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The Tax Credit Market During the Great Recession

The Great Recession of 2008-2009 created a brief but severe disruption in tax credit investment markets.  Thanks to timely action by the federal government and quick adaptation by state allocating agencies, essential rental housing projects were completed while tax credit investment markets adjusted.  Tax credit investment demand quickly bounced back, and pricing returned to efficient levels.

The economic recession, which officially began in December of 2007 and ended in 2009, had a direct negative impact on the normal functioning of the Low-Income Housing Tax Credit market. During the 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, 9 percent tax credits were selling for 95 cents per tax credit dollar, 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 have mostly returned to pre-recession levels. In March 2016, 9 percent tax credits were selling for $1.01 per tax credit dollar.

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.

In order to restore the functioning of the LIHTC during the recession, the federal government intervened with several legislative items. Congress included several measures in the Housing and Economic Recovery Act of 2008 (HERA) to support the LIHTC. These measures included increasing the dollar amount of tax credits that states could receive on a per capita basis, as well as increasing the minimum overall amount of credits certain states received. In addition, the measures included an $11 billion increase in the tax-exempt Housing Bond authority for states through 2010, to enable more tax-exempt financing for affordable multifamily developments. 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 was intended to allow states to generate revenue for exercising its bond authority, which was difficult during the 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 provided $2.25 billion to State Housing Finance Agencies for projects awarded LIHTCs between 2006 and 2009 to help cover the gap between tax credit investor equity and the costs of stalled, shovel-ready projects. Most states gave preference to projects nearest to closing and to projects with the smallest financing gaps in order to stretch TCAP funds.  TCEP allowed state HFAs to exchange unsold credits from 2008 and up to 40 percent of unsold credits from 2009 for cash grants they could use to help fund stalled projects. Generally, states provided the same exchange rate for tax credits, providing grants equal to 85 percent of the tax credit amount returned (85 cents per dollar of returned tax credit).

Although these measures authorized by HERA and ARRA appeared to have been effective during the recession in aiding projects utilizing the 9 percent credit, they did not appear to have been as effective in supporting projects eligible for the 4 percent credit. This is mainly because TCEP applied only to 9 percent credits, and although developers could technically use TCAP funds for projects using 4 percent credits, projects using 9 percent credits consumed most of these funds.

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