Affordable Housing and the Finance Market  

10 min read

Rising Interest Rates and Fears of Recession Force Developers and Lenders to Get Creative

Fluctuating interest rates and headlines warning of recession have deepened caution among many lenders—and developers—pushing them to develop new products and structure deals differently to make them pencil out. The uncertain economic terrain has spawned more creative dealmaking and encouraged broader development partnerships. 

That’s the overall sense of the housing finance market as described by numerous experts contacted by Tax Credit Advisor. The finance strategists outlined the shifts they’re seeing in the market and offered advice to developers on moving through the uncertainty. The current economic environment is volatile, they warn, and already has brought unexpected shifts, such as dips in the 10-Year Treasury that temporarily lowered interest rates amid the Federal Reserve’s increases. It’s best to look at financing options from multiple angles, they say, and perhaps form partnerships with others with more liquidity. In short, stay nimble. 

“Time and costs are what kill deals. My advice to someone interested in a refinance or new construction financing is to get started now. Who knows what will happen next year,” explains Holly Bray, senior managing director of multifamily capital markets at Newmark. “Borrowers and lenders should work together. Run the numbers. Stress test the transaction. Does it work at higher interest rates? What about costs? Can it absorb higher hard costs? Once you define where you are, in today’s market, it will help you make financing decisions. Knowing where you stand today also allows you to quickly measure the effects of market changes as you process your loan – putting you in the strongest possible position moving forward.” 

Developers Seek to Lock Rates, Enter Longer Amortization Terms 
The Federal Reserve has raised interest rates by 2.25 percentage points this year – the largest single-year hike since 1994, and more hikes are expected. The higher cost of borrowing money coupled with higher construction costs have made projects more difficult to finance. And rates are expected to go even higher. The result is new terrain for developers and lenders. 

“There is a perception that rates will rise. We are clearly in an inflationary environment. The GDP just declined for the second quarter in a row, which is traditionally a strong recessionary signal. It’s an odd mix of circumstances,” explains Bryan Dickson, managing director of affordable housing at NewPoint Real Estate Capital. “For multifamily, there is a real focus on what will happen to value…folks I talk to say there could potentially be a ten percent drop in values caused by rising interest rates and fewer buyers in the market. There just aren’t as many players, because of the uncertainty out there.” 

Adding to the mix of uncertainty is the fact that the 10-Year Treasury unexpectedly dipped, bringing interest rates down for a period. The dip pushed borrowers to restart some deals to take advantage of the lower rates. 

“A lot of clients, if their deals are pretty well baked, are looking to rate lock their transactions sooner,” says Suzie Cope, managing director of affordable finance at Lument. “When the 10-Year dropped, others were restarting their deals and locking them.” 

Dickson says many lenders expected to see a shift to adjustable-rate mortgages once interest rates started to rise, but they have not seen such a shift. 

“There definitely has been a gravitation toward fixed rates,” Dickson says. “With the recent drop in interest rates, we are seeing a real focus on early rate locks.” 

He says NewPoint is introducing various lending products to meet the moment, including a bond program that is designed to “prudently help generate more proceeds with interest-only loans and a 40-year amortization.” NewPoint also has the ability to restructure prepayment penalties, so they are less prohibitive. 

“We work to introduce products to help soften the rise in construction costs and the rise in rates,” he says. 

Bray adds that on the commercial side of real estate, banks and insurance companies have gotten more skittish about lending in the past four or five months. 

“Conventional lenders and banks don’t want to be caught with depreciating values,” Bray says.  

Sheri Thompson, executive vice president for Affordable Housing and Investment Management Proprietary Capital at Walker & Dunlop, says that while interest rates have risen, the demand for multifamily remains strong due to a lack of affordable single-family homes, continued rent growth, historically low unemployment and growth in asset valuations over the past several years. Still, Thompson says, “As inflation and recessionary fears have grown, there has been a pullback in both debt and equity capital inflows.”   

“This is the environment when Fannie and Freddie have historically stepped in to provide liquidity to the multifamily market. With 59 percent of their annual lending capacity still available as we enter the second half of the year, Fannie and Freddie have an opportunity to provide stability in the market.” Thompson adds that developers are looking for ways to make sources and uses work due to construction cost overruns and projected cost increases. However, investor demand for LIHTC is still strong.” 

“We haven’t seen any major shifts in affordable markets in the changing market,” she adds. 

Kenji Tamaoki, executive director, agency originations, PGIM Real Estate, says he is seeing “more aggressive lending terms for both new tax credit deals and refinances.” 

