The launch of a new federal housing program, approval of an important accounting change, and an extension of the 9 percent flat rate for housing credits, are among the top affordable housing stories of 2013.
There’s never a lack of news when it comes to affordable housing, and this year was no different.
There was plenty to talk about. Is housing finance reform moving ahead? Will the low-income housing tax credit (LIHTC) program be swept up in tax reform? How are deals overcoming rising interest rates?
Many of these stories and others are in their first chapter and haven’t finished playing out. They will continue to be written next year.
Below is a list of 10 key stories from 2013 selected by AFFORDABLE HOUSING FINANCE, with assistance from several industry leaders.
Contributing their picks on the biggest stories of the year were R. Lee Harris, president and CEO, Cohen-Esrey Real Estate Services; Bill Kelly Jr., president, Stewards of Affordable Housing for the Future (SAHF); Bob Moss, principal and national director of governmental affairs, CohnReznick; Michael Novogradac, managing partner, Novogradac & Co.; Stephen Wallace, partner and head of the affordable housing practice, Nixon Peabody; and Charles Werhane, president and CEO, Enterprise Community Investment.
Budget-strapped housing programs took a major hit under sequestration in 2013.
Housing vouchers were just one area that suffered deep cuts.
“Many of the 2,300 state and local housing agencies that administer housing vouchers are reducing the number of families that receive assistance by no longer reissuing vouchers when current families leave the program. We estimate that 40,000 to 65,000 fewer low-income families will be using housing vouchers by December 2013, compared to a year earlier,” wrote Douglas Rice, senior policy analyst at the Center on Budget and Policy Priorities, in November. “Moreover, these cuts will deepen considerably in 2014 if sequestration continues and voucher program funding remains essentially flat. Under that scenario, we estimate that between 125,000 and 185,000 low-income families will lose assistance by the end of 2014 (again, compared to December 2012).”
Several of the industry members helping review the past year placed sequestration on their list of top stories. No one wants to see sequestration or another government shutdown in 2014.
“We made it through the first year of sequestration and a new budget deal that pulls back on sequestration a bit, but loss of HUD (Department of Housing and Urban Development) funding is still a major concern,” says Nixon Peabody’s Wallace.
Rental Assistance Demonstration
The new Rental Assistance Demonstration program, also known by the snappy acronym RAD, is the centerpiece of HUD’s preservation strategy.
Nearly 24,000 units of public housing and 8,000 units of other multifamily housing have been approved to take part in the program, according to Shaun Donovan, HUD secretary, in late November.
The agency has received applications for more than 90,000 units to convert public housing under RAD and expects to hit the program’s 60,000-unit limit in the early months of 2014.
The first component of RAD allows public housing and moderate rehabilitation properties to convert, under a competition limited to 60,000 units, to long-term Sec. 8 rental assistance contracts. The second component allows Rent Supplement, Rental Assistance Payment, and Mod Rehab properties to convert tenant-based vouchers issued upon contract expiration or termination to project-based assistance.
So far, about 40 percent of the public housing authorities involved in RAD are using LIHTCs in their deals. Of those utilizing housing credits, 75 percent are accessing 4 percent credits and tax-exempt bonds, according to Donovan.
That’s notable because many states have unused bond volume cap. As a result, a net new resource to affordable housing is being used in a large share of RAD deals.
Industry Rallies Around the LIHTC
This was also a year in which the industry ramped up efforts to support the LIHTC program during budget negotiations and tax reform threats, says Enterprise’s Werhane.
Although tax reform didn’t get too far because of the gridlock in Congress, the industry rally has helped educate legislators about the housing tax credit.
CohnReznick's Moss points out that the Affordable Rental Housing A.C.T.I.O.N. (A Call to Invest in Our Neighborhoods) campaign and other efforts succeeded in getting 17 out of 22 Republicans on the House Committee on Ways and Means to grand openings and property events.
Tax reform will likely remain an issue in 2014. However, it was announced in late December that Sen. Max Baucus (D-Mont.) would be nominated to serve as ambassador to China. That could be a blow to a dramatic tax code rewrite, which Baucas, chair of the powerful Finance Committee, and Ways and Means Chairman Dave Camp have been working on, according to Moss.
Beyond the housing credit program and tax reform, the overall issue of affordable housing is being raised on the national consciousness, says Werhane, citing increasing news coverage and a recent speech by President Obama that touched on the issue.
“However, while the housing market continues to recover and the cost of housing rises, not enough attention is being paid to the shortage of affordable rental housing nationwide,” he says.
Introduction of Housing Finance Reform
The Corker-Warner bill was introduced in June, a beginning to housing finance reform.
Also known as the Housing Reform and Taxpayer Protection Act, the bill seeks to wind down Fannie Mae and Freddie Mac within five years. The government-sponsored agencies’ multifamily lending operations would be transferred to the newly created Federal Mortgage Insurance Corp. (FMIC). Based on the Federal Deposit Insurance Corp., the FMIC would collect insurance premiums and maintain a deposit fund on outstanding obligations. It would provide backstop insurance only after a substantial amount of private capital is exhausted.
In addition, FMIC would collect a fee, between five and 10 basis points, on all securities it guarantees. Revenues generated from the fees would be used to support affordable housing.
In the House of Representatives, Congressman Jeb Hensarling (R-Texas) introduced a bill, proposing the elimination of Fannie and Freddie and heavy restrictions on the Federal Housing Administration. Industry officials vowed to fight against this plan, according to an industry expert.
Extension of the 9% Credit Rate
There are two ways of looking at this issue. On one hand, it was good news for developers that the 9 percent flat rate was extended to projects receiving allocations in 2013, says Moss.
