In the 1990s, affordable housing projects were faced with a capital shortage. The degree of loan defaults witnessed throughout the 1980s left private-sector lenders reluctant to support such projects. The defaults of the 1980s were largely a result of lending excesses predicated upon existing project cash flows, rather than proposal reviews and risk assessments. As projects failed, the lending markets moved toward more conservative standards that required credit enhancement and strict underwriting.
In 1992, the Florida Affordable Housing Guarantee Program was created to stimulate private sector lending and, in turn, reduce the cost of financing housing projects. The Program aimed to create security mechanisms that allowed private lenders to sell housing loans on open markets, while providing a safe environment for lenders.
The Guarantee Program was created by a governor-appointed Committee on Affordable Housing (COAH) in 1991. The COAH worked to endow the Program with a Guarantee Fund by providing it with 16.19 percent of Florida's documentary stamp revenues. These revenues were the product of a 0.7 percent tax on all real estate transfers and initially afforded the Guarantee Program a 39.7 million dollar fund. While this fund was too small to directly fund projects, it was enough to leverage a reduction in the risk for private lenders through payment guarantees.
As of 1998, the Guarantee Program holds a fund of nearly 65 million dollars, but it is able to issue payment guarantees totaling five times its actual worth. The use of this fund offers a safer lending environment for private lenders. The Program was also able to create security mechanisms, which allowed lenders to sell their affordable housing loans on open secondary markets. This created a market environment in which the supply of loans increased, due to incentives and state-sponsored guarantees. The result was a lessening in the cost of financing affordable housing projects.
The Program's facilitation of a financially sound guarantee program effectively fostered a reversal in the direction of Florida's affordable housing lending market. In the first five years alone, the program assisted in financing 12,274 homes. Approximately 60 percent of the 9,652 multifamily rental units are reserved for designated low-income families. The Florida Affordable Housing Guarantee Program generated a market shift that serves a target population that would otherwise be at the mercy of free-market forces.