While everyone's attention is focused on market gyrations, credit squeezes and the housing melt down, not to mention the latest sex scandal and—remember—the endless Democratic Presidential campaign, the affordable housing industry is being quietly closed down. Look at what has happened:
Low income housing tax credits—the price for these credits has fallen in the past few months from over $1 per dollar of credit to 80 to 82 cents to the dollar—a 20% decline that is making new deals unworkable. The main reason for this meltdown is what has happened to Fannie Mae and Freddie Mac; their accounting scandals resulting in the new restrictions on their mortgage purchases as well as the decline in housing prices and the mortgage-backed securities markets all have combined to reduce or eliminate their profits. Thus the biggest market maker for the tax credits, Fannie Mae, has reduced its purchases of credits from over $2 billion in 2006 to $1.1 billion in 2007 and is now reportedly a net seller of credits. Freddie Mac has also reduced its purchases as well. The major banks that were also buyers are now struggling with loses and don't need or want credits. While the new pricing makes credits attractive investments to the corporations that used be in the market for credits, it will take months or years to get them back in as active buyers.
Thus developers who use low income tax credits to preserve or build affordable housing now need more debt, both hard and soft. But hard debt is harder to come by as the major national banks have been quietly restructuring their community investment groups, folding them up as they no longer need CRA credits to help gain regulator approval of acquisitions—this is not a time when banks are expanding. Also, all banks have tightened up their lending standards, shying away from all but gold plated deals or, at least, reducing loan to value ratios.
Soft debt has to come from local governments. The crash in housing values has constrained local government revenues, however, and there are less local government soft dollars available just when more are needed.
Meanwhile, back at Fannie Mae, the past year has seen the continued erosion of what was once a major commitment to affordable housing. A comparison of today's Fannie Mae with the Fannie Mae of ten years ago is striking.
Ten years ago, Fannie Mae had recently spun off the Fannie Mae Foundation and funded it with $100 million of Fannie Mae stock, then a blue chip investment trading in the 60s and 70s (Fannie's shares are $22.35 as this post is being written). It was the single largest national foundation committed to affordable housing, supporting non profits and homeownership education around the country. Today it is no more, shut down as Fannie Mae can no longer afford to fund it at significant levels.
Ten years ago Fannie Mae had just created the American Communities Fund to invest equity and debt in hard to finance inner city housing deals designed to revitalize neighborhoods across the country. The ACF also is now no more.
And, as mentioned earlier, Fannie Mae, then the primary support for the low income housing tax credit market is now selling more credits than it buys. It has also pulled back from support of the market for state housing finance agency tax exempt bonds.
On the plus side, it is purchasing more multifamily loans today than ever before, but overall, the company that was exploring new ways to support affordable housing and low income communities has pulled back and is struggling to stay afloat by buying $400,000 to $700,000 single family home mortgages on homes which are obviously neither affordable to low income families or located in low income communities.
All signs suggest that this will be a multiyear squeeze which will result in the loss of thousands of affordable housing units that could have been preserved and an increase in the national shortage of low income housing—unless, that is, the federal government responds. There is, however, scant likelihood that the federal government will enact any new programs or significantly increase funding of existing ones this year. Maybe a new administration will take a new approach to affordable housing with a new Congress next year, but even if that happens any new dollars or programs won't reach the streets until 2010 at the earliest.
Overall, prospects for affordable housing for the next few years are pretty glum; the national shortage of affordable housing is only going to grow worse at an increasingly fast pace for the next several years. After that? Well, we will just have to wait and see if it is possible to develop a new national commitment to the promise of the National Housing Act of 1949 :
"... a decent home and a suitable living environment for every American family."
I love this stuff. Thanks for your post. I hope people realize how valuable this kind of information is.
Posted by: Chuck Marunde | April 22, 2008 at 02:50 AM