Dissertation - Banking Regulations in LI Communities

The Socio-Economic Benefit of
Home Ownership in Low and
Moderate Income Communities
Thomas P. FitzGibbon III
DISSERTATION.COM
Boca Raton

The Socio-Economic Benefit of Home Ownership in Low and Moderate Income Communities
Copyright © 2010 Thomas P. FitzGibbon III
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any
means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without written permission from the publisher.
Dissertation.com
Boca Raton, Florida
USA • 2010
ISBN-10: 1-59942-362-6
ISBN-13: 978-1-59942-362-3

iii
ABSTRACT
The U.S. government spends billions of dollars and implements regulations involving
community lending initiatives to force banks to lend to low and moderate income
communities. However, little research has assessed the effectiveness of these moneys and
programs. The purpose of this study is to assess the relationship between low income
home ownership and community benefit, measured through several socio-economic
measurements within two Chicago community areas and two counties in Indiana.
Although welfare economic theory may support these investments and regulations, the
public also expects community improvement. The research design was quantitative using
existing data from Chicago Public Schools, Police Department and the U.S. government.
Analyses using regression and a one-tailed t test concluded that no significant differences
in crime rates, unemployment, high school graduation, and standardized test scores in a
community with higher housing growth versus a community without housing growth.
These results suggest that, if public investment in housing does not yield greater
community benefit, the financial support of low and moderate income housing should not
continue. Public funds may be more appropriately directed toward other efforts such as
education.

v
DEDICATION
I would like to dedicate this work to my maternal grandparents, Thomas W. and
Katherine M. Caven. They were both very hard working people who instilled a great
sense of responsibility in me. While my time with them was short, their personal ethics
and dedication to their family helped me understand how truly great they were.

vi
ACKNOWLEDGMENTS
There are several people I would like to acknowledge in their support in this
research effort. First and foremost, my committee chair, Dr. Mohammed Sharifzadeh and
secondly both Dr. Reza Hamzaee and Dr. Lilburn Hoehn who served on my dissertation
committee. It was with their constant support and guidance that I was able to complete a
research project that was both personally interesting and useful in the real world.
Additionally, I would like to acknowledge the significant support of my wife Jennifer.
She allowed me to spend a lot of my free time on this project while shouldering a lot of
the responsibilities at home.

vii
TABLE OF CONTENTS
LIST OF TABLES.................................................................................................................x
CHAPTER 1: INTRODUCTION TO THE STUDY.............................................................1
Introduction to the Study ....................................................................................................1
Statement of the Problem....................................................................................................3
Background of the Problem ................................................................................................4
Purpose of the Study...........................................................................................................6
Theoretical Framework for the Study.................................................................................6
Assumptions........................................................................................................................8
Scope and Delimitations .....................................................................................................8
Limitations..........................................................................................................................9
Definitions of Terms...........................................................................................................11
Nature of the Study.............................................................................................................12
Research Questions and Hypotheses ..................................................................................12
Significance of the Study....................................................................................................13
Summary.............................................................................................................................14
CHAPTER 2: LITERATURE REVIEW...............................................................................15
Introduction.........................................................................................................................15
Search Strategy ................................................................................................................16
Regulatory Actions of the United States Government........................................................16
The Impact of Government Funded Programs....................................................................27
Socio-Economic Impact of Government Funded Programs and Regulations ....................45
Gap in Research..................................................................................................................54
Summary.............................................................................................................................56
CHAPTER 3: RESEARCH METHOD .................................................................................57
Introduction.........................................................................................................................57
Description of the Research Design....................................................................................57
Target Population................................................................................................................60
Sample and Sampling Methods ..........................................................................................61
Data Collection ...................................................................................................................62
Data Analysis......................................................................................................................63
Validity and Reliability.......................................................................................................69
Measures for Participant Protection....................................................................................73
Conclusion ..........................................................................................................................73
CHAPTER 4: RESULTS.......................................................................................................78
Introduction.........................................................................................................................78
Demographics of the Community Areas and Counties.......................................................78
Socio-Economic Performance Indicators ...........................................................................82
Crime Rates......................................................................................................................83

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High School Selection......................................................................................................91
High School Test Score Performance..............................................................................92
High School Graduation Performance.............................................................................94
Median Income Data for the Community Areas..............................................................96
County Based Unemployment Data.................................................................................96
Summary..........................................................................................................................97
Results of the Data Analysis...............................................................................................98
Introduction......................................................................................................................98
Test of Hypotheses...........................................................................................................98
Hypothesis One.............................................................................................................98
Test of Hypothesis One: Murder Rate .......................................................................99
Test of Hypothesis One: Sexual Assault....................................................................99
Test of Hypothesis One: Robbery..............................................................................100
Test of Hypothesis One: Aggravated Assault and Battery ........................................100
Test of Hypothesis One: Burglary .............................................................................100
Test of Hypothesis One: Theft...................................................................................101
Test of Hypothesis One: Motor Vehicle Theft ..........................................................101
Test of Hypothesis One: Arson..................................................................................102
Test of Hypothesis One: Aggregate Crime................................................................102
Hypothesis Two ............................................................................................................104
Test of Hypothesis Two.............................................................................................104
Hypothesis Three ..........................................................................................................105
Test of Hypothesis Three...........................................................................................105
Hypothesis Four............................................................................................................106
Test of Hypothesis Four.............................................................................................107
Correlation of Variables................................................................................................108
Correlation of Crime Rate Measurements in New City.........................................109
Correlation of Crime Rate Measurements and Education in New City.................109
Correlation of Crime Rate Measurements in Austin..............................................110
Correlation of Crime Rate Measurements and Education in Austin......................110
Analysis of Autocorrelation.......................................................................................111
Summary..........................................................................................................................114
CHAPTER 5: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS .................115
Overview.............................................................................................................................115
Conclusions.........................................................................................................................115
Hypothesis One................................................................................................................115
Hypothesis Two ...............................................................................................................116
Hypothesis Three .............................................................................................................117
Hypothesis Four...............................................................................................................117
Implications.........................................................................................................................119
Recommendations for Action .............................................................................................122
Recommendations for Further Study..................................................................................124
Implications for Social Change...........................................................................................125

ix
Summary.............................................................................................................................126
REFERENCES ......................................................................................................................128

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LIST OF TABLES
Table 1 Racial Composition for the Community Areas Under Review ................................79
Table 2 Percentage of Owners-Occupied Housing in the Community Areas .......................80
Table 3 Racial Composition of the Community Areas Under Review..................................81
Table 4 Percentage of Owners-Occupied Housing in the Community Areas .......................82
Table 5 Murder Rates by Year in the Community Area........................................................83
Table 6 Sexual Assault Rates by Year in the Community Area............................................84
Table 7 Robbery Rates by Year in the Community Area......................................................85
Table 8 Aggravated Assault Rates by Year in the Community Area ....................................86
Table 9 Burglary Rates by Year in the Community Area......................................................87
Table 10 Theft Rates by Year in the Community Area .........................................................88
Table 11 Motor Vehicle Theft Rates by Year in the Community Area.................................89
Table 12 Arson Rates by Year in the Community Area........................................................90
Table 13 Total Crime Rates by Year in the Community Area ..............................................91
Table 14 ACT Scores for the New City High Schools..........................................................92
Table 15 ACT Scores for the Austin High Schools...............................................................93
Table 16 High School Population Taking the ACT Examination .........................................93
Table 17 Weighted Average ACT Score Performance by Community Area........................94
Table 18 Graduation Rates by High School by Graduation Year..........................................94
Table 19 Potential Graduating Population.............................................................................95
Table 20 Weighted Average Graduation Rates by Community Area....................................95
Table 21 Average Median Family Income for the Community Areas ..................................96
Table 22 Unemployment Data by County .............................................................................97
Table 23a Summary of Regression Analysis Data for Variables Predicting Crime..............103
Table 23b Summary of Regression Analysis Data for Variables Predicting Crime..............103
Table 24 Summary of Regression Analysis Data for Variables Predicting ACT Scores ......106
Table 25 Summary of Regression Analysis Data for Variables Predicting High School
Graduation..............................................................................................................................108

