seems like a big focus for the new leadership of various agencies.

“Most seniors want to age in place. Very few seniors have their houses fit for this stage of their life (...) Expanding finances and eliminating zoning laws could make it more comfortable for seniors to age in place...”

- Laurie Goodman

Diego Sanchez: Thinking back to those of you on the regulatory side, do you think the government programs will increase the income limits for affordable programs given inflation?

Faith Schwartz: I was recently at a roundtable discussion focused on government-backed down payment assistance programs. To be eligible for that, borrowers must hit 80% of the median income or lower. But, at this discussion we talked about programs that are being rolled out that allow for 140% to 150% of median income, because it is capturing more people that still have no down payment. They have good incomes, they just live in areas with expensive housing. There was a lot of chatter with a lot of advocates reflecting the reality of the market.

Laurie Goodman: There have been lots of lease purchase agreement (LPA) changes. A lot of the limits are now appli -

Jim Gray: Let’s start with the recently brought back “Affirmatively Furthering Fair Housing” plan. It will do a lot to help communities make more affordable housing available at a local level. That’s a huge thing! Also, the president’s statement from last year was unprecedented. I don’t know of a president in my lifetime who has made such an effort in affordable housing — he featured both manufactured housing and ADUs prominently.

The fact that Sandra Thompson is now at the helm of FHFA and is taking the affordable housing responsibilities very seriously is another great thing. The work that Julia Gordon has done at Ginnie Mae, getting to title I, is awesome. There’s a long list of impressive achievements for this administration in only two years.

Laurie Goodman: I wanted to pick up on manufactured housing and ADUs too. I think this alternative supply of housing can help a lot. Just to give you a sense of the numbers: from 1977 to 1994, we produced 240,000 manufactured housing units each year. In 2022 alone, there were only 100,000 units created. So the production of the most affordable form of housing for a growing population is way down. We aren’t even at the halfway point. We would need to add 70,000 units per year to be producing half of that. In terms of ADUs, there are about 1.4 million of them but 85.6 million detached, single-family homes. These are the single most important source of supply. 1.6% of all homes have an ADU. Increasing that to 3% over five years would create an additional 1.2 million ADUs. Between ADUs and manufactured housing, that would be about 300,000 additional housing units built each year. Last year we built about 1.5 million homes. So an increase of 300,000 would basically be a 20% increase over last year’s levels. These aren’t niche products. They’re really important. cities — is because the tools available to city planners are really complicated.

Diego Sanchez: Michelle, lumber has been very volatile and other basic supplies that go into building an apartment or house have been very expensive. Are there alternative forms of construction your organization is looking at? For example, what’s happening with modular housing?

Michelle Boyd: That industry is still really new, but we’re seeing a couple of companies that are reaching early stages of maturity. For those in the tech world, these would still be like Series B companies. It’s early and there may or may not be stable revenue. A lot of developers who want to use those tools have often only used them on one or two developments, ever. Within that environment, we’re seeing a lot of inconsistency about whether a particular development that’s built using modular actually achieves its own cost and timing goals that it sets out.

It isn’t because of underlying flaws in the technology, but it’s more about the IT and financial support for the folks who are building these and trying to capture the cost savings.

If you allow a four-story building instead of a three-story building, maybe that higher height isn’t feasible for the developer to build, so you’ve changed the zoning code but nothing happens. So, there’s a suite of tools out there that are helping developers and investors evaluate potential sites. The Terner Center saw a gap in those tools and saw a need for a tool that was really built for city planners and state governments to understand how a current zoning code can relate to the actual likelihood of a development being built.

Our tool is currently in use for the city of Los Angeles It allows them to toggle between 20 different policies and 20 different economic conditions like inflation, then project out under those conditions to see how housing developments may change across the city.

We are aiming to help city planners, especially in these complex cities, think through all the different zoning and policy tools they have in their toolboxes. That level of analysis is important because if you’re a city planner who is really pro-housing, you may not even know how to create that reality within your city.

“We know we need to advocate and impact housing policy. It really comes down to educating the community, from loan officers to real estate professionals and home buyers.”

If you think about anyone involved in affordable housing, especially in expensive environments, there are 17 different financing sources that go into an affordable housing development. That complexity makes it really hard for affordable housing developers to work with a modular factory, which needs more manufacturing-style finances. There needs to be an evolution of how we finance housing to allow it to work with these more industrialized processes. I believe in this process strongly and believe that it can help reduce costs and increase housing supply, but the industry is still in the early stages.

- Chuck Iverson

Chuck Iverson: To segment back to the underserved communities — and affordable housing in general — it comes down to a true focus. We have a long way to go in creating that focus. There is NAHREP, there is NAMMBA, both trying to educate the communities. There are resources available to you, but you have to get that information all the way through the supply chain and out into the community. For us, we looked at “what can we do right now?”

Diego Sanchez: If we’re talking about zoning — and that is an important part of the equation — lack of material supplies and housing supply is one of the big factors leading to lack of housing affordability. It sounds like you’ve worked with some zoning tech companies that are changing the game. Can you talk about some of the efforts there that add more density?

Michelle Boyd: The Terner Center actually came up with some of its own tools to serve city planners. There’s a lot of technology moving into the zoning space and part of the reason it’s hard to change zoning — especially in bigger

We know we need to advocate and impact housing policy. It really comes down to educating the community, from loan officers to real estate professionals and homebuyers. That is how we promote affordable lending. You have to use every single tool: FHFA, VA, housing finance and all financing products that are available to put people on a path to homeownership.