Heading into 2022, there was one giant unknown hanging over the affordable housing finance markets—the Build Back Better legislation.
While some advocates had high hopes the bill would pass in 2021, the legislation was still with the Senate at press time. Sen. Joe Manchin (D-W.Va.) dealt a blow to Build Back Better shortly before Christmas, saying he would not support the legislation. Discussions continued at the start of the new year.
The bill could bring a historic investment in affordable housing, including expanding the important low-income housing tax credit (LIHTC), housing voucher, and public housing programs.
“My expectation is there’s still going to be a considerable amount of capital flowing toward affordable housing,” says Paul Weissman, senior managing director and head of affordable housing production at Lument. “The big elephant in the room is what parts of the Build Back Better plan are going to pass. If the 50% test is reduced to 25%, I think everybody is going to be extremely busy and very active. We’ll probably see something close to twice as many bond deals if that happens.”
Maria Barry, national executive, community development banking, at Bank of America is also eyeing an overall increase in bond executions this year.
“We anticipate more 4% tax credit deals given the fixed floor and the potential of the 50% test moving to 25%,” she says.
With or without the provisions in the Build Back Better legislation, affordable housing looks to be in a strong position, according to finance leaders.
From a capital standpoint, the outlook is good, says Vihar Sheth, senior vice president at U.S. Bancorp Community Development Corp., noting that interest rates are still low and both debt and equity continue to be available.
“We’re in a growth mode ourselves,” he says. “I feel like a lot of people are either steady or growing on the investor side.”
That’s confirmed by other lenders and investors who say they are expanding their affordable housing platforms this year. This comes after the sector showed its strength amid the upheaval caused by the global pandemic.
“On the demographic side, the need for housing is very strong,” Sheth says. “We also saw how resilient this asset class was through COVID. Everyone was scared about a lot of things happening, and almost none of that materialized. Projects stayed occupied. Performance was good. Some of that was due to the support from the federal government. But, the developer community rallied, and investors and lenders were flexible. There were blips but nothing catastrophic. We know that affordable housing is a very strong asset class, and the past year showed everyone that it’s incredibly resilient. It has great returns relative to its risk profile. It’s an attractive investment in and of itself.”
Fannie Mae and Freddie Mac are both poised to boost their affordable housing activities this year after being given the go-ahead to increase their LIHTC investing and multifamily loan volumes from the Federal Housing Finance Agency (FHFA).
“There will be an increased role of the government-sponsored enterprises in the space, especially with added dry powder in the form of increased LIHTC investment from $500 million to $850 million each,” says Al Beaumariage, affordable housing program manager and senior vice president at KeyBank Real Estate Capital. “We feel confident that’s going to see increased investment in housing for very low-income bands, and it will flow into Duty to Serve areas, which for Fannie and Freddie tend to be more rural markets, interurban markets in some cases, and generally difficult-to-develop areas.”
He notes that FHFA is requiring that at least 50% of the enterprises' multifamily business be mission-driven affordable housing. FHFA also will require at least 25% of the enterprises' multifamily business be affordable to residents at or below 60% of the area median income (AMI), up from 20% in 2021.
Beaumariage also points out that the new leadership at the Department of Housing and Urban Development (HUD) will have a year under its belt in 2022. “We’re hoping they will strive to be more efficient for affordable housing loans in order to provide more FHA [Federal Housing Administration] or HUD debt in the affordable housing space.”
Stable Outlook
At the end of 2021, Fitch Ratings said it views the community development and social lending sector to be “stable with a neutral outlook for 2022,” with state housing finance agencies, socially driven lending institutions, and developers expected to continue to successfully navigate in an environment of rising barriers for affordable single-family and multifamily housing.
In 2021, the sector saw an increase in issuance in lending for affordable housing, to $24 billion as of October from $19 billion in 2020, and this is expected to continue in 2022, according to Fitch.
“With the overall focus on the exacerbated affordable housing crisis, it is anticipated that social lending and development organizations will see continued support from federal, state, and local levels and from the private sector,” says Fitch. “This is attributable to ESG (environmental, social, and governance) issues remaining a focal point in 2022 and beyond with these entities developing key performance indicators for ESG in both the public and private sectors. This alone is expected to be highly beneficial for the sector."
Others also point to ESG being a potential factor this year.
“We are cautiously optimistic about 2022,” says Bank of America’s Barry. “If the housing provisions of the proposed Build Back Better legislation pass, there would be significantly more funds available to finance development in 2022. The current focus on ESG and social impact investing has also generated significant interest from the private sector in looking at creative ways to help create and preserve affordable and workforce housing. If an increase in housing production becomes a reality, we could also see an impact on the price per credit, which may attract new investors to the market.”
