Save the TX State Affordable Housing Corporation by giving it a new mission

On Tuesday, June 24 the Texas Sunset Commission will meet to make a recommendation to the next Texas Legislature whether to continue, modify or abolish the Texas State Affordable Housing Corporation (TSAHC).  The staff of the Sunset Commission will recommend that TSAHC be continued in business for a probationary two year period.  I agree with the staff’s recommendation but not with their reasoning.

Sunset report coverRead the Sunset Commission staff report on TSAHC.

Because the functions of TSAHC and those of the Texas Department of Housing and Community Affairs (TDHCA) have grow to be very similar over the years, the Sunset Commission staff has focused on what TSAHC brings to the state that the state agency (TDHCA) does not.  TSAHC has argued that its ability to attract grants through its structure as a 501(c)(3) nonprofit is the added value that state gets by not abolishing TSAHC.

So, Sunset staff has proposed that this be the basis for evaluating TSAHC performance during the two year probationary period.

As part of this recommendation, the Corporation would be required to report to the Sunset Commission by September 1, 2010, on its annual performance in each of the following areas.

The number and amount of private grants, donations, or other funds applied for and received by the Corporation, and the use of these funds. …

In my opinion while there are useful and compelling functions TSAHC can perform for Texas, applying for housing grants as a non profit corporation is simply not one of them. The agency is setting itself up to duplicate and compete with private, community based, nonprofit corporations in seeking these grant funds.  Further, the amount of grant funds the agency can possibly generate cannot justify its existence as a large and rather expensive housing bureaucracy.

What follows is my analysis of the appropriate new role for TSAHC.


In order to explain my reasoning that TSAHC should continue to exist, but for a different purpose than that proposed by the Sunset Commission, it is necessary to review the historical purpose of the Texas State Affordable Housing Corporation relative to the Texas Department of Housing and Community Affairs (TDHCA).

When originally created in 1994 TSAHC, then known as Texas Star Mortgage Corporation, was a creation of the then executive director of the Texas Department of Housing and Community Affairs.  The nonprofit corporation was established primarily to service single-family mortgage loans issued by TDHCA and to refinance contracts for deed in the colonias.  While the refinance of contracts for deed was a general public welfare purpose, the explicit purpose for the corporation’s involvement in single family loan servicing was a money making one.  By contracting the loan servicing to a subsidiary nonprofit, it was thought TDHCA would be able to generate funds that could in turn be placed in the Texas Housing Trust Fund.  The housing trust fund is a source for grants and loans for affordable housing developments.  The housing trust fund is the sole source of state resources devoted to housing programs.  It has long been acknowledged that the most critical element missing in the state’s housing programs is an adequately funded housing trust fund.  Funds from the housing trust fund could be combined with other programs available to TDHCA such as the Low Income Housing Tax Credit program and the HOME Program in order to enhance the affordability of low-income housing developments financed by the state.

By 1995 the operations of TSAHC had become controversial when the then director of TDHCA transferred a large portion of the federal HOME program block grant from TDHCA to TSAHC.  This permitted the award of HOME funds without following the standard competitive procurement procedures normally associated with HOME program administration through TDHCA as a state agency.  Coupled with other serious administrative problems within TDHCA, this led the Texas Legislature to impose much needed and highly effective reforms through the Sunset review process.  As part of these reforms TSAHC was spun off and made a completely independent entity.

Through its short-lived first incarnation TSAHC was not given the time nor the opportunity to demonstrate whether it could generate significant revenue for the housing trust fund by assuming the responsibility for servicing of loans issued under the single-family mortgage bond program of TDHCA.  The servicing of these loans today is contracted by TDHCA to a master service (Countrywide).  I believe that part of the Sunset review process should be a critical assessment of whether or not assigning the master service role back to TSAHC would generate significant savings and loan servicing costs which could be transferred to the Texas Housing Trust Fund.

TSAHC’s mission is too broad

The extremely broad language in the purpose section of the TSAHC statute has not provided sufficient guidance to TSAHC as to how to differentiate its function from TDHCA.  Both agencies have as their primary purpose the provision of affordable housing, both owner and renter occupied, to families of low, very low, and extremely low income.  TSAHC’s purposes have been supplemented in recent years through the addition of specific charges to provide home loans to firefighters police and nurses, activities that are also, in a less targeted manner, within the areas of responsibility of TDHCA’s single-family mortgage bond program.  There is no general program which TSAHC is authorized to undertake that TDHCA is not also authorized to undertake.