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CHAPTER 1:
INTRODUCTION TO THE STUDY
Introduction
Over the past thirty years, the United States Government has played an active role
in developing greater home ownership opportunities for low and moderate income
families. The government intended to support these opportunities by a combination of
regulatory changes and direct program funding to increase the options available to the
targeted groups. The government’s immediate goal was to improve the funding options
for underserved communities; its long-term goal was to improve the overall socio-
economic condition of the community.
Although research has examined the socio-economic benefits of home ownership
in general, less attention has been given to the benefits of changes in home ownership in
low and moderate income communities. Given this lack of attention, the intent of this
study was to identify the regulatory and programmatic interventions to understand
whether improvements in home ownership occurred, and to assess the socio-economic
benefits of those programs in a low and moderate income community.
Given the breadth of government regulations from the Community Reinvestment
Act to the Home Mortgage Disclosure Act, the government provided the encouragement
to lenders in providing mortgage options that address the needs of low and moderate
income communities that were not previously available in the market. Additionally, the
government has established several funded programs to provide a financial stimulus to

2
lenders, community groups, and individuals in the effort to support home ownership to
the low and moderate income markets.
An additional problem is the inconsistency in available data that would support a
relationship between home ownership and accepted socio-economic measurements within
low and moderate income communities. Secondly, related to the impact of government
regulations and funding efforts, it is proving to be quite difficult to assess the benefits of
one particular program or regulation since there is typically a combination of several
options that could be used at any point in time. For example, in instances where multiple
funding sources used on a single project it could prove difficult to determine whether one
source was any more effective than another.
To address these problems, the aim of this study was to study the socio-economic
benefit of home ownership in low and moderate income communities. Evidence suggests
that the public investment has not always yielded greater community benefit (Czerwinski,
2006). For example, programs such as HOPE VI have intended to spur home ownership
in low and moderate income homes, yet the effectiveness of such programs has not been
measured. Acts like the Community Reinvestment Act, also intended to encourage home
ownership, have also been limited in their effectiveness. Such acts have tended to relax
the underwriting standards of banks to get more customers, thereby increasing loan
delinquency and foreclosure (Dreier, 2003). Given the disconnect between government
initiatives and effectiveness in the community, alternate investment channels may yield
better results. For example, research has found a link between educational attainment
and general community benefit. These findings suggest that an investment in education

3
may be a more effective alternative to housing that could yield an equal or better benefit
for the community.
Statement of the Problem
The United States government has spent billions of dollars in direct financial
support and administrative expenses to improve community conditions (Wood, 2007).
However, little evidence exists to substantiate the effectiveness of government efforts on
home ownership in low and moderate income communities. An initial review of
literature revealed that the nature of the relationship between home ownership and socio-
economic benefit is unclear. Therefore, the problem is that, while there are benefits that
individual home owners may have as a result of these programs and investments, how the
change in home ownership has to greater community health remains unclear.
To determine the socio-economic impact of these government programs, I
examined the relationship between home ownership (i.e., the non-manipulated
independent variable) and crime rate, unemployment rate, high school graduation rate,
and high school test scores (i.e., the dependent variables). My intention was to assess
housing growth between two low and moderate income communities from the
perspective of the ratio of total owners-occupied housing within the total housing
available. This ratio identified both the community area with no growth and the
community area with high growth. Because the demographic characteristics of the
communities were similar, this process of indexing served to reduce any inconsistencies
in growth between the community areas.

4
This information provided an inference as to whether home ownership related to
other socio-economic measurements. This information then provided a basis to the larger
discussion on welfare economics with specific application to Pareto efficiency whereby
any improvement in economic conditions of one individual is not to the detriment of
another. In this context, there is not a shifting of wealth from one individual which then
allows another individual to purchase a home.
Background of the Problem
The underlying intent of government programs has been to develop greater
opportunities for home ownership in the low and moderate income communities. The
goal of these efforts was to improve the quality of communities through the increase in
home ownership. By increasing home ownership, it was believed, other socio-economic
factors would improve, such as a decrease in crime rate and increase high school
graduation rates.
Historically, lenders have accepted deposits from the communities they served,
only lending to individuals with the least risk of defaulting on a loan. The result of this
practice has been that few individuals with a low and moderate income have been able to
get loans or establish credit. The majority of loans have been given to individuals earning
an upper income. These individuals have also comprised the population that typically
owned their own home, thereby leaving the low and moderate income population to
either rent or live in less-than-adequate owned housing (Dreier, 2003).
To address this discrepancy in home ownership, the government began
implementing regulations to encourage lenders to serve a larger community. Among the

5
most popular regulations was the Community Reinvestment Act of 1977. The primary
focus of this act was an improvement to the oversight of lenders that would force lenders
to provide credit to a demographic representation of the communities served. From this
act, banks would be forced to lend to the same populations from which they had accepted
deposits. Banks were also forced to consider the penalties associated with non-
compliance with the regulations. For example, non-compliance to the requirements of the
Community Reinvestment Act would limit a bank’s ability to create and offer new
products or even open additional branches in the community, thus stopping any growth
efforts until the non-compliance issues were resolved.
Initially, the lenders fought the regulations, arguing that lending to people
previously considered non-qualifying may put their business at peril and result in poorer
performance to investors. However, the government’s regulations passed and were put
into law. As a result, the lenders were forced to create new strategies to address the needs
of the low and moderate income community.
Along with these new regulations, there was also a need for the government to
directly fund programs that would support home ownership in the low and moderate
income communities. The government considered the regulations to be an effective first
step in the process, the potential market still needed to provide financial incentives to
potential home owners, community groups, and lenders. Over time, the government
established several different funded efforts such as the HOPE VI program and Bank
Enterprise Award program to provide a financial stimulus to a greater population.

6
The programs did increase home ownership, but little research has measured the
community changes from such programs, particularly the socio-economic benefit to low
and moderate income communities. Additionally, limited attention has been given to the
management of government funds, and little guidance is available for local organizations
to report performance back to the government. In the absence of this guidance, some
community organizations may use government funding for efforts unrelated to the
program goals.
Purpose of the Study
The purpose of the study was to examine the socio-economic changes in home
ownership in low and moderate income communities. Historical data were examined,
relating to home ownership, crime rate, employment rate, high school graduation rate,
median income rates, and academic test scores in two low and moderate income
communities in Chicago and two counties in Indiana. Analysis of these variables
provided empirical evidence of the socio-economic impact of home ownership on low
and moderate income communities.
Theoretical Framework
Arrow (1983) and Sen’s (1997) welfare economics theory, and Keynes (1936) and
Friedman’s (2002) market economic theories were used to define areas of government
regulation and distribution of government funds and to study the impact of government
funding on community performance.
Welfare economics theory posits that no one individual should become better off at the
expense of another individual. Arrow (1983) and Sen’s (1997) theories of welfare economics

7
conceive of taxes as a means to equalizing wealth across the population. Taxes could equalize
other factors such as educational opportunities, which have been considered by some (Keynes,
1936) as one of the primary environmental factors for equal opportunity. This tenet is
commonly referred to as Pareto optimality.
However, a variety of theorists, including Friedman (2002), consider that a typical
market economy is not Pareto optimal. The market economy in general contests the idea of
Pareto optimality, as there will always be an unequal distribution of wealth. Keynes’ (1936)
theory on the multiplier effect of money conflicts with Friedman’s market theory. For
example, Keynes’ theory posited that greater funds in a system would correlate with greater
consumer spending, which would, in turn, spur improvements in overall income.
Friedman’s (2002) theories do not support active regulation or long-term programs to
support low and moderate income communities. On the other hand, Keynes’ (1936) theory
suggests that it would be more effective for the government and the market to invest in this
effort. Keynes held the perspective that with the investment the government makes, that
investment would result in improved economic conditions for the individuals receiving support
from the programs. Arrow (1983) and Sen (1997) considered these housing development
programs to be the goals of welfare economics. They saw these programs as providing a
greater opportunity for low and moderate income families to improve their financial condition.
However, they followed different reasoning compared to Keynes. Arrow and Sen considered
government programs to be one of many income distribution programs to provide greater
opportunity in the community. Both considered education to be the key vehicle to provide an

