CBO Reports Thousands of Affordable Homes have been Financed by CMF, HTF But More are Needed
As of October 2022, both the Housing Trust Fund (HTF) and the Capital Magnet Fund (CMF) have financed affordable homes available to low-income households—a combined 23,989 rental homes and 4,200 owner occupied properties, according to a November 2022 report from the Congressional Budget Office (CBO). Furthermore, the report found that by the end of 2021, payments to the funds since their inception totaled $2.7 billion for the HTF and $1.5 billion for the CMF. The report details the specific process of how the HTF and CMF provide grants to both increase and preserve the supply of affordable housing.
An Overview of CMF and HTF
The HTF is managed by the U.S. Department of Housing and Urban Development (HUD) while the CMF is overseen by the U.S. Department of the Treasury’s Community Development Financial Institutions (CDFI) Fund. The HTF provides grants to states to increase and preserve the affordable housing stock for the lowest income households as well as provide homeownership opportunities for very low-income families. However, since annual national allocations have been under $1 billion, 100% of allocations have gone to extremely low-income households. Only a small percentage of HTF resources have gone to homeownership, as it is extremely hard to finance affordable homeownership for extremely low-income households. Through the CMF, the CDFI Fund provides grants to CDFIs and nonprofit housing organizations, which include housing finance agencies. These grants from the CMF must leverage other sources by a ratio of at least 10 to one, and proceeds of such leveraged funds then finance loans and capitalize funds all to build and preserve affordable housing.
The funds are financed through fees collected on annual new business purchases made by the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Contributions are supported by an upfront fee of 4.2 basis points on the principal balance of new mortgage guarantees. Then, 65% of those fees are allocated to the HTF. The remaining 35% of these funds go to the CMF.
Recent CMF, HTF Activity
In June of 2022, the Treasury CDFI Fund announced its largest CMF award amount of $336.4 million for the fiscal year (FY) 2021. The previous record was $175 million in its 2020 round. Similarly, the HTF had a record setting allocation of nearly $750 million announced in 2022. However, the CMF and HTF are expected to receive lower allocations in future rounds due to rising inflation, interest rates and fewer refinancings. Compared to the first three quarters of 2021, the GSEs’ new business purchases over the first three quarters of 2022 are 52% of 2021.
Annually, Novogradac estimates the amounts of funding that the HTF and CMF will receive. The FHFA announced that the HTF and CMF will receive a combined total of $1.14 billion for 2022. Novogradac bases these estimates on U.S. Securities and Exchange Commission filings of Fannie Mae and Freddie Mac. Thus far, the new business purchases documented in 2022 filings on which the 2023 estimates will be based on are lower than those used for 2022 allocations, which would lead to lower allocations to the CMF and HTF from the GSEs in 2023.
Though There is a Cost, Home Financed Through HTF And CMF Add to Affordable Housing Supply
As noted above, by the end of 2021, CBO found that payments to the HTF since its beginning totaled $2.7 billion, while the CMF totaled $1.5 billion. In FY 2021, grants of about $690 million were allocated from the HTF and grants of $336 million were awarded from the CMF. These grants were distributed to organizations responsible for constructing and maintaining housing for low-income renters and homeowners. The CBO finds that only a small portion of those grants have been disbursed to actual properties as of 2021. This is likely the result of CMF and HTF program requirements regarding placed in service and project completion dates. The CMF program requires that all units be placed in service within five years, meaning that recipients of 2018 and later CMF allocations still have time to place homes in service. The HTF program will reduce or recapture funds not committed within two years or are not expended within five years, again providing recipients of 2018 and later HTF allocations with time to place homes in service. Grants from the funds are made to entities responsible for producing and maintaining housing for low-income renters or homeowners. To receive grants, developers must meet certain eligibility and affordability requirements for the qualifying properties.
According to CBO, allocating this money through Fannie Mae and Freddie Mac is a cost to the government as these are two government entities, however the payments made by Fannie Mae and Freddie Mac to the funds do not increase the GSEs potential liability from their mortgage guarantees. This is because the GSEs are not taking on any additional risk, and eventually reduce the net income of the enterprises.
CBO notes that both CMF and HTF are essential to increasing the supply of affordable housing and have the ability to finance low-income properties. As of Oct. 3, 2022, properties funded with $317 million in HTF grants created 2,989 low-income rental homes. Additionally, $168 million in CMF funds have been spent on 21,000 low-income rental homes, and 4,200 low-income owner-occupied properties.
The report includes a comparison of the CMF and HTF programs to other federal housing programs on both the production and demand side. CMF and HTF are compared to other demand-side subsidies, namely the Housing Choice Voucher Program. Both CMF and HTF were found to fill in the gaps in financing created by the other programs or private capital. On the supply side, incentives such as the low-income housing tax credit (LIHTC), public housing programs, Community Development Block Grants and the HOME Investment Partnership program were mentioned. CBO determined that these production programs should be used in conjunction with the CMF and HTF programs to address the affordable housing crisis.
However, CBO concluded that it proves difficult to truly measure the effectiveness between each program. Comparisons must consider multiple factors, including the type of subsidy offered by each program. Programs like the HTF and CMF create subsidies with the intent of generating production of new affordable homes and preservation of existing affordable housing. Other programs may choose to offer subsidies that generate demand by giving renters and homeowners increased power of choice.
The CBO report also included a comparison of the HTF with the LIHTC incentive. At the end of 2022, grants from the HTF have created 2,989 units that meet the LIHTC program’s requirements, which include eligibility and affordability requirements based on income. The LIHTC had financed 122,000 new and rehabbed units between 2011 and 2015. In total, LIHTC has financed the development and rehabilitation of 3.6 million rental homes, according to the National Council of State Housing Agencies, making the LIHTC the most successful federal affordable rental housing supply program. The LIHTC has created more affordable rental homes on a per year basis than the HTF program, however the periods of comparison for each program vary, the HTF program was analyzed from 2016-2022, and LIHTC from 2011-2015.
It Will Take All Available Tools to Solve the Nation’s Affordable Housing Crisis
To make additional comparisons of the HTF and CMF programs against other federal housing assistance programs, CBO finds that more data is needed. The CBO report makes no specific recommendations due to its call to remain an impartial entity, though it does share that more than 13 million eligible households do not receive housing support. Additionally, the CBO estimates that there is a shortage of 1.5 million affordable rental homes that are affordable and available to low-income households. However, other reports have concluded that this shortage is larger. The National Low Income Housing Coalition estimates that there is a shortage of 7 million rental homes available and affordable to extremely low-income renters. Freddie Mac reports that there is a current shortage of 4 million homes.
Earlier versions of the Build Back Better Act (BBBA) had included $15 billion in additional HTF funding; however the Inflation Reduction Act, the reconciliation bill that ultimately passed did not include this historic allocation for the HTF. To properly address the nation’s affordable housing crisis, it is crucial that Congress continue to authorize funding for CMF and the HTF.
The nation’s need for affordable housing is significant, and will require many different tools, including all the programs mentioned in the CBO report, to address this crisis. Enhancements to these programs are needed to fill the affordable housing shortfall. A year-end tax bill could include LIHTC proposals, such as restoring and making permanent the 12.5% increase in 9% LIHTC allocations as well as reducing the private activity bond financing threshold from 50% to 25%, to help address the nation’s deficit in affordable housing supply. Novogradac estimates that these proposals could finance more than 1.9 million affordable rental homes over 10 years.