LIHTC Changes Bring Hope For Affordability Advocates, But HUD Cuts Loom

A set of federal policy changes has the potential to result in seismic shifts for the country’s Low Income Housing Tax Credit policy, widely regarded as the most popular tool for creating affordable housing.

An announcement last week that Fannie Mae and Freddie Mac’s investment caps in LIHTC projects would double to $4B is a crucial complement to the expansion of LIHTC itself under last month’s One Big Beautiful Bill Act, creating a sizable outlet that exceeds the private market’s capability.

But still-pending changes to other housing programs administered by the Department of Housing and Urban Development will determine the size and scope of the impact a bigger LIHTC program will have as the country’s affordable housing crisis presses on.

“Very few LIHTC units are built with just LIHTC,” National Apartment Association Senior Vice President of Government Affairs Greg Brown said. “It requires lots of sources of financing, including programs that are financed by HUD, or programs that are run by HUD.” 

The OBBB, signed in early July, made two critical changes to the LIHTC, which has generated over 3.5 million units in all since its inception in 1986, according to the Tax Policy Center. 

The OBBB funded the program permanently and lowered the private activity bond financing threshold for these projects from 50% to 25%. It also increased the 9% LIHTC allocation used for ground-up projects or major renovations by 12% starting in 2026. 

Novogradac estimated that these changes alone could mean 1.2 million additional affordable rental homes could be financed through these credits in the next decade. 

The changes were broadly welcomed by the affordable housing community, although many wondered if private investors would have enough appetite to buy the higher allocation of credits.

The Federal Housing Finance Authority’s announcement that Fannie and Freddie could invest twice as much in LIHTC helped ease some of those concerns.

“That announcement is a big deal, but I think it is best appreciated in the context of we have more tax credits, and now we have more resources to leverage those tax credits against,” National Association of Home Builders Assistant Vice President of Government Affairs JP Delmore said. 

Half of the $4B total credits will be earmarked for “difficult to serve” LIHTC markets — a definition that was expanded by the OBBBA — and at least 20% of that half will go to high-need rural communities. 

The changes work in tandem to help address what the National Low Income Housing Coalition estimates is a shortage of 7.1 million affordable and available rental homes in the U.S.

The two new policies are likely to boost the amount of equity available for affordable housing projects, National Council for State Housing Agencies Deputy Director of Tax Policy and Strategic Initiatives James Tassos said.

“The increase in the investment caps for Fannie and Freddie complements [OBBBA changes to LIHTC] very well, because it's going to bring in a lot of additional equity investment into the housing credit market at a time when we could see, frankly, a record number of deals done in the next 12 months compared to prior years,” Tassos said. 

But another important piece of the equation — the amount HUD can spend on its various rental assistance programs — is still up in the air. HUD cuts weren’t part of the OBBBA, but funding for the department is part of the appropriations process underway now. 

President Donald Trump’s proposed 2026 budget includes a $27B cut in rental assistance programs.

Both the House and Senate have suggested funding levels for HUD that are less damaging to HUD financially than Trump’s version of the budget, but all suggestions remain below the recommendations of industry groups such as the National Apartment Association.  

The current proposals typically keep HUD funding flat or offer less severe cuts. Flat funding, while not an on-paper decrease to funding, generally acts as a cut, since costs of labor and construction materials usually increase yearly while funding remains the same.

The appropriations process technically has an Oct. 1 deadline, but it can be extended. Some in the housing space are sounding the alarm about what stands to be lost if the most stringent cuts come to pass. 

“Many of these projects, these LIHTC projects, have housing choice vouchers as part of their financing plan — that is how these projects often pencil out,” said Amanda Hermans, a research associate in the Urban Institute's housing division. 

The Urban Institute released a report at the beginning of August on the projected impacts in the Bay Area of the proposed Trump budget. While the report acknowledged these cuts may not be realized, it highlighted the outsized reliance on federal funding for affordable housing that most localities have and the lack of available tools to replace those federal programs if they were to go away. 

Just the specter of those programs having less funding has already impacted affordable housing, as some developers are pulling back from the programs and resources with uncertain futures. 

SDS Capital Group CEO Deborah La Franchi told Bisnow that every developer she knows who uses vouchers has pulled away from those sources as a result of the lack of clarity about their future. 

“It's almost universal that people are stepping back from those programs right now, given all the uncertainty,” La Franchi said. 

“Lenders have become very hesitant to make commitments with all the uncertainty on those programs,” she added. 

The unclear future of those resources has caused other developers to pivot hard to get those projects done. Danielle Katz, counsel with Barclay Damon specializing in tax credit transactions, said that her firm’s clients haven’t slowed or been deterred by the possibility of funding being decreased. 

“Maybe it's more aggressive fundraising on their part, or maybe it's a cut slightly to their developer fee, but they're very much still looking to make these projects happen,” Katz said. 

Regardless of the outcome of funding, the interconnectivity of federal housing programs administered through HUD and LIHTC-financed projects was something that many industry professionals underscored. 

The ultimate fate of HUD funding will be an important piece of the puzzle moving forward for LIHTC developments. 

NAA’s Brown said he was optimistic because many HUD programs with futures being decided now have been around for years, if not decades, and have broad bipartisan support. That support has thus far saved them from some of the more draconian cuts initially proposed by the Trump administration. 

“That gives me some confidence as well,” Brown said.

“I think we will end up in a good place. It's just going to take some time and some work to get there.”