8
individual with the ability and the skill to be more professionally productive in their
professional lives.
All of these theories were brought into a greater context of the current state of the
housing market as well as the performance of programs and regulations developed to support
improvements in housing programs in low and moderate income communities. Both welfare
and market economics theories were used to determine whether the government efforts
resulted in Pareto optimization as well as a resulting socio-economic return on investment.
Assumptions
Given that the purpose was to assess the socio-economic benefits of home ownership in
low and moderate income communities, I assumed that the people in this study wanted to own
a home and did not want high residential turnover. I also assumed that they wanted to improve
themselves socio-economically.
Scope and Delimitations
The study included a socio-economic assessment of a low and moderate income
community in the city of Chicago. Two low and moderate income neighborhoods were
studied. Although these neighborhoods shared similar demographics, one neighborhood had a
history of growth in home ownership whereas the other had limited housing growth. The
study focused on two counties with a significant low and moderate income population in order
to assess the relationship between owner-occupied housing stock and unemployment.
Variables under study were limited to crime rates, high school graduation rates, rates of
home ownership as well as unemployment performance. This information was accessed both

9
from the Federal Government level as well as public information managed by the city of
Chicago. The delimitation of the study was that it was not feasible to examine every low and
moderate income community in the U.S. Instead, the focus was on the particular
neighborhoods or counties discussed above. While these areas were defined as low and
moderate income, the delimitation may have an impact on the ability to apply the specific
findings to other low and moderate income communities in the United States.
Limitations
The predominant limitation of the study related to data access. Although most of the
data were in the public domain, data on the historic high school academic performance were
not available. Additionally, the data was limited to two Chicago community areas and two
Indiana counties. For example, one of the data points reviewed was the American College
Testing Program test scores of high school students in the target neighborhoods. Although the
ACT test has been offered as an optional examination for over twenty years, the text was not
required in the state of Illinois until the 2000-2001 academic year. Thus, these data only
identified the academic performance of students starting high school in 1997 or later.
This study was also limited by the gentrification of neighborhoods over the period
under review. From this limitation, outcome measures could reflect the changing dynamics of
the neighborhood as well as the city. However, by comparing reasonably similar
neighborhoods within the city, the likelihood that similar dynamic changes would affect both
neighborhoods in the comparative study was lessened.

10
Another limitation was that the data related to crime rate only included those crimes
that were reported to government authorities. The true number of crimes may have been
higher than what was reported.
Furthermore, unemployment related data only reported on those not working and
actively seeking employment. This data did not report on those who are unemployed, but not
seeking work. This limitation may have resulted in an underreporting of unemployment
information. Since unemployment data were not tracked at the census tract level, it was
necessary to utilize employment data at the county level in order to provide an assessment of
the effect of changes in home ownership. Given that unemployment data were not available at
the community area level, I considered median income information at the census tract level as
a substitute for unemployment data within the overall community area analysis.
Data were also limited to public students, and did not include private or magnet school
students. With this limitation, data were excluded because it was difficult to assess the
performance of individual neighborhood residents when their performance was reported along
with other students who did not reside in the neighborhoods under study.
This study was also limited by other uncontrollable external factors that could have
impacted the performance of any neighborhood. For example, in a generally declining
economy, events such as drastic changes in unemployment will deteriorate in most
communities but can also have an adverse impact on low and moderate income communities at
a higher level which could result in increases in crime and decreases in educational
performance. Although these changes may have hindered the generalizability of these findings

11
to different communities, the selection of two community areas within the same city served to
mitigate some of these limitations.
Definition of Terms
The following terms will be used throughout the text of this study.
Academic Scorecard: An annual report provided for each public school within the
State of Illinois that lists the quantifiable information related to test score performance,
graduation rates and overall enrollment at the school, district and state level.
Bank Enterprise Award (BEA): A United States Government funded program that
provides financial incentives for banks to support low income housing programs.
Community Development Block Grant (CDBG): A United States Government funded
program that provides targeted funding assistance to low and moderate income communities.
Government Sponsored Enterprise (GSE): Financial services corporations established
by the United States Government to provide greater access to credit. Fannie Mae and Freddie
Mac are considered to be Government Sponsored Enterprises.
Low Income Housing Tax Credit (LIHTC): Provides a federal tax credit to private
investors who develop low and moderate income housing programs.
Prairie State Examination: A mandatory standardized test required of all Illinois Public
High school students that is completed at the end of the 11th
grade. The ACT test is included
within this examination.

12
Nature of Study
This study employed a quantitative design, involving collection and analysis of the
existing data regarding the effects of home ownership on certain socio-economic
characteristics of low and moderate income communities. Because the existing data were used,
a quantitative design was the most appropriate method to use for this research. Secondly, as
noted above, while past research may not have focused on this community, the gathered data
as well as the analysis methods used were consistent with this research as well.
Research Questions and Hypotheses
For the purposes of this study, indexed changes in home ownership in the low and
moderate income community were considered as the non-manipulated independent variable.
With that, the following research questions were considered.
1. What is the relationship between home ownership in low and moderate income
communities and crime rate?
communities and unemployment?
communities and standardized test scores?
communities and high school graduation?
Other variables within this analysis were considered, such as median income, to
address potential external factors impacting the collected data. The inclusion of these

13
variables provided a more ecologically valid understanding of the economic conditions of the
selected low and moderate income communities.
Significance of the Study
Although research has illustrated the benefits of government funding on home
ownership in general, little attention has been given to the impact of government funding on
low and moderate income communities. Thus, while research has supported further public
funding of these programs, little research has indicated the impact of those funds on low and
moderate income communities.
Many constituencies can benefit from this research. First, the government may use this
information to determine whether tax dollars should continue to be invested in improvements
to home ownership, and whether existing regulations for greater lending are benefiting banks
and communities. Second, the community members may use this information to redirect
available funds, identify interventions that could provide better community benefit or to
identify a more effective set of regulations that can improve community health.
This research could also benefit those who are seeking to implement community-wide
interventions for greater home ownership. This information may lead to the development of
different initiatives such mixed-income housing developments or commercial real estate
developments within the community to better address negative performance of some of the
important socio-economic performance measurements.

14
Summary
A conflict exists when discussing the perspectives of welfare economics and market
economics applied to low and moderate income home ownership programs. There is a desire
from the public to assist low and moderate income families in owning a home, it is unclear
which stakeholders should facilitate the effort. Market theorists like Friedman (2002) hold
that lenders should identify the market and address the demand, whereas welfare economic
theorists like Arrow (1983) argue that the government should spearhead the effort. In section
2, I consider a contemporary application of both market and regulatory actions in the low
income housing market, grounded in market and economic theories. In chapter 3, I discuss the
method used to collect and analyze my data. In chapter 4, I present the results to my analyses
for each research question. In chapter 5 I explain the applicability of the study results and
suggest recommendations for future research related to this topic.

15
CHAPTER 2:
LITERATURE REVIEW
Introduction
For the past thirty years, the United States Government has provided additional
opportunities for low and moderate income families to own their own home. The
government’s intent was to address the discriminatory practices by. These steps were
driven by the theory that home ownership would also improve other socio-economic
aspects of low and moderate income communities.
In this chapter, I will present some of the major regulatory and government-
funded programs that have been implemented to meet the needs of the low and moderate
income population. I will also discuss the market response from lenders and consumers as
well as the impact these efforts have in low and moderate income communities. I will
also detail the response from the lending industry both from a compliance perspective as
well as the identification of new product options designed specifically for potential low
and moderate income home owners. From there, the my focus will turn to reviewing
several examples of government funded programs developed to provide financial
incentives to lenders and communities to provide further investment in low and moderate
income communities throughout the United States. Finally, my review will continue with
an application of the general socio-economic community benefits of high home
ownership within the general context of welfare economic theory and its applicability to
low and moderate income housing programs.