Vanessa Rodriguez, who recently became head of Community Lending and Investment at Wells Fargo, also cites ESG as an increasingly important issue for investors and others. “Many are thinking about how they can make a measurable impact,” she says. “If you’re not asking that, others will be asking that of you.”
Companies will be asked to provide goals, progress, and metrics, notes Rodriguez, explaining that there is an increased focus on being a good corporate citizen from all constituents, including institutional investors, lenders, Fannie Mae and Freddie Mac, developers, and residents.
“There’s a big focus on ESG at our institution and for other folks,” adds Sheth. “People are getting savvy to ESG. We’re finding that the environmental part of ESG is getting more focused. I’ve talked to investors whose capital is being directed more toward renewable energy tax credits than affordable housing. We do everything here. I don’t see that being a problem for us, but some folks with limited appetites might see a shift.”
U.S. Bank, and the larger industry, is also focusing on racial equity. “This includes trying to catalyze emerging developers and figure out better ways to get more wealth creation in the hands of the communities that we often build housing in but the wealth doesn’t always stay in the communities,” Sheth says. “We’re working on initiatives to have special exposure buckets where we will relax standards and bring newer developers who don’t have the same liquidity and experience requirements that we would normally require. That’s a big move that the bank is supporting.”
What to Watch
Despite a generally strong, or at least stable, outlook, the industry could still face some serious disruptions this year.
Rising labor and material costs will further impact the supply chain, says Beaumariage.
“We’re already seeing it,” he says. “All of those factors will make affordable deals not pencil, especially with rising rates unless they have some sort of additional soft debt or equity going into them. The lack of available talent in employees and staffing across the broader industry is going to become more of a problem because more and more companies are looking to get into the space.”
Another issue is the degree to which inflation causes an increase in operating expenses at the property level, adds Lument’s Weissman.
“Labor and insurance costs were significantly higher in 2021 than the year before,” he says. “The way HUD calculates AMI numbers lags quite a bit from when incomes actually start to increase. There’s some concern that we may see relatively flat income numbers because they are looking back to the heart of the pandemic as they calculate new AMIs. At the same time, we have significant increases in costs of operating properties.”
While industry leaders are eager to see Build Back Better enacted, there’s still some wariness that the market will have to go through an initial adjustment period. The proposals have included increases to the annual 9% LIHTC allocation, a reduction of the 50% bond financing threshold to 25%, and other changes.
“The big question is whether the Build Back Better plan passes and what kind of resources come into affordable housing,” Sheth says. “It could increase the supply of credits faster than the demand for credits will keep up, so there may be a little disruption. I would say there are more positives than negatives. And, even the negatives are about how is the market going to adjust to new resources to hopefully build many, many more units.”
If Build Back Better was done in conjunction with an increase in corporate tax rates, that would help mitigate some of the effect of additional credits that hit the market and help offset some of the likely reduction in tax credit pricing that would result from a huge increase in credits hitting the market, says Weissman.
A drop in yields could also bring in new or returning investors into the market.
Another potential disruptor is the ending of the eviction moratorium around the country, notes the Fitch Ratings report. During the pandemic, the performance of the multifamily housing industry has been supported by federal stimulus payments, expanded unemployment benefits, and other programs.
“The cessation of the foreclosure and eviction moratoriums necessitated during the onset of the pandemic, coupled with the end of federal unemployment aid, may lead to increased delinquencies and evictions in 2022, particularly for lower-income tenants,” says Fitch.
New Models
On a more positive note, finance executives say they are encouraged by new affordable housing programs that have emerged.
Alice Carr, head of community development banking at JPMorgan Chase, points to the California Housing Accelerator program by the state Department of Housing and Community Development (HCD) as one example. The 2021-22 state budget appropriated $1.6 billion to fund the new program with monies from the Coronavirus State Fiscal Recovery Fund with the intent of reducing the backlog of projects in the affordable housing pipeline. The funds will help projects that have received funding under other HCD programs but have been unable to access tax-exempt bonds or LIHTCs.
“It takes a whole different way of thinking about risk,” Carr says. “You don’t have the [housing tax] credits, so we’re seeing loan to values on construction loans at 300% and 800%. That doesn’t go over well at a credit committee, but we’re getting there, and we’re going to do as much of that business as we can, and our team is working with the state to iron out some of the legal components.”
Wells Fargo also is planning to be involved projects utilizing the California Housing Accelerator program.
In addition, Chase is working with the New York City Housing Authority to renovate two large public housing developments without LIHTCs. Instead, the deals will be financed with historic tax credit equity and construction loans.
Alternative construction methods is another area to watch, with industry seeing advancements around modular housing, notes Carr. “We’ve seen innovative and different types of modular development getting done,” she says.
