Banking brief: Affordable housing finance depends on uncommon capital markets

Across the US, local efforts are emerging to address the lasting effect of the housing finance crisis on neighborhoods and accessibility to affordable housing. The challenges are significant, and until there is greater clarity on the future of the government sponsored enterprises (GSEs), improvement in wages for lower and middle-class Americans, and a fundamental understanding of what defines affordable housing for today’s population, uncommon capital markets will be key to developing sustainable solutions.

Opportunity for investment

These uncommon capital markets depend on coordinated efforts of public and private organizations to be more responsive to the cultural and financial challenges present in providing acceptable single- and multi-family housing, especially in blighted areas within larger cities. Many of these efforts will be directed at the population segments having the lowest levels of household income and those not qualifying for government-sponsored programs, yet demonstrating the ability to satisfy payment requirements, whether as an owner or a tenant. One such program, Bridge to Success, has provided access to housing to low-income homebuyers in Minneapolis and St. Paul. It is a multifaceted structure co-sponsored by municipalities and non-profit housing organizations, and invested in principally by banks and accredited investors.

Because the more traditional capital markets structures (e.g., securitization) have not yet returned to this space, and are not likely to do so in the foreseeable future, the opportunity is now for non-profit housing agencies, housing-focused foundations, and motivated investors, including regional and community financial institutions, to take the lead in changing the framework of affordable housing finance in America.

Basel III capital standards

Also playing into this emerging strategy of grass roots housing finance is how bank investments in these structures might be treated under the Basel III capital standards. Clearly these standards are intended to more effectively align capital requirements with the risk profile of a bank’s balance sheet and operations. Close study of these standards indicate that there is ample opportunity for banks to make such investments without an undue capital burden. Accordingly, those banks that take a serious view of the responsibility to the housing industry should be carefully evaluating their role in these solutions.

The need to provide sufficient and affordable housing to those who can afford it will not wait for the long-term resolution of the GSEs or the return of an active mortgage securitization market. It is now time to rally around locally focused and funded, and possibly uncommon, programs that will make a difference.