16
Search Strategy
Using the EBSCO and ProQuest Libraries, I conducted key word searches within
peer reviewed journals and government publications that focused on welfare economics,
low and moderate income housing programs, crime rate, socio-economic benefits of
home ownership, and the effect of home ownership and educational performance.
Regulatory Actions of the United States Government
Since the Great Depression, lending institutions have been regulated by the
United States Government. These regulations range from requirements of safety and
soundness of an institution to the different products the bank is able to offer to the public.
However, it was not until the late 1960s that regulations related to the service of low and
moderate income communities came to the market. The need for greater regulation and
oversight was not driven by the government, but by local community members who
wanted to gain political influence and change the existing banking environment (Dreier,
2003).
From a theoretical perspective, the existing lending system was inefficient. That
is without proper service to low and moderate income communities, the needs of a
potential market were not being addressed. The government’s rationale was that if the
lenders would not provide the service on their own, the government would create
regulations that would enable the lenders to provide loan products and meet the needs of
more consumers.
Considering the application of general welfare economic theory to these
regulations, one could assume that the regulations would provide a greater Pareto optimal

17
market. That is with the new regulations, the needs of more people could be met without
any loss to those that were already able to qualify for existing loan products, taking what
could be considered a less Pareto optimal system prior to the regulations and allowing the
system to perform at greater optimization with the needs of more consumers being met.
The implementation of regulations may not be the only answer. Market
economists like Friedman would conclude that these regulations are not necessary in that
if there was an actual need, the market would address that need if a market intervention
was a fiscally sound option. From the government’s perspective, the lenders concluded
that low and moderate income borrowers had a high risk of loan default and had no desire
to enter a risky market. Without the government’s regulatory intervention, the lenders
would likely not consider entry into the low and moderate housing market.
With the evidence indicating the need to address the lack of financing
opportunities for low and moderate income families, it was necessary for community
groups to band together to create the message that the status quo needed to change. The
first step in that process was that the victims of discrimination had to be identified
(Dreier, 2003). This identification would allow the stakeholders to visualize the people
that did not have access to home ownership.
Secondly, the community organizations needed to identify a set of solutions to the
problem (Dreier, 2003). The solution was not simply to require that the banks lend to
anyone that applied. What was necessary was the development of solutions for lenders,
developers, governments and individuals that would align the needs of the individual
stakeholders as well as the overall goals of the effort. This may involve new loan

18
products, services and counseling with the end results being financing options that would
meet the needs of all stakeholders.
Third, the groups needed to align themselves with politicians and public
organizations that would be the long term partners after any program or regulatory
implementation (Dreier, 2003). The need to partner with these groups will continue to be
necessary to keep the needs of low and moderate income families in the spotlight. Not
only do politicians and public organizations have community influence, but they can also
influence any government funding or support as well. The ability of the community
groups to leverage relationships with public organizations and politicians can have
tangible benefits with potential government funding and regulations, but can also
establish a higher level of credibility within the community.
Finally, the structure of the local organizations should not only to be aligned with
the overall goals of improving home ownership, but also should also provide a
mechanism to learn from one another (Dreier, 2003). There is no single solution that
would meet the needs of all low and moderate income families, but the need for a
structure that can share these best practices will result in more effectiveness for all local
organizations can benefit a wider set of community groups. Organizations such as
Neighborhood Reinvestment Corporation and Neighborhood Housing Services are non-
governmental organizations that focus on supporting local groups in addressing housing
development programs. Programs such as these provide counseling and operational
guidance that can leverage the best practices of a variety of successful local
organizations.

19
Starting with the Fair Housing Act, the Home Mortgage Disclosure Act, and the
Community Reinvestment Act, banks were required to offer their products and services
to a wider customer base. As a result, banks were required to not only accept deposits
from their community, but would also have to lend to that same community (Dreier,
2003). These regulatory changes were designed to address historic issues where banks
were willing to accept deposits from any customer, but would only provide credit to those
customers who the bank felt were the least risky. The result of the regulatory
implementation was that individuals considered either low or moderate income had
improved access to credit.
The regulations were implemented because of what was defined as discriminatory
practices (Freeman & Hamilton, 2004). However, there is some dispute as to whether the
alleged discrimination actually occurred. From a fundamental economics perspective, it
has been speculated that it would not be in a bank’s best interest to simply ignore a
population of potential customers without examining the financial quality of those
customers (Newman & Wyly, 2004). Doing so would diminish the potential revenue of
the bank by ignoring an entire segment of customers. Assuming that the discrimination
did occur, banks were considering characteristics such as race as a risk factor rather than
a simple analysis of the credit quality of the loan applicant.
Kaersvang (2006) argued that the Federal Housing Act may be focused more on
providing financing options for inner city residents that would give those residents a
choice to live someplace else other than their present location. As such, it may not be a
matter of providing financing options that would eventually improve the conditions of

20
inner city neighborhoods, but to give people an outlet to depart the inner city all together.
The result was that the Federal Housing Act was not necessarily a vehicle for urban
redevelopment, but simply an additional financial option that would give residents a
greater opportunity of choice.
With the implementation of the Community Reinvestment Act, banks would be
measured on their ability to fairly service all potential customers in their service area. In
the event of a satisfactory rating from the federal auditors, a bank would be able to
operate without further intervention. If a bank review was unsatisfactory, a bank would
not be allowed to open a new branch, offer a new product, or install a new automatic
teller machine. Thus, a bank could not expand in any operational area until the identified
compliance issues were resolved. Given the growth limitations provided under the
regulatory framework, compliance with the Community Reinvestment Act was critical to
the future success of the bank.
To address the potential compliance issues, banks were required to consider both
their product offerings as well as their underwriting requirements for credit (Fennell,
2008). However, before creating the new products and services, the banks needed to
develop an understanding of what options this new market needed. One potential area for
consideration were the requirements involving minimum down payment options for low
and moderate income home buyers. Traditionally, banks would require at least 10% of
the purchase price as a down payment from the borrower. With the down payment, the
borrower would assume a limited level of investment in the property by providing the
funds for the down payment while the bank would provide the balance of the funds

21
needed to purchase the property through a traditional mortgage. Additionally, the down
payment would also provide a financial cushion in the event of a downturn in the housing
market which would belay the risk associated with a mortgage balance that was in excess
of the current property value (Wray, 2006). Some may consider a 10% down payment to
be a minimal investment for the purchaser, but this amount would force a low or
moderate income family into either substandard housing or to simply not consider home
ownership as the required down payment was not affordable (Freeman & Hamilton,
2004).
Government Sponsored Enterprises such as Fannie Mae and Freddie Mac
developed loan products that would require down payments of less than three percent for
qualified low and moderate income families (McDonald, 2005). These organizations did
not lend directly to the public, the partner banks could now offer these more attractive
loans knowing that either Freddie Mac or Fannie Mae would eventually purchase the
loans from the banks. The Federal Housing Administration provided default insurance
for qualified loans (McDonald, 2005) or in some circumstances, Fannie Mae or Freddie
Mac would provide the default guarantees for loans not eligible for FHA insurance
(Jaffee & Quigley, 2008). With the insurance, banks would consider these loans to be of
lower risk as they would not be maintained by the bank after transfer to the secondary
lender.
With the lower risk, the Government Sponsored Enterprise loans also proved to
be very successful in several large markets in exceeding the goals of available affordable
housing (McClure, 2005). The participation of the Government Sponsored Enterprises

22
served to not only mitigate the perceived risk of the banks, but build upon that to provide
better products and investment in the targeted communities. However, it can not be said
that the success was consistent across all major cities, there was a clear indication that the
available mortgage products along with the secondary market acquisition of the
originated mortgages that there was a greater incentive to meet the needs of the low
income residents. However, Frame and White (2005) conclude that while the
Government Sponsored Enterprises did create and offer these more flexible loan products
to the market, the data that would indicate that the existence of these products is
inconclusive in relation to any significant improvement in home ownership (McDonald,
2005).
As a result, the banks viewed these new products as low risk along with meeting
new compliance requirements and the potential generation of fee revenue in the
origination process. Given the opportunity to access a new group of customers along
with the guarantees provided by the Government Sponsored Enterprises, lenders now
considered low and moderate income families to be a worthy investment. The result of
the willingness of lenders to provide products to these customers was that low and
moderate income families were now able to realize the opportunity of owning a home as
it was now a more affordable alternative with the lower down payment requirements.
In addition to the down payment requirements, banks consider a customer’s credit
rating to be an indication of their ability to pay the loan back once the funds are
disbursed. The credit rating requirements also proved to be challenging for low and
moderate income families as in many cases this population either had a very limited or

23
low quality credit history (Ibarra & Rodriguez, 2006). In order to qualify for most
traditional mortgages, a typical borrower must have an established and reliable history of
paying previous debts in a timely matter. With an established credit history, the bank
could assume that if a customer has paid their other debts on time they would likely also
pay their mortgage on time as well.
As a result of a lack of credit history, banks were forced to consider alternatives to
credit history that would also serve to provide evidence of consistent payment of
financial responsibilities. Banks would need to identify other financial responsibilities
that required routine timely payments but did not commonly appear on a credit report.
For example, banks could consider a customer’s payment history on rent expenses and
utilities as an indication of payment history. These expenses would not appear on a
typical credit report or have an impact on a credit score. However, an objective report of
payment history could be reviewed by the bank which would then provide an alternative
to the standard credit rating process.
After resolving the credit history and down payment concerns, the last remaining
challenge for this community were the requirements surrounding gross income
requirements. For most traditional mortgages, a customer cannot have a monthly
payment that would exceed 35% of an individual’s monthly gross income. Again, the
intent of this requirement is that the applicant is not accessing more debt than what the
applicant can afford to repay. For many low and moderate income families, this
maximum payment requirement would either result in the need for a significant down
payment in advance of the mortgage or the purchase of a home that was of limited value.

