Credit Losses Crushing Senior Low-Income Housing Developers

Last Wednesday, the Wall Street Journal ran an article that discussed the large institutional lenders and government sponsored entities (Fannie Mae and Freddie Mac) lack of participation in the federal government’s affordable housing tax credit program. As these companies have losses associated with write downs and credit related issues, their need for the tax credits to shield profits has diminished rapidly and thus causing a funding shortage for developers. The program was created in 1986 and allows for-profit and non-profit developers to receive 30-65% of the project’s cost via tax credits in return for agreeing to keep the rents affordable based upon a percentage of the area’s median income.


The liquidity crunch has spread and the market for investors who had committed to taking the credits have disappeared and many project have been stalled. Pricing for previously marketed housing credits have ranged from 95 cents to par (1.00) and have now dropped into the high seventies. Fannie Mae and Freddie Mac have been the largest investors over the years but based upon current market conditions, their falling equity values and concern about their viability might take them out of the market. While changes to the program may come via new legislation, this may not provide solutions fast enough. Considering the investment practices of overseas firms and governments in America, might they be able to purchase some tax credits and shelter some income from their activities in the U.S. and bridge some of the gap?


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