Having fought many battles with Congress over curbs to bond and other programs that affect affordable housing, John Murphy expects the challenges will continue as he retires from the National Association of Local Housing Finance Agencies after 30 years as its executive director.

"We've had many legislative battles over the years, fighting for our lives, as it were, as Congress decided to reduce funding or to change tax code incentives, stimulate private investment in affordable housing," said Murphy, who joined NALHFA the year before Congress passed the 1986 Tax Reform Act. "I had a very active membership in terms of advocacy on Capitol Hill and before the Treasury Department and the Department of Housing and Urban Development. I feel, collectively, we've made a difference."

In a lengthy interview, Murphy told The Bond Buyer that, with congressional interest in tax reform, controlling government spending and winding down Fannie Mae and Freddie Mac, there will be no shortage of challenges for the affordable housing industry after he retires at the end of the year.

Murphy, 70, is to be succeeded by Jason Boehlert, vice president of government affairs at the Manufactured Housing Institute. Boehlert is expected to join NALHFA on Dec. 2. He and Murphy will work together during their overlapping month.

NALHFA represents 80 to 100 local HFAs, which finance affordable housing. Some states do not have local HFAs, and others have multiple agencies. State and local HFAs can issue tax-exempt mortgage-revenue bonds, which are used to provide mortgages to low-and moderate-income, first-time home buyers. They can also issue tax-exempt multifamily housing bonds, which are used to finance multifamily rental real estate with units set aside for lower income households. Both MRBs and multifamily housing bonds are private-activity bonds.

Murphy talked about some of the challenges the affordable housing community will face in the new Congress.

Leaders of the incoming Congress have expressed an interest in corporate tax reform. Tax bills take a while to write, but there could be some activity on corporate tax-reform in the next congressional session, Murphy said.

"Does that mean bonds are at risk in a discussion of corporate tax reform?" Murphy asked. "I will say…that any time that Congress is considering taxes, bonds are at risk."

The draft tax-reform legislation that outgoing House Ways and Means Committee Chairman Dave Camp, R-Mich., released this year would essentially cap the value of the municipal bond tax exemption at 25% and eliminate the tax exemption for private-activity bonds issued after 2014. The proposal would also disallow federal tax credits for mortgage credit certificates, which state and local governments can provide to homebuyers instead of issuing MRBs. Additionally, the plan would repeal the 4% low income housing tax credit, which owners of multifamily housing buildings can receive if they finance at least half of the project with tax-exempt PABs.

President Obama's fiscal 2015 budget request would cap the value of the muni exemption at 28%, but would actually ease some PAB rules. It would allow states to convert some of their PAB volume cap into 9% LIHTCs that states can allocate. But the 9% LIHTC's cannot be used with bond financing. The budget request would also allow building owners to qualify for the 4% credits, even if the building was not mostly-PAB financed, as long as certain requirements were met.

In recent years, market participants have organized national groups, such as the Municipal Bonds for America Coalition and the Don't Mess With Our Bonds Coalition, that work to preserve the exemption. Murphy said that these market groups have to continue their advocacy efforts.

"We've simply got to continue to speak out about the importance of the tax exemption, what it does, who benefits from it, and that's a lot of work," he said. "But it absolutely is essential if we are to survive with our tax-code provisions intact."

In the new Congress, which starts in January, Sen. Orrin Hatch, R-Utah, is expected to become chairman of the Senate Finance Committee. Murphy said he is "encouraged" by the fact that Hatch was the principal champion in the Senate of making MRBs permanent, ending the practice of short-term extensions of the authority to issue the bonds. The new chairman of the House Ways and Means Committee will be Rep. Paul Ryan, R-Wis. Murphy said there is a fairly strong state HFA in Wisconsin.

In addition to tackling tax reform, the new Republican-controlled Congress may want to rein in federal government spending. As a result, "the appropriations subcommittees may have their hands tied by overall budget caps that don't tend to grow with inflation or any other need to adjust upward. I think that will be a tough battle to fight," Murphy said.

Grant Programs

The HOME Investment Partnerships Program and the Community Development Block Grant program, provide grants that can be used for affordable housing, are both subject to annual appropriations. Murphy said he thinks there are good arguments for keeping these programs well-funded.

"Our spending programs are popular, and I think the case can be made that the need for further affordable housing has not stopped, in fact it's increased, and that there absolutely has to continue to be a federal role in funding programs that expand affordable housing opportunities," he said.

Leaders of the congressional committees with jurisdiction over housing and the Obama administration want to phase out Fannie Mae and Freddie Mac.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, released a proposal last year to phase out Freddie and Fannie within five years. Earlier this year, Senate Banking Committee chairman Tim Johnson, D-S.D., and ranking minority member Mike Crapo, R-Idaho, released a proposal to wind down and eliminate the entities. Their proposal would establish a new Federal Mortgage Insurance Corp. modeled after the Federal Deposit Insurance Corp. Johnson is retiring from the Senate at the end of the year, but Murphy said that the likely incoming banking committee chairman, Sen. Richard Shelby, R-Ala., may want to make changes to Freddie and Fannie as well.

In May, NALHFA and other groups sent a letter to Johnson and Crapo asking them to clarify that state and local governments and their housing finance agencies could provide down-payment assistance to borrowers so they can meet the minimum 3.5% down payment requirement for first-time home buyers. The groups also asked the Senators to clarify that the new entity created by their bill could provide credit enhancement to tax-exempt and taxable multifamily housing bonds issued by state and local HFAs.