As an aside I note that the role of a statewide housing finance corporation such as TSAHC is a necessary and appropriate one.  First, while local housing finance corporations play an essential role in providing bond financing for single-family and rental housing at the local level, it is advantageous to have a statewide housing finance corporation that can bundle housing finance for multiple properties spanning the jurisdiction of several local housing finance corporations into a single financing package.  This bundling can result in substantial cost savings to developers and owners.

The problem is that both TSAHC and TDHCA are acting as housing finance corporations serving the same general consumer populations with housing finance programs that are very similar.

Need to have clear areas of unique focus for each agency

The duplication of power between these two state agencies coupled with their demonstrated inability to effectively differentiate markets and functions between themselves means that it is up to the Legislature to clearly define the appropriate roles for each agency in a manner that the current statute does not provide.

While competition in theory is a good thing, in and of itself it is not sufficient to outweigh the administrative and economic inefficiencies currently present in maintaining both TDHCA and TSAHC.  What is required is for the Legislature to invest each of these agencies with clear and distinct areas of responsibility.

In 2003 the Legislature attempted to do this by directing TSAHC to target difficult to serve populations through the development of small-scale pilot programs funded with a special allocation of rental housing bonds.  I supported this direction and still feel that the emphasis of TSAHC on innovation and hard to serve populations is the appropriate differentiation between the agencies.  TDHCA has historically failed to demonstrate a capacity to innovate within existing housing bond financed programs.  This is partly due to unrealistic caps on staff and administrative budget placed on TDHCA by the Legislature and partly due to the fact that TDHCA has been weighed down with the administrative burdens of the two large federal housing programs, the low income housing tax credit and the HOME program.

Not having the responsibility for the administration complex federal programs, TSAHC is in a better position to innovate and come up with creative solutions to specific bond financed housing problems prioritized by the Legislature.

Unfortunately, the experience of TSAHC in administering the 2003 rental housing bonds has been a disappointment.  TSAHC correctly understood the Legislature’s direction that it target lower income populations, rural areas, farmworkers and other difficult to serve populations with these bonds.  Yet, the available funds were not fully utilized and those developments that were funded by these bonds generally do not target these difficult to serve populations any more effectively than is already being done by other issuers of rental housing bonds, including local housing finance corporations and TDHCA.

In fairness to TSAHC, I must note that the agency has run into the problem which plagues all of the state’s affordable housing programs — a lack of sufficient state resources to serve these difficult to serve populations.  This is the purpose for the Texas Housing Trust Fund.

Challenges with past statutory direction

In directing TSAHC to undertake targeted lending activities directed at firefighters police and nurses the Legislature put TSAHC in a difficult position.  In the wake of 9/11 Legislature wanted to do something to reward Texas first responders.  But it sought to do so without providing any resources beyond the shallow interest rate subsidy offered by tax exempt bond financing.  The only resource the Legislature provided TSAHC for these loans was an allocation of existing single-family mortgage bond funds.  Issuing these bonds allows TSAHC to offer loans with interest rates only slightly below those available in the private sector.  In the early stages of attempting to implement these programs TSAHC was unable to attract a significant number of applications.  A very small interest reduction was simply not worth the hassle of applying for these type of mortgages.

I urge the Legislature to establish a statutory direction for TSAHC that the Legislature can revisit and alter when necessary.  I believe that the direction the Legislature took in 2003 is appropriate.  TSAHC should concentrate on underserved populations and on developing innovative strategies to address the housing needs of those populations, particularly extremely low income populations, rural populations, and farmworkers.

The current home mortgage credit contraction and elimination of most subprime mortgage loan products offers TSAHC an opportunity to use the bond resources to creatively address the huge home mortgage credit vacuum that has developed for lower income borrowers.

Changes needed in the board composition

The Board of Directors of TSAHC is currently made up of current and former banking professionals.  While some banking expertise on the Board of Directors is an asset, TSAHC employs financial advisors and other professionals to advise the agency on financial matters.  I believe that the Board of Directors should include persons who are knowledgeable about the housing needs of all populations TSAHC is directed by the Legislature to serve.  I also believe that the Board of Directors should include representatives who are familiar with the different segments of the housing provider community including nonprofit corporations.  It is essential that consumers be represented on the board including low income persons and persons with disabilities, and special targeted populations such as rural communities.

While I believe that a majority of the board should be appointed by the governor I urge the Sunset Commission to consider allowing a minority of members to be appointed by other entities with an expertise and an interest in housing.  I continue to urge that all appointees be confirmed by the Senate.  It is essential that TSAHC, through its Board of Directors, remains strictly accountable to the Texas Legislature.

