#162 Summer 2010 — Public Housing Privatization

The End of Public Housing

In written testimony submitted to the House Committee on Financial Services in May, excerpted here, a group of urban affairs academics argue that PETRA is nothing less than a formal divestment from public housing, worse than anything previous administrations have proposed.

Seth Tisue, CC BY-SA

Public housing demolition in Chicago

Public housing demolition in Chicago. Photo by Seth Tisue, CC BY-SA

As academics and researchers of urban policy and planning committed to equality and social justice, we strongly oppose the Obama administration and Department of Housing and Urban Development’s Transforming Rental Assistance (TRA) initiative, and its legislative proposal, the Preservation, Enhancement, and Transformation of Rental Assistance Act of 2010 (PETRA).

The solution TRA presents is debt financing through the conversion of 280,000 public housing units to Section 8 contracts. That is, to leverage $7 billion by mortgaging 25 percent of all remaining public housing units. As a multi-year initiative, Secretary Donovan states that the goal of TRA is to “not require any capital funding for public housing in a separate account.”

In other words, formal divestment and the end of public housing that residents have called home for over seven decades.

TRA does not enable more funding for the existing public housing program. It opens up public housing as a new source to feed the addiction to credit. Under the banner of preservation, public housing ceases to be public as it passes into the cradle of debt and leverage with its future mortgaged off to banks for profit. As such, TRA, like the preceding shifts in federal assistance to Section 8, is not meant to truly help poor households and individuals, but is a means of getting the federal government out of the low-income affordable housing business.

Rebranded Bush Initiative

TRA is a more extreme version of George W. Bush’s “Public Housing Reinvestment Initiative” (PHRI), which was rejected by Congress twice in FY ’03 and ’04. PHRI sought to enact the same framework TRA is currently pushing: using private financing to rehabilitate properties though mortgages, the argument that without private-sector money PHAs will be unable to address the capital improvement backlog, an emphasis on market discipline through “asset management” principles, the conversion of public housing to project-based voucher subsidies, and even the opportunity for residents to move after living in a converted development for only one year (two with TRA).

Ultimately, the conceptual differences between TRA and PHRI are minimal to nonexistent. What distinguishes the two proposals are the untold sums Obama’s HUD has spent on promotional outreach, interactive webcasts, stakeholder discussions, and PowerPoint presentations. An important difference is PHRI’s slightly more modest scale, which would have been limited to leveraging $500 million in 2003 and $1.7 billion in 2004.

HUD officials have repeatedly claimed over the past year that TRA does not privatize public housing. This could only be true if an exceedingly broad definition [of public ownership] exists. Indeed, the PETRA legislation provides that “PHA-owned” is to include “a project or unit owned by an entity in which the agency or its officers, employees or agents hold a significant direct or indirect interest and which has among its purposes the ownership or management of affordable housing.” Nowhere in PETRA is “indirect interest” defined. When considered against the standards established by a 2006 Congressional Research Service Report on the matter [of privatization], the PETRA legislation more than exceeds the multiple minimal standards.

What’s the Mechanism?

Neither TRA nor PETRA specify the mechanisms for debt-financing $7 billion from the $290 million requested in the budget. Provided the centrality of private equity and investment in the TRA initiative, this oversight is particularly glaring. HUD’s failure to disclose significant details on the legislative authorization or the structuring of tax-credits, mortgages, or other financing mechanisms underscores the minimal transparency affected during the TRA process.

That there is no new debt-financing authorization in PETRA suggests that HUD intends to mobilize existing but under or unused legislation. An obscure but likely candidate is the Public Housing Mortgage Program (PHMP). Approved in 1998 but only used six times since, PHMP authorizes “a public housing agency to mortgage or otherwise grant a security interest in any public housing project or other property of the public housing agency.” Furthermore, “no action taken under this section shall result in any liability to the Federal Government.” Unlike the Capital Fund Financing Program, which is limited to a percentage of annual appropriation, the PHMP can be secured against the property. Currently public housing is run at a loss so there is no surplus capital to pay debt service, but the conversion to Section 8 through TRA would enable PHMP to function due to the larger subsidy.

Fundamental Flaws

PETRA fails to specify any mortgage regulation. Specifically, it does not place a cap on the interest rate for a PHA’s loan nor is there any provision prohibiting the loan’s bundling or securitization, keeping it out of the secondary mortgage market.

Estimates of the capital improvement backlog used in TRA presentations are based on decade-old data. The new capital needs assessment will not be finished until October. In the face of these uncertainties, senior HUD officials have testified to Congress with figures including “may exceed $20 billion,” $26.4 billion, and the more common refrain of $20–30 billion. The lack of a definitive inventory and unspecified debt mechanisms place the reported $7 billion leverage figure in the realm of speculation.

PETRA also establishes no provision to prioritize properties in need of significant capital improvement. Properties eligible for conversion need only demonstrate that they will “promote the rehabilitation, energy-efficiency, and long term-financial and physical sustainability of properties.” The ability to “promote” “rehabilitation” bears no necessary relation to a project’s backlog. Provided that banks lend against both the ability to maintain debt service payments and the quality of a property’s asset, lenders are far more likely to extend debt to properties already in good physical condition. The properties with the greatest need are liable to be locked out or to borrow at a reduced volume.

Therefore, as drafted, PETRA neither encourages nor provides mechanisms for funding properties with significant capital backlogs.

This testimony highlights several major concerns we have with PETRA. However, many more exist. We believe that if this proposal is implemented, it will produce far more hardship and suffering in poor and low-income communities than it alleviates.

Amanda Huron, The Graduate Center at The City University of New York; Michael Brown, University of Washington; Gabriella Y. Carolini, Rutgers University; Nicholas M. Dahmann, University of Southern California; David Featherstone, University of Glasgow; James Fraser, Vanderbilt University; David Harvey, The Graduate Center at The City University of New York; Kim Hopper, Mailman School of Public Health at Columbia University; Peter Hossler, University of Georgia; Paul Kirkness, The University of Edinburgh; Bob Lake, Rutgers University; Jackie Leavitt, University of California–Los Angeles; Mark Naison, Fordham University; Kathe Newman, Rutgers University; Peter Marcuse, Columbia University; Laura Pulido, University of Southern California; Mark Purcell, University of Washington; René Francisco Poitevin, Gallatin School, New York University; Tom Slater, The University of Edinburgh.


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