Multifamily and financing industry officials said President Joe Biden’s newly released 13-page Housing Supply Action Plan is a step in the right direction to increase the affordable housing supply but questioned how much could be accomplished—particularly changes to the popular Low-Income Housing Tax Credit program—without legislative action this year as the mid-term election season heats up.
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Julie Sharp, executive vice president, tax credit equity syndications, Merchants Capital, pointed out that the plan includes several concepts previously proposed in the Build Back Better bill that passed in the House but stalled in the Senate. She noted that the sweeping proposal would infuse $55 billion to expand LIHTC and include a 10 percent annual increase in 9 percent allocations from 2022 to 2024 and a reduction in the 50 percent bond test to 25 percent from 2022 to 2026.
“The reduction in the 50 percent test is particularly impactful to affordable housing projects. We have seen a consistent pattern of housing developments that would have targeted low-income families with tax-exempt financing that were shifted to higher-income households because of a limited supply of private activity volume caps in states like Texas, New York, Tennessee, California and Utah,” Sharp told Multi-Housing News.
She noted if the reduction were in place it “would significantly increase affordable housing production in those states and chip away at the affordable housing needs in this country.”
David Sebastian, senior managing director at Greystone, said the plan’s vision is “fantastic” but noted the challenge in Washington, D.C., is implementing changes to tax legislation policies that have a chance of passing a divided Congress.
“I think that the things that have the most potential impact are lowering the bond financing threshold and increasing credit allocation. Those are things that generally have to be embedded in some sort of tax credits bill and attached to a bigger piece of tax legislation,” Sebastian said.
One step that can be made to improve the LIHTC program is finalizing the ‘income averaging’ proposed rule and that can be done through the Treasury Department, Sebastian noted.
Income averaging will allow developers to meet the same affordability goals by taking the average of the income for some households in the property rather than requiring all to meet the same threshold. The administration said this change will enable creation of more financially stable, mixed-income developments and make LIHTC-supported housing more feasible in rural areas and facilitate production of additional units for extremely low-income tenants.
Matthew Berger, vice president of tax and student housing at the National Multifamily Housing Council, was among several industry executives including Sharp and Sebastian who told MHN this would be a welcome and valuable change.
Berger said it would remove the uncertainties and enable “developers and program participants to have the clarity they need with respect to serving that population without any administrative headaches.”
Daryl Carter, chairman & CEO of Avanath Capital Management, an investment firm that acquires, owns, renovates, and operates affordable, workforce, and value-oriented apartment communities across the U.S., said the income averaging proposal would be beneficial.
“I think it incents the right things in terms of mixed-income housing. Our most successful communities are those that have a range of incomes. We have a property in Chicago where we have market rate units as well as public housing units and those are really successful,” Carter said.
GSE lending proposals
Carter said the one of the proposals that would be most helpful to his business would be exploring the feasibility of Fannie Mae and Freddie Mac purchasing construction to permanent loans.
“It’s not a huge issue but it certainly helps and it reduces cost and increases efficiency,” Carter told MHN.
While Mike Flood, senior vice president of commercial/multifamily policy at the Mortgage Bankers Association, called the proposal interesting and one to watch, he wondered how it would impact private sector lenders.
“Helping find ways to create more affordable housing is great but the question becomes let’s make sure that when you’re doing takeout finance, or you’re doing your forwards, that you’re not crowding out the private sector,” Flood said.
Shlomi Ronen, managing principal, Dekel Capital Inc., said he did not think it would push out private lenders or stifle competition.
The forward takeout program, or construction to permanent loans, from Fannie Mae and Freddie Mac “could be very attractive, especially in a rising interest rate environment, to help maintain affordability,” Ronen said.
Greystone is a high-volume agency and FHA lender, and Sebastian said he thinks the construction lending component of the financing of affordable deals is “probably the easiest piece of the transaction to facilitate” and he didn’t necessarily see the need for Fannie or Freddie to participate in that part of the marketplace.
“I think from an administrative standpoint either of those agencies would have to contract with the private sector or a third-party anyway to do those types of deals, to administer the construction loans. So, I don’t think I would focus on that aspect of the capital stack if I were drafting legislation,” Sebastian said.
Areas of agreement
The experts did agree on a proposal to reward jurisdictions that have reformed zoning and land-use policies with higher scores in certain federal grant processes and to leverage transportation funding from the Bipartisan Infrastructure Bill to encourage state and local governments to boost transit-oriented development.
“That’s not just money flowing out the door, it’s critical to removing barriers that are impeding the ability to produce desperately needed housing,” said Berger of the NMHC.
Both Sebastian and Sharp pointed to a proposal suggesting combining LIHTC deals with leftover funds state, local and Tribal governments may have from the American Rescue Plan to create more affordable housing.
Plans to streamline some federal funding programs when used simultaneously for affordable developments also received approval from the experts. Carter and Flood said they also need to address long approval times for Department of Housing and Urban Development loans.
“It takes six to nine months to process a HUD loan and they didn’t even mention that,” said Carter. “Even assumption of HUD loans will often take three to four months.”
Manufactured housing focus
The Biden plan addressed the need to encourage development of more low-cost housing options, including two-to-four-unit properties, tiny houses, accessory units, manufactured and modular housing. The administration is taking immediate steps to offer more access to lower cost financing to manufacturers and those buying manufactured homes. For example, HUD will increase FHA’s Title 1 loan program for manufactured housing to support greater securitization of the loans through Ginnie Mae’s platform and update the HUD Code to allow manufacturers to modernize and expand their product lines. Fannie Mae and Freddie Mac released revised purchase targets for manufactured housing loans and Freddie Mac will assess whether it can make changes to support loans for of personal property manufactured housing loans.
MJ Vukovich, an executive vice president at Bellwether Enterprise who is an expert on manufactured housing, said he provided information to administration officials while they were working on the action plan.
“I’m glad that the White House is taking some initiative to address affordable housing. I think the zoning piece and development piece, addressing that supply side issue, in my mind is a huge step in the right direction,” Vukovich told MHN. “Rents keep going up. Demand is as high as it’s ever been. To counter that demand you need some supplies.”
By using the manufactured housing sector, they can provide affordable housing more quickly than traditional construction. Vukovich said the goal is to also provide some liquidity to the buyers and manufacturers.
He explained that in 2001 there was a bust in the manufactured home segment which has made financing difficult over the ensuing years.
“It’s a good time for the White House to come in and say let’s start getting this where it should be because it’s a lot less of a credit risk that it was back in the early 2000s,” Vukovich said.