The Obama administration released it’s FY 2012 budget proposal. Among the most drastic reductions in multifamily affordable housing programs is a proposed elimination of the section 538 multifamily guaranteed loan program. The Terminations, Reductions and Savings report cited the rising cost of the program resulting from an increased default rate:

However, 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

The problems in the 538 program surfaced several months ago in the USDA’s budget submissions. A December CARH email newsletter called attention to the curious rise in the USDA Rural Development Section 538 Guaranteed Rural Rental Housing program loan guarantee score:

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.

The ten-fold increase in defaults was, in-part, responsible for a $13,625,000 increase in requested loan subsidies for guaranteed multi-family housing, an increase explained in the 2011 Office of Budget and Program Analysis explanatory notes:

The proposed increase supports the estimated loan obligations associated with the requested loan level in FY 2011. The increase in subsidy rate is a result of annual technical assumptions, increase in default rates, and interest changes as forecasted in the President’s 2011 budget economic assumptions.

Looking at the 2011 budget assumptions, the subsidy Rate increased from 1.15 in 2010 to 9.69 in 2011 with the program level remaining essentially constant. Underlying this rate change was an increase in the default rate from 1.49 to 11.73 (taken from the 2010 and 2011 subsidy estimates).


A recent state-level audit conducted by the Michigan Office of the Auditor General concluded that the Michigan State Housing Development Authority’s (MSHDA) LIHTC allocation policies were in violation of state and federal law. The audit, conducted from July 2007 through August 2009, found that, “MSHDA’s process for allocation of federal LIHTCs did not give preference to projects serving the lowest income tenants and projects obligated to serving qualified tenants for the longest period of time” and, as a result, “MSHDA violated both federal and State statutes and disadvantaged some applicants.”

In particular, the audit uncovered that MSHDA was allocating credits based on a “random lottery”:

The random lottery was used to select projects for the allocation and award of credits, after applying an initial threshold review. However, through the random lottery process, all projects meeting a minimum score were afforded an equal chance of being awarded the LIHTC. Consideration or preference was not made for the higher scoring projects or for those serving the lowest income tenants and projects obligated to serve qualified tenants for the longest period of time.

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The Maryland Department of Housing and Community Development (DHCD) announced its fall 2010 competitive funding round winners. The fall funding round saw 25 applications requesting $40 million in Rental Housing Funds (RHF) and $25 million in LIHTC, with five projects receiving a total of $16 million in RHF and $3.68 million in tax credits.

LIHTC Over Subscription Rate: 579%

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Housing Think requested the scoring sheet and tax credit applications from DHCD but the request was denied. Gary W. Desper, Maryland Assistant Attorney General, informed Housing Think that the documents requested were subject to exemptions in the Maryland Public Information Act (Md. Code Ann., State Gov’t §§10-611 through 628). According to Mr. Desper, the scoring sheet falls under a “deliberative process” exemption (§10-618(b)) “as intra-agency documents that reveal the deliberative process of the Department.”

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DOVER — This past Friday, The Delaware State Housing Authority held a public hearing to discuss the 2011 Low Income Housing Tax Credit Qualified Allocation Plan. In what Cindy Deakyne, DSHA Housing Asset Manager, described as a “most lively” meeting, members of the public expressed their concerns over a number of changes in the state’s QAP.

Among the changes that drew the largest attention was a modification to the State’s Preservation Rehabilitation Pool. Critics of the modification pointed to the inclusion of a point category for projects whose hard costs exceed $50,000.

David Layfield of Green Street Housing, a Delaware affordable housing developer (and co-founder of Housing Think) expressed his concerns that assessing this cost in the review process would prove timely and costly for DSHA and developers, “How do you measure that [hard costs?]… How is this substantiated? The CNA requirements would have to be revamped and it appears that they have not”. He also noted that the additional availability of 7 points to projects meeting this threshold automatically put new construction projects at a disadvantage in the non-profit pool.

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With the debate over extending the Bush-era tax cuts coming to a close, Washington has already set it’s sites on broader tax policy issues. A recent New York Times article revealed that a tax code overhaul could become a major component of the President’s tax plans in the coming two years. The suggestion follows recent comments made by the President:

I’ll have the opportunity to make the case that we’ve got to have tax reform, that we’ve got to simplify the system, that we do have to cut spending where it makes sense. But we’re also going to have to make sure that we’ve got a tax code that is fair and that looks after the interest of middle-class Americans and continues to grow the economy.

The President’s comments are supported by a slew of recent reports on the national debt and tax policy. A key component of all three reports is the elimination or signifiant reduction of tax expenditures. Expenditures that all reports indicate account for roughly $1 trillion dollars in lost tax revenue.

The Bipartisan Policy Center’s Debt Reduction Task Force released a report on November, 16th which suggest, “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 which calls for, “Eliminating specific expenditures [to] improve efficiency while simplifying the tax code.”

Most recently, the The National Commission on Fiscal Responsibility and Reform 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.”

