MN Housing board update: Agency considers action on low-end market-rate rental housing

At Minnesota Housing’s June board meeting, Commissioner Mary Tingerthal and agency staff discussed the tax exempt bonding authority, trends in the housing market, and updated the board on Agency news.

The meeting began with a discussion on local jurisdictions requesting a portion of the Agency’s tax exempt bond authority. For the first time in 10 years, there is not enough authority in the state-wide pool which opens an opportunity for the agency to review its unit cost containment policy. The meeting’s discussion then moved to recent trends concerning the loss of lower-rent affordable housing and the status of a special legislative session. Lastly, Commissioner Tingerthal updated the board on Moody’s recent ranking of the agency, summer research projects, changes to the down payment loan assistance program, and a brief report on the agency’s administrative budget.

Tax Exempt Bond Authority Requests

Commissioner Tingerthal opened the meeting with a discussion of tax exempt bond authority, stating that a number of jurisdictions are requesting a portion of the Agency’s federal tax exempt bond authority. For the first time in 10 years, there’s not enough authority in the statewide pool – the resource under state statute that is set aside for local jurisdictions. Tingerthal went on to say that tax exempt bonding is linked under federal law to availability of 4% tax credits. The Agency is generally asked to provide these credits to developers in conjunction with tax exempt bonding.

This possibility of awarding bonding connected to tax credits has brought the Agency to consider extending its cost control policies to 4% tax credit developments. Currently, the cost containment policy and predictive cost model is applied only to projects that receive 9% credits, deferred funding or bonding authority directly from the Agency. This need is underscored by the current controversy sparked by a recent report from the Institute on Metropolitan Opportunity related to artist housing. Metropolitan Opportunity’s report chiefly questions Schmidt Artist Lofts and A Mill Lofts, which were financed by tax exempt bonds and 4% credits respectively authorized by the cities of St. Paul and Minneapolis. Part of the controversy stems from the very high per-unit costs for these historic rehab developments. Tingerthal said it was because of the high costs that the Agency did not provide any deferred loan funding for these developments when it was requested several years ago.

Use of National Trust Fund Resources

Tingerthal indicated that staff was pulling the agenda item to approve proposed Agency use of the first $3 million in National Housing Trust Fund resources. On the day prior to the board meeting, the Institute on Metropolitan Opportunity had submitted comments on the Agency’s proposal, and Tingerthal said that staff needed time to consider these comments prior to board discussion.

Loss of Low-Rent Affordable Housing

In continuing her opening remarks, Tingerthal noted that another emerging critical housing issue facing the state is the loss of what many are calling “naturally occurring affordable housing,” or housing that is affordable to low and moderate income households without government subsidy. Investors are acquiring and upgrading numerous rental developments across the metro that would otherwise be market-rate housing with very affordable rents. Rent increases associated with these investments, as well as decisions to end participation in the Section 8 voucher program, are causing displacement of lower income tenants. Tingerthal noted that most of these developments were built in the 1970s and 1980s when there were federal tax incentives for this type of rental development.

In further discussion about recent investments in low-end market-rate rental housing, Tingerthal said that the Agency had recently received a letter from the Housing Justice Center asking that Minnesota Housing consider certain efforts to respond to this significant loss of affordability in the rental marketplace. On a related note, Tingerthal added that Greater Minnesota Housing Fund (GMHF) is requesting that the Agency invest in GMHF’s investment pool which is oriented to developer-owners of similar properties who pledge to keep rents affordable. Tingerthal said that the Agency would consider its options for engaging more on this issue. Agency staff is currently reviewing the request for its fit with investment guidelines and might bring a request for concept approval to the July board meeting.

Special Session Update

Tingerthal reported that she had no news for the board with respect to a special session of the legislature and bond funding for the Agency. If the Agency does not receive new bonding resources, it will be sitting on development proposals with funding requests running five times available resources, a significant increase from the more typical 3 to 1 ratio. She said that this resource constraint is particularly disappointing as communities are submitting stronger applications.

Moody’s Ranking of Minnesota Housing

Tingerthal concluded her remarks on a more positive note by stating that Moody’s, the national investment rating agency, had just issued a very positive report on Minnesota Housing. Moody’s gave the Agency its highest investment ranking and called the Agency’s single family loan performance “remarkable,” and its management “sophisticated and seasoned.” The report stated that the Agency’s single family bond program’s five-year profit margin averaged 17%, a percentage point higher than the median for the sector. This loan volume, double that of peer agencies, was in large part attributed to the Agency’s down-payment assistance program — 90% of Minnesota Housing’s borrowers in 2016 received downpayment assistance. The profit margin on the smaller pool of multifamily loans was even higher at 78% in 2015, more than twice the profitability of peer agencies, according to Moody’s.

Summer Research Projects

John Patterson, Director of Planning, Research and Evaluation for Minnesota Housing, announced that summer research projects this year are being undertaken by two University of Minnesota Humphrey School graduate students. One project will be a national review of best practices in landlord risk mitigation — a topic connected to this year’s $250,000 appropriation from the legislature for creating rental loss reserve accounts. The other project will be an investigation of trends and motivations behind borrower refinancing of Agency multifamily loans.

Changes to Down payment Assistance Loans

The board approved program simplifications and an increase in loan maximums for Agency down payment assistance (DPA) loans. For regular loans, the cap increased from $5,500 to $7,500. For the “plus” loans, targeted to single heads of households with minor dependents, the amount increased from $7,500 to $8,500. These modifications were in response to conditions in the marketplace driving down mortgage production, staff said. A low inventory of homes affordable to the Agency’s target market, higher home prices, and decreased seller willingness to pay closing costs, suggested that the Agency should increase down payment amounts to keep its loan volume in line with its forecast. These increased DPA loans also were needed because of higher dollar amounts borrowers were required to bring to closing. A staff example showed that to purchase a $160,000 home, if the seller no longer pays closing costs, the amount required from the buyer for closing costs is $7200, compared to $2,450 if the seller pays 3% of the closing costs.

Twin Cities Community Land Bank

The board also approved a $10 million, five-year revolving line of credit for Twin Cities Community Land Bank. The $3 million is for a neighborhood recovery program and the remaining $7 million is for strategic acquisition of land in areas facing significant growth in property values.

Agency Budget Report

The final report to the board was the Agency’s 2017 administrative budget totaling $34.8 million, an increase of 4% over the 2016 budget, and 15% over 2016 projected actual expenditures. According to Kevin Carpenter, the Agency’s Chief Financial Officer, this includes funding for a staff increase of seven full-time employees (to 250 total. Carpenter added that all of the growth in full-time employees could be attributed to temporary or contract positions being made permanent, or positions that come with funding through interagency agreements or grants. Commissioner Tingerthal pointed out that the Agency’s administrative cost, as a percentage of program assistance provided, has been in the 3-5% range over the past decade.

Stay tuned to the MHP Connect blog for next month’s minutes.