The other shoe dropped and scarcely anyone noticed.

That’s one way of looking at the market’s surprisingly mild response to the Tax Cuts and Jobs Act of 2017 on low-income housing tax credits (LIHTC).

Should you expect more of the same in 2019?

It’s not too early to start asking the question of key industry players, such as the lead banker for multifamily mortgage loans and housing bond issues for RED Capital Group, Nick Hamilton. The senior managing director recently sat down and discussed his 2019 outlook:

What aspects about the affordable housing marketplace concern you going into 2019?
A continued rise in 10-year Treasury yields will adversely affect permanent debt sizing and equity pricing, adding strain to projects that are already challenged by increased labor and materials costs. Reduced loan sizing would be felt most acutely on 4% LIHTC transactions, where the capital stack is more heavily weighted toward debt. While projects become more stretched for capital, sellers of existing properties eligible for LIHTC syndication have not reduced their pricing expectations.

The most hope?
There are many legislative proposals to encourage the production of affordable housing and to improve the LIHTC program. The affordable housing shortage impacts all states, so there is real bipartisan support to find solutions.

California has two propositions on this November’s ballot to fund affordable housing. The 2017 tax reform bill created qualified Opportunity Zones, which could mobilize a new source of equity capital.

Are the GSEs doing enough to support the kind of marketplace expansion that’s required?
The GSEs both have a strong appetite for affordable housing debt, since it does not count against annual lending caps set by their regulator. Freddie Mac innovated the TEL (tax-exempt loan) program a few years ago with great success, and more recently announced a mezzanine loan program for affordable and workforce housing. Fannie Mae offers pricing incentives not only for LIHTC transactions, but also for workforce housing and naturally occurring affordable housing.

A couple years ago, Fannie Mae rolled out the MTEB (mortgage-backed security as tax-exempt bond collateral) program to finance LIHTC projects. MTEB yields have risen less than Treasury yields, often resulting in lower long-term borrowing costs than banks can offer. Both GSEs have re-entered the market for LIHTC equity. They’re expected to play an important role in non-CRA (Community Reinvestment Act) markets that banks don’t always focus on.

How are you advising affordable housing developers and investors going into 2019?
Absent a shock to the financial markets, I expect interest rates to continue their gradual climb upward. U.S. Treasury yields have broken away from the anchors of low German and Japanese bond yields, and seem to be following market expectations for U.S. GDP growth and inflation. Short-term rates might increase at a faster clip, reducing construction-period negative arbitrage on forward commitment GSE transactions. It wouldn’t surprise me to see LIHTC and 80/20 new construction projects look to these structures more in 2019.

What’s your forecast for 2019?
Higher interest rates across the board seems likely, as does a continued flattening of the yield curve. That would reduce yield maintenance penalties on deals nearing the end of their compliance period, so there’s one silver lining to a flatter yield curve. I’m confident smart and capable people will continue to find ways to meet the challenges ahead.

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