For thousands of low-income renters nationwide — but especially in rural towns and small cities — the recession is hitting home in an unexpected way.
Nationwide, funding to build low-cost apartments has dropped by more than half in two years to $4 billion. Hundreds of projects can't get off the ground because the federal tax credits that help offset development costs are currently worthless to traditional investors.
Georgia, for example, typically funds about 30 projects a year using up to $20 million in federal tax credits. So far, only nine deals have closed for 2008 and none this year. In Savannah, one project was halted mid-development because of a financing gap.
"Everything is totally upside down from two years ago," says Laurel Hart, director of Georgia's office of affordable housing.
What's going on?
For more than two decades, the government subsidized the development of low-income apartments with a special tax credit. Every year, the government divvied up these tax credits among the states. Then, local housing authorities reviewed applications from developers and parceled out the credits, which were sold to investors to raise money for construction.
The largest investors in these credits were Fannie Mae, Freddie Mac and the banking industry. The problem is these companies have been losing billions, so there's no value in a tax credit to offset profits.
After the government seized Fannie and Freddie last year, they exited the market completely, taking away about 40 percent of the funding for low-income housing. National banks, meanwhile, have slashed their dollars and are focusing only on areas they must invest in to comply with federal community reinvestment laws, like New York and Los Angeles.
Regions like the South and Midwest lack that incentive and dozens of projects have been stalled.
In Georgia, Hart says she wants to use the federal money to finance projects that help alleviate the state's foreclosure problems. It could be used to redevelop foreclosed hotels or condo projects and convert them to affordable housing, she says. Or, create low-cost rental homes out of half-finished subdivisions that defunct home builders have abandoned.
Developer Alco Properties Inc. is applying for a federal grant to upgrade 244 apartment units in Nashville, Tenn. They desperately need a new roof, windows and kitchen appliances. Three-quarters of the residents make less than 30 percent of the area's median income and depend on government assistance to meet rent.
"If we're not able to preserve that housing and subsidy, it goes away," says Alco's senior vice president Robert Hyde.
The federal government knows there is a crisis. In May, the Treasury department said it will channel $5 billion in stimulus money to buy unsold tax credits for affordable housing projects approved since 2008. Developers who hold tax credits they can't sell can exchange them for government grants at rate of 85 cents on the $1.
Bureaucracy has held up the money, but even when it starts flowing it won't come close to meeting the growing need for affordable housing.
Census data show about 3 million affordable apartments were destroyed, converted to for-sale condos or upgraded to higher-priced rentals during the last six years. At the same time, more than half of all renters are spending at least 30 percent of their before-tax income on housing.
The waiting lists for affordable housing assistance are so long in places like San Diego, Orlando, Fla., and South Bend, Ind., the local housing authorities have stopped taking applications.
"These are single mothers with two children who work at Wal-Mart," says Brian Coffee, head of the tax credit program for Regions Bank in Birmingham, Ala. "This program provides housing for them."
There are so many applications from developers for tax credits that only one in four receive them, says Ronnie Thielen, president of the Affordable Housing Tax Coalition.
Thielen's coalition is lobbying Congress to extend Treasury's credit exchange program to cover projects approved for 2010. It is also proposing to allow the credit to be carried back five years, instead of just using it on future taxable income. The aim is to attract more types of investors, like insurance, manufacturing and technology companies, so the program doesn't depend solely on the financial industry.
"The need is overwhelming," Thielen says, "but we've been forgotten."