Housing Solutions: What Role Should Affordable Multifamily Housing Bonds Play?

Published on Thursday, September 11, 2014 - 12:00am

On July 23, a Bipartisan Policy Center (BPC) Housing Commission roundtable on affordable housing discussed a variety of proposals to expand the Low-Income Housing Tax Credit (LIHTC) program to address the significant need for affordable rental housing, and is set to continue discussing these issues, among others, at the BPC’s upcoming 2014 Housing Summit. Although the threat that tax reform poses to LIHTC still looms, the release of House Ways & Means Committee Chairman David Camp’s, R-Mich., tax reform discussion draft proposal committing to preserving the LIHTC has allowed the affordable housing community to pivot from a strictly defensive position and begin to consider proposals to increase LIHTC resources.

Affordable rental housing remains too scarce. As the Joint Center for Housing Studies at Harvard University report “America’s Rental Housing: Evolving Markets and Needs” recently found, “In 2011, 11.8 million renters with extremely low incomes (at or below 30 percent of area median income, or about $19,000 nationally) competed for just 6.9 million rental homes affordable at that income cutoff—a shortfall of 4.9 million units.” Because so many of those affordable rental homes are occupied by higher-income households, the Joint Center for Housing Studies noted in its 2014 State of the Nation’s Housing report that only 3.3 million units are affordable and available to extremely low-income renters.

To address this need, the BPC focused on two proposals. The first was the BPC’s proposal to increase LIHTC allocations by 50 percent. The second was President’s Barack Obama’s proposal to allow the conversion of private activity bonds (PABs) into LIHTCs. This proposal would allow states, at their own discretion, to increase their LIHTC authority by converting some of their private activity bond (PAB) volume cap into LIHTC allocations. The proposal would allow states to convert up to 8 percent of their PAB cap into 9 percent LIHTCs. For each $1,000 of bond cap “surrendered” by the state, it would receive an amount of 9 percent LIHTCs equivalent to $1,000 times the applicable percentage of the 4 percent LIHTC from December of the previous year.

Advocates of the PAB conversion proposal argue that because in recent years states have forgone a significant amount of the bond cap, the proposal would be an effective way to increase affordable rental housing. Those more skeptical of the proposal argue that it doesn’t significantly increase overall resources available for affordable rental housing because, as interest rates rise and the market for PAB recovers, more of the cap will be used in the future, leaving less unused cap for states to convert into LIHTC. The Council of Development Finance Agencies (CDFA) bond data from 2000-2013 and the recent trends in PAB markets may provide some context for this debate.

States aren’t required to utilize their entire bond cap every year. They are allowed to carry over unused PAB cap for three years. Every year, at least a few states abandon some of the PAB volume cap they have carried over because they are unable to utilize it before it expires. Before the passage of the Community Renewal Tax Relief Act of 2000, which enacted a one-time 40 percent increase in per-capita allocations (spread over two years) as well as established inflation adjustments, PAB volume cap wasn’t adjusted for inflation. As inflation rose over the years, the cap became worth less and less in real dollars. Therefore by 2000, few states had accumulated significant carryover, and as such, 45 states had no carryover abandoned. The financial crisis in 2008 and the collapse of the housing market significantly reduced states’ abilities to issue PABs. The CDFA’s data shows that the number of states with no carryover abandoned in 2008 was 33; in 2009 it was 23.


Blog Graph Number of States With No Carryover Abandoned, 2000-2013
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As the number of states with no carry over abandoned increased, the amount of carryover abandoned climbed upward as well. From a low of $107 million in 2000, carryover abandoned generally climbed at a moderate pace until 2009. In 2008, roughly $1 billion of carryover was abandoned.

The financial crisis made investors and lenders significantly more risk averse, reducing their demand for a variety of bond instruments. This, in turn, reduced states’ abilities to issue PABs. Again, referring to the CDFA’s PAB data, in 2009, the total amount of carryover abandoned was more than double the amount abandoned in 2008, with $2.3 billion carryover abandoned. Aside from a brief pause in 2012, carryover abandoned has continued to grow every year.

Advocates of the bond cap conversion proposal argue that the prevalence of abandoned cap means that the proposal would be utilizing mostly, if not entirely, unused cap.

