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This issue of Community Developments focuses on affordable rental housing – and on how banks and partnering institutions and agencies are working to make such housing available to more lower income Americans. Some 34 million American households occupy rental housing, so there are significant opportunities for banks to lend and invest in this sector. But there are significant challenges as well. Between 1993 and 2003, the number of rental units affordable to households in the bottom third of household income distribution – those earning $16,000 or less annually – declined by 13 percent, or roughly 1.2 million units. Many of these properties had to be vacated because of neglected maintenance. Others were upgraded and now command much higher rents or have been converted to condominiums. As a general rule of thumb, lower income households can afford to pay no more than 30 percent of their income for housing ($400 per month for a family earning $16,000). That’s well below median rents for decent housing today. Historically, a significant share of the rental housing available to lower income households has been made affordable through federal subsidy programs. Over the past 40 years, subsidies have supported the development of more than 3 million rental housing units.
Many of these long-term subsidies are expiring, however, and more than 200,000 units with project-based assistance have been lost from the affordable rental housing inventory over the past decade. This trend is likely to continue in the years ahead. How Banks Can Help Any crisis creates opportunities as well as challenges, and the loss of affordable rental housing is no exception. Because of the robust and continuing demand for affordable housing, innovative financial institutions can make significant direct or indirect investments profitably. Banks working with specialized partners in viable local markets can stem the loss of affordable multifamily units and help maintain housing that is essential to the well-being of our nation’s communities. If positioned correctly, banks can help meet the nation’s growing need for affordable shelter while making safe, sound, and cost-effective investments in their communities. The learning curve for banks investing in this sphere can be steep, but the upside can be commensurately rewarding. Banks that invest their resources in affordable multifamily housing preservation can receive not only a market-rate return on their investments, but may also receive positive CRA consideration for activities that support the supply of affordable housing, one of the core activities addressed by CRA. This issue of Community Developments offers numerous success stories in bank multifamily rental housing investment. For example:
Keys to Success A closer look at these and similar success stories indicates that preserving affordable multifamily rental properties requires commitment and expertise. Preservation can mean tackling myriad challenges, including multi-layered financing, tenant relocation, and complex local building codes and standards governing rehabilitation. Success requires determination, deal-making skills, and perseverance. Few persons or institutions acting alone have the necessary resources and expertise. Managing the entire development process – the planning, financing, permitting, construction, and restoration of rental properties – can be a Herculean task. So one of the most important keys to undertaking such projects successfully has been the creation of effective local partnerships. Successful partnerships involve the participation of specialized partners, including government agencies, foundations, nonprofit organizations, and multilender investors. Many banks have leveraged their resources – and accelerated the successful completion of profitable housing investment projects – by partnering with community development financial institutions (CDFIs) and similar entities steeped in local knowledge and community contacts. Broad-based initiatives are equally crucial to the success of any strategy to preserve affordable rental housing. For example, the MacArthur Foundation has launched a long-term, $150-million campaign to call attention to the importance of affordable rental housing, stimulate new policies to preserve and expand the nation’s stock, and facilitate new investment and ownership arrangements. Commitments on that scale make such investments even more attractive to banks. Working with the OCC As the federal banking regulatory agency charged with overseeing national bank investments in community development, the OCC is taking steps to increase the capacity of banks we supervise to finance affordable rental housing for low- and moderate-income persons. National bank investments in affordable rental housing are typically made through the public welfare investment authority provided to national banks under the National Bank Act, which is implemented by Part 24 of the OCC’s regulations. In 2006, the OCC led the way in encouraging Congress to raise the cap on such investments. Under the previous public welfare investment authority, national banks could commit no more than 10 percent of their capital and surplus to qualifying investments primarily promoting the public welfare. Even with this limitation, during the previous decade national banks made more than $15 billion in public welfare investments in affordable rental housing in all 50 states – investments so successful that many banks indicated they would do more if the limit were raised. Assessing the risks and rewards, the OCC recommended raising the limit to 15 percent. Congress agreed and in late 2006 enacted the change we proposed. Unfortunately, Congress at the same time limited banks’ opportunities to invest in affordable multifamily rental housing by cutting back national banks’ authority to make direct investments in mixed income projects in middle-income areas. The unintended consequence has been to discourage bank investments in areas eligible for CRA credit – economically distressed middle income rural communities, disaster-stricken areas, and neighborhoods targeted by government agencies for revitalization. Fortunately the House of Representatives has addressed this problem by passing the Depository Institution Community Development Investments Enhancement Act (H.R. 1066). This legislation would restore the broader, long-standing authority for national banks and state-chartered banks that are members of the Federal Reserve System and would provide the same investment authority to federal savings associations. The Senate Committee on Banking, Housing, and Urban Affairs is now considering the legislation S.2487. Enactment of this change would help banks and thrifts to participate more broadly in the affordable rental market and assist in preserving the declining inventory of multifamily rental housing. Looking Forward As the articles in this issue make clear, there’s no magic wand that will instantly reverse the current decline in the number and condition of affordable rental properties. But as these case studies and best practices also show, the achievements made possible by banks and their community partners are well worth the hard work necessary to preserve these units and bring stability and vitality back to our nation’s older neighborhoods and communities. I encourage national banks interested in more information on investments in this important part of the housing sector to contact the OCC. See a Directory of Affordable Rental Preservation Resources.
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