Analysis on Affordable Housing Financial Mechanism in USA〔*〕

Wang Xiaoxiao，Yan Jie，Li Luying

(1．College of Landscape Architecture Nanjing Forestry University，Nanjing Jiangsu 210037;

2．Customer Management Center China Development Bank，Beijing 100031;

3．Nanfang College Nanjing Forestry University，Nanjing Jiangsu 210037)

Ⅰ．Basic information of affordable housing

1．Define affordable housing

Affordability has different meaning for people who are at different income level．A $1，000，000 villa can be affordable for a football star but a one－bed room apartment which is rented for$400 per month may just meet affordable limit for a college student．Therefore before making further research on affordable housing，setting affordability a standard is totally necessary．

A standard for affordability that a low －income household’s monthly housing costs should not exceed 30 percent of its monthly net household income is commonly accepted．On the condition that a family pays more than 30 percent of income for housing，they are considered to have difficulty affording other necessities．〔1〕Besides this standard，for public agencies，they often define affordability in terms of area median income(AMI)．It is published for every metropolitan area by the U．S Department of Housing and Urban Development(HUD)．AMI is the midpoint in the income distribution within a specific geographic area．By the definition，therefore，there are half of households earning more than AMI and the other half have less income than AMI．

According to Table 1，for example，if a household’s income is less than 50 percent of AMI，it will be at very low － income level．HUD’s income limit provides the AMI data for specific community on HUD’s website．In Lansing，Michigan a household of four is defined to be low－income if its income is below $51，900．〔2〕Affordable housing incentives at the national level are directed at low level，very low level and extremely low level income residents．One thing should be considered:because AMI is calculation in a large area，it may not fit some specific small area．Therefore adjusting the official low －income and affordability is very important．

Table 1 AMI category

2．The function of affordable housing

Besides those social benefit mentioned above，the process of affordable housing development itself will have positive impacts on local economic．Make it easy to say，developing affordable houses can bring new job opportunities，new consumption in relative fields and form a ripple effect on local economy．An affordable housing economic effect model developed by National Association of Home Builders(NAHB)can examine the effect which is created by dollar and units of jobs for specific area based on given data．This model divides economic effect into three phases:construction，construction ripple and ongoing savings．During construction phase，development generates income，wages，local tax and jobs．In the second phase，wages earned by these workers will be spent on other local goods and services．Additional income for local people will be consumed on more local goods and services．This recycling of income just functions like a ripple to make local consumption multiplied．Ongoing saving is the money saved by low －income household through living in below fair market rent apartment．It will affect local economic when any new homes are occupied．Additionally affordable houses encourage young people，families to stay in this area and to contribute to local economy．Just starting to work and have a family，many young adults could not afford to live close to work．They usually chose to live in suburban or even farther place．The continuingly increased gas price makes the transportation burden much heavier．A comparatively cheaper living place around work could make young generation stay in that area and become good labor resource．On the contrary，as investment and labor comes to town，the market price of house definitely will increase．The houses which were affordable for some residents before could become unavailable anymore．Therefore how to maintain the affordability comes up．The most effective tool is the affordable housing resection．It will be explained in detail in later chapter．

Ⅱ．Mainstream financial resources

1．Market－rate Loan from private financing institution

(1)Commercial banks

Commercial banks generally are federally chartered members of the Federal Reserve System and are insured by the federal deposit insurance corporation(FDIC)．〔3〕It usually deals with deposits and loans business．As the most popular and available financial institution，commercial bank is an important real estate loan resource that can never be neglected．In real estate industry，commercial banks usually provide market－rate construction loan．Affordable housing developers can borrow portion of capital they need from commercial bank to combine with other low － cost capital．Due to the great availability，commercial bank is always a good choice．

