Bonds

Two Senate committees are raising the visibility of the housing shortage in the U.S., and weighing legislative action that could pave the way for more housing bonds.

The U.S. Senate Finance Committee held a hearing on Tuesday to explore tax policy as related to the affordable housing supply, and last week the Senate Committee on Banking, Housing, and Urban Affairs sent a letter to President Biden calling for utilizing a “whole-of-government” approach to address housing needs. 

Experts who don’t serve in Congress agree that a key piece of legislation could be a game-changer for homebuilding and the bond market.

“Enacting the Affordable Housing Credit Improvement Act would have the most significant impact on affordable housing,” said Emily Cadik CEO, Affordable Tax Credit Coalition. “This legislation is estimated to produce or preserve another two million affordable homes over the next decade.” 

The act contains two key elements of interest to the bond market that were stripped out of the Build Back Better reconciliation bill passed last August. Properties funded through the Treasury’s Low-Income Housing Tax Credit are eligible to tap 4% and 9% tax credits. The 9% credits are dispensed through local housing authorities via a competitive award process. 

The 4% credits are allocated to projects that receive at least 50% of their fundings through tax-exempt private activity bonds. The amount of PAB issuance is capped by the federal government creating a well-documented shortage and a perennial pain point for the affordable housing industry. In 2021, a 12.5% funding expansion to the LHTC program which is typically over-subscribed, was cut.  The AHCIA would address both issues which could pay dividends for the muni market. 

“Enactment of these provisions would allow for increased housing production and bond issuance,” said Garth Rieman, Director of Housing Advocacy and Strategic Initiatives, National Council of State Housing Agencies. Rieman cites a 2022 analysis by Novogradac that indicates the two changes would finance an additional 1.93 million affordable rental homes over the next 10 years.  

“Allowing housing credit developments to move forward with less bond financing frees up private activity bond authority for additional multifamily housing production or bond issuance for other uses, such as homeownership,” he said. 

Sen. Sherrod Brown, D-Ohio, chairs the Banking Committee authored the letter to the White House. He’s also a co-sponsor of the AHCIA. The appeal of the proposed legislation to bolster affordability is not universal. Sen. Ron Johnson, R-Wisc., voiced his opposition during the Finance Committee hearing on Tuesday.

“I’m not a real fan of using the tax code to socially and economically engineer,” he said. “The root cause is regulation, increasing the trade wars, a worker shortage, we need to focus on that rather than make it more complex and add another barnacle onto the ship of state.”

The anti-regulation rhetoric was echoed by Sen. Thom Tillis, R-N.C., who brought up the cost of mandated sprinkler systems.

Getting any new tax legislation passed in the current Congress is problematic.

“With congressional gridlock there are limited opportunities,” said Cadik. “Housing credit legislation generally requires a broader tax bill to serve as a legislative vehicle, but broader political issues have prevented the types of bills that would ordinarily carry these provisions.” 

Public finance workarounds are also infiltrating the housing market. California, which is currently wrestling with a PAB shortage, is taking a creative approach by tapping recycled bonds. According to the California Housing Finance Authority, “the CalHFA Bond Recycling Program is designed to preserve and recycle prior years tax-exempt private activity bond volume cap that would otherwise expire upon repayment of construction period financing resulting in redemption of bonds for multifamily affordable housing development.” 

Rieman thinks the strategy is viable and is looking for provisions in the AHCIA that will allow states to use recycled multifamily housing bond proceeds to finance homeownership through expanded mortgage revenue bonds.  

Standard & Poors tracks a municipal bond housing index which measures value over time. The chart mirrors interest rate changes but its overall expansion is also tied to a shortage. 

“When you look at the growth, the issuers are not looking to time the market,” said Brian Luke, Head of Fixed Income Indices, Americas, S&P Dow Jones Indices. “They’re looking to finance a need that’s a public good. They’re not going to say, ‘well, interest rates are high now, so let’s not issue any more muni housing finance bonds.’ They need to issue more regardless of the interest rates.” 

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