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Small changes could help small properties in a big way

by Ethan Handelman, National Housing Conference

A proposal to encourage risk-shared financing of small multifamily apartment properties may get consideration in Congress. It’s worth a second look at how this idea could lead to real improvements in affordable housing, particularly since one third of renters live in small properties. (For background, see our previous summary of a HUD roundtable on the idea.)

The proposal in brief: Allow qualified lenders with a track record of small multifamily lending originate loans to refinance and renovate small properties, then share the risk on the loans with FHA and securitize with Ginnie Mae. Why it’s a good idea:

  • Small multifamily is underserved now. Properties of less than 50 units are owned, operated, and financed inefficiently. Most are owned by individuals or small business with small portfolios. Lending is idiosyncratic and dispersed, because the transaction cost of originating loans is large compared to the value to be gained. In short, we could be doing this business better. Reliable access to efficient capital will encourage more professionalization of ownership, management, and financing, leading to better quality properties.
  • Small properties are by nature affordable housing. These properties already serve one third of the nation’s renters—they are generally older properties with lower rents. Helping these properties raise capital for repairs preserves them as affordable housing (likely their highest and best use) without the need for legal affordability restrictions that could raise transaction costs.
  • Private capital would share the risk. Private lenders would take a large share (possibly 50%) of the risk in making these loans, helping to ensure that the government’s share of risk is protected. Government’s role is to connect these loans to the efficient Ginnie Mae securitization, which is a larger pool of lower-cost capital.
  • Mission-oriented lenders know this business. Nonprofit lenders like Mercy Loan Fund, Community Investment Corporation, Low Income Investment Fund, Community Investment Corporation of the Carolinas and others have been making these loans for years to good result. Helping them access more efficient capital channels could preserve many more affordable homes.

The proposal is a good complement to the bill to allow state housing finance agencies to risk-share and securitize with Ginnie Mae (see this blog post from the National Council of State Housing Agencies, an NHC member). Indeed, many state agencies are proven, effective lenders to small properties and could use both new options. Together, they are a low-cost way to create and preserve more affordable housing.

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