The funds of commercial bank to provide loan are mainly from customer checking accounts which could not function as a long－term capital stream．The reason is that customers can use money in checking account anytime and the funds which commercial banks hold can not be available for long term．E-ven though saving accounts and certificates of deposits have relatively longer terms(30 days to 3 years)，they take a small part of commercial bank funds．Therefore commercial bank historically have not provided loan for long－term period．Short－term acquisition and construction loan are most common from commercial banks．Permanent loans are not Commercial bank’s large business because of Federal restriction and its own finance figures．Before developers go ahead to knock the bank’s door，they need to understand the situa-tion of market and process of loan application．Taking construction loan as an example，the market provides the 30 year fixed，15 year fixed，1 year ARM，3/1 ARM，5/1 ARM，7/1 ARM，10/1 ARM and interest－ only loan．Affordable housing developers should know what the target is．

As well，a self－ estimation is required before action．There usually are two main factors to determine the qualification:credit history(credit score)and a plan for the building(here is the house)．People with very high credit score have more loan options than these with very low score．For these very experienced and successful developers，they will be easier to get a loan from commercial bank than these who just get into market for not very long period．Because they have accomplished some projects and have a good loan repayment record．The credit history and equity will be scrutinized very carefully today．In addition，loan lenders need a good story about your building．They need to know your exact plan．Therefore if borrowers are able to show blue print，brief construction schedule and some other proof to lenders，there will be a big chance to get the loan．Once these pre － qualification settled，developers can try to contact their lenders－ commercial banks．Not every bank offers the same loan．Making a conversation to very bank in town is a good to get different choice．Additionally，affordable housing developers can get consolation from a construction loan broker who represents for many banks and sometimes can provide better deal to borrowers．After making decision，borrowers have to fill an application and bank will determine whether they are qualified or not．The loan application 1003 is a uniform form and is attached as appendix．

In 2008，sub － prime crisis has a serious influence for real estate market．Some of commercial banks which have loan service are going through a difficult time．According to Crain’s Chicago Business’s report，The delinquency rate for construction loans in the Chicago area hit 10．8%in the second quarter this year，up from 8．4%in the first quarter and 2．6%in the year－ earlier period．The national delinquency rate rose to 8．1%，up from 7．2%last quarter and 2．4%in second － quarter．〔4〕

In order to protect themselves and maintain capability to make competition，many of commercial banks start to shrink the amount of loan and more carefully to examine borrowers’qualification．Options available for large scale projects is greater difficult in securing favorable terms for the borrower．Where previously they would speak with 20 lenders to secure funding for large residential projects，they are now speaking with 40 to 50 financial institutions for each loan．〔5〕Developers seeking construction loans are finding that banks are generally no longer willing to firmly commit to loans of$250 million or more without participants committed to holding a substantial portion of the loan．It is true that commercial banks reduce the business in real estate field right now;however，as a major resource of market－ rate loan，it still can provide assistant for affordable housing developers and will come back on right tract after this economic low tide．

(2)Savings and loan associations

Most savings and loan associations(S＆L)are federally charted members of the Federal Housing Finance Board(FHFB)and are insured by the federal savings and loan insurance corporation(FSLIC)．It is known as thrift and it is financial institution that specializes in accepting savings deposits and making mortgage loans．In history，S＆L is the prime real estate lenders in the country and provided most of the financing for one － to four － family homes．〔6〕The primary sources of funds for S＆L are customer savings accounts and certificates of deposit which could provide long period capital and make S＆L to be able to offer permanent，long － term loans．

After the savings and loan crisis of the 1980s and 1990s，the number of federally insured savings and loans in the United States declined almost half(from 1986 to 1995，the number from 3，234 to 1，645)．〔7〕These survived S＆L reduced their loan and made more strict examination on borrowers．In order to relieve the influence of S＆L crisis，congress required S＆L to establish an affordable housing program to help non－profit affordable housing developers and local economic development with the auspices of FHFB(federal housing finance board)．There are three components in this program:the community investment funds(CIF)loan program，the affordable housing program(AHP)and the community investment program(CIP)．Under CIF loan program，the members of FHFB could borrow money from its district Federal Home Loan Bank(FHLB)at a discount rate and then they pass this discount on to the borrowers in form of a lower interest on the loan．〔8〕Because the member could borrow money for 30 years so it can provide permanent loan at the reduced rate．It is not a competitive program，any members could borrow money．Affordable housing developers can contact local savings and loans which is a member of FHFB to examine whether they have proper loan options．

