Housing Policy Concept in the United States

Introduction

The public housing program and the concept of affordable housing seem to be identical because they provide needy people with housing, but the two imply significant differences. On the one hand, the public housing program “was the largest subsidy program for rental housing until recently for low-income individuals and families” (Oluku, 2011, p. 28). The government created specific developments to accommodate low-income and subsidized people. Even though the program draws attention to providing needy citizens with housing, its primary focuses are different. For example, the public housing program was a driving force to create jobs during the Great Depression (Oluku, 2011). On the other hand, the concept of affordable housing also focuses on housing costs and income. According to Schwartz (2015), affordability is present when households spend less than 30% of “their pre-tax income on housing” (p. 67). The government provides a tax credit to developers if the latter promise to make a portion of their residential units affordable.

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Main body

The information above means that the difference between the public housing program and the concept of affordable housing is in a volume that is given to the needy population. In other words, public housing is entirely dedicated to low-income individuals, while affordable one is only a portion of more prominent developments. The second option is better because public housing is often associated with concentrated poverty, higher crime rates, and unemployment (Oluku, 2011).

Since low-income individuals cannot afford housing, the government provides them with subsidies. A federal rental housing subsidy is a government program that increases the production of low-income housing and helps people pay their rent. For example, “private owners of federally subsidized rental housing may designate entire developments or portions of developments for occupancy by elderly households” (Schwartz, 2015, p. 451). In this case, a subsidy refers to specific rent reductions. As a result, the rent should not exceed 30% of older people’s adjusted income that has excluded $400 on medical expenses (Schwartz, 2015, p. 451).

In addition to that, families that reside in public housing can receive a few more federal rental housing subsidies, including Section 8 project-based units and Housing Choice Vouchers. According to the Joint Center for Housing Studies of Harvard University (2019), the number of families that are enrolled in these subsidy programs is continuously increasing. As a result of this, “the stock of public housing fell by more than 100,000 units” since 2010 (Joint Center for Housing Studies of Harvard University, 2019, p. 33). Consequently, the examples above demonstrate that the needy population benefit from federally subsidized rental housing.

Federally subsidized rental housing can also be characterized as affordable housing. It is so because, in this context, the term affordability means that a household spends less than 30% of its income on housing (Schwartz, 2015). Thus, when the government provides citizens with rental subsidies, it is performed to reach the percentage above. In other words, if rental housing is federally subsidized, it means that low-income people receive assistance to be able to cover their housing expenses. Consequently, both affordable and federally subsidized housing denote that rental costs are decreased by the government to allow individuals and families to cover the costs.

At the same time, it is not always that affordable housing should be federally subsidized. As has been mentioned above, housing is subsidized when its cost is artificially decreased to account for 30% of a family’s income. However, when it comes to the middle or even high-income households, they do not need subsidies to spend less than 30% of their income on housing. Such situations occur when family income is high or when it becomes possible to reduce construction costs. For example, Colton (2002) explains that the use of new technology in the building sphere makes housing more affordable for American citizens.

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Even though the United States is one of the most developed nations in the world, homelessness is a severe problem in the country. According to the National Alliance to End Homelessness (2020), “seventeen out of every 10,000 in the United States were experiencing homelessness on a single night in January 2019” (para. 2). This seemingly low ratio accounts for 567,715 people throughout the US (National Alliance to End Homelessness, 2020, para. 2). This problem becomes even more significant because it affects various people irrespective of their family status, gender, state of living, and ethnicity. At the same time, the District of Columbia, New York, and California are the states with the highest homelessness level (National Alliance to End Homelessness, 2020).

That is why it is not a surprise that the government draws specific attention to the given issue, which results in various federal housing programs for the homeless. An essential step to end homelessness was made in 2012 after “President Obama signed into law the Helping Families Save Their Homes Act” (Schwartz, 2015, p. 460). The act focused on both homelessness prevention and rehousing the individuals who are at risk of homelessness. Even though the government attempts to solve the issue by providing housing to homeless or potentially homeless individuals, the demand exceeds the supply.

Today, the US has the Housing Finance System (HFS) that is the most effective in the world among its counterparts. However, this system was not always the same, and it was significantly different during the era of Exploration (pre-1930s). According to the US Department of Housing and Urban Development (2006), that era was characterized by semiannual payments “with no or partial amortization, and the maximum loan-to-value ratio was about 50 percent” (p. 3). At the same time, maturity terms for many mortgages accounted for two to eleven years, while lenders were typically ready “to cover no more than 60% of a property’s value” (Schwartz, 2015, p. 114). That is why it is not a surprise that the Great Depression lead to a significant crisis in the US housing sector.

