A favorite tactic for zealots on the right and the left is to try to disguise their ideology and values as economic necessity.[ii]

Financial pressures seem to be leading the U.S. to make a fundamental change in the way the government does business.  The Great Recession, beginning late 2007 and presumably ending in 2009 , created a set of massive government initiatives.  We are familiar with the TARP (or the bank rescue) and ARRA (or stimulus) and various other small business, Medicaid, teacher and local government rescue efforts.  These efforts, coupled with the Obama Administration’s expansion of Medicare, created a shift in budget priorities.  Intentional or not, new programs create new constituencies.  Once spending starts, businesses and local governments invest precious resources to wade through typically complex federal programs.  With resources invested, pressure builds to maintain those programs.  This continuing pressure looks to some like a potential ongoing demand for massive federal spending.

The fiscal year 2010 federal budget was in excess of three trillion dollars with a deficit of about $1.3 trillion.[iii]  The fiscal year 2011 budget was even larger, though the deficit projections shrunk slightly.[iv]  These deficits are of historic significance both as a percentage of gross domestic products (“GDP”) as well as a total dollar number.  Indeed, these budget deficits as a percentage of GDP rival deficits the U.S. ran during World War II.[v]  So we see an economic downturn, the likes of which we haven’t seen since the 1930s, and government spending response, the likes of which we haven’t seen since the early 1940s.  In addition to the sheer magnitude of this spending, and with no hint of a financial problem, concerns begin to rise about the United States’ continued ability to borrow.

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Potential Problems with Privatization

In the past two weeks, senior republicans in the House and Senate have introduced comprehensive legislation to reform the nation’s housing finance system.  On October 31, House Committee on Financial Services’ member Scott Garrett (R-NJ) released proposed legislation to replace the current government-sponsored enterprise (GSE) model with a private mortgage-backed securities (MBS) market established under a regulatory framework based on a clear-cut, risk-based pricing system and without a government guarantee.  On November 9, Senate Banking, Housing and Urban Affairs Senior Senator Bob Corker (R-TN) introduced the Residential Mortgage Market Privatization and Standardization Act (S.1834), legislation to unwind the GSEs Fannie Mae and Freddie Mac and replace them with a private, forward-funded MBS market based on certain deliverability rules and technology established by the Federal Housing Finance Agency and banks, servicers, originators, GSEs, and mortgage investors.

While both bills are intended to reform and replace the current GSE MBS mortgage-finance model, only Senator Corker’s bill includes provisions to wind-down Fannie Mae and Freddie Mac.  The primary reason Representative Garrett’s proposal lacks “wind-down” provisions is the fact that the House Financial Services Committee has already passed 15 bills to wind-down different aspects of Fannie Mae and Freddie Mac’s current business that Representative Garrett, in his legislation, assumes to have been enacted.  The Democrat-controlled Senate Banking Committee has yet to mark up legislation that would impose a piecemeal or comprehensive measure to wind-down and overhaul the GSEs; Senator Corker’s legislation reflects that fact.

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Prospects for Increased Program Participation

On October 24, the Federal Housing Finance Agency (FHFA) announced that it will modify a number of borrower eligibility and lender participation requirements of Home Affordable Refinance Program (HARP) in an attempt to increase participation in the federal refinancing program.

photo courtesy of kevin dooley

HARP was implemented in 2009 in order to allow underwater homeowners the opportunity to refinance their home loans to lower mortgage interest rates. Many borrowers were eager to take advantage of the historically low rates, but were handicapped by their inability to meet some of the standards typically required to refinance, such as those that preclude borrowers with high loan-to-value loans. HARP was modeled – like several other Administration loss mitigation and foreclosure prevention programs started around the same time – to assist a very specific problem and class of homeowner. In HARP’s case, the target homeowner is one who wished to refinance his or her mortgage, but owes more on their mortgages than their individual homes are worth. Program administrators believed that underwater homeowners represented a substantial portion of the troubled homeowner populations, and that HARP would go a long way to stymie the accelerating wave of foreclosures flooding the nation’s housing market.