AHP is established to subsidize the interest rates on advances or loans made by Federal Home Loan Bank system to a member banks．The banks then pass these subsidized interest rates and direct subsidies on to non－profit housing developers．It is very similar with CIF．The difference is that AHP is competitive program．Through a local member bank of FHL Bank，non －profit developers can apply AHP funds．Since the program’s inception，the Banks have awarded more than $2 billion in AHP grants through their members．Between 1990 and 2004，nearly 430，000 housing units have been subsidized with AHP funds．In 2004，$229 million was made available by the Banks to subsidize 39，802 units of owner－ occupied or rental housing．〔9〕CIP provides funding for community － oriented mortgage lending．It is a flexible program that members can use to finance a wide rang of housing and economic devel-opment projects，for example，day care center and special needs housing．In 2007，CIP had advance commitment for housing projects$2，994．1 million．The projected housing units were 27，227．〔10〕

2．Below market－rate loan created by tax－exempt bond

Besides the loan from private part，affordable housing developers can apply below market－ rate loan from state and local government level．One of the main fund resource of these loans is tax －exempt bond issuance．In other words，state and local governments use bond issuance to collect money and create loans for affordable housing development．Before further discussion，It is necessary to introduce the basic information of bonds and bonds issuance．Bond is a debt security，in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest(the coupon)at a later date，termed maturity．〔11〕Through issuing bonds，issuers collect money from holders and pay them interest in certain period．When bonds come to maturity，issuers pay the whole amount of money back to bond holders．

Here，the bond discussed is municipal bond which is issued by a city or other local government，or their agencies．By using the capital raise from bonds，state，local government could create loan for affordable housing．Jurisdictions which are authorized to issue bonds can issue two kinds of bonds:general obligation bonds and revenues bonds．General obligation bonds(GOB)are secured by the full faith and credit of the government issuer but Revenue bonds are payable from and secured by the revenues generated from the projects they finance．GOB has higher security than the Revenues bonds and it uses the full faith the insure the payment back of the bonds．The bonds functioned for housing are revenue bonds which are backed by only the project’s revenues，not the full faith and credit．

Bonds used for housing generally are revenue bonds，secured by the project’s revenues and technically revenue bonds are categorized as tax － exempt and taxable bonds．〔12〕Bonds that are issued by state and local governments to pay for the costs of building government facilities or financing government operations are tax－exempt:interest paid to bondholders is not subject to income tax．Therefore tax is exempt for bondholders．However，bonds issuance for most housing function as private activity bonds not government operations or government－ owned facilities and are，therefore，taxable．The major categories of qualified private activity bonds for housing development are:mortgage revenue bonds，exempt－ facility bonds，redevelopment bonds and “501(c)(3)bonds”．〔13〕Taxable bond financing was ignored prior to 1986，however is a common vehicle for financing multifamily housing development．The reason making it real is traditional financial institution have pulled out of these types of lending．

Using tax exempt revenue bonds to raise capital for housing loans was started in the 1960s and has become very common since then．Tax exempt bond financing has many benefits．It can reduce the mortgage interest for home purchase loans by 50 to 100 basis points，compared to conventional mortgage loan．〔14〕For developers，loans created by tax － exempt financing can not only be used for construction，but also widely used as permanent loan．It is usually combined with other housing subsidies and tax credit(discussed in next section)to make housing projects more affordable．Tax －exempt bond financing is the single largest source of below－market mortgage financing for affordable housing．

3．Low income housing Tax credit

Low income housing tax credit(LIHTC)is a powerful tool that can assist both for－profit and nonprofit developers to raise the equity to complete the purchase，construction，and rehabilitation of affordable housing．It also has provided a way to attract corporation investment to affordable housing development．

