Central View: Innovation Can Spark Low-Income Markets

Glenda J. Wilson

Given the recent impact of the current economic conditions on homeownership, the development of rental housing is becoming increasingly important to provide homes for families and also help stabilize neighborhoods.

Because of its mission to maintain economic stability, the Federal Reserve has long had an interest in the Low Income Housing Tax Credit (LIHTC) program, a major source of capital for the development of rental housing. The program is the federal government’s primary tool for financing the development of affordable, rental housing for low- and moderate-income families.

Over the past 20 years, these tax credits emerged as the leading source of capital subsidy for the construction and rehabilitation of such housing. Using equity investments from public-private partnerships, the LIHTC program has created more than 2 million housing units nationally since its inception, including more than 70,000 units in the Eighth District between 1986 and 2006. Furthermore, until the recent economic downturn, the program peaked at financing and constructing approximately 100,000 rental units per year nationally.

Since the downturn began, the LIHTC syndication market has experienced distress as fewer investors have an interest in the credits. Traditionally, the market has been concentrated among relatively few major investors: banks and government sponsored enterprises (GSE). Many banks have drastically reduced their investment in LIHTC projects as their need to offset taxable income has declined. Likewise, a large drop-off in tax credit purchases by the GSEs, which previously comprised about 40 percent of the market, has contributed to the recent decline in LIHTC market volume. Low investor demand for tax credits has led to multiple challenges for the affordable rental housing production market.

Our Fed’s Community Affairs function is particularly focused at this time on stability and opportunity in low- and moderate-income communities, including affordable rental units. To that end, in conjunction with the Board of Governors, we commissioned a series of short articles by practitioners and experts to highlight their pioneering ideas for bolstering the LIHTC market. The six articles and video presentations are found in Innovative Ideas for Revitalizing the LIHTC Market, which you can download. The same site includes a video of a bus tour around St. Louis that shows actual projects developed using LIHTCs.

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