The One Big Beautiful Bill Act changed the rules regarding the amount of bond financing needed to collect low-income housing tax credits which cheered housing advocates as lenders are now seeing the results.
"We are seeing more affordable and multifamily transactions come to market, and a growing percentage of those capital structures include a taxable bond component alongside the tax-exempt bonds," said Rob Wrzosek, president of affordable strategies at NewPoint, Real Estate Capital.
The issuer base includes local conduit issuers and state housing finance agencies.
Affordable housing development relies on LIHTCs as a vital chip in the capital stack.
LIHTCs are issued by the Internal Revenue Service and administered by state-level HFAs.
OBBBA made a temporary 12% increase in the allocation of 9% LIHTCs permanent.
It also reduced the amount of private activity bond financing needed for affordable housing developers to quality for 4% tax credits to 25% from 50%.
NewPoint believes the changing market is a direct result of the reduction.
"We have also seen a meaningful increase in the securitization market," said Wrzosek. "These transactions typically involve unrated multifamily revenue bonds that are aggregated and securitized through a national conduit issuer, such as the Wisconsin-based Public Finance Authority."
According to NewPoint, activity in that segment is up about 20% year over year.
"We expect that growth to continue as sponsors and capital providers increasingly use securitization structures to access broader sources of liquidity," said Wrzosek.
NewPoint acts as a Fannie Mae, Freddie Mac, or FHA lender with the resulting mortgage-backed security or agency guarantee providing credit enhancement for the munis.
"These structures have existed for many years but have grown in popularity recently as borrowers seek more efficient ways to combine agency financing with tax-exempt bond execution," said Wrzosek.
The firm also acts as a direct bond investor by purchasing both rated and unrated munis including credits that may not otherwise fit within the traditional public-market execution.
The borrowers are typically affordable housing developers.
The math to make affordable housing deals pencil out still favors total tax exempt financing but those deals are becoming increasingly scarce.
According to Wrzosek, taxable debt rates are currently about 6% while tax exempt debt is bouncing around 5.20%.
"A deal that is 100% tax-exempt will provide 5-7% more proceeds than a deal that is 50% tax exempt and 50% taxable," he said.
"The 5% less proceeds is combined with the fact that LHTC equity pricing has decreased dramatically over the last few years (.87/credit to .77/credit). It means that affordable housing projects need find 10-15% of the total development cost as additional subsidy and that's increasingly difficult."
The housing market is poised for another boost by way of the 21st Century ROAD to Housing Act which was passed into law without President Trump's signature in July.
The ROAD Act is also expected to accelerate the use of LIHTCs by lowering the cap on public welfare investments to 20% from 15%.
The cap limits how much banks can invest in community development projects, which includes affordable housing.
A higher cap is expected to pull even more private investment into the affordable housing sector.
