Financing Affordable Housing, a Part of WMF's Soul.

Affordable housing is a growing unmet need in this most affluent country. This company has found a way to make affordable multifamily finance a business priority--and a rewarding one, at that. Low-income housing tax credits are at the heart of its success.

HOUSING ACT OF 1949

"The Congress hereby declares that the general welfare and security of the Nation ... require ... the realization as soon as feasible of a decent home and a suitable living environment for every American family...."

EVERY ORGANIZATION HAS TO HAVE A SOUL--FINANCING AFFORDABLE HOUSING IS PART OF OURS. Millions of Americans work every day, but no matter how hard they try, they can't get a slice of the pie. They have to start somewhere. And for some, the first step can be moving from a car to a rental unit--a key step to putting lives back on track. Everyone needs a roof!

These beliefs resonate at The WMF Group, Vienna, Virginia.

As the person responsible for the conventional multifamily and affordable finance business, my perspective stems from working 27 years in the apartment industry. After building and managing more than 1,000 apartment units in the toughest areas of New York City, I came to embrace the concept that decent and affordable housing is a cornerstone of community stability and development.

Our company values start at the top, with Shekar Narasimhan, WMF's chairman and chief executive officer, who borrowed the firm's mission statement from the Housing Act of 1949--a declaration for decent housing for all Americans--which hangs in every WMF office. According to Narasimhan, "The preamble to the Housing Act is one of the most powerful statements ever made by the U.S. Congress."

"Over one-third of Americans, or close to 100 million people, live in rental or multiple-unit housing, most with significantly lower income than single-family homeowners. The majority of the properties that WMF finances in multifamily are for individuals and families with limited options," says Narasimhan. "We have an obligation to ensure the viability of this housing, including a duty to lobby for appropriations. The tax bill legislation currently pending on Capitol Hill includes an increase in the low-income housing tax credit and bond cap increases that will expand the supply of equity and credit, another step toward fulfilling the 1949 dream."

The dream is not served by walking around with a map and push pins to stake out a housing site. For years, I have seen others make the mistake of building for the sake of building-for example, a developer constructs housing because he couldn't build something else; a community group supports housing to make a name for itself; or a politician wants to score points. All sorts of agendas obfuscate one simple fact: Housing must be part of a larger community development plan.

Lenders must also advocate for high housing-quality standards, whether for a conventional or affordable property loan. That's our responsibility. Factors to evaluate include the capability and experience of the borrower, the condition and management of the property as well as maintenance. Other vital aspects are location, likelihood of tenants, resources in the market, employment and rental assistance. Whether luxury or low-income, the commitment to quality standards should be undeviating.

A delicate and complex balance exists between the role of conventional lenders, quality housing standards and risk, particularly when weighed against the sizeable need to produce more affordable housing in this country.

Few mortgage bankers have the history, focus and size to take on the challenge of closing affordable deals. Even large institutions resist the commitment to assume risk and apply the resources for deals that can take a long time to fund. In fact, some would profile affordable housing as the riskiest real estate deals in the multifamily arena. On the table is the gamble that all aspects of the deal will come together and stay together, rents can't be raised when expenses increase and occupancy must be maintained over 95 percent.

Some major players understand affordable financing well enough to incorporate these intricate transactions into a business plan. While WMF is by no means comparable to the world's largest banking institution, affordable housing has been an integral part of our operations for the last five years. In 1998, WMF started a dedicated affordable housing finance group based in Columbus, Ohio. In addition, affordable housing is supported by senior management, a national sales force and an investor with a big appetite for the affordable product. Fannie Mae is the nation's largest investor in the multifamily sector and WMF is its leading partner, with total production exceeding $2 billion in 1998.

The obligation to provide affordable housing is also beginning to take hold in the nation. Federal and state governments, housing agencies, investors and lenders recognize the growing demand. Recent public opinion polls confirm public support for the fundamental need for clean, safe and decent housing. The Low-Income Housing Tax Credit (LIHTC), the only production program for affordable housing, has gained prominence in the last decade. Current legislation would increase the amount of tax credits by 40 percent. Republicans and Democrats alike agree that affordable housing is here to stay.

The crisis

According to the report "Waiting in Vain: An Update on America's Housing Crisis," released in March by the U.S. Department of Housing and Urban Development (HUD), the strong economy that has improved the lives of most Americans has hurt some of the poorest families by worsening the crisis-level shortage of affordable housing.

Government guidelines define "affordable" as housing that costs less than 30 percent of gross household income. HUD figures indicate the number of families with crisis-level needs is 5.3 million households, or 12.5 million people. These include working poor, urban families as well as families living in the "'burbs." Suburban households with critical housing needs jumped by 146,000, or 9 percent, from 1991 to 1995. These families earn less than 50 percent of area median income and either pay over half their incomes for rent, live in severely substandard housing, or both.

