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Last week the Senate Banking, Housing and Urban Affairs Committee created a permanent affordable housing fund that, when fully capitalized, will be used to build 1.5 million affordable homes during the next 10 years. Affordable housing advocates were jubilant about the bill, which along with the House version, has been steadily inching to the president’s desk. Unfortunately, capital for the fund will be delayed for at least two years as the expected sources – Fannie Mae and Freddie Mac – will be tapped to finance a homeowners’ bailout fund.

The bill’s successful passage to the Senate floor, not to mention the delays in funding it, also serves to highlight larger difficulties in finding financing for affordable housing – a state of affairs that has been building for the last year or so. For instance, the funding delay is a story that is being replayed in state and local legislatures throughout the country as the economy slows, according to George T. Faris, an attorney with Lamm Rubenstone. “Whenever there is a general tightening of budgets, one of the first programs hit is affordable housing,” he tells GlobeSt.com.

At the same time, developers are grappling with a steady erosion in tax credit prices. “Tax credit prices have gone down by 15% over the last year or so,” Bernard Carr, executive director with the New York State Association for Affordable Housing, tells GlobeSt.com.

The impact of these duel trends translates into less funding available for affordable housing construction. “Successful developers pull together funding sources from a variety of disparate places and make it work as a project,” Faris says. “But rule number one with affordable housing is that margins are slender, so if one piece is out of alignment the numbers for a project can easily get out of whack.”

State agencies that sponsor the tax credits are not being as generous as they have in previous market cycles, according to Faris. “As a consequence, the value of the credit decreases for the commercial lender that has agreed to buy back the credits at the end of the project.”

Also, Carr notes, both Fannie and Freddie — two of biggest purchasers of tax credits – have left the market in the past several months. Furthermore, many banks that buy these tax credits have also loaded up on subprime debt and now are experiencing losses, which as Carr points out, “is the best tax credit there is – so there is no need for them to buy affordable housing credits.”

The exit of these two buying sources, he reports, has helped drive prices down by 15%, to 85 cents on the dollar. Uncertainty in the bond market has had an impact as well, he adds.

Carr, however, believes the tax credit prices will eventually rise. “I am hoping Fannie and Freddie get back in the market. Also, while some tax credit buyers have left, other institutions that have not previously considered investing in tax credits are entering the market.”

Whether this happens in time to salvage projects languishing on developers’ whiteboards remains to be seen. Tax credit prices are too low for a lot of projects right now, Faris says, which is why upfront government funding is more critical than ever. “Developers are saying ‘we just can’t build these houses, especially at the current cost of construction and energy.’”

The national affordable housing fund established last week is a hopeful development, Carr said. “But in reality we won’t see its affects for at least three years – and that is assuming the bill is signed by the president.”

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