The New Pilot Program is designed to streamline the Federal Housing Administration (FHA) mortgage insurance application process for new construction and substantial rehabilitation projects under sections 221(d)(4) and 220, respectively, of the National Housing Act. It complements the traditional federal policy foundations of affordable housing support, namely 1) the LIHTC program and 2) federal loan and credit guarantee programs offered by HUD and the Department of Agriculture (USDA).
HUD’s key objectives with the New Pilot Program are to reduce processing time and redundant review for FHA mortgage insurance applications. The agency envisions consequent cost savings for affordable housing investors and developers due to improved interest rate certainty via rate locks (important during a rising rate environment) and reduced holding costs. The Department seeks to facilitate reduction of processing times to 30 days for expedited FHA application reviews and 60 days for standard reviews.
Streamlining the process, in HUD’s view, will support private sector investment in federally designated, economically challenged OZs. Such investment may offer substantial tax benefits for equity investors who reinvest realized capital gains therein (for more details on OZs, see Signet’s previous discussion), in addition to those conferred upon LIHTC program participants. Because FHA insured loans typically allow for higher leverage compared to private-sector financing solutions, the combination of OZ tax breaks, LIHTCs, and FHA mortgage insurance may allow limited equity investment to finance more and larger projects, ultimately making possible more affordable housing.
The New Pilot Program is the most visible effort to date at federal policy coordination efforts, led by the sixteen member agencies of the White House Opportunity and Revitalization Council, to support investment in OZs nationwide. In anticipation of demand for twinned LIHTC/OZ projects, the New Pilot Program has announced training for HUD program underwriters on OZ incentives, in addition to specifying steps for accelerated FHA application processing.
However, a recent Government Accountability Office (GAO) report also highlighted fraud risks in the LIHTC program:
LIHTC program policies, while requiring high-level cost certifications from developers, do not directly address this risk because the certifications aggregate costs from multiple contractors. Some allocating agencies require detailed cost certifications from contractors, but many do not. Because the Internal Revenue Service (IRS) does not require such certifications for LIHTC projects, the vulnerability of the LIHTC program to this fraud risk is heightened…Weaknesses in data quality and federal oversight constrain assessment of LIHTC development costs and the efficiency and effectiveness of the program.
As the LIHTC credit allocating agencies (generally state and local housing finance authorities) monitor development costs for affordable housing projects in their jurisdictions, they can benefit from rigorous and systematic process implementation and review to guard against potential fraud in this high-profile program.
A Federal Tax Credit Fraud Investigation
In December 2016, the US Department of Justice announced that seven defendants had been sentenced in a scheme to steal federal funds intended for low-income housing. As employees of a Miami-area development company, the defendants applied for HUD grants administered by the Florida Housing Finance Corporation (FHFC). From 2006 to 2012, the conspirators submitted fraudulently inflated construction contracts on at least eight developments, resulting in $26 million of excess tax credits and grants. The defendants were sentenced to up to 57 months in federal prison.