Affordable housing market showing signs of life

(Crain's) — After riding out a tumultuous two years, Joe Hagan is breathing easier these days as he pursues investors for affordable housing projects across the country.

As president and chief executive officer of National Equity Fund Inc., Mr. Hagan has spent the past decade raising money for tax-credit funded housing developments and growing the Chicago-based non-profit into the nation's sixth largest apartment owner, with a portfolio of more than 100,000 units.

His job became a lot tougher in 2008, when the nation's biggest users of low-income housing tax credits, Fannie Mae and Freddie Mac, collapsed, and big banks cut way back on tax-credit purchases as they struggled with their own financial problems.

But money is flowing back into the market thanks to an improving financial sector and two emergency government programs. And the NEF is on track to have one of its best years ever: it aims to raise $700 million in 2010, and has already collected $600 million.

"We're in good shape to hit that goal, obviously," says Mr. Hagan, 57.

Formed in 1987, the NEF buys federal tax credits awarded to developers from local housing finance agencies and then sells the credits to investors that use them to lower their tax bill.

The low-income housing tax credit program has become a major source of funding for affordable housing, accounting for the addition of nearly 2 million homes since the federal government created the program in 1986.

The NEF, an affiliate of the Local Initiatives Support Corp., has been one of the biggest low-income housing tax credit syndicators in the country, investing $7.5 billion since its inception. The non-profit's local projects include the recently opened $27-million Rosa Parks Apartments at 541 N. Homan Ave. in West Humboldt Park, which will house 94 families.

But demand for tax credits fizzled in 2008 as the economy plunged into recession, credit markets seized up and losses piled up at big banks.

Fannie Mae and Freddie Mac, which together had accounted for about 40% of low-income housing tax credit purchases, completely withdrew from the market. Tax-credit prices fell as low as 60 cents on the dollar, from 80 cents in mid-2008.

NEF raised just $366 million at the end of 2008, compared with a record $780 million at the height of the market in 2006. The non-profit raised $560 million last year.

To offset the drop in demand, the federal government in 2008 created one program to provide temporary gap financing needed to reactivate stalled tax-credit projects. Another program allowed developers to trade full tax credits back to the government for cash if investors weren't willing to purchase them.

Financial firms, meanwhile, have come back into the market. Bank of America Corp., TD Bank Financial Group and The Goldman Sachs Group Inc. returned mid-year, and NEF was able to pick up several new investors, including Morgan Stanley.

"There's a lot of demand that wasn't there a year ago," says Michael Bernier, a member of Ernst & Young LLP's Tax Credit Investment Advisory Services practice. "But there's still a lot less than when Fannie and Freddie dominated the market."

Mr. Hagan, an Ohio University alum who grew up in Youngstown, Ohio, has been in the affordable housing business for more than 20 years. In 1989, he founded the Ohio Capital Corporation for Housing, where he spent four years as president and chief executive officer.

Mr. Hagan moved to Chicago in 1993 to join Banc One Community Development Corp. as president, taking over as managing director of Bank One Capital Markets Inc. five years later. He was named president and CEO of NEF in 2000.