Affordable Housing Future Flow Contributive Asset-Backed Securities issuance now exceeds $2.5B and, fueled by the Fed’s recent rate cut, is expected to exceed $3B in issuance early in Q1 2025. Accordingly, Westwood Capital continues to encourage affordable housing developers to consider employing its proprietary Affordable Housing Future Flow Contributive Asset-Backed Securities (AHFCABS), as a source of truly low-cost real estate acquisition and development capital. When we predicted a Q3 rate cut in our Q2 2024 update, we were not expecting the Fed to kick things off with a 50bps reduction in the policy rate, at least not so soon. Such larger-than-usual reductions are generally an admission of a policy error in scale or timing, and this one was no different. Recession is not an option for the Powell-led Federal Open Markets Committee. While today the 10-year U.S. Treasury is trading at 3.79%, after backing up from 3.60% immediately prior the Fed’s announcement last week (sell on the news) – the yield down nearly 100bps since it’s 2024 peak in April. Chairman Powell was clear that this ‘recalibration’ was meant to account for the sharp decline in inflation since 2023 and to stay ahead of a potentially weakening job market – it now seems clear to most observers that the Fed’s principal aim is to avoid unnecessarily higher unemployment in order to reach its ‘holy grail’ 2.0% inflation target. Indeed, at 2.2%, the current PCE inflation rate is the lowest it has been since 2020. Moreover, in addition to last month’s cut, Fed policymakers made clear their expectations that the benchmark rate would fall by yet another half of a percentage point by the end of 2024, followed by a full percentage point in 2025 and another half point in 2026. As a reminder, AHFCABS are priced at a spread over the 10-year treasury, and we expect that spread to tighten materially in the coming months. While the Fed got caught with almost 24 months of very high inflation challenging its earlier expectations that the pandemic-related price spikes would be “transitory,” in the end they were correct -if you ignore the passage of time. There is little doubt now that all of the inputs to the high inflation of late 2021-2023 were pandemic-related, though longer lasting than anticipated three years ago. Westwood is now forecasting that the 10-year yield will stabilize this cycle in a range of 3.00% to 3.25%, beginning by the end of Q2 2025. We anticipate that mortgage rates will continue to soften as rates fall, spreads tighten, economic and labor data continue to weaken, and the Fed becomes more dovish in its willingness to do more to help the U.S. stay out of recession. And while no one is rooting for it, a stock market correction at this point in the cycle would further benefit borrowers to the extent that it triggers a flight to safety into bonds. For those not yet familiar with it, the future flow passive contribution structure enables developers to tap into the value of their residual GP/SLP cash flow from annual property cash flow, development and management fees, and disposition and refinancing proceeds – over the full life of portfolio properties – to create a borrowing base, the proceeds of which can be used for any purpose. By utilizing this structure, developers are in essence borrowing against their own equity – but at investment grade bond rates. Because the execution of these transactions often requires four to six months, or more, from inception to closing, now is an advantageous time to commence execution of an AHFCABS transaction, in anticipation of considerably improved market conditions in Q4 2024, and continuing well into 2025 and 2026.