On the other, it was bad news that the fixed rate wasn’t made permanent or extended beyond 2013.
Extensions of the 9 percent flat rate and New Markets Tax Credit are back in play next year, says Moss.
LIHTC Accounting Change
In December, the Financial Accounting Standards Board (FASB) supported allowing qualifying LIHTC investments to use the proportional amortization method, where the costs as well as the tax credits and other tax benefits of the investment are reported in the income statement on a net basis as a component of income taxes.
Many in the affordable housing industry have been behind the change because it makes the accounting of LIHTC investments clearer. With new clarity comes the potential of making LIHTCs more attractive to a deeper pool of investors.
This is important because the LIHTC market is made up largely of big bank investors. Bringing in other corporations would not only add new capital but provide more investor diversity, which would help the market better weather different economic and industry conditions.
Growing Affordable Housing Crisis
The demand for affordable housing isn’t a new story, but it is a growing one.
Report after report continued to detail the need for affordable housing for millions of Americans. Here’s a sampling of evidence that came out in 2013:
- In its Worst Case Housing Needs 2011: A Summary Report to Congress in February, HUD reported that households with worst-case housing needs numbered 8.5 million in 2011, up from 7.1 million in 2009. This is a 19 percent increase from 2009 and 43 percent over 2007 levels. Worst-case housing needs are defined as renters with very low incomes (below half the median in their area) who do not receive government housing assistance and who either paid more than half their monthly incomes for rent, lived in severely substandard conditions, or both.
- In February, the NLIHC reported that for every 100 extremely low-income renter household, there are only 30 affordable and available units.
- In December, the Joint Center for Housing Studies of Harvard University released America’s Rental Housing: Evolving Markets and Needs. The report points out that the number of households that were eligible for housing assistance swelled from 15.9 million in 2007 to 19.3 million in 2011 while the number of very low-income renters benefiting from some form of support only edged up from 4.4 million to 4.6 million.The Joint Center also called attention to the nation’s changing demographics, including the growing number of seniors. It estimates that if current homeownership rates hold, the number of renters age 65 and older will increase by 2.2 million, or some 40 percent, in the decade ending in 2023. With substantial shares of these households living on fixed incomes, both the need and eligibility for rental assistance will soar.
There was also some good news this year as homelessness has gone down. A focus on ending homelessness among veterans is paying off. In November, HUD reported a 24 percent drop in the number of homeless vets and a 16 percent reduction in chronic homelessness since 2010.
Confirmation of Mel Watt
Utilizing newly eased filibuster rules, the Senate voted 57 to 41 in December to confirm Mel Watt to head the FHFA, which oversees Fannie Mae and Freddie Mac.
Republicans blocked a vote on his confirmation in October. Democrats countered by lowering the threshold needed to end a filibuster.
In his new role, Watt will have a critical role in deciding the future of Fannie and Freddie. Housing finance reform, including the funding of the National Housing Trust Fund, will be major issues for him in the coming year.
Industry groups, including the National Housing Conference and the National Low Income Housing Coalition (NLIHC), applauded Watt’s confirmation.
"I am confident that Mr. Watt, an early supporter of legislation to establish the National Housing Trust Fund, will make sure that Fannie Mae and Freddie Mac provide needed support to affordable housing," said Sheila Crowley, president and CEO of NLIHC, following the vote.
A Democrat from North Carolina, Watt served in the House of Representatives since 1993.
Better Buildings Challenge
HUD and Department of Energy expanded the Obama administration’s Better Building Challenge to multifamily housing.
Fifty multifamily property owners, including many of the top affordable housing firms, have committed to the challenge to make roughly 200,000 housing units at least 20 percent more energy efficient in 10 years.
“This will begin to transform the drive for energy efficiency in affordable apartments and the reduction of greenhouse gases from boutique pilots to scale,” says SAHF’s Kelly.
Bipartisan Policy Center’s Housing Commission Report
In February, a commission of former cabinet secretaries, former senators, and other housing experts unveiled a new vision for housing policy.
The report from the Bipartisan Policy Center’s Housing Commission proposed a new housing finance system that calls for a far greater role for the private sector and the eventual elimination of Fannie Mae and Freddie Mac.
More surprisingly, the commission recommended a 50 percent increase to the LIHTC program.
“We estimate a 50 percent increase in the allocated credit would support the preservation and construction of 350,000 to 400,000 additional affordable rental housing units over a 10-year period at an average annual cost of $1.2 billion over the first 10 years,” said the commission in its report, Housing America’s Future: New Directions for National Policy.
The report addresses “the need for additional LIHTC resources, a housing solution for all of the poorest Americans, strategies for enabling seniors to age in place, and recommendations on the future of the housing finance system,” says SAHF’s Kelly. “In particular, the recommendations on aging in place and housing finance reform are already having an impact.”
- Volcker Rule:Late in the year, five financial regulatory agencies adopted rules implementing a provision of the Dodd-Frank bill known as the Volcker Rule. The industry appears to have avoided any direct impact on financial institutions’ ability to invest in and sponsor LIHTC investments, says Novogradac.
- HUD Reorganization: HUD began a major reorganization of its multifamily division. This effort includes reducing field offices and introducing a new risk-based processing system that aims to improve efficiency.
- Rising interest rates: Interest rates continued to creep up in 2013. For some LIHTC deals, that meant a reduction in the amount of hard debt that could be supported.
- Natural disasters: While the Northeast worked to rebuild after 2012’s Hurricane Sandy, new disasters struck, including floods in Colorado and tornadoes in the South and Midwest.
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