Sponsored by Bellwether Enterprise
2017 has been a tumultuous yet exciting year for the affordable housing sector—impacting communities of all sizes across all markets nationwide. Recent changes to tax credit rates have spurred competition and propelled the market to develop new and improved ways to meet the rapidly growing need for affordable housing. These changes combined with proposed budget cuts from both the Senate and House of Representatives further position the market for an uncertain year ahead.
A Year of Unprecedented Changes
Last year’s presidential election created a wave of uncertainty in the affordable housing market, as tax credit pricing tumbled in its immediate aftermath. Though pricing stabilized toward the middle of the year, many affordable housing transactions were forced to change their financing sources and alter project plans.
Additionally, these tax credit changes sparked competition and growth in the debt and equity space, while the recent Federal Housing Finance Agency (FHFA) mandate and cap limits for Fannie Mae and Freddie Mac created competitive pricing for affordable, workforce, and green housing transactions. Since such transactions don’t count against the implemented cap and are a focal point for Fannie Mae and Freddie Mac’s annual scorecards, both agencies expanded their offerings and focused on increasing product innovation to keep up with growing demand.
A Shift in the Outlook
As we approached 2018, the outlook for affordable housing seemed promising. Both Fannie Mae and Freddie Mac were once again purchasing low-income housing tax credits (LIHTC) as investors, and the Federal Housing Administration (FHA) and United States Department of Agriculture (USDA) were continuing to provide much needed liquidity for affordable transactions while maintaining a strong investor appetite—leading to interest rates continuing to lower.
However, in late November the House of Representatives passed its latest tax reform bill, jeopardizing the positive outlook for 2018 and creating a new wave of uncertainty.
An Upcoming Year of Uncertainty
As it currently stands, the House bill eliminates private-activity bonds and the associated four percent LIHTCs, historic tax credits, and new market tax credits—all of which throw the current affordable housing market into disarray and translate to a devastating loss of over one million new and rehabilitated affordable units over the next few years.
Although the Senate bill maintains all of these programs, both bills recommend a 20 percent corporate tax rate, which has the potential to reduce demand and pricing for LIHTCs, thereby reducing further equity funds in affordable housing transactions. This will exacerbate funding gaps already seen in affordable transactions, putting more pressure on developers to find soft funds, carry more debt, and find alternative financing sources.
As the affordable housing landscape continues to evolve, 2018 has the potential to introduce even more uncertainties to the market. Factoring in potential challenges, agencies must continue to expand offerings and incentives to ensure that developers are not prompted to pursue alternative development options. With demand for affordable and workforce housing continuing to grow, this is vital to ensuring our nation’s most vulnerable communities have a place to call home.
Phil Melton is executive vice president, national director of affordable housing & FHA lending. During his 20-year career, Phil has implement new processes and developed crucial relationships with Freddie Mac, Fannie Mae and FHA, originating over $3.7 billion in direct and coordinated products, leading BWE’s Affordable Housing Group.
Learn more at www.bellwetherenterprise.com.