While the reports agree on tax expenditure reduction, they disagree on the scope of the reform. The Commission on Fiscal Responsibility offers two scenarios of expenditure reduction, a “zero-plan” that could, “reduce income tax rates to as low as 8%, 14%, and 23%”, and a less extreme reduction allowing for some remaining tax expenditures, “Even after adding back a number of larger tax expenditures, rates would still remain significantly lower than under current law.”

The Bipartisan Policy Center distinguishes between needless expenditures and those that offer an economic benefit, “While some tax expenditures promote important social and economic goals, others have little economic justification”. This is an important distinction for those in the Affordable Housing industry who fear a complete elimination of tax expenditures could mean the end of the LIHTC program.

“We are certainly following the issue very closely”, said Peter Lawrence, senior policy director for Enterprise Community Partners, Inc, “We have made the point of communicating [to the President and Congress] the Low Income Housing Tax Credit program’s 25-year track record of success.”

Both Mr. Lawrence and the reports see the alternative to LIHTC as the expansion of housing vouchers or a new grant program all-together. These limited options make the demise of the tax credit program seem less likely, “We are very skeptical that congress would decide, in the context of discussion on the national debt, to fund an 8 billion dollar grant program.”

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A Texas court decision involving discrimination in the allocation of tax credits is the latest chapter in a national conversation on LIHTC allocation policies

This September, a court found in favor of the plaintiff’s prima facie case in The Inclusive Communities Project, Inc. v. Texas Department of Housing and Community Affairs (N.D. Tex. 2010).  The Inclusive Communities Project, a Dallas-based organization that helps low income individuals find affordable housing, alleged that the Texas Department of Housing and Community Affairs (TDHCA) perpetuated racial segregation and discrimination through their Low Income Housing Tax Credit allocation policies.

TDHCA acknowledged the statistical findings of segregation but argued that § 42 gave them a mitigating “compelling government interest”. TDHCA cited the mandate in § 42, “to give preference to projects that serve the lowest income tenants and that are located in HUD-designated ‘qualified census tracts’”.  The court denied summary judgment on this defense, claiming the, “Defendants have failed to establish that TDHCA cannot comply with § 42 in a way that has less discriminatory impact on the community” and citing that by TDHCA’s own admission, there is no conflict between § 42 and the Fair Housing Act.

This is not the first case of its kind in recent years. In 2003 a group of four public interest organizations challenged the validity of New Jersey’s Qualified Action Plan. On appeal (In RE: Adoption of the 2003 Low Income Housing Tax Credit Qualified Allocation Plan) a judge ruled in favor of the state, finding that the state satisfied it’s fair housing duties given its agenda under section 42 of the tax code, “[the fair housing duties] must be defined congruent with its [New Jersey Housing Mortgage Finance Agency's] express statutory powers and far-reaching housing agenda as defined under federal and state law. See 26 U.S.C.A. §42…”

While the subsequent legal proceedings in Texas have potentially significant implications on tax credit allocation policy within the state, this case is part of a broader national conversation on the roll of allocation policies in perpetuating segregation and discrimination.

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While the Bush era tax cuts have dominated recent media coverage, a key piece of the broader tax legislation (released by Senate Finance Committee chairman Max Baucus, D-Mont.) known colloquially as the Tax Extenders bill, has quickly become the political issue of the moment for the affordable housing industry.

In a November 15th press release, Enterprise Community Investment urged the senate, “to take up and pass the Job Creation and Tax Cuts Act of 2010 (S. 3793)”. The release notes four “essential” provisions that will either extend or renew authorization on the following affordable housing programs: The Gulf Opportunity Zone Low Income Housing Tax Credit (LIHTC) Placed-in-Service Deadline Extension, LIHTC Exchange Program, New Markets Tax Credit (NMTC), and the National Housing Trust Fund.

In the release and in support of the programs, Enterprise cited the 6,000 affordable homes, over 14,000 related jobs and $1 billion in construction tied to the Gulf Opportunity Zone, and $18 billion in private capital, 400,000 new jobs and assistance to more than 15,000 businesses tied to the New Market Tax Credit program.

The fate of the bill continues to evolve at a rapid pace. On December 3rd, Peter Lawrence, senior policy director for Enterprise Community Partners, Inc, in an article published on housingfinance.com, painted an uncertain future for the bill, “There have been some positive developments, but at the same time there are marked differences between the parties on the issue of taxes.” Today, however, he was “modestly hopeful” that the tax legislation will pass, citing “numerous reports” that negotiations are proceeding in a positive direction.

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Re-posted from the December, 3rd Appraisal Buzz Newsletter

By Peter Wallison and Edward Pinto

The administration has quietly shifted most federal high-risk mortgage initiatives to the government’s original subprime lender.

It is hard to believe, but it looks like the government will soon use the taxpayers’ checkbook again to create a vast market for mortgages with low or no down payments and for overstretched borrowers with blemished credit. As in the period leading to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size. When it collapses, housing prices will drop and a financial crisis will ensue. And, once again, the taxpayers will have to bear the costs.

