Monday Double-Take

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Days after we learned that the bailout of America’s government-backed mortgage orgy is likely to surpass $150 billion, the Department of Housing and Urban Development is peddling a strikingly counterintuitive idea: fund $20-$30 billion in improvements in public housing by taking out government-guaranteed mortgages on its housing stock.

First, some context by the New York Times here. In this front-page, above-the-fold story, we learn that public housing is in disrepair. HUD says we are all losing money as a result. Every year there is an average net loss of 10,000 units from the public housing stock of 1.175 million units, thanks to a “penny-wise, pound-foolish” failure to adequately maintain apartments and houses it will be costly to replace, says David Lipsetz, a senior advisor at HUD.

Some other context not provided in the piece: the $20-$30 billion would fund repairs beyond what’s needed “to keep [existing public housing stock] in the condition it is,” says Lipsetz. Also, housing for the poor did extraordinarily well in the stimulus bill, better than many advocates had dared hope: housing assistance programs got $11.1 billion dollars under ARRA, more than $4 billion of which was for capital repairs to public housing. Lipsetz calls that cash dump “a huge effort on the part of the administration.”

Also by way of context, we’re about to have an election in which Democrats are expected to get their heads handed to them on the issue of fiscal restraint.

But politics aside, is the proposal good or bad policy?

In general, improving the state of public housing is something most people would support, as long as the country can afford it and as long as the method of doing so doesn’t create negative unintended consequences. The bill would allow public housing owners to borrow from private sources to make capital repairs using Congress’ funding commitments as collateral, says HUD. Lipsetz argues that government-subsidized multi-family housing units have already been funded in the private marketplace for 30 years, and that their default rate is 1/10th of 1%.

Sounds totally safe, right? Not necessarily. One source of funding for those multi-family housing units has been small banks that tap advances from Federal Home Loan Banks around the country. The FDIC’s inspector general has been autopsying failed banks—139 this year and counting—and has found that many went under in part because of overreliance on Federal Home Loan Bank advances; the IG’s office calls those advances a “volatile” source of funding that can make bank balance sheets look sounder than they are. The HUD proposal would increase demand on a system that has helped destabilize small banks nationwide.

Not surprisingly, the HUD proposal isn’t catching fire on the Hill. It did make it into Obama’s 2011 budget, but Barney Frank opposes it. HUD is quietly hoping that maybe it can convince Rep. Keith Ellison to introduce a bill funding it.