Four other shoes
By David A. Smith
4 min read
In 1900, if you lived in a New York tenement, your bedroom was usually right below that of your upstairs neighbor. When he removed his heavy shoes late at night, you’d hear the two muffled thumps clearly through your ceiling – first one, then the second. Any delay between thumps might keep you awake, wondering what had happened above you.
So it is with the affordable housing industry’s ecosystem. Five years ago, I’d have bet that four large “shoes” would have dropped by now. None have – leaving our markets in curious suspense.
The undropped shoes include:
Shoe No. 1. The exit from conservatorship of Fannie Mae and Freddie Mac. Quick – how much has the federal government lost because of these two government-sponsored enterprises? Remarkably, essentially nothing. While the pair lost $187.5 billion in 2008 (much in the form of non-cash write-downs), they have since returned $185.3 billion in dividends to cash-strapped Uncle Sam – and continue making potfuls of money.
The miraculous recovery of the golden egg-laying GSEs makes pending legislation to wind them down, currently wending slowly through Congress, look politically foolish. And with former U.S. Rep. Melvin Watt (D-N.C.) now in place as the new director of the GSEs’ oversight agency, we can expect a more liberal and expansionist view of the role of Fannie Mae and Freddie Mac than his conservative predecessor, Ed DeMarco. Fannie and Freddie have to come out of conservatorship – but as what? Will they resume being LIHTC’s principal permanent debt source and 40% equity gluttons?
Shoe No. 2. The AMT “fix”. According to public choice theory, the ideal tax from a politician’s perspective is a levy you can cut every year, knowing it’ll grow back enough so you can cut it again. Enter the federal alternative minimum tax (AMT), which over two decades has swollen from a political gewgaw into a slow monster that Congress has had to suspend annually, lest it gobble up another 30 million households.
In 2012, the American Taxpayer Relief Act of 2012 put in place a medium-term solution, costing an estimated at $1.8 trillion over 10 years despite raising the top marginal bracket to 39.6%. Even so, the AMT will still catch over three million taxpayers annually, and the number will rise in the future. If the AMT’s reach extends to the large, CRA-motivated financial institutions, there goes the low-income housing tax credit equity market.
Shoe No. 3. America’s artificially suppressed interest rates. Starting in 2008, the Fed has pursued a policy of “quantitative easing,” or QE, basically printing money like a banana republic. Yet the world’s largest economy hasn’t been punished for this move. Indeed, in the short term, QE has been an unalloyed success, keeping interest rates minuscule.
QE enriches banks, impoverishes the elderly and savers, and allows the federal government to pretend our debts are manageable. More parochially, it helps prop up LIHTC prices at artificially lofty levels.
Suppressed interest rates won’t continue, and they’ll likely spike at a moment not of our choosing. Then what?
Shoe No. 4. Green improvement performance guarantees. Just a few years ago, green improvements went from a luxury to a virtual necessity in new/rehab LIHTC properties, where new soft financing meant green didn’t have to be economic. Many thought it would only be a matter of months before a viable junior loan product emerged – that with cheap debt, the volume of green improvements would easily quadruple.
We needed a new debt product because PACE financing (Property Assessed Clean Energy), the darling of some green advocates, doesn’t “work.” By priming an existing loan, it simply transfers the performance risk from the new lender to the existing lender, and when Fannie/Freddie publicly rejected PACE, the time for new debt seemed ripe. Yet a substantively rumored Fannie Mae green refinancing loan product never appeared. Was it just mothballed by Ed DeMarco, now to be aired out by Mel Watt? If so, green-driven refinancing LIHTC transactions could bloom.
Waiting for the other shoe to drop keeps us up at night because we interpret the silence: Is our upstairs neighbor merely distracted, sound asleep, or (heaven forbid) stone cold dead? In 2014, which shoes will drop – and to what effect?
David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay State of the Market, available by emailing dsmith@recapadvisors.com.
