Financing Affordable Housing in a Volatile Economy

Despite hopes that conditions would stabilize heading into 2023, the economy is still being impacted by continually rising interest rates. On Nov. 2, the Federal Reserve announced its fourth successive 75-basis point rate hike, marking the sixth time that interest rates have increased this year. Though December’s 50-basis point rate hike was the smallest increase since May, rates are now at their highest level since 2007, and the Fed maintains its stance that ongoing increases are appropriate to rein in inflation.

While the multifamily industry is typically resilient during both inflationary and recessionary periods, as economic uncertainty persists investors still face challenges funding affordable housing development.

Mark Dean, head of affordable production for real estate finance firm NewPoint Real Estate Capital and a 40-year veteran of the affordable housing finance industry, sat down with Bisnow to discuss the impact of inflation and rising rates, what 2023 has in store for affordable housing, and how the NewPoint Impact platform can help investors and developers create and preserve this housing.

Bisnow: How have rising interest rates impacted affordable housing financing in 2022?

Mark Dean: Rising rates have played a major role in widening the imbalance between the sources and uses of funds in a project. When they are balanced, it becomes straightforward to finance and develop affordable housing. Unfortunately, in today’s environment, uses are up and sources are down, and there’s a sizable imbalance for most of 2022 that doesn’t look like it’s going to be resolved anytime soon.

Several factors are negatively impacting the uses of funds. Protracted development timelines due to labor constraints or logistical delays have led to additional carrying costs. There are also increases in hard construction costs, such as materials and labor, all on top of the higher debt service costs due to rates. Rising rates also impact sources, as they influence the debt service coverage ratio and, ultimately, loan sizing.

Regarding refinancing, there is a sizable amount of bridge debt that originated over the past three years, catching some developers off guard. Those borrowers are concerned about the direction of rates as it relates to maturities. The original plan to exit into permanent financing isn’t always an option, as many deals just aren’t yet seasoned enough for a permanent exit. 

As a result, borrowers are going to look to purchase that extension, which also isn’t always an option. This is especially true from banks, as that extended loan becomes a classified loan, which necessitates funding additional capital in a loss reserve fund — something banks want to avoid. The alternative is to find a new bridge lender, someone who buys the same story but with a different outcome two years from now.  

Bisnow: Can you speak to the NewPoint Impact platform? What are the benefits of pairing private capital with government-subsidized products? 

Mark Dean: NewPoint Impact is very entrepreneurial in that it seeks to provide a solution that balances the sources and uses problem discussed earlier. In today’s world, where projects are undersourced and overused, NewPoint Impact offers creative, effective ways to plug gaps in deals.

One of the Impact products is a synthetic 221(d)(4) construction financing program, in which NewPoint provides the construction financing — with favorable underwriting terms that maximize proceeds — while structuring the transaction for a highly desirable Federal Housing Administration takeout. This type of solution does not exist in any replicable, scalable way in the market. 

Bisnow: Are you noticing any trends in the types of programs or structures that seem to work best with current market conditions? 

Mark Dean: Many borrowers feel they have missed the window to fix their rate long-term. They’ve decided to wait things out, perhaps taking a variable-rate solution that allows for a conversion to a fixed rate. 

Another factor driving product selection today is that sellers may not have the leverage they did nine months ago. Back then, a buyer would hear, “it’s great you want to buy this, but you need to close in 30 days.” They were then left scrambling, trying to figure out how to close, and a bridge loan was the only solution. The market has moved back to a more measured and thoughtful place in terms of the process around an acquisition. However, NewPoint is still seeing a good deal of bridge activity for transitioning assets. 

With a general sense of uncertainty and risk aversion, many borrowers are going to be looking for forward rate locks or commitments, areas in which NewPoint has made concerted efforts to become a market leader. There are also going to be some opportunities, especially in distressed assets. 

Bisnow: What does 2023 hold for multifamily and affordable housing?

Mark Dean: The Federal Housing Finance Agency's 2023 multifamily volume cap structure for the government-sponsored enterprises continues to support the affordable space while broadening the types of properties that can qualify as mission-driven. By removing the requirement that 25% of multifamily business must be affordable at 60% of area median income, the FHFA has effectively freed up additional capacity to finance more naturally occurring affordable housing. Green loans are now classified as mission-driven for units at or below 80% AMI, up from 60% AMI in 2022. This should expand the benefits offered by Fannie Mae’s Green Rewards and Freddie Mac’s Green Advantage programs. Additionally, the 2023 cap structure created a new mission-driven category for workforce housing that should incentivize borrowers who pledge to preserve affordability through rent or income restrictions.

Another major influence on the market is that we are in the second wave of year 15 Low-Income Housing Tax Credit recapitalizations. Since we can’t build our way out of the affordable housing crisis, we need to make sure it doesn’t get any worse by letting LIHTC housing roll off and become market-rate. The good news is that we are in the window to recapitalize, and NewPoint has the right people and products to get it done — even if that means we had to create a new product, such as the NewPoint Impact Resyndication Bridge Loan, to do so.

Additionally, the results of the midterm elections will exert an influence. Historically, a split in Congress means gridlock. Gridlock results in the status quo, which is helpful regarding efficiency in the capital markets, which detest uncertainty. I also think gridlock affords real estate investors with a degree of certainty in terms of moving forward with certain types of projects. 1031 exchanges aren’t going to disappear when there is gridlock. Hopefully it gives developers a degree of predictability, at least for the next couple of years, so they can focus on tackling the affordability issue on the supply side. That will benefit future residents of affordable housing.

–Originally published in Bisnow