The failure of deinstitutionalization to provide an appropriate place for the mentally ill to live in the communities is the topic of this report. The history of how community-based housing programs fell victim to the same coordination problems that generally plagued deinstitutionalization efforts is discussed. Problems discussed include: (1) communities did not have initial resources to establish many residential programs; (2) federal support transferred to the communities provided inducement to close state hospitals; and (3) mentally ill persons had to pay for housing with federal aid benefits which were inadequate to provide access to even low-income housing. Legislative guidelines to remedy the housing problem are suggested including transitional supervised houses and family care homes. Specific state laws addressing this problem are discussed. It is noted that federal money for public housing and mental health services will probably decrease while the demand for housing will increase, and that recent court cases have supported community-based housing for the mentally ill. A Virginia case study and references are included. (ABL)