An annual report, released in June by the Joint Center for Housing Studies of Harvard University, entitled "The State of the Nation's Housing: 1999," confirms HUD's findings. While economic abundance in the 1990s has produced solid homeownership gains across the board, escalating rents and house prices are making it even harder for the working poor to buy or rent.

According to Eric Belsky, executive director of the Joint Center, "Now that house prices and rents have been rising faster than inflation, many renters are caught in a bind. Already, more than million renters with very low incomes spend more than half their incomes for housing."

"The working poor face serious housing challenges," adds Nicolas P. Retsinas, the Joint Center's director and former FHA Commissioner. "Even working full time at $7 per hour leaves a single parent with too little money to afford even a modest rental. In fact, in eight states they would have to work two full-time jobs just to reduce the cost of their housing to 30 percent of their income."

The tax credit

While the tax credit is no panacea for the nation's housing needs, the program is the longest-lived federal protection program for multifamily housing in U.S. history. It was created under the Tax Reform Act of 1986 to raise equity to fund development of low-income rental housing. Tax credits provide a dollar-for-dollar reduction in tax liability for 10 years, and are available for new construction or acquisition and rehabilitation of existing properties. The tax credits, purchased by investors in return for the reduction in tax liability, raise equity to help finance rental developments and are used in combination with conventional or government-assisted financing.

Legislation was introduced July 1 to increase the per capita on the tax credit from $1.25 per person to $1.75. According to HUD, a substantial expansion of the LIHTC would create as many as 180,000 units of new affordable rental housing for low-income Americans over the next five years. These new units would be in addition to the 75,000 to 90,000 affordable apartments now created each year as a result of the credit.

"Every state needs an increase in tax credits," says Jim Tassos, senior legislative and policy associate for the National Council of State Housing Agencies (NCSHA)."The program has not been adjusted for inflation since inception in 1986, and costs of producing all housing have gone up at least 50 percent." Tassos adds that the total amount of credit available to allocate is roughly $375 million per calendar year, but the total demand for credit--the allocation requests received by the states--is close to $1.2 billion. This represents a 3-to-1 demand for the resource.

Even so, NCSHA is excited about news from Capitol Hill. The tax bill legislation, which includes the tax credit increase, passed easily in the House and just barely in the Senate prior to the August recess. However, the big tax package faces a potential veto threat from the White House.

"What's important now is not what happens to the bill, but that we got it in at all," says John McEvoy, NCSHA executive director. "To have any chance of getting the tax credits into a smaller bill that will eventually be signed--we had to get them in the big one. The news on the housing credits is about as good as we could have hoped [for]."

According to Andre Shashaty, editor and publisher of an affordable housing trade publication, Affordable Housing Finance, the tax credit program has a very good track record and a clean bill of health from all government reviewers. Shashaty, who has followed the program closely and reported on housing government policy issues since 1979, is not reluctant about taking HUD to task in his editorials. So his laudatory comments about the tax credit program carry some weight.

"While the tax credit program is doing quite well, this success must be weighed against the fact that we are losing 1,000 assisted housing units a month from conversion to market rate or abandonment. HUD is also demolishing the worst high-rise public housing that must be redeveloped. In all, we aren't making progress, we are probably falling behind," says Shashaty.

While all agree tax credits are beneficial, WMF staff members also express more concern than optimism about the burgeoning need and dwindling supply of affordable housing properties nationwide. "You cannot house poor people without a governmental role," says Charles Santer, who heads WMF's affordable housing finance group and has more than 20 years' experience in all sectors of housing and finance. "The only material production program for low-income housing right now is the tax credit, which addresses the needs of only the working poor, not the very poor," says Santer.

Sheila Crowley, president of the National Low Income Housing Coalition (NLIHC), agrees that the tax credit does not impact the housing supply for the poor with worst-case housing needs. "Even the tax credit properties have a difficult time being affordable for people at this level without ongoing tenant-based assistance," she says. "In order for tax credit programs to make a sizeable dent in the affordable housing crisis, we need a dual strategy to increase housing production and resources for rent subsidies through the voucher program.

Lest you think these expectations are unrealistic, a little perspective helps. NLIHC has done an analysis that demonstrates the relationship between the federal tax expenditures for subsidized housing and direct budget outlays. A whopping 63 percent of federal housing subsidies go to the top 20 percent income bracket, or those earning an average income of $122,000. Only 19 percent go to the lower-income spectrum. Put another way, the total tax expenditures, which include mortgage interest tax deductions, add up to $102.1 billion; the total direct outlay for low-income housing is $28.3 billion.

WMF's affordable team

Along with Santer, WMF's affordable finance team includes Stephanie Wiggins, a dedicated underwriter, and loan production staff in Vienna, Virginia; Columbus, Ohio; and Los Angeles. In addition, many loan officers throughout WMF's nationwide system also originate affordable deals. As of July, we have surpassed last year's entire affordable production, exceeding $70 million.

