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The outlook for affordable housing development in 2021 is a positive one, with government entities showing strong support for increasing affordable housing availability. Now investors, developers and lenders should meet the charge, too. Insights from the experts follow.

Even before the COVID-19 pandemic, the United States had a housing affordability crisis. Today, the nation faces a shortage of approximately 7 million affordable rental homes1 for people whose household incomes are at or below the poverty line. In the face of this deepening crisis, we have seen growing momentum in terms of policy initiatives and federal funding to address housing affordability.

Stacie Nekus, team leader for KeyBank’s Equity Growth Initiative, convened a panel of affordable housing experts to discuss developments in early 2021. Participants were Buzz Roberts, President / Chief Executive Officer, National Association of Affordable Housing Lenders (NAHL); Emily Cadik, Executive Director, Affordable Housing Tax Credit Coalition (AHTCC) and Al Beaumariage, National Program Manager/Senior Vice President-Affordable Housing, KeyBank Real Estate Capital (KBREC).

Major federal funding increases

As AHTCC’s Emily Cadik pointed out, affordable housing is having a moment that advocates hope will continue. On December 27, 2020, President Trump signed a bipartisan year-end legislative package including a long-awaited minimum 4% low-income housing tax credit (LIHTC) rate for affordable housing acquisitions, a disaster housing credit allocation, $25 billion in emergency rental assistance and other measures. Under our new presidential administration with a change in Senate balance, affordable housing remains a key priority. In March 2021, Congress passed the American Rescue Plan, which provides over $40 billion for housing.

“There has been more than $70 billion put toward housing in just the past few months, which is a sad testament to the need and the way the crisis has grown in the past year,” said Cadik. “But it shows there is growing recognition among policymakers that affordable housing is essential.”

Affordable housing credit improvement act

One of the most useful policy tools for spurring affordable housing development is the federal low-income housing tax credit (LIHTC), the dollar-for-dollar tax credits that real estate developers and investors can claim to help finance affordable housing projects. The Biden Administration has proposed increasing investment in LIHTC as part of infrastructure legislation. With bipartisan support of Congress, the pending reintroduction of Affordable Housing Credit Improvement Act could help to further expand tax credits available.

"States from coast to coast are also pushing for increased access to private activity bonds (PABs), which are used together with the LIHTC and have been in higher demand in response to growing affordable housing needs. While the shortage of PABs was once viewed as a big-city, “blue state” concern, such states as South Carolina, Georgia and Tennessee are increasingly in need of more PABs as well," said Cadik.

Proposed changes to LIHTC income test

Cadik was among those who testified at a recent Congressional hearing about proposed IRS regulations concerning LIHTCs that some advocates argue would inhibit affordable housing development. AHTCC was among organizations advocating to retain the current income averaging approach, enacted in 2018, that provides flexibility for developers and broadens the range of tenants that can benefit from LIHTCs.

As Cadik explained, a key concern about the proposed rules is that a single unit with an unqualified tenant could threaten all the tax credits applicable to an affordable housing project. “The IRS regulations essentially introduced more risk into the income-averaging set-aside,” said Cadik. “It’s not just a future issue, but created an immediate reaction. We’re starting to see income-averaged developments already underway that are threatened by the proposed rules.”

Community Reinvestment Act reform

NAHL’s Buzz Roberts discussed the current state of Community Reinvestment Act (CRA) reform that has been underway since 2017 as the Federal Reserve, the Office of the Controller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) put forth different and somewhat conflicting proposals. However, progress may be possible with changes in leadership at the OCC.

“The election of the Biden Administration opens the door to the possibility that the OCC will be more aligned with where the FDIC and the Federal Reserve want to go,” said Roberts. “Getting even one agency to come up with a CRA rule is hard and time-consuming. To get three agencies on the same page is harder. The good news is that they’ve all been thinking about this for a long time.”

Also, in September 2020, the Federal Reserve issued an Advanced Notice of Proposed Rulemaking (ANPR) raising the question of whether the CRA should explicitly address race. Racial equity is one of four organizational principles for the Biden Administration, noted Roberts.

Aside from the Biden Administration’s focus, the CRA requires modernization. Many banks, including KeyBank, engage in mortgage lending or other CRA-related activities beyond their branch footprints – activities that the CRA does not recognize. Others have growing digital businesses.

“Are there reasons to limit recognition for a bank’s activities anywhere in the country?” questioned Roberts. “That’s going to be a big question for the agencies to determine.”

GSEs continue to support affordable housing

Affordability continues to be central to the mission of government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac, with mission-driven business required to comprise at least 50% of total volume for each GSE and 20% of volume must come from more deeply affordable housing, according to KeyBank’s Al Beaumariage. Loan purchase caps for Fannie Mae and Freddie Mac are $70 billion each in 2021, or $17.5 billion per quarter, whereas the 2020 caps were $20 billion per quarter for $100 billion over five quarters beginning in fourth quarter 2019.

Beaumariage anticipates a growing GSE focus on workforce housing in 2021, with Freddie Mac providing forward commitments for construction of workforce or affordable housing that lack Section 42 credits. Fannie Mae has created a “self-initiative affordability” product for current workforce housing and new construction, also in the form of forward commitments. “It’s an exciting program,” said Beaumariage. “We’re expecting these programs to be very competitive and to do very well.”

HUD focuses on accelerating affordable housing

Beaumariage reported that the US Department of Housing and Urban Development’s (HUD) Multifamily Accelerated Processing (MAP) production increased dramatically from about $10.8 billion in FY19 to $17.8 billion in FY20 – a 65% increase – and the pace is continuing. MAP production with an LIHTC component was up 16% in the same period, from $2.4 billion in FY19 to $2.8 billion in FY20.

“We’re happy about HUD’s announcement last week that they will prioritize all affordable transactions over any of their market-rate transactions,” said Beaumariage.

HUD just released a new MAP guide and now allows refinancing of properties less than three years old – projects previously prohibited unless a property was constructed with Davis-Bacon wage rates. Beaumariage noted that KeyBank has been very actively working with clients to position properties for FHA take-out refinancing using the bank’s balance sheet products.

“HUD does take a bit longer on the processing side, but interest rates are second to none, so it’s well worth the wait,” said Beaumariage. “We’re also seeing increased flexibility in the use of equity bridge loans. We are quite confident that the new revisions will improve the equity pricing that a developer can realize on a HUD deal going forward.”

Bridge loan proceeds can now be used to reduce the equity installment requirement, which remains at 20% of gross equity, with added flexibility for any bridge lender. Modified rules concerning initial operating deficits and working capital funding for affordable housing are expected to decrease the amount of cash needed for construction loan closing – a challenge market wide.

“It’s no secret that the Biden Administration is prioritizing affordable housing,” said Beaumariage. “We expect to see HUD programs becoming more competitive with other financing sources."

KeyBank propels affordable housing

The outlook for affordable housing in 2021 is a positive one, with government entities showing strong support for increasing affordable housing availability. Now investors, developers and lenders should meet the charge, too.

KeyBank Community Lending and Investment is one of the nation’s leading investors in affordable housing. Clients rely on KeyBank’s integrated national platform and deep experience putting together innovative and complex financing solutions in partnership with for-profit, nonprofit and government agencies. For more information, reach out to Stacie Nekus and Al Beaumariage.

This document is designed to provide general information only and is not comprehensive nor is it legal, accounting, or tax advice. Credit products are subject to collateral and/or credit approval, terms, conditions, and availability and subject to change. Key.com is a federally registered service mark of KeyCorp. ©2021 KeyCorp. All rights reserved. Banking products and services are offered by KeyBank N.A. Member FDIC.