Under the federal income tax code tax credit is a kind of tax benefit given by IRS(internal revenue service)．It is“dollar to dollar”against the tax liability or in tax bill for property owner or investor which means it is a deduction of amount of tax after taxes is calculated．One dollar tax credit equals to one dollar which can be reduced from tax liability．Tax credit is only given to eligible projects which have to meet all the requirements．

Tax credit is different from tax deduction and is more effective than the later one．Just like mentioned above，it is“dollar to dollar”against the tax liability．But tax deduction is only the reduce from taxable income．After using tax deduction taxpayer has$90 more tax liability than using tax credit in this situation．Therefore it is obvious that tax credit is more effective than tax deduction．Low income housing tax credit is one type of tax credit to encourage housing developers to build affordable housing and give incentives for the utilization of private equity in the development of affordable housing aimed at low －income Americans．For return，developers will be awarded tax credit to deduct income tax or treat it for capital from other investors．

Ⅲ．Conclusion

This paper has provided affordable housing developers an overview about main financing resources on market and introduces several mainstream ones in detail．With latest data and information，it analyzes the changes on affordable housing finance market．As well，this paper makes an analysis for Chinese affordable housing developers about what they can learn from the U．S and what potential opportunities are in China．There are many ways to finance a project and many resources available on market．Based on different projects，developers should try to use every possible finance resource to make housing more affordable．Many layers of fund is a trend．By mixing different financing resources，developers can create an unique way;On affordable housing finance market，there are three resources which are used commonly and should be understood by developers:loan，tax credit and tax －exempt bond issuance．By learning all these three tools，developers can basically understand the market．If they have more interest on other resource，developers also can do more research based on this paper．Affordable housing development in China needs a partnership between public and private．Instead of creating affordable housings by itself，local Chinese governments could encourage real estate developers to create more affordable housings by providing financing support．Grants，low － interest rate loan，tax － exempt bond issuance and tax － credit can be experimentally used．In addition，China should be aware of sub－prime mortgage market mistake tha t the U．S made．

〔1〕U．S Department of Housing and Urban Development，2008，from:http://www．hud．gov/offices/cpd/affordablehousing．

〔2〕HUD FY 2008 Income Limits Summary，2008，from:http://www．huduser．org/datasets/il/il2008/2008summary．odn?inputname=METRO29620M29620*Lansing－East+Lansing%2C+MI+MSA＆selection_type=hmfa＆year=2008．

〔3〕Bennett L．Hecht，Developing Affordable Housing－A practical Guide for Nonprofit Organization，1999，p．113．

〔4〕Alby Gallun，Local construction loan delinquencies rise，2008，from:http://www．chicagorealestatedaily．com/cgi－ bin/news．pl?id=30828．

〔5〕Richard Bassuk，Market poses challenges for residential construction loans．Real Estate Weekly Journal，2008，from:http://www．allbusiness．com/banking－finance/banking－ lending－ credit－ services－ secondary/8940060 －1．html．

〔6〕Bennett L．Hecht，Developing Affordable Housing－A practical Guide for Nonprofit Organization，1999，p．113．

〔7〕Timothy Curry and Lynn Shibut，The cost of Savings and loan crisis:truth and consequences，2000，from:http://www．fdic．gov/bank/analytical/banking．pdf．

〔8〕Bennett L．Hecht，Developing Affordable Housing－A practical Guide for Nonprofit Organization，1999，p．114．

〔9〕Federal Housing Finance Board，Report of the Horizontal Review of the Affordable Housing Programs，2005．

〔10〕Federal Housing Finance Board，CIP and CICA Program Advance Activity，2008，Revised 8－14－2008．

〔11〕〔13〕Bennett L．Hecht，Developing Affordable Housing－A practical Guide for Nonprofit Organization，1999，p．95．

〔12〕Peter Werwath，Financing Mechanisms for Affordable Housing，Enterprise Community Partners，2007．

〔14〕Joseph Guggenheim，Tax credits for low income housing 9th edition，1996．