At that time, there existed a few essential establishments that contributed to the development of the housing industry. “Terminating” Building Societies (TBSs) was the first of them, and they represented financial communities, where people pooled savings to provide one another with the finances necessary to build houses. The first mortgage loans led to the disappearance of such societies because members tended to take shared funds to cover their debts. That is why the TBSs were replaced by more formal establishments, including “Permanent” Building Societies, Building and Loans, and savings and loans (US Department of Housing and Urban Development, 2006).

By the 1930s, the American housing finance sector was in a complete crisis. Challenging economic conditions resulted in the fact that people did not have sufficient money to make their regular payments. Consequently, mortgage foreclosure became a widespread phenomenon, and thousands of families suffered from it. Irrespective of that, it was not until President Franklin D. Roosevelt’s New Deal, that American citizens felt relief concerning housing finance. The following information will present the most significant advantages of Roosevelt’s initiatives that cannot be overstated.

Firstly, the legislation under consideration resulted in the fact that the federal government became directly involved in the US housing finance sector (Green & Wachter, 2007). Consequently, the given market became more regulated and convenient for individuals and businesses. Secondly, the Roosevelt administration saved millions of families from mortgage foreclosures because it made mortgages more affordable for borrowers and less risky for lenders (Schwartz, 2015). It was possible because the New Deal initiatives led to the creation of fixed-rate and self-amortizing mortgages that implied high loan-to-value ratios. In conclusion, the information above demonstrates that Roosevelt’s New Deal housing policy initiatives were of importance for the whole nation.

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The Federal Housing Administration (FHA) was a significant element in altering the US HFS. One can even suppose that many positive features of the US HFS were imposed by the FHA. It refers to the fact that the FHA was used by the federal government to insure mortgages provided by qualified lenders (Schwartz, 2015). It was necessary to protect the lenders from default and other adverse phenomena with the help of insurance opportunities. Thus, if borrowers could not make their mortgage payments, it was the FHA responsibility to cover the unpaid sums. According to Colton (2002), “funds to pay the losses on defaulted mortgages came from the insurance premium levied on the mortgage holder” (p. 7).

At the same time, the FHA resulted in a few more advantages. Firstly, it facilitated the use of long-term loans that implied low-moving payments. Consequently, the borrowers obtained an opportunity to have more time to repay their loans. Secondly, the FHA suggested fixed payments of both principal and interest, which was convenient for borrowers to plan their finances. Thirdly, the FHA contributed to significant success since it was a self-supporting system. It was so because outlays for defaults and administrative expenses accounted for insurance premiums.

Fannie Mae and Freddie Mac are significant for the US HFS because the two make the mortgage market more liquid. On the one hand, Fannie Mae was created in 1938 to purchase FHS-insured mortgages (Schwartz, 2015). This government-owned agency borrowed money in areas with more available credit and lend money where individuals and businesses required financial assistance (US Department of Housing and Urban Development, 2006). On the other hand, Freddie Mac appeared in 1970, and its principal mission was to increase the affordability of mortgage financing. Colton (2002) admits that Freddie Mac developed the Participation Certificate that was “the first private mortgage-backed security for conventional mortgages” (p. 9).

Conclusion

Even though the two are individual agencies, they have common features. It relates to the fact that the agencies buy mortgages through the secondary mortgage market to provide lenders with an opportunity to originate more loans, and this strategy influences the US HFS. Firstly, the secondary market for residential mortgages becomes more liquid, which is beneficial for all stakeholders. Secondly, the increased liquidity leads to higher access of the population to credit opportunities. The information above shows that Fannie Mae and Freddie Mac are beneficial for the US HFS.

References

Colton, K. W. (2002). Housing finance in the United States: The transformation of the US housing finance system. Web.

Green, R. K., & Wachter, S. (2007). The housing finance revolution. Institute for Law and Economics.

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Joint Center for Housing Studies of Harvard University. (2019). The state of the nation’s housing 2019. Web.

National Alliance to End Homelessness. (2020). State of homelessness: 2020 edition. Web.

Oluku, U. A. (2011). A comparative analysis of the effectiveness of the Hope VI program in revitalizing conventional public housing sites: A multiple case study in St. Louis (Publication No. 433) [Doctoral dissertation, University of Missouri-St. Louis. UMSL Graduate Works.

Schwartz, A. F. (2015). Housing policy in the United States (3rd ed.). Routledge.

US Department of Housing and Urban Development. (2006). Evolution of the US housing finance system: A historical survey and lessons for emerging mortgage markets. Web.

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