The Texas Association of Community Development Corporations (TACDC) has recommended:

… that the Sunset legislation include a provision to expand the TSAHC board from five members to seven or nine members and that there be board seats designated for representatives of those served by the Homes for Heroes Program (firefighters, police, teachers, etc.), and that there be board seats designated for representatives of non-profit and charitable organizations.

While I agree that it is appropriate for nonprofit corporations that do not do business (or otherwise have a conflict on interest) with TSAHC to serve on the board, I disagree that board members representing very specific individual constituencies should be mandated for board representation.  It is in the interest of the state that TSAHC remain able to evaluate and respond to the entire, changing range of housing needs and constituencies in Texas. Setting aside board seats for firefighters, police, teachers and others that represent narrow constituencies could balkinize the policy considerations of the board.

Single family housing finance programs need innovation

TDHCA has not been innovative in each use of its first-time home buyer programs.  It has not responded well to changes in market conditions such as the advent of large numbers of subprime and predatory loans.  I would have hoped that TDHCA would have developed lending products which would have offered viable alternatives to homebuyers to these abusive loans.  Despite our urging, TDHCA did not do so.

TSAHC did attempt to develop a new single-family loan product in response to changing market forces although the program was cut short by the financial failure of its private sector partner.  I would strongly urge the Legislature to direct both agencies to use the single-family mortgage bonds allocated to them to help homeowners who are not being served currently by the prime mortgage markets to be able to acquire prime conventional mortgages.

I recommend the Legislature give both agencies two years to demonstrate innovative approaches to making homeownership loans affordable to borrowers not served by the prime conventional market.  At the end of two years the Legislature should review the performance of both agencies and make a determination as to which is best equipped to administer the state’s first-time home buyer programs.

Risks associated with the multifamily housing are a concern

The first step in ensuring that multifamily housing remains affordable, clean and safe is to make sure that it is adequately budgeted.  The large 2001 multi-family housing refinancing carried out by TSAHC was doomed to failure by inadequate budgeting for repairs and long-term maintenance.  If the funds are not available to maintain the units, and if they are not initially constructed or rehabilitated to a quality condition, then the development is doomed to fail.

I am deeply concerned about potential liabilities both at TSAHC in TDHCA pertaining to the deterioration of the multifamily portfolios of both agencies.  Both agencies should perform site inspections of each multifamily property at least every two years.  The agencies should require property management companies to include in the leases with the tenants a toll-free number to contact the agency with information regarding substandard or dangerous conditions.  Agencies should monitor police reports on a yearly basis at each property and conduct special inspections of properties where there are an unusual number of police calls.

Statistically valid resident satisfaction surveys should be conducted on a regular basis.  Owners and property developers associated with multifamily projects which fail to achieve a reasonable standard of satisfaction through these surveys should be barred from further participation in financing programs through either agency.

Other issues to monitor during probationary period

a) Steps should be taken to ensure that revenues earned by TSAHC as well as similar revenues earned by TDHCA are properly reported to the Senate Finance and House Appropriations Committees so that these revenues can properly be directed at program activities rather than hidden as administrative expenses.

Both TSAHC and TDHCA generate substantial revenues from the issuance of single-family and multifamily bonds.  On occasion the Legislature has attempted to ensure that excess funds are directed into the Texas Housing Trust Fund rather than absorbed by the agency for administrative expenses not fully understood by legislative appropriators.  Under the current budget documents and the performance indicators reported by the agencies it may not be clear to the Legislature that the revenues are being used for administrative costs vs. going back into the housing trust fund.

For example, despite earning millions of dollars in revenue from the issuance of bonds TDHCA has seldom if ever returned any of this money to the state housing trust fund. The complexities of housing finance make it difficult for outsiders to understand where the money is and where it goes.  It is very important that the Sunset Commission prioritize this as one of its goals.

I am concerned that instead of establishing yet another housing fund as within TSAHC outlined in the Sunset report, TSAHC should return grants and revenues it generates to the Texas Housing Trust Fund.

b) Better, more appropriate performance indicators need to be developed for reporting to the Legislative Budget Board the accomplishments of both TSAHC and TDHCA.

The current set of performance indicators is too generalized and vague to provide members of the Legislature an understanding of what housing resources are being produced by and what populations are being served by either agency.

In summary, TSAHC can advance the cause of providing affordable housing to needy Texans.  But to effectively do so it needs a clear and realistic mission, not one that places it in competition with Texas private, nonprofit corporations or the existing state housing agency.

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