A Conversation with HUD Secretary Shaun Donovan

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, grew up in the city of New York in the '60s. "I remember very well people sleeping on the streets that I would walk past on my way to school," he says. The sight made a big impression; in college, he volunteered at homeless shelters and did an internship at the National Coalition for the Homeless. He briefly considered becoming an architect so he could design affordable housing but in graduate school got hooked on housing policy. He has worked at the Joint Center for Housing Studies at Harvard University; the Community Preservation Corp., a non-profit lender and developer of affordable housing; and in the private sector on affordable housing portfolios. On the federal level, he served as deputy assistant secretary for multifamily housing, overseeing programs to help 1.7 million families access affordable housing. Immediately prior to becoming HUD Secretary, he was commissioner of the city of New York's Department of Housing Preservation and Development, helping to build and preserve more than 165,000 affordable housing units.

Housing Giants Contributing Editor June Fletcher talked with him recently about what he feels needs to change in HUD under the current administration and how he plans to achieve it.

Housing Giants: You said HUD programs need to be modernized, that they're at least a generation behind where they must be. Which programs and what would you change?

Shaun Donovan: HUD's programs haven't fundamentally adapted — whether it's public housing, but project-based Section 8, the voucher program — to the innovations and the energy which has been driven really by state and local areas, and non-profit groups. HUD has not been a significant contributor in many ways to that innovation. HUD's programs [are] not working well with the low income tax credit, which was created in 1986, and has really become the primary way to create or preserve affordable housing today. [I appointed] Carol Galante, who runs Bridge Housing Corp. out in the Bay Area. She's one of the great leaders in innovation at the local level, runs one of the biggest — and I think the best — non-profit developers in the country and is going to run our multifamily program as deputy assistant secretary. [She's] exactly the kind of [person] we need to bring innovation and change. We have to open our programs up to private investment and private capital, integrating them with transportation, with education, with energy efficiency. I want HUD to be a leader — not looked at as a barrier — to that kind of innovation.

When I was in New York, we decided to fundamentally change the zoning policies to try to bring inclusionary zoning in a much more aggressive way. We didn't look to HUD for inspiration on that; we had to look at other localities around the country. I want to make sure that the next housing commissioner in some local area would come to HUD for guidance and best practices.

Donovan: I think inclusionary zoning can't be taken in a vacuum; we need to think about it as part of a broader set of policies that lower barriers to housing production. One of the reasons we have expensive housing in parts of this country is because the cost of building housing — whether it's limited zoning potential or a range of other barriers [such as] the cost of brownfields remediation — lower supply and raise price. So when we in New York fundamentally changed the zoning incentives, it was in the context of expanding the supply of housing. We had record levels of construction for four years in a row — more than 30,000 housing permits in New York City. In the history of the data, since the 1960s, there was [only one year when there were] more than 30,000 permits. We were increasing the capacity for housing in transit-oriented areas in places that made sense to add density and to add population. We [made] sure that what were in many cases new communities — former industrial and manufacturing areas — were built in a diverse way with a range of incomes.

HG: One of the things that builders are worried about is that oftentimes the cost of improving transportation or the cost of mitigating environmental impacts falls on them. Builders are sometimes glad to do it in good times because they can get it done a lot faster than government can. [But] they have to pass these costs on to homeowners and this, of course, is a terrible time to do that. What's your comment?

Donovan: We're not proposing to take over local land use powers at the federal level. And it's important that there be local flexibility in terms of meeting the unique needs of places around the country, so this can't be a one-size-fits-all sort of approach. To go back to the example I had about inclusionary zoning, there's lots of interest in this kind of planning around the country; there's a lot less expertise than there is interest. [In New York], we did a ton of modeling — of balancing the value of development rights, what financing was available — looked at lots of different models in terms of the percentages and how it would mix with the subsidies that were available. Saying you want inclusionary zoning and getting it right are two different things because you have to be sure you're not stifling development, but you also want to maximize the amount of affordable housing that you get. The federal government has always provided significant funding to support local transportation, local infrastructure. The recovery bill presents a significant opportunity to go even further along those lines. But I think you'll also see in the President's 2010 budget, and in a range of places, that we want to make investments to support this kind of integrated planning and development efforts.

HG: Do you think that the amount of money that's in the stimulus package is enough?

Donovan: It's a significant amount of money — $13.6 billion — [and] it represents close to one-third of HUD's annual budget, so it's a very important investment. But it's part of a larger set of investments that we're making in housing. There are tax provisions focused on first-time home buyers and stimulating demand — provisions around the low-income housing tax credit. The Homeowner Affordability and Stability Plan is up to $275 billion that we're providing to keep mortgage rates low to help spur refinancing and the modification of mortgages. We've accomplished a huge amount in terms of a comprehensive set of investments to help the housing market return. The other thing to not lose sight of is that we want to get the private sector back in a strong way into the mortgage market. But right now, between Fannie Mae, Freddie Mac and FHA, we're talking about more than 95 percent of all new mortgages in this country.

HG: What changes would you like to see in the mortgage finance system?

Donovan: One of the things that attracted me to the public sector was the ability to work closely in partnership with the private sector, to make sure that this is not public versus private sector. [The question is] how do you create a regulatory system that allows transparency [and] greater fairness in the system, but sets the rules of road so there can be private sector innovation and allow the private sector to really drive the kind of economic activity that we need. Clearly, we had gone too far in the direction of ignoring or eliminating the regulatory responsibilities of the federal government. Also, let's not lose sight in the current crisis of the important role that homeownership plays for low- and moderate-income people.

If we get back to some of the basics of mortgage lending, we can very successfully create wealth-building and successful homeownership for low- and moderate- income people. I think that means some simple things, like making sure that somebody can pay a mortgage. I also think we need to look closely at some of these securitization vehicles. There is clearly a role for a secondary market for mortgage products, but it has to be done in a way that we don't get the kind of behavior that we've had, where servicers can't act in interests of owners in general, and get stymied by the complexity of interests, and the lack of real incentive to do the right thing in terms of originating mortgages.

HG: That brings me to the whole idea of these new mortgage rescue scams. There have been press releases, and you have information for consumers on your Web site, but do you have any ideas of how scams can be eliminated?

Beyond that, I think that a broader partnership is needed between HUD, the Justice Department, the Federal Trade Commission and a lot of the state attorney generals and others who have been effectively focused on many of these issues, much more so than the federal government has been over the last few years.

HG: HUD set aside $50 million last year to fund counseling services. Is that enough?

Donovan: I don't think $50 million is enough. We're working very closely with NeighborWorks [America] — that's been responsible for allocating a lot of that funding. You'll also see that [in] the 2010 budget that we have an increased commitment to counseling going forward as well, not just on a one-time basis. We believe that HUD ought to be doing more for the network of HUD group counselors around the country.

HG: The effort to revamp the Hope for Homeowners program will exclude people with a net worth of $1 million or more, but if you have substantial assets, you're more likely to pay your bills. Should these people be excluded?

Donovan: There's been broad agreement between Congress that FHA is a tool that shouldn't be competing extensively with the private sector but ought to be focused on serving underserved borrowers and underserved markets. We have, as part of the recovery bill, expanded the loan limits of FHA to allow a larger number of people to participate by going up to $730,000 in the highest cost markets in terms of loans. We need to focus not on places where the market is generally taking care of the problem [but where] people have the resources to be able to make sure that they remain in their home long-term. We should be focused on serving the underserved markets and helping to make sure there are alternatives for everyone who can and should be buying a home.