The report's assertions---only 52 of 363 metropolitan areas are expected to regain the jobs lost in the recession by the year's end, housing prices are still abysmal---look accurate, and land with a thud. But the appeal, that Congress should reverse its shrinking aid to cities, will land in the House and Senate with a whimper.
Meanwhile, a smaller group of urban enthusiasts gathered in Chicago, on Wednesday night, to make a very different appeal to Washington. Their target was not Congressional budget-makers but Federal financiers. In a room of urban planners and investors, John Norquist, the President and CEO of Congress for the New Urbanism, made the case that government agencies were choking city growth through staid lending standards. Peeling back loan restrictions on mixed-use developments, those that combine residential and commercial, he argued, is a simple step D.C. could take toward "unlocking opportunity in the American economy."
For each loan they underwrite, Federal lenders put a restriction on the total non-residential rents the project can reap. Depending on the loan type, HUD limits it to 15% or 30% of the gross income. Fannie Mae and Freddie Mac, the bulwarks of the housing market, won't let rents top 25%. On top of that, the agencies each set caps on the total floor area for commercial properties. So a developer who wants to build with mixed-use---say, restaurants below an apartment complex---can only bring in so much rent, and hand out so much space, to the restaurants to qualify for a Federal loan.
The effect, explained Norquist, is a surge in development that bends awkwardly to meet lending standards. He mentioned the "dingbats" in L.A. and the "four-plus-ones" in Chicago, clunky apartments that tuck parking spaces beneath residencies. "This rule," he said, "has had an incredible impact on architecture and design."
"Form follows finance" was the choice expression of Scott Bernstein, President of the Center for Neighborhood Technology, an urban policy think-tank, who spoke after Norquist. Like a good urbanist, Bernstein pushed for the viable alternative of density. He threw up an image of three areas: an exurban plot, a suburban circle, and the Damen Blue Line stop, a central hub of commerce, livelihood and---for better or worse---gentrification in Chicago. Retail job totals there soared above the other two neighborhoods. Apartments sat stacked atop stores, bars and restaurants. "They don't waste an inch of space," he concluded.
But the more revelatory image Bernstein clicked through showed fresh foreclosure data crunched by his group. The charts measured recent foreclosures of both commercial and residential properties in Illinois. As expected, residential properties hit foreclosure far more than commercial ones, at a rate that makes them three times as risky, the numbers claimed. If lenders backed mixed-use development---essentially, a merger of the two property types---they could hedge their risk much better than with pure residential lending.
By restricting non-residential development, Federal lenders may have unintentionally backed far rockier investments. "The risk priorities are upside-down in FHA," Bernstein said. "The data shows it's riskier to do what we're doing." Most private lenders follow the lead of the GSEs, keeping their underwriting restrictions just below those in Washington.
In a city like Chicago, where officials are hoping to grow out of our budget hole, these lending standards can cramp development. Joe Williams, a financier in Bronzeville, an historic home of the city's black middle class, saw a project derailed by the Federal lending restrictions. His initial plans, drafted four years ago, were for a mixed-income apartment development---divided into public housing, affordable and market-rate units---that rose above 28,000 square feet of commercial space. But the plans hit the wall of the recession, then the ceiling of the HUD non-residential restrictions. So he moved on from Federal lending. "Had we met the [HUD] criteria," he told me, "we would have been done a year and half ago."
It's difficult to estimate how much of a stimulant tweaking finance restrictions would be, here in the city or elsewhere; CNU doesn't have hard projections. (I would wager that pressuring FHA to overturn its stance on writing down homeowner negative equity would do more to unlock the urban economy than anything else.) But the shift in the housing market suggests that mixed-use demand is picking up---in 2011, multifamily housing starts jumped up 60% from the previous year. And even if the current mayoral approach in D.C. pays off in full, the effect wouldn't be colossal. Back in 2009, at the center or the recession, cities only received 3% of their revenues from Federal funds.
CNU says their pitch is inching forward in Washington. They recently recruited the National Association of Home Builders as an ally. Antonio Riley, the HUD Midwest Regional Administrator (and former Wisconsin legislator when Norquist was Mayor of Milwaukee), was in attendance Wednesday night, voicing his support. But Norquist drew a stark contrast between his approach and the quixotic one seized by the mayors gathered in D.C. "We're not," he said, "begging the Federal government to spend money."