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On September 21 the Federal Reserve Board (FRB) announced that it would undertake further monetary stimulus in an attempt to revive the staggering economy. The FRB made the announcement after their Federal Open Market Committee (FOMC) meeting, one of eight such meetings held each year to set monetary policies in accordance with the FRB’s “dual mandate” of fostering maximum employment and price stability. To achieve these goals, the Board has a number of policy tools at their disposal, aimed at lowering long- and short-term real interest rates, rates on U.S. Treasury securities of varying maturities, and conventional mortgage rates. Since December 2008, the central bank has purchased $2.3 trillion in longer-term Treasury securities, agency debt, and mortgage-backed securities in an effort to lower longer-term interest rates, including mortgage rates.

Their most recent action is called “Operation Twist,” named after the dance “The Twist”, a dance popular when an operation of comparable mechanics was first (and last) utilized by the central bank. Under Operation Twist, the FRB will purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and sell an equal amount of Treasury securities with remaining maturities of 3 years or less by the end of June 2012. In their notes, the FRB says Operation Twist is an effort to push long-term interest rates down and encourage lending, especially when it comes to home loans. By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates.

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The debate over comprehensive tax reform and the implications of such reform on the tax credit program have been a long simmering issue in the affordable housing community. A flurry of reports on debt reduction over the past year and the debt-ceiling debate that followed have contributed to a fiscal and political environment that put many in the industry on watch.  So, with all of the attention this issue has been getting, what are the odds the low income housing tax credit is in any real danger from super-committee action? According to several industry experts, the answer appears to be low.

For starters, one of the committee’s co-chairs, Patty Murray (D – WA) is a staunch ally of affordable housing causes. “Patty Murray is very supportive of housing”, said Colleen Fisher, Executive Director of the Council on Affordable and Rural Housing. “John Kerry also has a very good track record… in general, amongst all members of the committee, there appears to be support on the tax credit side of things”.

Peter Lawrence, Senior Director of Public Policy & Government Affairs for Enterprise Community Partners, echoed Colleen’s sentiments, “Patty Murray has been a long standing champion of affordable housing and huge advocate for housing and community development.” He also mentioned Senator Kerry (D – MA) and Representative van Holland (D –MD) and Baccera (D – CA) as allies of the affordable housing cause.

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Part I in a series that will examine the congressional super committee and the Low Income Housing Tax Credit program

At several points during the debate over raising the debt ceiling, Washington appeared to be headed towards a “grand compromise”. Such a deal would have mixed broad ranging cuts, including cuts to entitlement programs, with revenue-increasing tax reform. While tax reform is certainly not a novel policy proposal, it is one that has gained traction in recent months as politicians and policy-wonks alike have searched for solutions to the country’s mounting debt-crisis. It is also a policy proposal that has drawn the attention of the affordable housing industry, as industry advocates fret over the future of the Low Income Housing Tax Credit in a world without tax-loopholes. The debt-deal that eventually emerged could hardly be labeled grand, but the possibility for a “grand bargain” including tax-reform remains alive, with responsibility for a deal shifted to the so-called “super committee”.

The call for tax-reform has been mounting for months. In November of 2010, the Bipartisan Policy Center’s Debt Reduction Task Force released a report that suggested, “An end to almost all tax expenditures to offset the costs of the much lower tax rates”. The President’s Economics Recovery Advisory Board released a report in August 2010 which called for, “Eliminating specific expenditures [to] improve efficiency while simplifying the tax code”, and perhaps most notable of the slew of reports, The National Commission on Fiscal Responsibility and Reform (more commonly referred to as the Bowles-Simpson report) called for a comprehensive tax reform that would, “Sharply reduce rates, broaden the base, simplify the tax code, and reduce the deficit by reducing the many ‘tax expenditures’—another name for spending through the tax code.” [click to continue…]


Questions arise surrounding the default rate as the affordable housing industry fights to keep the program alive

On February 14th we posted a story on the Obama administration’s proposed elimination of the USDA Rural Development’s 538 multifamily guaranteed loan program.  In the Terminations, Reductions and Savings report that accompanied the proposed budget the administration cited the rising cost of the program caused by a dramatic increase in the program’s default rate:

…the defaults in these programs have been much higher than initially projected, and the increase has happened quickly, making them more expensive than their direct loan counterparts. In addition, the direct loan programs have very low defaults, even though they tend to serve the much lower income residents/communities

We also noted that the program’s default troubles were not news to the affordable housing industry. A CARH email newsletter had noted the troubling rise in default rate several months earlier:

In the USDA’s budget submission, the score for FY2011 appropriations increased nearly ten-fold from FY2010… It appears that certain defaults in the Section 538 program, together with changes resulting from the lack of interest credit subsidy, have been cited as reasons for this scoring increase.

