Harvard Report: Further Steps Needed to Restore LIHTC Market

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Tax Credit Advisor, February 2010: More steps than the two current federal stimulus programs are needed to restore the federal low-income housing tax credit program (LIHTC) to a sound footing, according to a new report by the Harvard University Joint Center for Housing Studies.

Entitled, The Disruption of the Low-Income Housing Tax Credit Program: Causes, Consequences, Responses, and Proposed Correctives, the report outlines possible ways to revitalize the program to increase investor demand for housing credits and to spread equity more widely.

The 45-page study discusses the history of the LIHTC program, causes of the disruption to the program in 2008-2009, and the effectiveness of the federal Tax Credit Assistance Program (TCAP) and Section 1602 credit exchange program. Established by the American Recovery and Reinvestment Act of 2009, the TCAP and exchange programs provide federal dollars to stalled LIHTC projects to enable them to advance to construction and completion.

According to the report, the disruption of the LIHTC market, in which credit prices and equity supply fell sharply, was not caused by an inherent flaw in the program. “It is important to recognize that the LIHTC crisis is due to a drop in investor demand in the wake of the worst financial crisis since the Great Depression,” says the study, “not with the performance of the program to date in delivering affordable housing at a very low loss rate.” In fact, the report says the program has been highly successful in producing large numbers of quality affordable rental units through effective public-private partnerships that meld private-sector capital with public policy objectives.

Policy Options

The report notes, “The TCAP and Exchange were not intended to revive demand or improve the market price of tax credits.” It notes that while the two stopgap programs are filling funding gaps in a number of stalled credit projects to enable them to move forward, the programs alone cannot return the program to the sound level it was at before. It indicates that changes that broaden the investor base for housing credits – since narrowed to a small universe of primarily financial institutions motivated largely by the federal Community Reinvestment Act (CRA) – are needed.

“Absent additional legislative action or the formation of a liquid secondary market, neither tax credit demand nor tax credit pricing is likely to return to mid-2000s levels any time soon,” says the study.

The paper outlines possible policy options designed to reignite demand for housing credits, including three key proposals advocated by the Rental ACTION coalition.

Options included are:

  • Shortening the investment horizon for the LIHTC and restoring the value of the credit to firms without any tax liabilities in any given year. The report calls this the most efficient way to restore the investor base to the mid-2000s level. In order of preference, ways to do this include: (1) Making housing credits refundable; (2) Extending the carry back period for the credit to five or more years; or (3) Allowing Fannie Mae and Freddie Mac and TARP recipients to use their current housing credits to offset the dividend payments they owe to the U.S. Treasury.
  • Broadening the investor base for housing credits. This could be accomplished by making the housing credit refundable or extending the carry back period. Absent these, other options would be to selectively relax the tax law’s passive loss rules and broaden the coverage of CRA.
  • Creating a viable secondary market for housing credit investments. This could shorten the investment period for the LIHTC and expand investor demand without legislative action.

The study also says that expanding the exchange program to include 4% housing credits – credits generated by tax-exempt bond financing – could help recapitalize expiring use subsidized housing projects.

(Report: http://www.jchs.harvard.edu)