Sue Lani Madsen: Near disaster in housing market averted

The city of Spokane narrowly avoided a Jan. 1 shutdown of all new residential loans in a tangle of red tape.

Nobody really made a mistake. The crisis was an unintended consequence of good intentions to add more flexibility to residential zoning and build more housing faster, crossed with the good intentions of 1980s federal loan policies to prevent fraud.

Today’s column could go the cynical route, but that’s no way to start a new year. This is the story of how Chad Thomas had his faith in city government restored when the right people acted quickly to face and fix a problem.

“This wasn’t something that might happen,” said Thomas, an experience mortgage lender. “The new zoning had passed and it was law. No one knows how close we came to a total disaster.”

When the Spokane City Council adopted new residential zoning at their Nov. 20 meeting, it was unanimous. The Building Opportunities and Choices for All (BOCA) Act was intended to encourage market-based solutions to building more ‘missing middle’ housing by allowing increased density in residential zones. It was supported by both progressive advocates and the more conservative Realtors Association.

“Probably the best example of unity in government right now is housing,” said Councilman Jonathan Bingle this week. “There are differences in the why, but we are coming together on the what.”

The city ordinance adopted would have made permanent changes allowing up to six-unit residential buildings in any neighborhood starting Jan. 1, as long as they met specific requirements for size and scale. It made Spokane an early adopter of reforms required under House Bill 1110, passed by the Legislature in April 2023 and going into effect 2025.

City Planning Director Spencer Gardner described months of outreach to the community and the feedback that led to the new zoning approach. He found what most concerned people was not so much how many mailboxes were on a building, but whether new larger-than-single-family housing would blend well with their neighborhoods.

When Spokane experienced a housing boom in the early 20th century, there was no zoning. Many of Spokane’s most desirable older neighborhoods include a mix of small apartment buildings and single-family homes, developed in response to market demand.

“What we’re doing is returning to the way we used to build cities, recognizing the mistakes we’ve made,” Gardner said.

While HB 1110 defines appropriate locations of up to six-unit buildings based on transit and federal affordability guidelines, Spokane’s ordinance started from the neighborhood point of view with setback and height restrictions to meet hyperlocal concerns.

Jonathan Bingle echoed Gardner’s sentiment on a return to the lessons of the past. He pointed out the new rules provide property owners more control. “Aren’t we (conservatives) the champions for property rights, getting government out of the way?”

And then it turned out government was still in the way. Residential appraisers can only appraise properties up to four units. Properties zoned to allow five or more units are considered commercial and can’t be financed with a residential mortgage, even if there’s only one house on the property.

Thomas was seriously faced with closing his business on Dec. 31. “I was one of the first to start jumping up and down … it’s Fannie Mae, FHA, VA – none of these can be a lender, because the appraisers cannot do the appraisals,” Thomas said. He says the problem comes down to one line on one form. The appraiser has to confirm the highest and best use of the property is residential, and if the zoning allows commercial development, then a residential appraiser has to pass it off for a commercial appraisal and loan.

Thomas raised red flags the first week of December with Spokane County Commissioner Al French and Jay Sporn, residential appraiser supervisor in the County Assessor’s office. French was concerned about the impact on county revenue and homebuyers. Sporn realized how fast implementation of the new zoning was approaching. If realtors can’t make sales, lenders can’t make loans, properties can’t transfer, state and county can’t collect taxes and “it hurts every major stakeholder including purchasers, grinding the whole system to a halt.”

The Spokane City Council acted quickly to adopt an emergency solution on Dec. 14, resetting the maximum number of units at four. HB 1110 and it’s six-unit requirement is still in effect statewide, however, and so are federal lending laws.

Untangling this mess will take more work at both the state and federal levels. Chad also called Rep. Leonard Christian, R-Spokane Valley, a Realtor.

“It wasn’t brought to our attention when we were voting on the bill in Olympia,” Christian said.

He expects a fix to be a high priority when the Legislature convenes in January.

“We’re going to have to change it from six to four statewide before HB 1110 takes effect because the state doesn’t get to dictate what the federal requirements are for Freddie and Fannie.”

Here’s to hoping the Legislature can pull together in 2024 as efficiently as local staff and elected officials did in December to find both short and long term solutions to making old-fashioned neighborhoods possible again.

Contact Sue Lani Madsen at rulingpen@gmail.com