Affordable deals require experienced and knowledgeable lenders. Tax credit allocations can be lost if a developer does not build housing units within a specific time frame. Severe penalties are another consequence. From the lender's perspective, affordable deals are not easy money. Wiggins characterizes them as multifaceted, requiring a lot of patience. Reflecting on her heyday years of producing commercial/multifamily loans in 30 days or less, she's had to readjust her expectations. Affordable transactions take 60, 90, 120 days, or longer, and she admits to thinking, "Why do it?" She also has the answer.

"You have to remember you are not only doing this because WMF is earning a fee and affordable represents an important part of our production goals," Wiggins says. "We are directly providing financing for affordable housing. No matter how long it takes those units will be built and they will be occupied by people in need. Period!"

The place to live

After the monthly Friday afternoon ice cream social, Dottie Leyland, 78, sits with fellow residents in the comfortable and expansive lobby of The Carlin Apartments, a modern, low-income senior property situated nicely in a high-end suburb of Washington, D.C. "I wouldn't be able to enjoy my retirement years if I had to make it on my own. This is the place to live," says Leyland.

Property manager Catriona Purdy, agrees. She doesn't know what residents would do without "their tax-credit building."

Says Purdy, "They would probably be forced to rent a room or live with family. Or they would wait on a Section 8 list for years and years while living in very difficult circumstances."

Located in Arlington, Virginia, the apartments are within walking distance of a Metrorail station, a major retail mall, churches and a senior center. Built in 1996, the 10-story building has 162 units with age and income restrictions.

"Most of the 170 residents here could not afford to rent on the open market," says Purdy. "I don't think I have a single resident whose income is $33,000, which is the guideline based on the median income issued each year by HUD. Typical residents here earn between $10,000 and $16,000, and about 40 residents fall right at the federal poverty level of $500 a month and have a Section 8 certificate."

WMF originated the loan in April to refinance the Carlin's construction loan. "We brought together various resources to close the complex deal, including one of the nation's largest non-profit senior housing owner operators, Retirement Housing Foundation, along with Fannie Mae, which funded the loan and enhanced the security under its Targeted Affordable Housing program," says Santer.

The transaction is a 30-year, fully amortizing permanent loan for $6,525,000, and carries a 7.465 percent interest rate.

"WMF's financing lowered our monthly payments by $10,000," says Purdy, adding that it was difficult to get financing due to tight cash flow, partially caused by the county's requirement to have a full-time social services coordinator on staff. She views the tax credit program as a perfect partnership between investors and the federal government, and also believes that tax credits are an ideal vehicle for making assisted-living projects affordable. "There are plenty of gorgeous assisted-living facilities for $3,000 to $4,000 a month, but we don't have many options for folks on fixed incomes living in Arlington," she says.

Americans support affordable housing

A recent public opinion survey showed that the majority of Americans believe that providing quality, affordable housing should be a national policy priority. The survey was released by San Francisco--based Novogradac & Company LLP, a national public accounting and consulting firm specializing in affordable housing issues.

"Almost three-quarters of respondents support tax incentives to build affordable housing," said Michael Novogradac, managing partner for the firm. "Because we received these positive results two years in a row, this underlines the fact that Americans support public/private partnerships to generate quality affordable housing for working low-income families."

As a nondepository commercial mortgage finance company, WMF is not bound by regulatory requirements to meet the nation's escalating need for housing. However, our role to expand quality housing at the lowest possible cost is an important partnership with the development community in the multifamily sector. We plan to aim higher next year and have doubled our affordable housing goals for 2000. Profit can be realized as long as we understand the risk.

A business notwithstanding, we believe that clean, decent and affordable housing is a fundamental need in this country.

Doug Moritz is chief executive officer of the multifamily business unit of WMF Washington Mortgage Corp., the commercial mortgage banking arm of The WMF Group, Ltd. Based in Vienna, Virginia, WMF is one of the largest commercial mortgage financial services companies in the country. Gina White, media relations director, The WMF Group, contributed to this article.

HABITAT, A PERFECT FIT FOR WMF

WHILE BUILDING AFFORDABLE APARTMENTS IN impoverished Brooklyn neighborhoods, I saw firsthand the impact of community support for housing, especially when resources are scarce. Several years ago when scouting around for a volunteer project that would best symbolize WMF's personality, Habitat for Humanity International seemed the perfect fit.

At the time, I was also chair of the Mortgage Bankers Association of Metropolitan Washington (MBAMW). The Mortgage Bankers Association of America (MBA) had just made a national commitment to Habitat to donate funds for building homes in Boston and Chicago and to provide $10,000 seed grants for 10 other cities. Together with the local MBA, we signed up for the seed grant and agreed to raise the remaining costs. Donations were given by local institutions and WMF staff, and construction began the first week of June, coinciding with National Homeownership Week.

Every month now, a hearty bunch of "WMFers" take off a day's work and bring their hearts and hammers to the Habitat build-site in the Southeast section of Washington, D.C. Employees will continue to participate one day a month along with other crews working Tuesday though Saturday, until the house is completed. A single mother and her four children will be the recipients of the new home scheduled for completion in early 2000.