Could Crowdfunding Trends Improve the U.S. Affordable Housing Crisis?

The United States has experienced rising housing costs, now complicated by COVID-19 and the associated eviction crisis. Governments and communities alike are on the hunt for effective strategies. Crowdfunding trends may be the solution, with the potential to raise capital for affordable housing initiatives on a local level and beyond.

The Housing Crisis and the COVID-19 Eviction Wave

According to a recent survey by the U.S. Census, 23.7 million Americans, or one-third of all U.S. renters, lacked confidence that they would be able to pay rent the following month. More than half of those renters already reported falling behind in their payments, as cited by The Hill. In June, the Federal Housing Administration extended its eviction and foreclosure moratorium until August 31, although it only applies to people with federally insured, single-family mortgages. On July 24, the CARES Act’s eviction moratorium also lapsed, and so have many local and state moratoriums. The CARES Act’s $600 USD supplement to unemployment insurance expired at the end of July. Without assistance to renters and landlords, the eviction wave will expand even further.

Even before the pandemic, approximately 20.8 million renters paid over 30 percent of their income toward housing costs even before the pandemic. That adds up to six million more “cost-burdened renters” than in 2001. Of those “cost-burdened renters,” 10.9 million, or one-quarter of all renters, were spending more than half their income on rent.

The Senate and the House of Representatives have each put out their coronavirus stimulus packages: the HEALS Act and the Heroes Act, respectively. While the HEALS Act does protect federally backed mortgages, the Heroes Act expands eviction moratoriums to almost all rental residences for a full year to account for how long the COVID-19 economic downturn will likely last, as compared and cited by CNET.

Crowdfunding as a Solution

Community investor crowdfunding in real estate is relatively new. Here’s an example: In 2019, to mitigate the housing crisis for tech workers in Seattle, nonprofit affordable housing provider Bellwether Housing launched a $4.5 million USD fundraising campaign for the first time anticipating that tech workers would contribute a few thousand dollars each, or less. Bloomberg covered the story.

Unfortunately, some other real estate investment and crowdfunding platforms, such as Fundrise, are not geared toward affordable housing development or community investment. In an opinion piece, Aaron Reuben, Business Law Scholar at Georgetown Law, pointed out that while current crowdfunding rules under Regulation A+ and Regulation D of the Securities Act allow online crowdfunding from a somewhat limited pool of investors called accredited investors, legal risks deter many developers from soliciting funds from local communities. For instance, the JOBS Act created Rule 506(c) crowdfunding requirements which permit issuers to advertise and make a broad public appeal, although only accredited investors may buy into an offering. If the SEC were to enact special safe harbors to these regulations that incentivize community investment, crowdfunding could raise money to develop and update local affordable housing.

Because affordable housing is considered “in the public interest” for purposes of many government policies, Reuben suggested that perhaps such safe harbors utilized by developers and community investors would fall along similar lines. This is important because, under the law, the SEC may exempt offerings from its rules, as long as such exemption still protects investors and remains “in the public interest”.

Additionally, current accredited investor qualifications are based on income and net worth, rather than expertise, knowledge, or experience. Therefore, according to Reuben, the SEC might modify the qualifications for accredited investors to value local knowledge. Employment, income, and residency might remain factors in such a revised regulatory framework for crowdfunding, however.

To protect both accredited investors and community investors, developers might be required to hold question-and-answer sessions and make brief, specific disclosures customized to the real estate/affordable housing environment. Along with other revised rules, such disclosures could lessen a developer’s legal risks by offering more certainty about what the SEC requires, Reuben commented.

We hope that these suggested crowdfunding reforms will become a reality, perhaps beginning with some nonprofit initiatives and expanding from there. In the meantime, be sure to follow https://blog.verifyinvestor.com/ for more crowdfunding news.