In doing this, Congress is repeating the same policy mistake it made in 1992. Back then, it mandated that Fannie Mae and Freddie Mac compete with the Federal Housing Administration (FHA) for high-risk loans. Unhappily for both their shareholders and the taxpayers, Fannie and Freddie won that battle.

Now the Dodd-Frank Act, which imposed far-reaching new regulation on the financial system after the meltdown, allows the administration to substitute the FHA for Fannie and Freddie as the principal and essentially unlimited buyer of low-quality home mortgages. There is little doubt what will happen then.

Since the federal takeover of Fannie and Freddie in 2008, the government-sponsored enterprises’ (GSEs’) regulator has limited their purchases to higher-quality mortgages. Affordable housing requirements Congress adopted in 1992 and the Department of Housing and Urban Development (HUD) administered until 2008 have been relaxed. These had required Fannie and Freddie to buy the low-quality mortgages that ultimately drove them into insolvency and will cause enormous losses for the taxpayers.

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Two recent SEC proposed rules have sparked a debate over the role of the Commission in regulating housing bonds.


In October, the SEC proposed two rules to enforce provisions of the Dodd-Frank act, which mandates increased transparency requirements for securitizers of asset-backed securities (ABS) and the ratings agencies reporting on ABS.

Specifically, the rules would:

require securitizers of asset-backed securities to disclose fulfilled and unfulfilled repurchase requests across all transactions

require any issuer registering the offer and sale of an asset-backed security…to perform a review of the assets underlying the ABS

require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer’s review of the assets

NCSHA Response

In response to the proposed rules and the SEC’s call for comments, the National Council of State Housing Agencies (NCSHA), an advocacy group that represents state housing agencies, issued a statement calling for HFA exemption from the proposed rules:
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Housing market, available financing options, and active development community cited as causes for high level of Low Income Housing Tax Credit (LIHTC) oversubscription.

This is the inaugural publication of Housing Think’s annual Most Oversubscribed LIHTC Programs. This list is not intended as a comprehensive study but rather a snapshot of the funding activity in the LIHTC program from state to state.

The list was compiled by taking a look at each state’s most recent and complete data for 9% competitive low income housing tax credits. Given the timing of this post, most states were only able to offer a complete set of data for 2009, with several exceptions (providing 2010 data). Furthermore, most states reported figures in dollars applied for and dollars allocated, however, several states had more complete information on number of applications and allocations. With this in mind, an initial round of data collection was conducted and the states were ranked from most oversubscribed to least. A subsequent round of fact checking followed by phone calls to both HFAs and developers resulted in the list and commentary below.

The List:

State: Florida
Oversubscription Rate: 509%
Allocations: $42,961,326
Applications: $261.894,591
Year: 2009

State: Rhode Island
Oversubscription Rate: 467%
Allocations: $1,613,119
Applications: $9,147,478
Year: 2009

State: Connecticut
Oversubscription Rate: 362%
Allocations: $8,100,000
Applications: $37,400,000
Year: 2009

State: Illinois
Oversubscription Rate: 359%
Allocations: $27,248,276
Applications: $125,021,429
Year: 2009

State: Colorado
Oversubscription Rate: 322%
Allocations: $12,569,127
Applications: $53,054,860
Year: 2009

Behind the Numbers:

HFA officials and developers in several states cited the headwinds faced by developers (both conventional and affordable) as a force driving higher than usual applications. In Rhode Island and New Hampshire (which came in at sixth most oversubscribed) state officials pointed to a difficult financing environment leading conventional developers to seek alternative and additional modes of funding. An official in Rhode Island revealed that application numbers are up from the previous two years (6 million in 2007 and 5.4 million in 2008): “as a result of market forces, people are looking for more funding for their projects”. A state official in NH noted that the number of applications compared to allocations is usually closer to two to one but that the “particularly competitive year” could be attributed in part to a glut of “stalled condo projects” seeking alternative sources of financing through the LIHTC program.

In Colorado Jan Hawn, CFO of Care Housing noted the same challenging financial conditions: “On the investor side, the pipeline has been narrow and projects have been slow to get off the ground”, but also cited high demand for affordable housing as a cause of the high oversubscription rate: “unmet needs [in Colorado] lead to a number of developers filing applications.” Rachel Basye, Director of Marketing and Strategic Development for the Colorado Housing Finance Authority offered a simpler explanation for the states historically high level of oversubscription, “ In Colorado the LIHTC program is currently the main source of funding for affordable housing”, pointing out other states have additional appropriations and funding programs.

Bob Palmer, Policy Director for Housing Action Illinois cites an active developer community in Illinois as driving the high level of competition “we have a very active developer community both in the non-profit and for profit sectors”. He went on to point out particularly strong constituencies for supportive housing communities, housing for persons with mental illnesses, and senior housing developments. He also cited Illinois’ historically poor record when it comes to providing “independent options” for mental health patients, and noted that a recent court ruling could spur further development of housing for mental health patients. A state official in Illinois also cited “a strong development community” as well as an “organized and objective process” drawing in developers from out of state.

Officials from Florida and Connecticut were unavailable for commentary at the time of writing.