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Sustainable Planning to Recover from the Mortgage Crisis Transcript

October 8, 2009

Moderator: Welcome to the Federal Reserve Bank of Atlanta's Foreclosure Response podcast series. I'm Karen Leone de Nie with the Federal Reserve Bank of Atlanta, and today we're talking with Dan Immergluck, an associate professor of city and regional planning at the Georgia Institute of Technology in Atlanta. Dan conducts research on housing markets, fair lending, community development finance, neighborhood change and segregation, and related public policies.

As the country grapples with a recession that is in part driven by the mortgage crisis, it's reasonable to ask questions like, What might this mean for home ownership in the future? How might it impact efforts to provide affordable housing? And what role can local government play to help promote more sustainable development decisions going forward? Today we'll be talking with Dan about these issues. Dan, thanks for joining us.

Photo of Dan ImmergluckDan Immergluck: Thank you, Karen.

Moderator: So what do you see as some of the likely implications of the changes in mortgage markets over the last year or two for housing options, especially for low- and moderate-income households?

Immergluck: Well, there's going to be many, and it's hard to speculate too much. But first, I think the return to more conservative housing finance will have some long-term implications in the mix between rental and ownership housing. This isn't to say that there won't be any more affordable home ownership for folks, that that can't be a good thing. But I think there will be a much bigger focus on what I call both sustainable and financially beneficial home ownership; that there'll be an emphasis on both those things. Risk-based pricing—when people pay higher interest rates because their credit scores are lower, that kind of thing—may make sense in some ways. But when borrowing costs become very high, as we saw with subprime lending, it basically makes it much harder, even if you can pay the loan, it makes it much harder for that loan to make sense financially. So lots of folks even who didn't go through foreclosure who got subprime loans probably would have been better off renting from a financial perspective—taking the money they put down for the house, putting it in a savings account, and renting at a lower monthly cost. And then the problems of foreclosure and default risk just add to that scenario. So we're probably going to see less home ownership. I don't think it's going to be dramatically less in the long run, but I do think we'll see some pullback. And in some markets that'll be stronger than others, especially when home ownership costs are very high in a local market.

Another thing that I think is a kind of bigger policy issue that some local governments, state governments will try to push, but really is a national issue, is promoting alternative tenure, what's called alternative tenure—not just having an option between renting and owning, but having options like limited equity cooperative housing, which is very popular in Europe and is popular in some localities in the U.S. The increase in the number of community land trusts, these vehicles allow for ownership, but are much more a risk-limited form of ownership. So you don't get the chance to make a lot of money in a short period of time by buying a house, but it's cheaper to buy the house, and the risk of foreclosure is severely reduced.

Moderator: Beyond changes in single-family mortgage markets, are there other fairly concrete ways that the financial crisis has affected community development and affordable housing efforts?

Immergluck: There are. The effects have been broad; lots of nonprofits in community development, just like in other areas, are hurting. But let me give you a couple of more concrete examples. First, there have been real impacts on something called the Low Income Housing Tax Credit Program. This has been the major, what's called supply-side, subsidy for rental housing in the U.S.; basically it gives a subsidy to developers of affordable rental housing, and it's been really a major subsidy source, accounting for something like 20 percent of lower rental costs, rental housing in the U.S. And unfortunately a few things have happened during the financial crisis that have really put a crimp in the program. One is, until 2007 or so, the two largest investors in the low-income housing tax credit program, by far, were the government-sponsored enterprises Fannie Mae and Freddie Mac. They were essentially private companies and they were purchasing what are called these tax credits, and that was creating capital for affordable housing. Well, when they went into conservatorship last year, they stopped doing that; they had really slowed down before that, so that took away two major sources of capital, of low-cost capital for rental housing.

On top of that, the second kind of category of investors in low-income housing tax credits that were major providers, and still are, although smaller, were banks—banks and thrifts. And they were encouraged in two ways. One is they could get a tax credit for their investment. Well, we know that many of those banks don't have very much income to need a tax credit for. And secondly, they got credit under the Community Reinvestment Act; they still do. But since, really, credit under CRA, I think, in some people's minds is less important during the financial crisis, it's not the first thing people think of when they're trying to make sure the bank survives. I think that incentive is also kind of dampened. So, basically, the market for tax credits has been severely constrained, the premium that affordable housing developers get for those investments is reduced dramatically, and just the amount of capital flowing in has been reduced.

Another example of a problem that cuts across a variety of financing sources is just the fact that what's called risk premiums—the amount that lenders require for anything that looks not completely plain vanilla, any kind of real estate projects or municipal finance that's a little bit out of the ordinary—they require a premium, a higher interest rate, and those premiums have increased dramatically. So trying to do creative finance from a community development perspective or municipal government perspective has become much more difficult. So that's another concrete.

And then the more obvious problems of just nonprofit housing groups having trouble getting foundation grants because foundations have lost a lot of money on their investment portfolios or are not making nearly as much money. Municipal government budgets are being really hard hit because of their dependence on property taxes, and they fund all kinds of community development activities, either directly or indirectly. So those are some of the concrete impacts.

Moderator: Shifting gears, we know that the foreclosure and economic crisis has affected cities throughout the country. We also know that local government officials and planners are making decisions about how to respond to these challenges. Do you have any lessons that you'd like to share with these planners and officials?

