What is the role of the 4 percent Low-Income Housing Tax Credit?

The 4 percent low-income housing tax credit program is a critical but underutilized source of federal financing for affordable homes. The 4 percent credit is available to any housing development that is financed with tax-exempt private-activity bonds and offers rents affordable to families making less than 60 percent of area median income. While some additional subsidy is usually necessary to make a project work, the equity generated through 4 percent tax credits is a significant asset that contributes substantially to the costs of providing affordable rental homes. Policymakers interested in maximizing the availability of federal funding for affordable housing in their community may wish to consider strategies for expanding their use of this valuable tool when feasible under stable market conditions.

Current issues and limitations of the 4 percent Low-Income Housing Tax Credit The economic recession which officially began in December of 2007 has had a direct negative impact on the normal functioning of the Low Income Housing Tax Credit market. During this recession, two of the biggest investors in LIHTCs, Fannie Mae and Freddie Mac went into conservatorship. In addition, large financial institutions, also major investors in the credits, saw unprecedented losses, thereby limiting their need for tax credits. The overall effect of these events was a drop in demand for LIHTCs leading to a drop in the price investors were willing to pay per dollar of tax credit. In March 2007, tax credits were selling for 95 cents per tax credit dollar [cite], however, during the economic downturn they sold for as little as 60 to 68 cents per tax credit dollar. Current prices fluctuate and are based on a variety of factors, but are still lower than prior to the downturn. Declining economic conditions also reduced investor interest in tax-exempt private-activity bonds, which in turn decreased the amount of funding available for affordable rental developments that would be eligible for the 4 percent Low-Income Housing Tax Credit. All of these events have seriously curtailed the proper functioning of a system that previously was the most effective tool for the creation of affordable rental housing in the country. The federal government has intervened in an attempt to restore normal functioning to the LIHTC market. Congress included several measures in the Housing and Economic Recovery Act of 2008 (HERA). These included increasing the dollar amount of tax credits that states can receive on per capita basis, as well as increasing the minimum overall amount of credits certain states receive (click here for further details on how tax credits are allocated to the states). In addition, the measures included an $11 billion increase in the tax-exempt Housing Bond authority for states, potentially enabling more tax-exempt financing for affordable multifamily developments. [2] More recently, the administration has proposed a program in which Treasury would purchase securities from Fannie Mae and Freddie Mac backed by new housing bonds issued by state housing agencies. This will allow states to generate revenue for using exercising its bond authority, which has been difficult during the recent recession due to the lack of demand from bond investors. Congress also included several measures in the American Recovery and Reinvestment Act of 2009 (ARRA). These included creation of the Tax Credit Assistance Program (TCAP) and the Tax Credit Exchange Program (TCEP), also known as the Section 1602 Exchange. TCAP provides $2.25 billion to State Housing Finance Agencies to help cover the gap between tax credit investor equity and the costs of stalled, shovel-ready projects. TCEP allows state HFAs to exchange unsold credits from 2008 and up to forty percent of unsold credits from 2009 for cash grants they can use to help fund stalled projects. [3] Although these measures authorized by HERA and ARRA appear to have been effective so far in aiding projects utilizing the 9 percent credit, they do not appear to be as effective in supporting projects eligible for the 4 percent credit. This is mainly because TCEP only applies to 9 percent credits, and although developers can technically use TCAP funds for projects using 4 percent credits, projects using 9 percent credits have consumed most of these funds [cite coalition documents]. In response to these barriers to using the 4 percent credit, several housing and tax credit industry organizations have recently made efforts to extend the use of TCEP to 4 percent credits along with other proposals designed to return proper functioning to the LIHTC market.

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Click on the topic areas below to learn more about expanding use of the 4 percent low-income housing tax credit: How does the 4 percent Low-Income Housing Tax Credit work? How have states and localities used the 4 percent Low-Income Housing Tax Credit? Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits.

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[2] National Council of State Housing Agencies - Housing Bonds
[3] National Council of State Housing Agencies - ARRA Housing Credit Assistance Programs