Housing Finance Reform
The financial crisis has triggered a wide-ranging, active debate on the future shape of the housing finance system. With the September 2008 decision by the government to place Fannie Mae and Freddie Mac in conservatorship, the discussion has focused principally on the future of these two institutions and the government role in the secondary mortgage market. SAHF and its members are particularly focused on ensuring that the housing finance system supports multifamily housing finance, in general, and affordable housing finance specifically.
Government Sponsored Enterprises (GSEs)—The Role of Fannie Mae and Freddie Mac in the Development and Preservation of Affordable Housing
The historical focus by policy makers on the role that Fannie Mae and Freddie Mac play in the single-family mortgage market and in support of homeownership has obscured the large-scale, critical role that these two GSEs have played in financing of multifamily housing debt.
SAHF members are primarily concerned with the ready availability of reasonably priced short- and long-term credit to facilitate the construction, acquisition, and rehabilitation of subsidized affordable housing. The SAHF member properties typically receive some form of federal or state subsidy, such as Section 8 project-based or tenant-based rental assistance payments, HUD Section 202 grants and rental assistance, and/or Low-Income Housing Tax Credits. In virtually all cases, reasonably priced mortgage credit is essential to project feasibility. For this reason, SAHF has been an active supporter of the "duty to serve" provision enacted by Congress in 2008, requiring the GSEs to develop new approaches to affordable housing preservation transactions. SAHF submitted comments to Fannie Mae and Freddie Mac's regulator - the Federal Housing Finance Agency (FHFA) - on the preservation duty to serve provision on two separate occasions
Click here to read SAHF’s September 2009 comment letter and here for SAHF’s to read SAHF’s July 2010 comment letter.
Some of the issues we highlighted in our comment letters include:
Expansive and Inclusive Definition of Affordable Housing Preservation
We urged FHFA to write rules that encourage an expansive and inclusive set of properties that could qualify for affordable housing preservation treatment and a list of activities that would otherwise count toward the satisfactory fulfillment of the GSEs’ duty to serve requirement for affordable housing preservation. The rules should include properties not specifically enumerated by the Congress such as those properties supported by HUD’s rent supplement (Rent Supp), rental assistance program (RAP), and Section 8 moderate rehabilitation programs. We also proposed that FHFA make it clear that preservation activities can also include interventions that serve to conserve energy and reduce the operating costs of a development. And, we argued that the final rule should also make it clear that eligible activities could include a strategy of acquiring unsubsidized properties in order to preserve the properties as affordable housing over the longer term.
Enterprise Involvement with Low Income Housing Tax Credit Properties
While it is hard to argue that Fannie Mae and Freddie Mac should return to the markets as equity investors in the LIHTC program until they return to profitability, there are numerous ways in which the GSEs could support the housing credit market consistent with their new preservation duty to serve. The GSEs could participate in housing-credit related affordable housing transactions on the debt side. Secondly, Fannie Mae and Freddie Mac are owners of many affordable housing properties – many of which have reached, or will reach, the end of their 15-year tax credit compliance period during the period of time covered by the duties to serve. The duties to serve could make it clear that the GSEs get credit in those instances where they transferred or sold their ownership interests to a nonprofit owner for the purpose of continued affordability of the property. And, we recommended that the Enterprises could serve a powerful and needed role in helping to restore a healthy LIHTC market by introducing a secondary market for trading tax credit equity positions.
Multifamily Real Estate Owned (REO) and Loss Mitigation Opportunities
The Government Sponsored Enterprises have another powerful opportunity to support affordable housing preservation through the creative disposition of their real estate owned (REO) portfolios. The transfer or sale of these properties to long-term stewards of the properties as affordable housing, with seller financing, should be strongly encouraged in the duties to serve provisions.
More Flexibility in Underwriting
The duties to serve provisions are clearly meant to encourage greater underwriting flexibility in order to support the enumerated market segments. The GSEs should apply more flexibility in their underwriting requirements for deals involving affordable housing preservation. Increased flexibility does not imply that the GSEs need to take on additional risk. Previously, the GSEs required inordinate operating reserves to cover the Section 8 appropriations risk, for example, taking significant resources out of the transaction for unproductive uses. Affordable housing preservation transactions often come with preexisting conditions or quirks that make them not strictly compliant with one or more of the many underwriting standards. If GSE underwriting standards apply in a "one-size-fits-all" manner, preservation transactions will be rejected out of hand.
Community Reinvestment Act (CRA)
In the 15 years since regulators last updated the Community Reinvestment Act (CRA) rules, the financial services industry has undergone dramatic changes. Likewise, the nation’s housing and community development needs have changed in profound ways.
The challenges today are often larger and more complex. We have learned a great deal about what works and does not work. Financial institutions have increased their understanding of the needs of communities and enhanced their product offerings, while the nonprofit institutions that are doing much of this work in the nation’s communities have grown in strength and capacity. There is much more work to be done. The upcoming rewrite of the rules represents an opportunity to update CRA based on the changes in the market, to better align CRA with national housing and community development policy priorities, and, ultimately, to achieve greater positive outcomes for America’s communities.
Click here to read SAHF's comment letter on efforts to modernize the rules guiding the Community Reinvestment Act (CRA).
SAHF’s principal recommendations can be summarized as follows:
Add a new Community Development Test that encourages financial institution participation in a broad range of activities, including affordable housing and community development lending, investments, and services.
Better align CRA with other national housing and community development priorities, programs, and subsidies.
Provide greater incentives for banks to address national priorities and underserved communities that include communities outside their current assessment areas.
Provide full CRA credit for investments in qualified mission-oriented Community Development Financial Institutions (CDFIs) and nonprofit affordable housing development entities, even if these entities are located outside of the bank’s assessment areas.
Reemphasize the practice of sustainable homeownership for low-income households, defined by responsible lending products and practices and coupled with housing counseling services.