"This would clarify that the Federal Mortgage Insurance Corp. established by this bill would carry on the essential role that Fannie Mae and Freddie Mac currently play in facilitating the critical financing of affordable housing by state and local housing finance agencies," the groups wrote.

Freddie and Fannie have been important to local HFAs over the years, Murphy said. The previous head of the Federal Housing Finance Agency, which is the conservator for Fannie and Freddie, wanted to phase out the entities. But the current director of the agency — Mel Watt, a former congressman who started in the post earlier this year — wants Freddie and Fannie to be more engaged. The FHFA instructed them to work more closely with state and local HFAs.

"That's a very positive development from our point of view," Murphy said.

Fannie and Freddie have programs that are beneficial for state and local HFAs. Under Fannie's HFA Preferred program, state HFAs and initially a small number of local HFAs can offer loans that require the borrower to only come up with a down payment of 3%, though that money can come from a variety of sources. In the conventional single-family mortgage market, there has to be at least a 5% down payment for Fannie and Freddie to buy the mortgages.

And Freddie has a tax-exempt loan program in which it is buying loans for affordable multifamily housing at favorable interest rates, Murphy said.

Freddie and Fannie used to buy tax-exempt MRBs and multifamily housing bonds prior to about 2006, when they started having financial problems. They bought about 35% of the tax-exempt housing bonds and LIHTCs, Murphy said.

"It was significant when they left," he said.

Past Victories

Murphy also talked about some of the successes NALHFA has had during his time with the group.

Murphy started at NAHLFA in January 1985, just before, the 1986 Tax Reform Act was enacted, which had significant implications for housing bonds.

Before 1986, tax-exempt multifamily housing bonds were not subject to any volume cap, and tax-exempt single-family, mortgage revenue bonds were subject to an annual $200 million per state volume cap that was just for this type of bond. But the 1986 act placed multifamily bonds, MRBs and other types of private-activity bonds under a "unified state volume cap," Murphy said.

Also, the 1986 act sharply curtailed the deduction developers could take on losses from investments such as affordable multifamily housing buildings and instead created the 9% and 4% LIHTC program. Murphy said that it took a while for the housing industry to figure out how to make the most of LIHTCs. Now the program has become "highly successful," he said.

Since 1986, Murphy has helped local HFAs achieve legislative victories and ward off harmful changes to affordable housing incentives in the tax code.

Initially, Congress expected that the authority to issue MRBs and industrial development bonds would sunset. After several extensions of the ability to issue those types of bonds, the programs were made permanent in 1993. The LIHTC was also made permanent that year.

Getting the permanency for MRBs and LIHTCs was "a major victory," Murphy said.

NAHLFA also successfully worked on getting Congress to create the HOME program under the Cranston-Gonzalez National Affordable Housing Act of 1990. One of the main ways that HOME funds are used is to provide financing for multifamily affordable housing projects that fill the gap between projects' costs and how much can be raised through bond financing and the LIHTC, Murphy said.

In 2000, NAHLFA worked on legislation that increased the amounts in the cap formulas for PABs and the 9% LIHTCs and indexed the formulas to inflation. The Housing and Economic Recovery Act of 2008 provided an $11 billion one-time increase in volume cap for MRBs and multifamily housing bonds. It also made the LIHTC program easier to use. The American Recovery and Reinvestment Act of 2009 was also "very important" to the housing community, Murphy said.

NALHFA also worked to get the Treasury Department to create the New Issue Bond Purchase Program that ran from 2009 to 2011, under which the department agreed to buy up to $15.3 billion of tax-exempt MRBs and multifamily housing bonds. State and local HFAs would issue the bonds, which Fannie and Freddie would then securitize and then sell to Treasury, Murphy said.

MRB issuance has been low lately and is unlikely to pick up until conventional interest rates rise to about 5.5% or 6%, Murphy said. There is a lag between when MRBs are issued and when they are used to provide mortgages. During that lag time, the proceeds need to be invested, and since interest rates are low right now, the proceeds would be invested at rates below the bond rates. In the meantime, HFAs have been issuing taxable securities as an alternative to MRBs, he said.

Multifamily housing bond issuance has been fairly steady. "It's a very effective tool, because it brings low-market financing to the developers, either new construction or preservation of multifamily affordable housing," he said.

Murphy described himself as "a local government guy through and through."

He started his career in city government and management in Bowie, Md. in 1967. The city was planning to redevelop its blighted areas. "Though I wasn't working directly on that, I was very interested in it," he said.

Murphy stayed at the city until the early 1970s, becoming Bowie's acting city manager for about 18 months toward the end of that time. He also got into lobbying while working for the city, representing Bowie before the Maryland General Assembly.

A desire to use his legislative experience at the national level led him to take a job at the National Association of Counties, where he worked on housing and community development issues. He worked at NACo from 1972 to 1983, then at a government relations firm for two years, and joined NALHFA in 1985.

Murphy works for Smith Bucklin Corp., an association management company. In addition to his role at NALHFA, he is also executive director for the National Association for County Community and Economic Development. The groups have some overlapping membership, but bonds are not a primary tool used by NACCED members, Murphy said. Boehlert will become executive director of both groups.

In his retirement, Murphy intends to "volunteer and take a little time to read and decompress." He also plans to take continuing education courses at American University and babysit his young grandchildren about one day a week.

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