24
In order to provide some flexibility in the maximum payment requirement, banks
first reviewed a borrower’s rent history. It is common that low and moderate income
families pay a very high percentage of their income towards rent, in some examples, rent
payments were nearly 50% of an individual’s gross income per month (Mueller &
Schwartz, 2008). In reviewing this information as well as the consistency of timely rent
payment of the customer, the bank could then consider a higher monthly payment. The
lender could make the assumption then that if the customer had consistently made their
high rent payment, it was likely that the consistency of a mortgage payment of a similar
amount would result. Banks would likely not allow a mortgage payment to be at 50% of
gross income, they would likely consider something higher than the current maximum
which would allow the customer to purchase a more valuable property.
The result of these actions by the banks was the development of new mortgage
options for low and moderate income families that would provide a greater opportunity to
finance and purchase a home. Banks considered this to not only be a social benefit to the
community, but it would also provide a financial benefit by accessing a new customer
segment. The social benefit provides a greater amount of goodwill in the community
paired with the most important factors of risk, profit, and regulatory compliance. These
new products were able to effectively address these needs.
While banks have loosened their credit standards and processes, any future
adjustments to underwriting requirements may conflict with the existing risk assessment
processes of the bank (McClure, 2005). The result of this risk aversion is that there is
still a customer segment with unmet needs. With the existing unmet demand, there was a

25
market for an additional lending industry outside of traditional banks, the subprime
lender (Newman & Wyly, 2004). Subprime lenders would operate in a similar manner to
banks in the function of providing loans with the exception of not accepting deposits
from customers. The subprime lender would generate new loans and then immediately
sell those loans on the secondary market to organizations like Fannie Mae and Freddie
Mac. The business focus of subprime lenders was low and moderate income borrowers
that may be of higher risk with normal underwriting standards (Shlay, 2006).
Subprime lenders offered more creative loan products that were not commonly
offered by traditional banks. For example, subprime lenders would offer options such as
interest-only mortgages, loans that would finance more than 100% of the property value
or adjustable rate mortgages which would offer a low initial monthly payment with the
risk that the payment may change in the future terms of the mortgage. Most traditional
banks were unwilling to offer similar loan products offered through subprime lenders as
the interpretation was that the default risk was much higher when compared to existing
mortgage options.
With the collapse of the mortgage market over the past few years, the perception
of risk for subprime loans appeared to be correct. As Jaffee and Quigley (2008) note,
nearly 9% of subprime mortgages were already in foreclosure. However, these defaults
and foreclosures were not solely related to low and moderate income borrowing. In
addition to low and moderate income families, more affluent individuals also entered into
default and foreclosure. The new customers were different. These affluent borrowers
simply assumed more mortgage debt than what could be paid over the terms of the

26
mortgage. The resulting collapse in the mortgage market that we are witnessing now is
that not only did many subprime lenders fail, but those organizations that purchased the
loans also failed.
From a compliance perspective, the banks could demonstrate to the regulators that
they were providing additional options for mortgages that would serve a wider portion of
the community. From a risk perspective, the banks were still following an underwriting
process that addressed the need to assess the customer’s ability to pay the mortgage back.
Along with the underwriting perspective, there was a readily available secondary market
with Fannie Mae and Freddie Mac that were willing to purchase these loans shortly after
origination resulting in the default risk moving from the bank to the new purchaser
(Freeman & Hamilton, 2004). At a minimum, the banks could also see a short term profit
in the generation of origination fees associated with the loans. The banks were able to
identify a new customer channel for their products that was relatively low risk and would
generate a steady income (Shlay, 2006).
Outside of lenders, there was a history of discrimination on the part of property
insurers. It was uncommon for insurance companies to discriminate in terms of race, but
several insurers would simply ignore entire areas of a city due to the perception of a risk
of loss. This lack of available options for property insurance proved to be detrimental to
families wishing to purchase a home as without property insurance, there was no
potential for a mortgage. Without property insurance, lenders would not finance the
property against damage or loss as it would be detrimental to the property value and the
underlying mortgage. Changes in available insurance would also result in existing

27
residents choosing to leave a community due to continually rising insurance rates
(Kaersvang, 2006).
From the insurers’ perspective, the perception was that areas with high crime and
urban blight were too risky without any improvements in the socio-economic factors or
the general condition of the insured properties (Kaersvang, 2006). The insurance
companies could simply charge higher premiums for those in the community, leave the
community all together or charge higher premiums to those in lower risk communities.
Just like lenders, insurance companies are businesses and are measured by their ability to
be profitable. The amount of profit for an insurance company is measured by the amount
of claims paid against the amount of premiums received. Where insurance companies see
a net loss, they are forced to consider other options of how to reduce that loss.
The government did further regulate insurance companies to provide more options
to particular communities, but regulations alone did not solve the problem. There was a
need to develop partnerships between community groups, individuals and insurance
companies that would provide a mechanism where the insurance companies could see
that the investment by lenders, individuals and governments would result in socio-
economic improvements within communities. Those improvements would then result in
a lower risk for the insurers which would then result in lower losses or increase profits for
the insurance companies.
The Impact of Government Funded Programs
Beyond simply implementing several regulations that would force banks to
provide better products and services to low and moderate income communities, the U.S.

28
Government took steps to create several government funded programs that would provide
direct funding to banks and communities to support local efforts to strengthen home
ownership in underserved communities. These government programs range from grant
funding to targeted communities to grants provided to banks that were complying with
the new regulations.
With the government providing direct funding into the market, the underlying
intent was that a small investment would encourage other outside investors to also fund
efforts in the targeted communities. There is a clear basis for this theory within Keynes’
multiplier theory. The underlying intent from the government was that the minimal
federal investment would then stimulate other investments that could then result in socio-
economic improvements such as reductions in crime rate and unemployment within the
community (Hannsgen, 2007). Keynes would surmise that the initial public investment
and potential gains in employment would also result in more local spending by those
living in the community. Improved employment conditions would encourage those
newly employed individuals to spend more money, resulting in further increases in
employment. Keynes considers that the investment multiplies as the funds circulate
through the economy. Even though Keynes’ approach was based on accepted economic
theory, the actual existence of the multiplier effect in the community could be questioned.
For example, one could consider the investment of funds into an endeavor which directly
creates new jobs. Those gaining employment would spend their income on goods and
services which would generate further investment. However, Keynes’ theory may be
contradictory to the results of housing programs. Regardless of whether a project focuses

29
on developing new housing or rehabilitating existing housing, any resulting increases in
employment would be temporary and end at the conclusion of a specific project.
There are several challenges with assessing the effectiveness of the government
funded programs. First, with the various programs in existence, it is difficult to prove the
effectiveness of any single program in the market (Erickson, 2006) due to several
instances of program overlaps (Staudt, 2006). Secondly, many of the funded programs
require that the government funding is not the only source used on a particular project.
As discussed above, the intent of the government programs are that the public funds are
used to leverage private partnership and funding to support an overall project. However,
what is the common practice is that the seed funding from the government is simply used
to leverage other public funds from a federal level (Shear, 2007). This is also supported
by Basolo (2006) where it was not only clear that the vast majority of funds came from
federal grants, but in “over half of the cities spent no local dollars on housing programs”
(p. 107) which provides further evidence on the overdependence on federal support for
program funding. In contrast, Super (2005) notes that the lack of local investment could
also be the result of local governments waiting for the federal government to spend their
funds first rather than having the funds originate from local budgets.
One could consider the impact of the HOPE VI program in support of home
ownership. The HOPE VI program was designed to create more mixed-income
communities that would support both low and moderate income home ownership. The
intent of the HOPE VI program was that with a greater mix of people from different
backgrounds, all residents of the community would benefit (Jois, 2008). However, the

30
implementation of the program did not encourage middle-income families to enter the
specific community (Varady, Raffel, et al, 2005). Like those with low or moderate
income, the expectation of safe neighborhoods, good schools and a strong community
identity would be necessary prerequisites in order to enable prospective residents to
consider moving into a HOPE VI project (Hanngsen, 2007).
When considering the impact of school quality and neighborhood selection, one
could consider the city of Chicago to be an example of where school quality is a
significant factor in neighborhood selection. The Chicago Public School system is
composed by both locally assigned schools where residents of a particular area are
assigned to a specific school or magnet schools where students have an option to attend
out of neighborhood schools based on previous academic performance. Along with the
neighborhood and magnet schools, there are several charter school programs throughout
the city that commenced operations within the last five years.
There is significant diversity of location for the Chicago Public School System,
there is also a wide range of quality at the high school level. With the current school
funding model is based on property taxes in the local neighborhoods, one would
generally find that the schools of higher quality are located in higher income areas of the
city. In contrast, those schools with historically weak performance records are typically
in low income communities in the city. In the Chicago market, programs like HOPE VI
may prove difficult to promote until there was a supporting improvement in school
quality within the existing low income communities.

