Smart Growth America and its coalition of real estate developers and investors LOCUS, which represents private-sector development interests from across the United States, present a series of reforms to federal real estate programs.
Taken together, these reforms could save the federal government an estimated $33 billion per year while updating outdated programs to achieve better outcomes for households, communities and taxpayers.
Today’s programs unfairly penalize families who can’t afford or choose not to buy a home, favor single-family homes over other types and provide financial incentives to purchase second homes when many families still struggle to purchase their first. In addition, the majority of funding goes to a small proportion of households, several policies are barriers to forces in today’s marketplace and programs are failing to adequately support existing neighborhoods. Taken as a whole federal real estate programs have not kept pace with the evolving real estate market nor do they pursue of a coherent set of policy goals.
Federal Involvement in Real Estate: A Call to Action proposes policy changes to begin to address these problems. We encourage Congress to improve federal real estate programs in the following ways:
Smart Growth America recommends phasing out a portion of NFIP rate subsidies so that insurance rates better reflect the true risk of flooding. Rates should be risk-based and subsidies should be means tested. In addition, targeted assistance should be provided outside of the rate structure for low-income families, and mitigation funds should be used to help nationally targeted communities develop innovative flood mitigation strategies to achieve affordable, accessible and self-sustainable outcomes. This would ensure the program continues to help those most in need of support and create economically resilient communities.
The Federal Housing Administration (FHA) is now backing more loans than ever before. As the housing market rebounds, it is time to refocus the agency on its mission of helping first-time low-income families secure a mortgage. Smart Growth America recommends Congress lower FHA’s loan limit from its current historically high level to a more traditional level, consider increasing guarantee fees and allow FHA to seek indemnification from problem lenders. We also recommend FHA do a thorough analysis to determine if their creditworthiness standards are appropriate.
As Congress begins to consider comprehensive tax reform, all real estate tax programs deserve examination. Three in particular warrant closer review: the mortgage interest deduction, the real estate tax deduction and the capital gains exclusion. Smart Growth America recommends limiting the mortgage interest deduction to primary residences, and capping the deduction at $500,000 instead of $1 million in mortgage value. We recommend limiting the real estate tax deduction for households earning over $100,000 per year. And we recommend lowering the capital gains exclusion from $250,000 for individuals and $500,000 for households to $125,000 for individuals and $250,000 for households.
The Low Income Housing Tax Credit is the principal way the federal government supports the construction and preservation of affordable rental housing. The credit helps the private sector add about 100,000 rental units annually. However, this is not enough to meet growing demand. Smart Growth America recommends making the credit’s nine percent fixed minimum credit rate permanent, and enacting a fixed floor rate for the acquisition credit at no less than four percent. In addition, we recommend increasing the credit’s annual allocation by 50 percent.
Rehabilitating existing buildings can reduce costs for municipalities and add to the local tax base, but these projects can be cost-prohibitive for developers. The Rehabilitation Tax Credit is designed to encourage this rehabilitation. However, the current scope of the Rehabilitation Tax Credit limits its effectiveness. Smart Growth America recommends increasing the credit to 15 percent of rehabilitation costs; broadening eligibility to include project-wide redevelopment costs; making residential buildings eligible; and changing the age criteria so that any building over 50 years old would be eligible for the credit.
Saving for a first down payment is challenging for many families, and in the aftermath of the real estate bust many lenders have increased down payment requirements. For families and individuals who do want to become homeowners, the federal government could more effectively target its assistance by making it easier to save for a down payment. Smart Growth America recommends Congress establish individual Mortgage Savings Accounts, an optional tool that would direct an individual’s pre-tax contributions into a savings account established to help save for their first down payment.
Upfront loans for infrastructure repairs can make infill projects more financially feasible for developers, and help communities reap the benefits of neighborhood revitalization. Smart Growth America recommends Congress create an Innovative Financing for Infrastructure Rehabilitation Program to help developers meet upfront infrastructure costs. Modeled after the Transportation Infrastructure Finance and Innovation Act (TIFIA), such a program would provide low interest loans, loan guarantees or other credit for smaller scale projects funded through the Department of Treasury. Smart Growth America recommends an annual authorization of $500 million for this program.
This platform unites neighborhood advocates, real estate developers and budget hawks. We’re coming together to help middle class families and the communities they live in.
Together, we can help more people have access to affordable homes and save for their first down payment. We can leverage private investment to rebuild America’s infrastructure, and we can revitalize communities across the country.
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