Looking at the 2011 budget assumptions, we found that the subsidy rate increased from 1.15 in 2010 to 9.69 in 2011, driven by an increase in the default rate from 1.49 to 11.73.

Affordable housing advocates have since rallied around the program in an effort not only to save the program for FY2012, but also to maintain it’s funding levels in FY2011. These efforts culminated in a recent joint letter to both the house and senate:

We would urge you as you complete consideration of the Fiscal Year 2011 budget to provide the necessary appropriations to allow for a program level of $129 million and then in Fiscal Year 2012, consider allowing fees to be charged, thus making the program revenue neutral.

While the efforts to maintain a funding level of $129 million in 2011 have proven unsuccessful (the recently released FY2011 CR, H.R. 1473 only provides $30 million), the fight to keep the program alive in FY2012 goes on. The letter, signed by numerous advocacy groups, strongly contests the default rate at the center of the program’s proposed elimination:

We refute both statements, particularly the default rate… The default rate and therefore the subsidy rate for the program are incorrect as relayed by the Administration in its FY 2011 and FY 2012 budgets. The Council for Affordable and Rural Housing (CARH) has numbers that can demonstrate the default rates to be less than the agency transmitted in their budget.

The Numbers

Further investigation revealed that the increase in default resulted from just five properties going into foreclosure. The table below shows the series of loans that went into default, grouped by repurchase date to indicate which loans belonged to each of the five properties:

Also included in the table is a calculation of the default rate. This calculation, taken by summing the default amounts, and dividing the sum by the total outstanding principle in the program, results in a default rate of 8% not 11.73%. “Somewhere there is a disconnect, said Rob Hall of Bonneville Multifamily Capital.  While concerned with this disconnect, he was more troubled by the way in which the numbers do not paint an accurate picture of the program’s cost, “Historically [this default rate] is not indicative of the deals getting done in the past 7 years.”

A different program

Underlying this belief is the fact that four of the five loans were originated in the early years of the program, before updated underwriting practices went into effect: “Four of the five deals were not tax credit properties. All the deals closed in the last 5,6,7 years have been LIHTC properties. They are completely different than deals from the early days of the program, which had virtually no equity.”

The changes Mr. Hall is referring to stem from a 2004 Notice of Funding Availability that awarded points to 538 loan applicants based on Loan to Value ratios and a 2005 NOFA that awarded points for Loan to Cost ratios.  Additionally, since 2005, Rural Development has pushed to have every 538 loan securitized by the Government National Mortgage Association (GNMA). Because GNMA requires a Loan to Cost Ratio of 50% or less, this move has been accompanied by subsequently tighter NOFA requirements. The combined effect of these policies is that the agency has been funding loans that have more equity, generally in the form of tax credits. Pictured left is a clip from the 2005 Notice of Funding Availability that details the debt to cost preference scheme.

Given the historically low rate of defaults in the LIHTC program, the correlation between 538 and tax credit deals has significant implications for the 538 program’s projected cost. A recent Ernst and Young report showed the default rate for the 23-year history of the program at .83%, and an annual rate of about .03%.

“Recent 538 deals should be nearly identical to that TC rate because they are all the same deals. The default rate is well below 1% for 538 loans originated in the last 5-7 years.”  Said Mr. Hall. He also noted while the loans that went into default should never have been underwritten, “the lenders behind these loans are no longer involved with the program and the officers who originated the loans are no longer with the program.” He continued, “Members of the industry just want the default rate to reflect this, something reasonable like 2-3%. The higher default rate is leading the budget people and congress to believe the program is very expensive when it is not. “

Symptom of broader ills

A recently released GAO audit on the USDA’s 514/515 Farm Labor housing program suggests that the questions surrounding the 538 program could be indicative of broader problems for the agency. In particular, the GAO found that, “Rural Development (RD) overestimated its credit subsidy costs for the fiscal year 2010 FLH loan cohort”, attributing this overestimate to errors in calculating the default rate, “we found that the primary driver of the change from the fiscal year 2010 credit subsidy estimate to the re-estimate was the default cost component and, more specifically, how this cost component was calculated.”

