I just came from a presentation by two housing experts I respect greatly that left me concerned for the future of affordable rental housing (an all too frequent occurrence these days). Charlie Wilkins and Tom White presented their paper "No Federal Guaranty for Multifamily" at the American Enterprise Institute. The nutshell summary (quite possibly Procrustean, for which I apologize) of their paper is the claim that a federal guaranty is inherently distortive and that over time will impose large costs on taxpayers. The paper advocates replacing the federal guaranty with private capital delivered via risk-based pricing, augmented by direct subsidy to create affordability where the market won't otherwise deliver it. At its root, the paper's recommendation raises the prospect of less affordable rental housing in pursuit of overall efficiency and, possibly, higher returns and higher risk to lenders and investors.
The paper is unequivocal that removing the federal guaranty from multifamily would increase the cost of capital. In other words, the money that developers borrow to create apartments would cost more, so they could borrow less of it. If the amount of debt that can be raised shrinks, some developments will become financially infeasible, and fewer apartments will be produced. Further, apartments for low- and moderate-income renters, especially subsidized properties, would be disproportionately hampered, as they are less likely to meet what the paper terms "prime" loan characteristics. Although the paper offers FHA as a sole-source solution for these below-prime loans, that channel is simple not wide enough to bear the burden alone.
Nor would direct subsidy to create affordability offset this loss of debt capital for affordable housing. As the severe cuts in the most recent FY 2012 appropriations bill for HUD, fiscal constraints limit what we can spend. This situation will get worse, not better, for the foreseeable future.
So, given that we have:
- A proven 20-year GSE track record in multifamily that did not lose discipline during the boom, unlike the private conduits
- Rising rents and severe affordability burdens for renters in many markets (see the Center for Housing Policy's Housing Landscape 2011 and Paycheck to Paycheck for data)
- The beginnings of a recovery in multifamily after a severe credit crunch moderated only by the existence of federally-backed capital source