Student Corner: The Community Reinvestment Act & LIHTC: How changes in the banking sector could affect affordable housing

<p>Over the past few decades, the Low-Income Housing Tax Credit (LIHTC) has become the nation’s most important policy to incentivize the creation of affordable housing. LIHTC, administered in North Carolina through the North Carolina Housing Finance Agency, allocates credits to private developers who then produce affordable units. Since its inception, LIHTC has helped create an estimated 2.3 million homes.</p> <p>The policy is unique because few developers actually use these credits themselves, instead opting to sell them to investors to help finance construction. As a result, changes in demand for these credits can sometimes affect the financial viability of affordable housing projects.</p> <p>Who invests in LIHTC? Because affordable developments don’t generate substantial revenue, investors instead use the credits to reduce their tax liability. Since the 1990’s, large, publicly traded financial corporations have become the largest investors in housing credits. According to one report, approximately 85% of all housing credits are purchased by banks.</p> <p>Housing credits are appealing to banks for a number of reasons. Because bank profits are relatively stable year to year, they have a consistent need to reduce their tax burden. Housing credits are also safe assets for banks that are barred from making unnecessarily risky investments. Nationally, LIHTC units have higher occupancy rates and lower foreclosure rates than traditional multi-family housing.</p> <p>Banks are also bound by federal law to make investments and loans in communities where they draw deposits. This law, called the Community Reinvestment Act, plays an important role in the development of affordable housing, because it drives banks to fund development by purchasing housing credits.</p> <p>What is the [...]</p>