Those more skeptical of the proposal argue that as the economy recovers, the current upward trend in bond cap utilization will reduce the amount of carryover available for conversion, reducing the potential effectiveness of the bond cap conversion. They also argue that because the amount of carryover abandoned varies by state, the bond conversion proposal would not increase the amount of LIHTC in each state fairly or consistently.


Blog Graph Volume of Private Activity Bond Cap Carryover Abandoned, 2000-2013
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These issues become clearer by focusing on multifamily housing bonds specifically. Multifamily housing bonds are PABs that are used to finance multifamily properties and they are often combined with the four percent LIHTC. Multifamily bond issuance grew fairly steadily between 2000 and 2007, according to CDFA, with roughly $3 billion in bonds issued in 2000 and approximately $6.25 billion issued in 2007. In 2008, however, multifamily bond issuance dropped by $4.6 billion, or 78 percent. Interest rates for taxable debt were so low during the crisis that, for investors, taxable debt was often more appealing than debt from multifamily bonds. This lack of appeal reduced the demand for multifamily housing PAB.

The market remained weak in 2009, but began to recover in 2010. The PAB data for 2000-2013 provided by the CDFA shows that multifamily housing bond issuance hit its post-crisis peak in 2012, with roughly $5 billion in bonds issued. This issuance total declined only slightly in 2013, falling to roughly $4.7 billion in bonds issued. This outcome suggests that while the multifamily housing bond market is recuperating, the road to recovery remains yet ahead.


Blog Graph Multifamily Housing Bond Issuance, 2000-2013
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Even though CDFA’s data indicates the total quantity of multifamily bonds issued steadily climbed upward between 2000 and 2007, the percentage of multifamily bonds out of total PABs issued actually began to decline as early as 2006. (The data for total PAB issuance was only available as far back as 2005.) This pattern suggests that while the multifamily bond market heated up prior to the financial crisis, the PAB market as a whole heated up even faster. When the financial crisis hit in 2008, multifamily bond issuance collapsed, further decreasing the percentage of multifamily housing bonds out of total PABs issued. The CDFA’s PAB data shows the percentage of multifamily housing bonds as a percentage of PABs held steady in 2009, began to recover in 2010, and accelerated dramatically in 2011. Housing bond issuance was at 54 percent of total PAB issuance in 2013.

Bond conversion proposal critics note that multifamily bonds are just one of many eligible uses for PABs to argue that bond conversion may not work as planned because in many cases, housing finance agencies (HFAs) are not the ones making decisions about PAB allocations among eligible uses within states.



Blog Graph Multifamily Housing Bond Issuance out of Total Private Activity Bond Issuance, 2005-2013
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It is also valuable to examine the percentage of total bond cap available used for multifamily housing. CDFA reports that from 2000 to 2013, the year with the highest percentage of multifamily housing bond issuance out of the total cap available was 2002. In 2002, 18.4 percent of the total cap available was issued for multifamily housing. The CDFA data shows that the percentage of multifamily housing generally declined at a moderate pace until 2007. The financial crisis hit the multifamily housing market hard, dropping the percentage of multifamily housing from about 12 percent in 2007 to 2 and a half percent in 2008. The percentages began to slowly rise in 2010. This growth was partially because of the housing market recovery, and partially because specific provisions of the Housing and Economic Recovery Act (HERA) of 2008 expired. HERA added $11 billion in extra housing bond volume cap in 2009 that could be carried over to 2010, increasing the total amount of bond volume cap available, thus pushing down the percentage of the total cap available that was issued as multifamily housing bonds. When the additional housing cap expired, the percentage of multifamily bonds rose.


Blog Graph Multifamily Housing Bond Issuance out of Total Private Activity Bond Cap Available, 2000-2013
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Finally, it is useful to examine the CDFA’s data on a state by state level. Ranking the states by average yearly multifamily housing PAB issuance from 2011 to 2013 reveals some interesting trends. For example, while South Carolina and Hawaii haven’t historically been among the largest issuers of multifamily housing PABs, in 2011 and 2013 their yearly average issuance put them at seventh and eighth, respectively. On the other hand, states with historically strong multifamily housing PAB issuance, such as Michigan, Pennsylvania, New Jersey and Maryland, didn’t rank as highly as they had in previous years. Of the 50 states, according to CDFA, 11 did not issue any multifamily housing PABs from 2011 to 2013.

Policy makers and the affordable housing community should take into account the recent data in the PAB market while weighing their policy choices.