Creative Financing for Affordable Housing

From Shaping the Future of Construction: Insights to redesign the industry
by Richard Koss



Attracting private capital into programmes for affordable housing has been a long-run challenge in both developed and developing countries. In general, the problem is that purely private capital is incentivized to devote its resources towards the development of high-end properties for upper-income households.

Purely public forms of capital can be brought to bear to support affordable housing construction, but cost control can be a problem without the profit incentive. In addition, public resources are limited, in particular in emerging markets, and can fall far short of the public need. What we see then is the development of many forms of public regulation and partnerships with the private sector in order to meet the affordable housing challenge. While still in early changes, a great deal of institutional and technological innovation is just now being brought to bear on this issue that offers considerable promise in this area, particularly in emerging markets.

Regulation and government-sponsored enterprises

Traditionally, higher-income countries have dealt with the issue of affordable housing via a variety of regulations on financial institutions and public support of income targeted at housing. In terms of regulation, the idea is that financial institutions, notably banks, receive public support through features such as cheap funding through taxpayer-insured deposits. In exchange they should be directed to allocate capital towards affordable housing projects that are expected to be profitable, but not so much as the development of costlier units. In the United States, one such mechanism is the Community Reinvestment Act.

Another approach is the formation of government agencies or government-sponsored enterprises (GSE’s) which support liquidity and affordability to loans directed at lower income homeowners and to developers who build high-quality rental units aimed at lower-income communities. They do so in part by designating balance sheet directly towards these mortgages. In addition, they also set standards and share risk with the private sector through the issuance of mortgage-related securities (MRS). In the US these entities include agencies such as the Federal Housing Agency and the Veterans Administration as well as the housing GSEs Fannie Mae and Freddie Mac. GSEs are tasked to support lower-income housing through sweeping regulation known as the Affordable Housing Goals and the Duties to Serve. Other nations have housing agencies, notably Japan and Canada.

The UK has an innovative programme called Help-to-Buy that allows lower income households to purchase a share of a home (usually 25% – 75%) and pay rent on the rest.

Another affordability policy is income support for lowerincome housing. In the US there is the Low Income Housing Tax Credit Programme (LIHTC).

Another approach which is more local in nature is the requirement that developers who are given rights to build on a piece of land set aside a certain number of units designated as affordable housing. Such programmes are very popular in California where affordability is particularly problematic.

Financing vehicles

Another set of responses to the affordable housing financing challenge can be characterized as “financing vehicles”. These are generally partnerships between private, philanthropic and public entities that bring the efficiency of private capital to bear with credit enhancements provided by government and charities. In general, the returns to private capital are somewhat less than for purely private projects, but the experience is that many private developers are willing to participate in these programmes out of a sense of civic duty and reputation enhancement. There are many classes of such investments that are targeted at different segments of the market. These include below-market debt funds, private equity vehicles and real estate investment trusts (REITs). The Urban Land Institute provides a useful summary of these efforts.

In many cases, the public funds come from regional entities (generally states in the US). These are known as Housing Finance Agencies (HFA’s). The US Treasury lends support to more distressed local communities through entities known as Community Development Financial Institutions (CDFI’s). All-in-all there are many hundreds of such vehicles and structures, revealing great innovative thinking that can be targeted at particular needs in distinct communities. There are far too many to list here, but an example that has received attention is the JP Morgan Partners in Raising Opportunity (PRO) programme that provides funding to CDFI’s across the country.”

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Posted by at 2:58 PM

Labels: Global Housing Watch


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