Biden Administration Looks to Close Housing Supply Shortfall with its Housing Supply Action Plan

Published by Peter Lawrence on Wednesday, May 18, 2022 - 12:00am

The Biden administration on Monday announced its Housing Supply Action Plan, which is designed to close the housing supply shortfall in five years. This plan includes the creation and preservation of hundreds of thousands of affordable homes in the next three years. By addressing the significant and growing deficit of the availability of affordable homes, the administration also hopes to address the persistent problem of inflation, as housing costs make up about one-third of the main inflation indicator—the Bureau of Labor Statistics’ consumer price index, and the lack of affordable homes is significantly contributing to the rise of inflation.

The plan calls for four points of emphasis for affordable housing practitioners:

  1. Expansion of the low-income housing tax credit (LIHTC) and creation of the Neighborhood Homes Tax Credit (NHTC) used in concert with other local and federal funds will aid in the creation and preservation of affordable housing across the country,
  2. Final average income test guidance will be out by September, 
  3. Encouraging alignment of affordable housing subsidies, and
  4. Growing Fannie Mae’s and Freddie Mac’s LIHTC equity investments.

The following summary provides highlights of the main legislative and regulatory components of the plan.

Legislative: LIHTC and NHTC Proposals

The plan calls for investments in housing production and preservation, such as those outlined in the House reconciliation bill to increase the annual LIHTC allocation cap and create the NHTC.

The White House cited Novogradac analysis that the reconciliation bill could finance nearly 1 million affordable homes over 2022-2031. To achieve this goal, the House-passed reconciliation bill would do several things:

Furthermore, the plan cites the fiscal year (FY) 2023 Treasury Greenbook, which included a roughly $10 billion proposal to provide a 30% basis boost for bond-financed LIHTC properties that would be similar the boost already available for 9% LIHTC and as proposed in a similar provision of the Affordable Housing Credit Improvement Act (H.R. 2573/S. 1136), but would only apply in the case of new construction or substantial rehabilitation that adds net new affordable rental homes.

Additional federal resources are needed to create housing affordable for people with the lowest incomes. The reconciliation bill would also bolster funding for U.S. Department of Housing and Urban Development (HUD) programs that can be paired with the LIHTC to produce and preserve housing that is affordable to extremely-low-income renters. These programs include the Housing Trust Fund, the HOME Program, Housing Choice Vouchers and the Project Based Rental Assistance program. Together, the plan says that, these investments would produce and preserve hundreds of thousands of deeply affordable, rental housing homes across the country.

While the LIHTC incentive and previously mentioned programs will help create affordable housing for low-income renters, the NHTC would be an excellent resource to finance affordable homes for low- and middle-income homebuyers in distressed communities. The Neighborhood Homes Investment Act (H.R. 2143/S. 98), sponsored by Rep. Brian Higgins, D-New York, and Sen. Ben Cardin, D-Maryland, supported by the Biden administration and included in the pending reconciliation bill, would boost the supply of affordable homes for low- and moderate-income homebuyers who have struggled with the historically low availability of affordable, starter homes, according to the plan.

The plan also highlights the FY 2023 $35 billion HUD Housing Supply Fund  and $5 billion CDFI Fund Affordable Housing Supply Fund proposals for affordable housing production.

Legislative and Regulatory: American Rescue Plan’s State and Local Fiscal Recovery Funds

The American Rescue Plan’s State and Local Fiscal Recovery Funds (SLFRF) finances a broad range of affordable housing activities eligible for support from the development of multifamily or single-family affordable housing, preservation of existing affordable housing, permanent supportive housing, support for home repairs, homeownership assistance, rental subsidies, and other activities. On a White House briefing call, administration representatives said they were continuing to look at regulatory and legislative options to facilitate using SLFRFs as gap financing for LIHTC properties. Bills in the House and Senate to provide such a legislative fix were recently introduced.

Regulatory: Finalizing Average Income Test Regulations

Under the Housing Supply Action Plan, the Biden administration will also finalize the LIHTC average income test (AIT) regulations by the end of September, work to improve the alignment of federal funds to reduce transaction costs and duplications, and strengthen Fannie Mae and Freddie Mac financing for multifamily development and rehabilitation, which will likely include further increases in their LIHTC equity investments.

