Credits work by allowing investors, usually big banks, to reduce their tax burdens in the future in exchange for money invested today. But many big banks suddenly have no profits to speak of, erasing tax liabilities and, therefore, demand for tax credits. Credit prices crashed, and when developers can actually locate an investor, they are getting far less money for each credit they sell.
"It's been a calamity to the program," says Ronne Thielen, president of the Affordable Housing Tax Credit Coalition.
Originally created in 1986, the tax-credit program was an attempt to wean affordable-housing construction off its dependence on federal money and bring in the financial expertise and discipline of private companies.
The entities that have come to dominate the tax-credit world read like a who's who of troubled financial institutions: Fannie Mae, Freddie Mac, Washington Mutual, Citigroup, and Wachovia, among others. Fannie and Freddie alone made up more than 40 percent of the market before dropping out of it completely at the end of 2007.