31
Varady, Raffel, et al. (2005) reviewed the performance of the HOPE VI program
in Cincinnati, Ohio. In this HOPE VI implementation, the local officials charged with
promoting the new housing program supported by the HOPE VI program focused on
developing housing in low income neighborhoods that would be attractive to market-rate
middle-income home owners. However, the officials “ignored the issues of schools and
middle-income families (p. 155).” In this circumstance, the goal of the project was to
provide a more diverse income community, but there was a failure to attract higher
income residents due to the perceived weakness of the local schools.
To make matters worse, Jois (2008) concluded that there were several examples
of HOPE VI programs that actually resulted in a net loss of affordable housing in
comparison to the environment prior to the HOPE VI project. What was missing was an
expectation that the resulting project should at least offer a break even in affordable
housing units. Unfortunately, while that should be an obvious expectation, the growth in
available housing units expectation is not currently built into the overall requirements of
the HOPE VI program. HOPE VI is not alone in this result of a net loss of affordable
housing stock. In fact, between the implementation of the Housing Act of 1949 and the
creation of the Department of Housing and Urban Development in 1965, there was a
propensity for a net loss of new housing stock throughout the period (Erickson, 2006).
The rationale for the Housing Act of 1949 was to build more affordable housing, the
result was that the while new housing was developed, there was less available to not only
the existing population in the community, but to new residents as well.

32
According to Wood (2007) of the Government Accountability Office of the U.S.
Government, there were also several concerns related to the performance of the program
as well as the Department of Housing and Urban Development’s oversight of the
program. Within the requirements of HOPE VI, the government is not to be the only
funding source for individual projects. The government funds should be leveraged to
access private funding sources for the project. In actual practice, nearly 79% of the
funding for HOPE VI projects came directly from government funds. Some of this lack
of leveraging may be due to inconsistent application processes for other sources of public
and private funding there is a need for a process that better supports the leveraging goals
and expectations (Shear, 2007).
Even though evidence of community improvement in the areas surrounding new
HOPE VI projects did exist, the Government Accountability Office was unable to
attribute the improvement to the HOPE VI project or other factors in the community.
The Government Accountability Office concluded that the Department of Housing and
Urban Development’s operational oversight was lacking. As a specific example, “HUD
did not have an official enforcement policy to deal with grantees that missed project
deadlines” (Wood, p. 9). This is problematic in that it is indicative of an inefficient use
of government funds provided in the construction grant.
However, in their same study, Varady, Raffel, et al. (2005) did identify one
community where the previous high crime area was transitioned into a mixed-income
community with significantly lower crime rate and higher levels of community
involvement. This community was the Park DuValle community in Louisville,

33
Kentucky. The planning for this program was significantly different than the planning
for the community in Cincinnati, Ohio discussed above. At the inception of the planning
process, the Park DuValle community planners focused on identifying methods not only
to attract low and moderate income first time home buyers, but also developed a plan to
promote the community to middle-income families as well. This HOPE VI
implementation was significantly more in line with the goals of the project and the HOPE
VI program.
The Park DuValle also established a local advisory council for the community and
worked with the City of Louisville to establish a new school that would better support the
expectations of middle-income families with children. The school effort as well as the
establishment of a community center and playground was attractive to both low income
and middle-income families. When comparing the changes in crime rate within the
Cincinnati and Louisville HOPE VI projects, the Park DuValle project saw a very
significant reduction in crime in comparison to the environment in the community prior
to the project launch. The only failure of this project, as the researchers note, was that the
goals of racial integration were not met as the resulting community continued to be
predominantly African-American (Varady, Raffel, et al, 2005).
There are examples of both successful and less than successful programs in these
efforts, Squires and Kubrin (2005) theorize that the motivation for programs such as
HOPE VI and the Community Reinvestment Act tend to focus more on issues of location
rather than supporting individuals within a community. They conclude that the focus
tends to be on improving a particular area or development that may have a high

34
concentration of a specific population. This focus on location rather should not be the
sole focus of a project. As they note, there is a greater need to “reduce the concentration
of poverty and segregation (p. 60)” rather than simply improving the housing and not the
overall demographics of the community.
As discussed above in the HOPE VI programs in Cincinnati and Louisville, the
program in Cincinnati failed in its attempt to encourage middle-income families with
children to enter the community. This could be defined as a focus on place rather than
people. This is in contrast to the Park DuValle project which focused on not only
providing better housing for the existing community, but also provided an incentive for
residents from outside of the community to consider entering Park DuValle. Given the
increase in community diversity of the Park DuValle project, this project would be
considered to be the result of a need to focus not only on the location and the property,
but to also focus on lowering the concentration of poverty in the area as well.
There must be a fine balance between both place and people. For example, if the
focus is too highly placed on the needs to decentralize poverty, there is a risk where a
majority of the population may simply leave the area and move to either other
neighborhoods or the suburbs rather than stay in a central city. The focus on place based
programs have a limited ability to show a positive benefit to the community (Tranel &
Handlin, 2006) with the result that those remaining in the central city population further
concentrate both poverty and in many cases, race as well (Bayoh, Irwin & Habb, 2006).
Where government programs are used, the need exists that the resulting newly developed
property should not only be attractive to new members, but also should be affordable to

35
the existing community as well (Fennell, 2008). If the suburbs are more attractive from a
cost and benefit perspective, there is less incentive for someone to remain in the
community when there are better alternatives in other areas.
HOPE VI is not the only example of a government program to support the
development of low and moderate income housing programs. Staudt (2006) concludes
that the multitude of programs might actually be causing more harm that good. The issue
with these multiple programs is that there is a limited level of mutual exclusivity between
individual government programs. The result is that the multiple programs overlap in
attempting address the same community need. This overlap results in two challenges.
First, there are additional costs associated with the redundancy and secondly, as discussed
above, it is difficult to determine if any one program is successful. In discussing the
theories of Milton Friedman, Staudt (2006) surmises that this lack of “coordination and
potential incompatibility of the programs can prove to be troublesome when assessed
separately but, but when investigated together, they border on the absurd (p. 1209).” This
conclusion further supports the idea that the apparent redundancy in these programs may
actually result in the effort being less efficient and more expensive when compared to the
potential outcomes of a single program and oversight body responsible for meeting the
market need.
This overlap occurs at the jurisdictional oversight level as well (Staudt, 2006).
When reviewing the processes related to federal government oversight of subsidized
housing programs, there are three different oversight bodies responsible for these
programs. In the House of Representatives, the Finance Committee oversees all

36
subsidies, the Banking Housing and Urban Affairs Committee in the Senate. The
Department of Housing and Urban Development are responsible at the Executive level of
government. One could conclude that with these overlapping oversight functions, there is
an inherent risk that there will be a direct conflict between the overall goals of the
program and the methods to achieve those goals.
In addition to HOPE VI, another government funded program is the Community
Development Block Grant program. The Community Development Block Grant program
was designed to provide funding to targeted communities where the existing housing
stock was falling into ill repair. The funding would then be transferred to state or city
government administrators for distribution to the targeted community (Super, 2005).
While the mission of Community Development Block Grant was clear as an investment
in low and moderate income communities, what was lacking was a realistic method of
assessing whether or not a specific community was eligible to receive Community
Development Block Grant funds.
Posner (2005) noted in his testimony to the United States House of
Representatives that the current funding eligibility model does not appropriately consider
either population size or poverty status when determining funding to an eligible
community. The result of the failure of the funding model is that there is a propensity for
cities to receive large grants where the actual needs in other cities receiving lower funds
is greater. The funding is getting out into the market, but the challenge is that with the
existing funding model, there is a risk that the funds are not getting to the communities
with the highest need Additionally, as Czerwinski (2006) noted that in addition to the

