Over the past several years, Congress has tried to enact legislation to reform the federal housing finance system but has not been successful. In addition, legislation to encourage investment into low-income housing was recently introduced in Congress. Despite longstanding gridlock in both chambers, housing policy remains an important issue that may have some potential for action.
The Trump Administration has made government reform a key part of its agenda. President Trump signed executive orders that implement several processes for streamlining regulations and shifting certain programs to the private sector. For example, the White House’s budget requests to Congress propose to shift ENERGY STAR from the Environmental Protection Agency (EPA) to the private sector or at least impose user fees on manufacturers. This approach is also applied to housing finance reform. Both Freddie and Fannie have been under conservatorship since 2008, and the White House recently released a proposal to reform these GSEs (Government-Sponsored Enterprises). The proposal would allow the agencies and competitors to have an explicit guarantee on mortgage-backed securities that are “only exposed in limited, exigent circumstances” and would be “on-budget and fully paid-for.”
As part of the reform-minded approach of the Administration, these GSEs could undergo a transition into fully private entities through a large public offering. A proposal from the White House is expected at any time, which the Departments of Housing and Urban Development (HUD) and the Treasury Department are tasked with drafting. Treasury will detail the plans for GSEs while HUD lays out a plan for the housing finance agencies that it oversees.
In Congress, Republicans and Democrats are divided on how to approach the issue. In the Republican-controlled Senate, Sen. Mike Crapo (R-ID), chair of the Banking Committee, released a proposal in February which would turn Fannie and Freddie into private mortgage guarantors— competing with other private guarantors—while allowing for Ginnie Mae to provide a government backstop. While House Financial Services Chairwoman Maxine Waters (D-CA) has been slower to release details about a plan for her committee, she recently remarked that “it is time for Congress to come to a solution on the long-term status of GSEs” and highlighted several principles that should underlie any reform proposal, including maintaining access to the 30-year fixed-rate mortgage, ensuring that sufficient private capital is in place to protect taxpayers and maintain- ing credit access for borrowers. She added that “the inclusion of small financial institutions must be a critical part of any conversations on GSE reform.”
Also on housing policy, legislation was recently introduced that would address the nation’s shortage of affordable housing by protecting, expanding and strengthening the Low-Income Housing Tax Credit (LIHTC). Created by the Tax Reform Act of 1986, the LIHTC program gives state and local LIHTC-allocating agencies the equivalent of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.
The credit is meant to subsidize either 30% or 70% of the low-income unit costs in a project. The 30% subsidy, which is known as the 4% tax credit, covers new construction that uses other subsidies or the acquisition cost of existing structures. The 70% subsidy, or 9% tax credit, supports new construction without any additional subsidies. Congress permanently enacted a minimum 9% credit rate floor in 2015 with bipartisan support, however, the floating 4% credit rate still limits the equity available to build affordable rental homes. Establishing a minimum 4% credit rate will allow for more subsidies to build affordable housing.
The bipartisan legislation recently introduced in both houses of Congress by a bipartisan group of lawmakers in- crease investment in affordable housing and provide more resources and stronger protections for at-risk groups. They would enhance the 4% credit and multifamily housing bond portion of the program, streamline requirements and pro- vide states with additional flexibility, facilitate housing credit development in challenging markets like rural and Native American communities, increase LIHTC’s ability to serve low-income tenants and better support the preservation of existing affordable housing.
The goal is to stimulate construction by increasing the amount of credit used to build affordable units by 50%, which is estimated to create 384,000 more homes in the next decade. The Act would also stabilize the value of the tax credit at 4%, eliminating uncertainty for developers juggling additional acquisition costs and other subsidies. NLBMDA supports the LIHTC as an effective means to expand the supply of affordable housing and promote job creation.