The report also provides insight into the mysterious credit subsidy rate formula: “Four cost components comprise the credit subsidy estimate for the FLH program: defaults, net of recoveries; interest; fees; and a component labeled “all other,” which includes prepayments.” Going on to explain exactly how the agency erred in their default rate calculation:

Specifically, when the fiscal year 2010 budget formulation credit subsidy estimate was calculated, the estimated default cost component was inflated by a prepayment estimate. That is, RD overstated the estimated default cost component to reflect the effect of prepayment. RD, includes the impact of prepayment estimates in the all other cost component

It remains unclear whether RD uses the same credit subsidy formula for the 538 program and whether mistakes in the same prepayment calculations could have contributed to an inflated 538 default rate.  However, some industry experts find it hard not to see similarities between the two issues, “My take is that if there is a problem with determining the subsidy rate for one program, there may be issues in determining rates for other programs.” , said Colleen Fisher, Executive Director of the Council for Affordable and Rural Housing (CARH),   “I think that it shows that there are some issues that need to be worked out between OMB people and the budget people and the program people that actually know what the story is.”

She went on to reiterate that the program today is a vastly different one than produced four of the five problem-properties, “The program is too important now and we have really seen it improve since its early days. From an infancy period where it had some issues, we can now use this program to do some good”,  she continued,   “I think if we can get through FY2011, I think we might be seeing the agency reviewing the subsidy rate, that’s all premised on the crazy FY2011.”


A January 13th article in the New York Times, entitled Auditors See Rising Defaults in Rural Loans, focused on the USDA’s mishandling of $133 million in budget authority for Rural Development’s Section 502 Single Family Housing Guaranteed Loan Program, granted through the American Recovery and Reinvestment Act of 2009.  The mishandling came to light through a December audit by the Office of the Inspector General.

The audit examined a sample of 100 loans, finding 28 loans where, “lenders had not fully complied with Federal regulations or Recovery Act directives in determining borrower eligibility.” The Audit found the USDA granted loans to applicants with annual income that exceeded program limits, to borrowers that did not meet repayment ability guidelines, those who had abiility to secure credit without a government loan guarantee, borrowers who already owned adequate homes, and borrowers who used government loan guarantees to purchase homes with swimming pools.

While the report does not contain a complete explanation of the causes behind the program failures, it points to “instances where agency policies and guidance were unclear, inadequate, or insufficient.” and alludes to future insights and recommendations to be contained in a future, final audit. The audit concluded the following:


In our judgment, the borrowers that did not meet repayment ability guidelines also have a higher risk of becoming delinquent and defaulting on their loans. Based on the sample results, we estimate that 27,206 loans (over 33 percent of the portfolio) may be ineligible with a projected total value of $4.0 billion.

So several months after our FOIA request, we have finally received a list of the 22 lenders behind the 28 loans mentioned in the audit:

document2011-03-11-095015 (dragged)

Article Image courtesy of Flickr user James Cridland


In cautious political climate, CRA reform takes center stage

The affordable housing industry is coming off a year in which the market for tax credits dramatically recovered from a period of capital flight.  However, a tumultuous political climate could place the LIHTC program under fire, as debt-reduction and tax code overhaul become increasingly salient issues.  Both the strength of the tax credit market, and the current political environment, have industry advocates cautious about asking for anything from the new congress.

At a recent industry conference, Bob Moss, Senior VP and Director of Origination at Boston Capital, cautioned, “I think you have to be really careful about asking for stuff [in this political climate]”. Joseph Hagan, President and CEO of the National Equity Fund, quickly chimed in, “I think we have to be very limited in what we ask for. Everyone in congress is saying they want to reduce the deficit.”

In spite of the cautious atmosphere, there is one proposal that has emerged as an industry-cause.  Given its cost neutrality and regulatory (as opposed to legislative) nature, CRA reform continues to have broad support from both industry and government players alike.

The Community Reinvestment Act (CRA) was enacted in 1977 to encourage commercial banks and saving associations to meet the needs of low- and moderate-income borrowers.   As the banking industry and lending practices have evolved, CRA regulations have periodically adapted to reflect those changes.

Most recently, with the bursting of the housing bubble and the economic downturn, CRA regulations were altered to cover lending activities included in the President’s Housing and Economic Recovery Act (HERA) as well as the Neighborhood Stabilization Program. However, questions remain over the program’s functionality.

Last July and August The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), The Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) held a series of public hearings on CRA reform.  While the perspectives and opinions offered during the series of four meetings varied greatly, there was general agreement that CRA assessment does not appropriately reflect the diffuse nature of modern lending practices.