To qualify for the LIHTC incentive, developers must make commitments to create housing that is affordable to households that meet specific income thresholds. The AIT allows a developer to meet the same affordability goals by taking the average of the income of all units in the property as opposed to requiring all units to meet the same threshold. This test will allow LIHTC developments to house tenants at a variety of income levels from tenants that would otherwise not qualify for LIHTC housing (with incomes up to 80% of the area median income (AMI)) to households earning far below the 80% AMI LIHTC threshold. Again, by the end of September, the plan states that the U.S. Department of the Treasury will finalize regulations to provide needed guidance on the average income test. The LIHTC Working Group provided comments on the proposed regulations seeking important changes.

Other Regulatory Actions

Through this plan, the Biden administration also aims to improve the alignment of federal funds to reduce transaction costs and duplications, and accelerate development. Affordable housing development often requires more than one federal source of funding. The LIHTC incentive pairs well with various HUD programs. However, each funding source comes with its own set of rules and procedures. The Biden administration will make changes to harmonize federal requirements across programs as much as possible to encourage alignment of affordable housing subsidies. In fact, the White House, HUD, Treasury and the U.S. Department of Agriculture will convene state housing agencies to discuss best practices on the alignment of applications, reviews and funding.

Fannie Mae and Freddie Mac (the government sponsored enterprises, or GSEs) will increase their activity in the affordable housing sector by purchasing construction to permanent loans for affordable housing development, as well as by growing their LIHTC equity investments in the year ahead.

In their Duty to Serve plans, the GSEs released revised purchase targets for manufactured housing loans, which will foster greater liquidity for manufactured housing and increase delivery of manufactured homes. These single closing loans finance the construction of multifamily housing, in addition to serving as a permanent mortgage. This allows for the developers to only need one loan, which reduces interest rate risk, loan resizing risk and transaction costs.

These new benchmarks for the GSEs don’t include the work they have done over the past couple of years. Earlier this year, for example, the Federal Housing Finance Agency (FHFA) raised the maximum amount of multifamily loans Fannie Mae and Freddie Mac can purchase by 11%, to a total of $78 billion in 2022. And last September, Fannie Mae and Freddie Mac also increased their equity investment in LIHTC developments, resulting in investments in more than 7,000 apartments.

The GSEs anticipate further growing their LIHTC equity investments in the year ahead. And to ensure a strong focus on affordable housing and traditionally underserved markets, FHFA is requiring that at least 50% of the GSEs’ 2022 financing for multifamily housing be targeted to mission-driven affordable housing.

The plan also calls for other regulatory actions, including:

  • Partnering with the private sector to address supply chain disruptions for construction materials,
  • Reforming HUD's HOME Investment Partnerships Program regulations to further enhance it as a key tool for the production and preservation of affordable housing,
  • Supporting new and existing affordable housing in Indian Country, and preserving more than 10,000 HUD-assisted multifamily rental housing units in urban and rural America,
  • Incentivizing state and local governments that have reformed zoning and land-use policies with higher scores in certain federal grant awards, especially those in conjunction with infrastructure financing, and
  • Implementing new financing mechanisms to build and preserve more housing where there is a lack of affordable financing options, including manufactured housing, accessory dwelling units (ADUs), two-to-four unit properties, and multifamily buildings with less than 50 units.

Next steps

While the Housing Supply Action Plan would be among the most comprehensive all of government efforts to close the housing supply shortfall in history, and the regulatory components can be implemented by the administration without congressional action, the legislative components of the plan still very much depends on action from Congress. All eyes remain focused on the pending reconciliation bill, and in particular the Senate and Sen. Joe Manchin, D-West Virginia. Staff to staff negotiations are ongoing, but it is unclear if and when action on a revised reconciliation bill may advance. If the reconciliation does not advance, the next most likely legislative vehicle for LIHTC and NHTC proposals would be a year-end tax bill, which typically has included extensions of expired and expiring provisions. It is worth noting that the 12.5% increase in the 9% LIHTC annual allocations expired at the end of 2021 and clearly qualifies for consideration in such tax extenders legislation. Other tax proposals, such as lowering the bond financing threshold, may also be considered in such legislation.

Stay up-to-date on news and analysis on the LIHTC and other tax incentives with a subscription to the Novogradac Journal of Tax Credits.