The nation’s affordable-housing crisis has deepened for decades and has only worsened over the course of the COVID-19 pandemic. A coordinated commitment is required to address the growing shortage of affordable rental-housing units. The only question is whether action can be taken with the same urgency that our response to the health crisis has required.
The rising demand for affordable apartments also presents a wide-open opportunity for commercial mortgage brokers to work in a largely untapped market. The private sector has an important role to play. Mortgage banks and brokers across the country must step up to the plate and do all they can to help solve this crisis.
Nearly every market in the U.S. faces a mounting shortage of affordable rental housing as millions of people lack access to a stable and safe place to live. The strain has only intensified. Rent prices rose 150% from 2010 to third-quarter 2019, according to the Joint Center for Housing Studies of Harvard University.
In the most expensive markets, such as Los Angeles, New York City and Washington, D.C., the median rent price for a one-bedroom apartment exceeded $2,000 a month as of July 2020, according to the Zumper National Rent Report. In San Francisco, the median monthly rent for a one-bedroom apartment was $3,280. Ever-rising rents make it increasingly difficult for even middle-class families to rent in many areas of the U.S.
No state has an adequate supply of affordable rental housing for the lowest-income renters, a problem that keeps many families in poverty. An affordable place to live allows people more access to job training, higher education, needed medical treatment and more benefits. It is estimated that the U.S. needs more than 7 million additional affordable-housing units for the lowest-income renters, the National Low Income Housing Coalition reported.
The COVID-19 emergency has greatly exacerbated the already severe shortage of affordable rentals. Millions of Americans have filed for unemployment due to the pandemic. The people impacted by this economic shock were already among the most economically vulnerable, including young people with little or no savings and piles of student-loan debt. Others who are most affected include minority groups, undocumented immigrants, people without a college degree and the elderly.
The COVID-19 emergency has greatly exacerbated the already severe shortage of affordable rentals.
A market in crisis
The emergency is particularly severe for renters of naturally occurring affordable housing (NOAH). This segment is comprised of market-rate units with rents that are generally affordable to lower- and moderate-income households but do not receive any government subsidies or rental assistance. Although the number of NOAH rental units continues to decline, they still provide by far the largest share of affordably priced units in the country, and they remain a critical source of rental housing for low- to moderate-income households.
Even before the COVID-19 outbreak, many of these households were considered “rent burdened,” paying more than 30% of their income toward rent. Now that many people are out of work, this burden is increasing and will likely get worse as the fallout from the crisis continues.
For property owners, the sudden decrease in rent collections could create a crisis of its own. Many multifamily-housing owners are likely to see increased operating costs even as rental income declines. With more people staying home, utility and maintenance costs will likely go up. Owners also will spend more on cleaning and sanitizing their buildings. This is in addition to the typical recurring expenses, such as mortgages, real estate taxes and management personnel. There is a risk that landlords will try to push more of these costs onto renters.
Although the federal government has allocated significant money to both individuals and small businesses, the timing and coordination of these efforts has been problematic. Advocates continue to express concern that insufficient money is going to the neediest citizens and that the federal relief to small businesses has been poorly administered. The result is that too little money seems to be getting to the people and businesses that need it most, exacerbating cash-flow problems for both tenants and property owners.
Ultimately, COVID-19 will claim yet another victim: the supply of affordable-housing units. For low-income households, there is a real possibility that many may lose their homes. This will surely lead to increased housing instability, homelessness, and all of the related financial, social, mental and physical health problems that follow.
Just as with any other sector of the market, developers of affordable-housing units need advice and the expertise of a broker who can help them secure financing.
Brokering affordable rentals
Often, the housing crisis is thought of as an issue that only the government has the resources to tackle. Although the problem might ultimately be solved by government policies and funding, real estate professionals, including commercial mortgage brokers, can support affordable-housing efforts right now.
Banks already play an important role in financing affordable housing. They essentially function as a conduit for multifamily loans insured by the U.S. Department of Housing and Urban Development (HUD), or those guaranteed by Freddie Mac and Fannie Mae. The commercial mortgage broker’s role is more subtle. The broker is the middleman of any real estate transaction. They are conduits of information, matching a client’s needs with a lender’s program. They have a unique opportunity and platform to help tackle the housing crisis by serving as a bridge.
Generally speaking, however, brokers avoid affordable-housing projects. Developers in this space typically work directly with lenders. In this respect, the financing options for affordable-housing projects have likely suffered. Mortgage brokers can help their clients ferret out financing sources that they may not have considered. Given that affordable-housing developers do not tend to work with brokers, the borrowers in this market may not be receiving loans with the best available terms and interest rates.
Just as with any other sector of the market, developers of affordable-housing units need advice and the expertise of a broker who can help them secure financing. This space also has its own special nuances and challenges. One of the biggest hurdles for the affordable-housing market is the need to work with a combination of government and private money. For instance, government-backed loans typically are not large enough to cover the substantial costs of developing affordable apartment units, so developers often need to attract private investors through federal tax credits that support this type of housing. These are awarded by local housing authorities. The application and closing process can take several months.
It is typically more difficult for an affordable-housing project to pencil out. More equity investment is typically needed to cover the gap. The loans are underwritten with below-market rental rates. Even though less rent is coming in, however, the operating expenses are still at a relative market value. So, reaching the necessary debt-service coverage ratios can become a huge issue when trying to underwrite loans for affordable housing. Another issue with affordable-housing projects is the need for community support. These projects often draw well-organized opposition in a neighborhood. This can cost developers precious time and money.
The adept mortgage broker can become an essential ally in solving these problems. This also is a ready-made opportunity for brokers to expand their business base. As mentioned, this is a largely untouched sector for brokers with a potentially large pool of clients. Because the need for affordable housing is never-ending, there are countless developers looking to borrow money to construct or refinance affordable housing. The financing package, however, can involve multiple agencies, including HUD, the government-sponsored enterprises and state housing authorities. You will need to master the regulatory requirements not found in other markets. Once you do that, however, the door to this market will open with few competitors.
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The last time that the world faced a pandemic was roughly 100 years ago with the Spanish flu. With the housing market looking substantially different today than it did back then, there is virtually no data to predict what will happen. Although the world is full of uncertainty right now, it is clear that there will be demand for affordable housing, so mortgage brokers should seize the chance to make themselves experts and support this critical need. ●