CRA reform is a rare case where actors on multiple sides of the issue seem to agree, with both lenders and LIHTC developers pushing for an expansion of assessment areas. Matt Parks, director of investments for Discover Bank, had the following to say about potential reform:

As a CRA Officer of a Direct Bank with customers disbursed throughout the country, we are frequently challenged to invest in viable projects within a narrow assessment area that is shared with many large bank competitors.  Although we collaborate on many projects, we find ourselves focused on such a limited number of projects, but with significant investment objectives.  This narrow focus and unrealized supply, unfortunately does not find its way to viable projects in other areas of the country that could benefit greatly from the attention and available investment capital…. but, with a broader and well defined regional area, banks similar to mine can become more confident in extending the reach of our CRA investments.

Patrick Sheridan, Senior VP of Housing Development at Volunteers of America, echoed the sentiment that assessment areas should be expanded, “The largest problem with the CRA is that it doesn’t cover all areas of the country equally. If fixed, much of the country would see much more consistent investment.”

Sheridan and other members of the development community are optimistic about the reform process signaled by the government hearings.  “The CRA reform that was being talked about was not a legislative fix so it could be something that is feasible that could benefit the industry” said Sheridan, “Because it is a regulatory as opposed to legislative fix and it is budget neutral, it has a much higher likelihood of happening.”

“We’ve shifted our priorities”, said Joseph Hagan during the same panel in which he urged caution, “one of the things we are looking at is non-legislative issues, like CRA reform”. It remains to be seen, however, even with the consensus and cost neutrality, whether Washington and the affordable housing industry will see their priorities align.



The collapse of the housing market has forced non-profits to reconcile the opposing forces of increased need with increased competition for resources. The Blackbaud Index of Charitable Giving reported a 2.1% decrease in giving to human services organizations for the three months ending December 2010 compared to the same period in 2009.

However, at least two affordable housing organizations have maintained or expanded through the crisis. Habitat for Humanity International is widely recognized as a leader in the field. It has seen its contributions remain relatively flat during a time when many similar organizations faced major challenges, a fact that Habitat contributes to its past successes.

“Habitat’s track record of performance has mostly shielded it from the valleys of the economy,” said Derrick Morris, Capital Campaigns Manager at HFHI. “With fewer dollars to go around, donors are more intent on making their donations count.” Habitat’s reputation has also helped it gain financial support from the federal government’s Neighborhood Stabilization Program (NSP), funds that have largely gone to help more families in urban areas.

“We have seen a greater need in urban areas which hasn’t been an area of strength for us. NSP has allowed us to undertake bigger block projects to revitalize entire neighborhoods,” said Morris. “With any sort of government funding we have to make sure that the conditions of the grant allow us to maintain the integrity of programmatic impacts.”

A newer organization has found success by utilizing fundraising strategies more typical of for-profits. Builders of Hope was founded in 2006 by Nancy Murray, a former ad executive, to bring innovation to the field. Finding the donor pool skeptical of newcomers, Murray approached a segment largely ignored by non-profits: investors.

“One of our most reliable funding sources is giving circles”, said Murray. “We take a loan out from individuals to fund our projects and they in turn receive interest on the loan. Everybody wins from the investor to the homeowners.” The organization has paired this novel approach with an environmental focus by rehabbing existing homes with mostly donated materials.

“The average home produces about 35,000 pounds of debris when it is demolished,” explained Murray. “When we renovate, we keep about 70% of the house intact and rebuild with materials that would have otherwise gone into a landfill. You would be surprised at what some people throw out.” This process is how Builders of Hope has managed to keep its costs low for its homeowners and investors. None of its 220 homes have been sold for over $200,000.

While the housing crash and continued economic instability promise to pose on-going challenges for the non-profit sector, Habitat and Builders of Hope give the industry reason to believe that progress can still be made under difficult conditions.

About the author: Justin Lucas is currently serving as an AmeriCorps member with Our Towns Habitat for Humanity in Cornelius, North Carolina. Prior to moving to North Carolina, he worked for Habitat for Humanity of Northern Fox Valley where he started A Brush with Kindness, an exterior home repair program for low-income families in the northwest suburbs of Chicago. As an active participant in the non-profit community, Justin brings first-hand knowledge of the issues currently facing families in need of affordable housing.