The Credit Crunch Hits Home

By now some of the root causes of the current world-wide credit crisis are familiar to everyone. We’ve heard over and over about subprime mortgages, risky jumbo mortgages, and their family of products: adjustable-rate mortgages (ARMs), 2-28 loans, interest-only payments, option ARMs, no-doc loans.

We have also learned how these mortgages were sliced into pieces and bundled into investments making up the alphabet soup of the investment vehicles: RMBSs (Residential Mortgage Backed Securities), CDOs (Collateralized Debt Obligations - a term that appeared in the New York Times only three times before 2005, but almost every week since summer 2007, and nearly daily since Spring), SIVs (Structured Investment Vehicles) and CDOs of CDOs.

The subprime crisis has spilled across the entire financial industry. Inter-bank lending and liquidity, commercial paper, money market funds, the auction-rate securities market, hedge funds, and the stock market have all become “victims”. Banks and financial institutions are writing down billions of dollars of losses and are being bailed out and/or “injected” with cash from their federal governments. Falling housing prices, compounded by record foreclosures have yielded a massive housing bust, not only in the US, but in the UK and throughout Europe. This crisis is truly global.

Here in Alaska, it seems we have been relatively shielded from the housing crisis and the resulting credit crunch. But as we dig a little deeper, we are beginning to see real effects on a local level. One such example:

Over the past two years, the Rasmuson Foundation has been working with a nonprofit housing developer, Community Development Inc., in their efforts to redevelop the notoriously aged and deteriorating Fairview Manor Apartments in Fairbanks into Weeks Field Estates – a new, affordable housing complex. The majority of the financing for this project was via the Low-Income Housing Tax Credit program, while the Rasmuson Foundation was poised to provide a program-related investment (foundation lingo for a low-interest loan) to provide additional gap subsidy to the development.

A quick primer on the Low-Income Housing Tax Credit (LIHTC) program: Established in 1986 the LIHTC program provides market incentives to acquire and develop or rehabilitate affordable rental housing. Over the past two decades the program has helped construct and rehabilitate more than two million affordable housing units in the nation. In oversimplified terms, housing developers are awarded tax credits by state housing finance agencies that they can sell to investors. They use equity generated from the sale of these tax credits to lower the debt burden (mortgage) on their developments, making it easier to offer lower, more affordable rents. Investors purchase the tax credits to lower their federal tax liability. And who are these investors? Historically, they have been banks, insurance companies, and the government-sponsored entities (GSEs) of Fannie Mae and Freddie Mac or the same folks deep in middle of the current crisis.

The tax credit investor for the Weeks Field development was SunAmerica Affordable Housing Partners, one of the nation’s leading investors in low-income housing tax credits. SunAmerica is also a wholly-owned subsidiary of AIG, the largest insurance company in the world.

On September 15, all parties involved with Weeks Field expected SunAmerica to close on the project, providing necessary cash. After all, construction had been underway with a groundbreaking and demolition occurring more than a month earlier. Yet, the assault on financial service companies continued world-wide and, apparently, no company was too big to fail. AIG, one of the highest capitalized companies in any industry, succumbed to this pressure. The Federal Reserve, citing special considerations, subsequently bailed out the non-depositary institution. Not surprisingly, SunAmerica pulled out of the Weeks Field deal.

With the departure of SunAmerica, the developers of Weeks Field have been scrambling to find a new tax credit investor - hopefully one that is willing to pay a competitive rate for the tax credits. Given declining income and balance sheets of potential investors and the overarching credit crunch, it may prove more difficult than ever before.

Increasingly, the same is true for other nonprofits throughout Alaska, especially those that have relied on bank lines-of-credit or similar vehicles to finance their operations.

We’ve begun to hear anecdotally about tightening short-term working capital loans to nonprofits of all sizes and missions and are interested in how the credit crisis has affected your organization. Please share your stories.