“Forty-year amortization is available for new tax credit deals in strong markets, and 35-year amortization is possible for some refinances,” says Tamaoki. “Spreads remain stable despite economic uncertainty and the risk of a recession. There are a lot of requests to refinance existing tax credit deals because, in many states, the lack of bond cap makes re-syndication very unlikely. The acquisition market seems to have slowed down because of the recent increase in interest rates, but we expect activity to pick up again.” 

Need Remains Strong in Affordable Housing; More Developers Move to Building Workforce Housing 
Lenders say the need for affordable housing remains stronger than ever and lending in that market has picked up in recent months. Some developers also are moving into building workforce housing because the projects work out better.  

“There’s a dramatic difference between the market rate and affordable housing markets,” says Cope, of Lument. “On the affordable and tax credit side, we saw a slow down for a while with the peak in the 10-Year Treasury 

market, as well as growing construction costs. But the affordable space has dramatically picked back up in the past six months. I think that speaks to the continued demand for affordable housing.” 

Dickson adds that the “demand for affordable housing is extreme.” 

“We have undergone a significant shift in conditions through Covid and now, given where we are today, we are seeing rents rise across the country and the supply of units is constrained,” Dickson adds. 

Tamaoki also sees a strong affordable market. 

“The market is good for affordable housing despite some significant economic concerns, such as high inflation, the risk of a recession and the expiration of eviction protections. Affordable properties in all markets continue to see high demand, high occupancy levels and stable income,” says Tamaoki. “Fannie Mae and Freddie Mac are expanding their affordable housing loan options. For example, Fannie Mae recently expanded the list of properties that are eligible for pricing discounts under its Healthy Design and Enhanced Resident Services program. Freddie Mac expanded the list of properties eligible for its non-Low Income Housing Tax Credits forward program. FHA has been able to significantly increase the number of deals they can process by hiring a contract underwriter. The amount of time between when an application is received and when an underwriter is assigned has been substantially reduced.” 

Dan Duda, senior vice president and national director of originations and acquisitions at Churchill Stateside Group, says he is seeing more affordable housing developers venture into workforce housing amid rising interest rates and construction costs. 

“We are seeing more developers explore development opportunities in the workforce housing space,” says Duda. “There is a substantial need and demand for housing for people who have Area Median Income levels less than 100 percent. Due to huge rent increases on market rate properties, renters are getting pushed out of existing housing.” 

Duda says, “Churchill Stateside Group is a USDA Rural Development 538 Lender. This product works well for workforce housing deals in rural areas as it offers non-recourse construction to permanent loan with low rates and 40 year amortizations. The USDA RD 538 loan program is for tenants with income less than 115 percent AMI.” 

“It is meant for the workforce housing demographics,” says Duda, adding that it fits “affordable developers who want to have that social impact.” 

Cope, of Lument, sees a similar shift to workforce housing. 

“Where those funding gaps have gotten significantly larger on construction deals for affordable housing, we have seen deals move from tax credit deals to workforce housing deals in some situations,” says Cope.  

Cope adds that her company also is seeing affordable housing developers work together to close deals and in some scenarios where developers are working with nonprofits to bring in more capital to get deals done. 

“There are a couple of nonprofit developers who have started to use their excess capacity to come into transactions to help fill those gaps,” she says. 

Cope speculates that the increase in financial partnerships and shift to workforce housing is born out of a desire to simply get deals done in this precarious environment. 

“As we continue to have uncertainty about the future of rates and the current relatively low 10-Year Treasury rate now, we are seeing people trying to get deals done if they can,” she says. “People are happy to be accepting a double instead of a home run.” 

Cope adds that she also sees more people using soft funds, such as state and local programs, to fill the funding gaps. In July, the U.S. Treasury also announced that they will expand the use of Covid State and Local Fiscal Recovery Funds to include financing for affordable housing. 

Taking the Long View in Finance 
With rising interest rates spooking the market, Bray, of Newmark, advises developers and lenders to take the long view.  

“Even though rates are at five percent or 5.5 percent, that is still a lot better than they were in the 1980s and 1990, and we did deals then,” says Bray. “Maybe it is not the three percent you could have gotten four or five months ago, but it is still a really good rate.” 

“I did deals at 12 and 13 percent and they still got done…,” she says. “My advice to someone looking for financing is, ‘Let’s get going. Who knows what will happen next year.’”  

Pamela Martineau is a freelance writer based in Portland, ME. She writes primarily about housing, local government, technology and education.