37
issues of population size and poverty status, the Community Development Block Grant
funding formula also gives additional weight to the amount of pre-1940s housing in a
specific community. It is common that older properties tend to need more repairs both in
frequency and expense, but there are two flaws with this additional age-based weighting.
First, it is likely more expensive to improve property that is over sixty years old and
secondly, that this method may ignore the needs of communities with newer housing
stock that may also have a significant need. The result of the age-based weighting is that
more funds may be spent to improve fewer older housing rather than trying to benefit the
needs of more home owners who may need lower cost repairs. The result is that fewer
residents are assisted at the expense of improving a smaller number of older properties.
Super (2005) considered that programs like Community Development Block
Grant where the program administration is transferred from the federal to the local level
is misguided. The transfer in administration results in a misalignment of programs goals
between the federal and state administrators. This misalignment is another example
where the federal government is providing the funds without the necessary guidance or
accountability to ensure that those funds are used in a manner that meets the program
requirements. A case could be made that the local governments have a higher awareness
of a particular neighborhood problem, there is a greater need for oversight by a joint
federal and local effort.
Along with the government funding provided to housing projects, the government
also provides funding to local community groups who are supporting local housing
programs. The government funds are administered through Technical Assistance Grants

38
that are provided to the local organizations. McCool (2002) from the Government
Accountability Office notes that there are problems with this program as well. While the
Technical Assistance Grants are designed to provide training support to local
organizations, the General Accountability Office often found that the funds were not used
for that purpose. Examples where grant funding was used for purposes such as training
grant writers to developers on more effective ways of navigating government funding
programs were cited as not being aligned with the requirements of the Technical
Assistance Program.
This failure is not as much a fault of the local organizations, but it is a failure of
the Department of Housing and Urban Development’s oversight and guidance as to how
the funds should be used (McCool, 2002). With the lack of oversight, the local groups
simply receive the funds and spend them on what they consider to be the highest
operational need at the time of receipt. Similar to the problems with Community
Development Block Grant and HOPE VI, the Department of Housing and Urban
Development does not measure the effectiveness of the Technical Assistance Grant
program within the local communities receiving the funds. Since there is limited
oversight on the actual use, it would be quite difficult to determine whether the program
in general has been effective without a thorough understanding of exactly what the funds
were used to support. Clearly, the General Accountability Office concerns about the lack
of measurement were justified since the U.S. Government sets aside between $100
million to $200 million in funds on an annual basis for the grant program.

39
Finally, one could also consider the effectiveness of incentive programs that are
provided to banks participating in loan programs for low and moderate income
communities. A prime example of a bank incentive program is the Bank Enterprise
Award program. The Bank Enterprise Award program was designed to give cash awards
to banks that were supporting community reinvestment activities in low and moderate
income communities (Scott, 2006). However, the Government Accountability Office
noted that there were several problems with the current administration of the Bank
Enterprise Award program. First, as with the other programs discussed above, there was
no objective measurement to determine whether the program was successful in spurring
new investment. In fact, there were several examples noted by the Government
Accountability Office that would indicate that not only had the actual impact been
overstated, but that specific research conducted by the Government Accountability Office
indicated that the impact of the program was of limited significance. Secondly, there was
no requirement that the banks spend the award on any specific area, it simply went into
the bank's balance sheet (Scott, 2006).
There were also several examples where the calculations used to determine what
the award amount should be were so poorly structured that there was a risk of
overpayment to a bank. Even when appropriate award amounts were provided, those
amounts were so small that the value of the award from the perspective of the bank was
insignificant when compared against the overall cash position of the bank. Finally, there
was a limited ability to determine any difference between incentives already provided
under the Community Reinvestment Act and those incentives paid through the Bank

40
Enterprise Award program. Instead, it was more common that banks focus on the
requirements under the Community Reinvestment Act rather than any cash incentive that
would be provided to them under the Bank Enterprise Award program (Scott, 2006).
Beyond all of the programs and financial incentives to the various stakeholders
supporting low and moderate income housing development, there was also a need to
develop a plan to encourage prospective residents to consider that home ownership is a
possibility. With limited information, the vast majority of low and moderate income
families will simply conclude that home ownership is not possible. Home ownership is
not a possibility for everyone, but it is necessary for the stakeholders to have a process in
place that can identify those individuals who have the highest potential to purchase a
home and provide an environment where the property acquisition process is both efficient
and customer focused.
Even though society is transitioning into an ownership society (Wray, 2006) one
should also consider that for many years, that same society has conditioned low income
individuals to become dependent on many programs such as Section 8 and welfare
(Grinstein-Weiss, Irish, et al, 2007) rather than home ownership. As such, when working
with people in these groups, there may be resistance to losing the benefits they have had
with the purchase of a home. It is often necessary to not only offer the available
programs to this population, but to also discuss how home ownership will create more
financial stability and improvement for the individual (Di, 2007). The idea being that
home ownership is promoted as an economic benefit, but in the eventuality, the new
owner must be financially self-sufficient (Wray, 2006). Along with the personal

41
economic benefit, these programs, when compared to entitlement programs like Section 8
and welfare can improve resident tenure in a community which results in a more cost-
effective use of federal funds (Hoff & Sen, 2005).
The communication process should provide support prior to and after the home is
purchased. This could involve programs such as matching savings programs that will
provide financial support for saving funds for a down payment (Grinstein-Weiss, Irish, et
al, 2007), programs to establish a reliable credit history as well as after purchase support
programs on personal budgeting and home maintenance. With the end result being that
the potential home owner is prepared to financially support the purchase.
Programs such as these could be supported within the theories of welfare
economics. At the heart of welfare economic theory is that wealth is redistributed to
those who need to have greater access to the funds. For home ownership programs, a
portion of paid taxes are redistributed to those individuals who would meet the programs
qualifications. In the example discussed above, public funds would be used to provide
either direct down payment assistance or matching of saved funds. In contrast to other
government funded efforts discussed here, these are examples of funds that would go
directly to the consumer rather than an intermediary such as a bank or local organization.
Another example of a government funded program, albeit at the state and local
level, is the Low Income Housing Tax Credit program. Low Income Housing Tax Credit
programs allow a local government to use a tax incentive to a property developer when
that developer is providing greater housing access to low and moderate income families
(Mueller & Schwartz, 2008). As a result of a Low Income Housing Tax Credit, the

42
developer is able to use the tax credit against future taxes owed to the issuer of the credit.
In addition, Low Income Housing Tax Credits can be traded or sold in a similar manner
to other assets owned by a developer with the new owner having the ability to apply the
tax credit in the same manner that the original owner possessed.
Low Income Housing Tax Credits can prove to be a very effective method in
facilitating new development of low income housing (Jaffee & Quigley, 2008). The
developer receives a financial incentive to develop housing to meet the needs of this
population and will often pass some of the savings to new home owners with price
reductions when the property is available for sale. However, with Low Income Housing
Tax Credits, there is no funding that actually changes hands. Since this is a tax credit, the
local government is not providing direct funding to the developer, the government is
simply allowing the developer to apply a credit towards future taxes owed.
Nevertheless, while there is a benefit to the utilization to Low Income Housing
Tax Credits, there has also been a failure to appropriately assess the long term financial
impact on government budgets for these expenditures (Erickson, 2006). Unlike a
program that provides direct funding for a particular program or project that is normally
budgeted, Low Income Housing Tax Credits can be used at any point after the tax credit
is awarded. Given the flexibility of use, it may be difficult for local governments to
predict how these credits will impact future tax revenues.
Fennell (2008) considers that there could also be a financial incentive for a new
resident to enter a community where that incentive works in a similar manner to a Low
Income Housing Tax Credit for a developer. In this option, the buyer and developer

