2008-08-22, 10:26

The saying in Washington goes the federal government works in two ways; inaction and over-reaction

By: Multifamily Real Estate Industry Team
The long awaited housing bill has been enacted H.R. 3221, the Housing and Economic Recovery Act (HERA) http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h3221enr.txt.pdf is in reaction to the inaction of the federal government in the run up to the subprime housing crisis. Whether this legislation is an over-reaction is yet to be seen. More importantly, how is this 260-page bill going to effect the multi-family housing market?

HERA makes significant changes to the Low Income Housing Tax Credit (LIHTC) program increasing the available credits by ten percent from $2.00 to $2.20 per capita. In addition, on July 22, HUD made major changes to FHA Multifamily Mortgage Insurance program and the LIHTC program through Mortgagee Letter 2008-19 http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-19ml.doc. I would recommend anyone interested in these programs take a look at the excellent Washington Update put out by the National Multi Housing Council on July 31 http://www.nmhc.org/Content/ServeContent.cfm?ContentItemID=4825&IssueID=80 (Membership required).

But the headline on this bill has to be “Reform of the Government Sponsored Entities!” Section 1101 of HERA creates a new federal agency the Federal Housing Finance Agency (FHFA) by merging OFHEO (the regulator of Fannie Mae and Freddie Mac) and the Federal Home Loan Banks. This at a time when Fannie Mae and Freddie Mac are trading below five bucks a share with investor confidence badly shaken. I have concerns that the disruption of setting up FHFA, a new regulator, and all the procedures and movement of desks that entails could lead to LESS oversight in the short-run at a time when Freddie and Fannie are most vulnerable.

That said, it seems to me that anything that settles the markets and makes capital more available for housing should help apartment owners. Patrick Duffy’s http://www.housingchronicles.com/ has a great blog on this notion. He goes further, however, to state that employment concerns are causing the “Shadow Market” to begin to encroach on the standard rental market. The shadow market is best shown in the movie “Kit Kittredge, An American Girl” http://www.americangirl.com/movie/ where Kit’s family is forced to take in borders to pay the mortgage during the Great Depression. This bears watching and is not likely to be touched by HERA.

As far as home ownership and its effect on the rental market goes, HERA is a mixed bag. It allows moderate income first-time buyers essentially a zero-interest loan of up to $7,500 that has to be paid back over 15 years. That may induce a few folks into the market. At the same time, the legislation prohibits (starting Oct. 1, 2009) seller-financed downpayment programs like ones run by AmeriDream and Nehemiah Corporation. While this prohibition should reduce defaults because buyers have “more skin in the game” by virtue of making downpayments out of their pockets, it will take out of the market a segment of buyers thus reducing the demand and increasing housing supply. These factors could ultimately increase the number of renters because potential buyers that cannot afford closing costs will need to stay in rental housing longer.

It will be interesting to see how the markets react to the now implicit federal guarantee the Freddie and Fannie have received. Also, will lenders start lending again to either single- or multi-family housing buyers? Will the new Congress and President pull back on home ownership efforts by focusing on improving incentives for the rental market or will the concept of “a chicken in every pot” http://www.presidentsusa.net/1928slogan.html be replaced by a house for every family? Time will tell, but my money is still on the enthusiasm of wealth creation made possible by ownership.

(This entry posted by Mark Harkins, a member of Womble Carlyle's Federal Government Affairs team)

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