Immergluck: Sure, a few. A colleague who teaches planning in New York City recently posted on his blog a question that said, "Where was planning?" And another related anecdote is the Wall Street Journal ran a story recently on Atlanta, in fact, where there were four very large buildings permitted and developed in the same year all within the same block essentially; these were large office/condo towers, and they're all sitting there now basically empty. And so the question comes up, Where was planning? You know, where were the people who made the decisions on the building permits, and that stuff should have been probably not all approved at the same time.

Another piece in the newspaper recently told a story of a bank in kind of inland Southern California that was knocking down 18 houses that it owned that it had taken back in foreclosure—brand new houses, some not quite finished—because there was absolutely no market for those. And so the question that comes up again is, Where were the planners?

Certainly, you know, planners are not the cause of these problems of the crisis of the overbuilding, but I'm going to use these and other stories to teach planning students that their role is not to just follow the private market but to identify when the private market is going astray from a local perspective and exercise government control over excess. I think we've definitely moved over the last 20 years to planning as being completely driven by markets and basically assuming that if the market says this is a good decision, if the bank says we're going to give this developer a loan, then planners should not second-guess that. And I think we've now learned that there is a role for planners to do some second-guessing. Certainly that doesn't mean that planners are going to be able to stop the next foreclosure crisis or the next overbuilding boom, but I think they can play some role.

More directly, planners have an ability to affect local real estate activity when markets get out of hand in a number of concrete ways. First, they develop and implement what are called comprehensive plans, including for housing. Basically, the plans say, you know, "We will allow for this new development here," or "We won't allow for it." Secondly, they review and approve zoning and annexation decisions, and the like—and take those to commissions—oftentimes that are not consist with those plans. So these are often, basically, variances from the comprehensive plans, and rather than just approving everything that comes through they have an ability to reject things. Finally, in doing those things, planners, especially in medium and larger cities, often conduct what are called fiscal impact analyses. And these are basically economic models that say, "If this project happens, what will the effect be on the tax base for the locality and on the expenses, including schools and public services of the locality?" And I'm afraid, in the past, these have been very kind of myopic, short-term analyses that have pretty much said, "Any revenue is good revenue, and if it happens next year that's all we need to know." And I'm afraid there's been no consideration for the volatility or the risk of those revenue streams if those developments don't work out and the fact that you may be stuck with a bunch of empty buildings if those projects don't work out.

Moderator: So in continuing with that very long-term perspective, I wonder what else governments and communities can do to be better prepared for financial problems, like the mortgage crisis, in the future?

Immergluck: Well, I think one of the silver linings from a local planning and teaching local planning perspective has been the financial crisis, the mortgage crisis, and really what has precipitated the real estate crisis, has given a new reason for promoting greater diversity in land use and housing mixes at the local level. This country has become really quite segregated in terms of land use where one local government, one suburban government, might have only single-family detached owner-occupied housing with price points between 300,000 and 350,000. Well, when that market—that submarket—tanks, that means the entire tax base of that locality goes with it. Whereas, if we can promote diverse land uses—some commercial, some rental, lower-end, higher-end—within a smaller area within a locality, then when the rental market tanks that'll be just part of your tax base, not all of your tax base. And so while in the past planners have kind of relied on social outcomes—promoting mixed-income housing and promoting good urban design—the crisis now gives us an argument that's just based on good fiscal management and basically, again, going back to the idea of reducing risk in the tax stream for promoting good diverse land uses and housing uses.

Moderator: Clearly, the breadth of the problem is significant, and municipalities are struggling with foreclosure and fiscal issues and other challenges. I'm wondering, do you sense some type of capacity issues in dealing with these problems and how the local governments are responding to them?

Immergluck: There are certainly capacity issues, both in the private and the public sector and the nonprofit sector. The mortgage crisis, in particular, kind of, you know, hit us like a ton of bricks and it's going back to the fact that, you know, basically, three-quarters of the ZIP codes that have really high levels of REO [real estate owned properties] are suburban. Many of these places, many of these localities, never had to deal with housing issues before from a public sector perspective. They didn't have a community development program; they didn't work with nonprofits to deal with housing problems. That was really considered something for central cities or maybe some older suburbs. It's also true that the boom-bust regions that have been hit hardest, even in their central cities, they have less infrastructure because they've been around less and they've been dealing less with housing issues from a public perspective.

Moderator: Dan, as a wrap-up, we know that local governments across the country are ramping up their capacity to deal with these issues. Can you give us at least one example?

Immergluck: Sure. Again, because of some of the mismatch problems, where the foreclosures and the REO have accumulated in places that really haven't thought about housing issues or, certainly, vacant property issues before, there are creative ways to respond to that. In Phoenix, for example, where there have been housing groups in the city but not in the suburbs for a while, some of the local governments in the suburbs that are dealing with rapidly increasing REO properties have asked groups, nonprofit groups in the city of Phoenix, to come out and basically subcontract with them for their efforts to reclaim vacant properties and to give them basically consulting help on that as well.

Moderator: Dan, thanks for joining us today.

Immergluck: Thank you.

Moderator: For more information on community development, visit the "Community Development" section on the Federal Reserve Bank of Atlanta's Web site at We've been speaking with Dan Immergluck of the Georgia Institute of Technology. This concludes our Foreclosure Response podcast on community development issues. Thanks for listening. If you have comments or questions, please email