43
could receive a tax credit. After the property acquisition, the buyer could either get a
credit towards property taxes owed or could have a structured reduction of their property
taxes over a determined period of time that would provide the additional financial
incentive (Conley & Gifford, 2006). Dreier (2003) also concluded that these tax credits
could act in a similar manner to the Earned Income Tax Credit currently available to
qualified applicants.
Even with the financial incentives for developers to offer low income housing,
that does not necessarily imply that the Low Income Housing Tax Credit program has
been successful. As Mueller and Schwartz (2008) discuss, there is limited data that
would indicate that the tax credit related to the targeted development of low income
housing actually satisfies the actual market demand. The conclusion being that the
financial incentive needs to be sufficient for the developer to provide the housing. While
there is a social benefit to meet the needs of the population, if the developer cannot offer
the project at a sufficient profit in comparison to non low income housing projects, there
would be little likelihood that the developer would implement a project where the
potential of profit maximization does not exist.
Hendrikson (2006) concluded that the focus of civic leaders cannot simply be of a
financial nature. There is also a necessity for governments to provide more favorable
terms that not only balance the financial risks associated with developments in the inner
city. This balancing should include the financial incentives, but should also include
easing requirements on permits and other steps necessary to efficiently develop the
property. One should also consider the impact on regulations such as zoning on the

44
community (Staley & Claeys, 2005). While zoning areas as single-family or owners-
occupied would support home ownership over renting, those same practices could also
exclude renters from residing in a particular neighborhood (Nelson, Dawkins & Sanchez,
2004). The result is that the government is not simply being a funding source, but they
are also engaging in a partnership with the developer as well. Thereby balancing the
needs of home ownership, businesses and renters to support effective community
development programs (Jois, 2008).
Even with the varied programs discussed above there is limited data that actually
assesses an individual program’s effectiveness in the community. By U.S. government
requirements, program performance must be assessed by objective performance
measurements. This is not simply based on the amount of money invested, but the
outcomes that resulted as this would be a better measurement of the return on the
government’s investment (Staudt, 2006). There are many examples of an investment
yielding an increase in housing stock, but in most cases those improvements were the
result of several programs rather than one particular program under review.
Conley and Gifford (2006) conclude that there is little connection between
programs that provide opportunities to provide economic parity and home ownership.
From their research, programs that offer additional financial assistance or incentives do
not necessarily result in any significant increase in home ownership within a community.
In fact, as they note, “home ownership tends to prevail where state commitments to social
insurance programs are smallest” (Conley & Gifford, p. 75). There is a clear limit to the
information that would justify not only why government programs and regulations may

45
not necessarily generate improvements in home ownership. As discussed below, there is
cause to question that there are any socio-economic benefits for the community in the
event that home ownership does increase based on the investment.
Socio-Economic Impact of Government Programs and Regulations
The long standing justification for the regulatory changes and funding from the
U.S. government was that funded programs and regulations would result in improved
housing conditions in low and moderate income communities. As a result of those
changes, other socio-economic benefits of home ownership would also occur (Frame &
White, 2005). These benefits were to include improvements in employment, crime rate
and educational performance within the community.
When specifically examining the impacts of home ownership and general health
of home owners, Laaksonen, Rahkonen, et al (2005) indicated that while there was a
relationship between general health and home ownership, over 50% of good health was
explained by other socio-economic factors rather than home ownership as a primary
factor. There was an indication that home owners were healthier than those that did not
own homes, but the notion that there was relationship between the two variables could
not be completely supported.
When considering the relationship between crime rate and home ownership, there
was limited evidence to prove a relationship that would indicate that those communities
with higher home ownership rates have lower crime rates. Other factors such as
“poverty, racial composition and instability” (Tita, Petrus & Greenbaum, p. 310) also
have a role in crime rate. There are communities that have a higher than average ratio of

46
home ownership that still have significant issues of crime due mainly to other socio-
economic factors that also impact the condition of a community.
Research does support that crime can actually lead to the decline of a community
which could then result in declines in home ownership (Tita, Petrus & Greenbaum,
2006). One should not assume that the reverse is true. While declines in home
ownership do lead to increases in crime, it does not necessarily hold that increases in
home ownership would lead to decreases in crime. One could surmise that this decline
could very well be the result of individuals leaving the community to other areas
considered to be safer, but it could also be the result of declines in existing property
values resulting from the impact of negative changes in factors such as crime rate
(Hanngsen, 2007 and Gibbons, 2004). Lynch and Rasmussen (2004) conclude that the
data supporting a relationship between crime rates and home values is inconsistent. They
conclude that it is a combination of the immediate surroundings of a property as well as
the general environment in the city as a whole. Individuals may interpret higher crime
areas as risky from a housing investment perspective, the data to support that conclusion
may not be generally applicable to all communities.
The opposite is true when there are improvements in crime rate. If the housing
situation it is likely that property values will increase. This is a positive result for the
home owner, but it is also necessary to consider the impact that increases in property
values have on the remaining renters. As property values increase, property taxes will
also increase. The result is that those property tax increases are commonly passed from
landlord to tenant in the form of rent increases (Hoff & Sen, 2005). With the improved

47
property values, there is a corresponding increase in net worth of home owners along
with a similar decrease in net worth of renters. To make matters worse, if a renter does
elect to purchase a home in the future, they would end up paying a higher price for the
home when compared to the price if they entered the market with the initial offering
(Jeske, 2005).
Increases in crime rate can lead to a downward spiral for the entire neighborhood.
As more people take the option to leave to other areas and fewer owners enter the
community, existing property would likely be neglected and result in more residents
departing and conditions further deteriorating (Gibbons, 2004). In the eventuality, the
result is that the remaining community members are those with no choice but to stay in
the community while simply attempting to survive the poor conditions. While factors
such as crime rate do have a negative impact on most communities, they tend to have a
much more significant impact on disadvantaged neighborhoods (Tita, Petrus &
Greenbaum, 2006).
When considering the impact of home ownership on employment, Munch,
Rosholm and Svarer (2006) theorized that home ownership may be a barrier to
employment. Their perspective was that people who owned homes were less mobile for
employment opportunities in comparison to renters within the same locations. The idea
being that people who owned homes were less likely to consider relocation for
employment as it would likely require selling their home. The lack of mobility could
then result in a loss of investment value or equity in a slow housing market. The result
being that the home owner would have to balance the potential gain with the new

48
employment opportunity against a potential loss that could result from the sale of their
existing home. There was a potential of improved employment in the event of
improvements in home ownership, but the research indicates that home ownership could
stifle future employment opportunities for those same home owners.
In the same study, Munch, Rosholm and Svarer (2006) also concluded that when
home owners became unemployed, their transition to regaining employment was much
shorter in comparison to renters. This quicker transition may be the result of other socio-
economic factors such as average level of education between renters and home owners
which would not be a reflection on whether or not an individual owned a home. While
this study did not focus solely on low and moderate income communities, the issues of
employment tend to be significantly higher in these communities when compared to the
general population. Unemployment is typically much higher in low and moderate
income communities when compared to the general population. While the study does
indicate that home owners tend to have a lower transition period from one job to another,
the results did not indicate that improvements in home ownership would necessarily lead
to improvements in employment, in the general population or in low and moderate
income communities. Based on the existing research one cannot objectively assess
whether or not a relationship between home ownership and employment exists.
In general, there is a strong link between education and socio-economic status.
Those with higher levels of education tend to be better off from a socio-economic
perspective which then supports improved employment opportunities (Tolnay &
Eichenlaub, 2007). Additionally, Zhan (2006) considered that education of single

49
mothers has a significantly greater influence on socio-economic mobility when compared
to home ownership. In their research, Caner and Wolff’s (2004) concluded that
individuals who did not complete college or university “were twice as likely” (p. 500) to
be asset-poor in comparison to those who completed college. One could assume that if
home owners have less flexibility in a job search in comparison to renters, Munch,
Rosholm and Svarer (2006) surmise that the shorter transition time is likely due to a
combination of other factors exclusive of home ownership.
There is also a disparity in race and education. Segal (2007) notes, that while
education is an “indicator of future economic success” (p. 69), there is a significantly
higher likelihood that a white person will complete a college education in comparison to
African-American or Latino-American individuals. One could conclude that the issues of
affordable housing are not simply the result of having affordable financial options
available to loan applicants. The lack of a college education may also be a barrier to
affordability. Without a significant level of education, individuals may not have
sufficient financial success that would make a home more affordable. This link between
education and economic success might serve to justify an increased government
investment in educational programs.
The link between education and economic strength is another example where a
relation may exist, but the order of the events is reversed. It is education that leads to
home ownership rather than an assessment of whether home ownership results in
improved educational performance. The Segal (2007) study concludes that those with
higher levels of education tend to have higher levels of income making home ownership a

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