Archive for the ‘Affordable Housing’ Category
Seattle Mortgage Bankers
I don’t get to visit with these folks as often as I’d like (maybe…. twice in… forever?), but they had a great luncheon meeting yesterday on HUD multi-family and health care finance. As dull as that topic sounds, HUD lenders are almost the only game in town for these sectors, and as such the “deal” volume at HUD has exploded.
Also, unfortunately, the “bad deal” flow has dramatically increased. HUD is seeing a rapid increase bad loans — not the same sort of levels we see in the sub-prime housing market or even in the conventional commercial market, but given the high degree of underwriting on these projects, HUD usually expects a loan-loss problem in the fraction-of-a-percent range. Thus, when loan losses start approaching 2%, it’s time for a lot of serious soul searching.
We had heard some vicious rumors out of the east coast that HUD was “shutting down assisted living lending”. Well, that’s apparently not true. However, there are a few obvious problems in the “New Normal” (I’m increasing stealing that phrase to describe the post-recession financial reality). Based on what I heard yesterday, I think HUD multi-family borrowers are going to see three significant issues:
1. The pipeline is a LOT longer. They haven’t done this on purpose, but the volume of deals coming thru the door at HUD is disproportionately large compared to the number of underwriters. (I saw this in the residential FHA/VA market back in the early 1980’s, when FHA money was the only game in town for start-up homebuyers, and it took longer to process a loan than it did to build the house!)
2. Underwriting criteria will be more subjective, and borrowers with little track record will face significant scrutiny.
3. Terms will be more severe. In the case of assisted living, the LTV went from 90% to 75% (although the Loan-to-Cost is still 90%) and DSCR is now 1.45, up from 1.1. This is mainly reflective of the significant problems in the assisted living market.
On the positive side, some programs are being slightly liberalized (232 program, for example). All in all, though, HUD multi-family borrowers will have a somewhat tougher time in the future than they had in the immediate past. Will this change down the road? Probably. I would expect that eventually we’ll see a return to somewhat easier money, but not until HUD works through the loan-loss problems and the conventional market becomes competitive again.
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Busy week — and it’s only Wednesday
On Monday, I spoke on Low Income Housing Tax Credits at the Rainier Club’s Real Estate Roundtable here in Seattle. It was a tag-team event — my co-speaker was Paul Cummings, who heads up Enterprise Community Partners’ Western Region. His portion of the presentation more-or-less summarized how that market works (short answer: affordable housing developers get tax substantial credits which they can either use, sell, or syndicate). My portion was to discuss the state of the market (it stinks really bad because the usual buyers of tax credits are in disarray). We both then summarized the pending legislation to fix things (Congress knows it needs to act, but is loathe to provide more aid to financial institutions. Something will be done very soon, and we hope it’s enough.)
On Tuesday, I attended an economic briefing presented by Jack Albin, chief investment officer of of Harris Private Bank. His talk was mainly centered on securities, and only briefly touched on real estate (and at that, on REITs). He found REITs a bit hard to read, because so much of their current dividend yield is in stock dividends. Fundamentally, though, I thought most of what he said was pretty good.
Then this morning, I woke up to find myself quoted in an above-the-fold article on the lead page of the business section of the Seattle Times. The article concerned the recent release of the Case-Shiller index, which essentially says that residential real estate prices tanked from October to November. I added a couple of caveats to that. While Case-Shiller is an excellent index, and one of only two residential pricing indices which currently “work” (the other being the one from the Office of Federal Housing Enterprise Oversight), the C-S index month-to-month statistics have to be taken with a huge grain of salt. These indices are based on actual sales of homes, and they work wonderfully during “up” markets (I had an article about such repeat-sales indices in the Journal of Housing Research a couple of years ago). However, during periods of market disruption, such as we have now, these pricing indices are skewed downward due to a bias in the data. In short, since the data only reflects actual transactions, it’s generally picking up a huge percentage of distress sales, foreclosure sales, and other sales under duress. My quotes in the article picked that up.
I also pointed out — for local consumption — that the Seattle market is still pretty vibrant compared to the rest of the country. While we’ve had some noteworthy lay-offs (Microsoft’s first layoffs in history), and our other basic employers are troubled, we still have one of the best economies in the world here in the Pacific Northwest. I’d much rather own a home here than in most of the other top-20 cities in the Case Shiller index.
Well, that’s it for today.
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Low Income Housing Tax Credits
This coming Monday, I’m making a presentation at Seattle’s Rainier Club to the Real Estate Roundable about Low Income Housing Tax Credits. It’ll be more-or-less a tag-team event — another fellow from the not-for-profit community will talk about their focus, while I’ll present the for-profit perspective.
These two communities (for-profit, and not-for-profit) really aren’t in competition with one another, although it seems that way sometimes. Both are recipients of a fairly finite pool of tax credits. In some locales, they work in tandem since the two groups bring different strengths to the table. In the Seattle market, where we’re headquarted and do much of our business, the two groups tend to go it “alone”.
Right now, though, these two groups are working together to try to get some sort of LIHTC relief out of Congress. In short (and this is a very truncated overview), tax credits are awarded for projects and can be used to offset other income for Federal tax purposes. The credits have to be used straight-line over a multi-year period, with no carry-backs or carry-forwards. Thus, the recipient of the tax credits (usually a developer of an affordable housing project) will sell or syndicate the tax credits to corporate buyers. Individuals can’t use the tax credits due to the passive loss rules, and corporate buyers need to be able to look down the road and predict a steady stream of taxable income in future years against which the credits can apply.
In recent years, the most likely buyers have been financial services firms — banks and insurance companies. In fact, some of these companies have subsidiaries set up just to buy the tax credits and help finance the projects. With the current roilling in the financial services sector, these industries have basically shut down buying, so the affordable rental housing development business is on the skids right now. This is a huge problem — something like half of the total apartment construction in America in the past 10 years has been in the affordable housing sector. With the collapse of home buying, the demand for affordable rental housing is soaring. In addition, this construction activity provides jobs, buys building material, and generates urban redevelopment.
You would THINK that such a win-win business would have Congress jumping to provide very modest support — ad actually the dollars needed to get this sector back on its feet are trivial compared to what’s being spent for the rest of the bailout. The problem is, it’s difficult to come up with a quick solution to this problem that DOESN’T use the financial sector as the conduit. Simply put, the financial sector is so heavily intertwined with the afforable housing sector, that the solution will either have to be channeled thru the banks and insurance companies OR we have to invesnt a new and costly conduit from scratch.
The first solution (using the financial sector as a conduit) is repugnant to Congress right now, since they’ve already sent the financial sector to the woodshed. The latter solution (re-invent the wheel) is both silly and probably un-do-able. So where does that leave us? With a gaping hole in our nation’s housing strategy and no quick fix in sight.
The good news is that there is widespread agreement that SOMETHING has to be done. Unlike the auto industry, there aren’t any nay-sayers complaining that affordable housing should be allowed to collapse. However — and this is terribly ironic — affordable housing woes affect all 435 Congressional districts approximately equally (OK, urban ones a little worse than others, but you get the picture). As such, we don’t have the Congressional delegation from one state (say, Michigan) championing this bail-out above all others.
Now it’s just a matter of finding a solution that Congress can stomach.
From a small northwestern observatory... 