As Expected, Housing Trust Fund and Capital Magnet Fund Contribution Estimates are Lower than Record-Setting Levels but Higher than 2020
Each year, Novogradac estimates annual contributions to and amounts available for the Capital Magnet Fund (CMF) and the national Housing Trust Fund (HTF)—for 2023, $377 million for the HTF and $203 million for the CMF are expected to be available, considerably lower than 2022 estimates. The drop in CMF and HTF funds was expected because increased interest rates in 2022 and the corresponding rise in mortgage rates have had a chilling effect on the housing market.
Estimates are based on 2022 U.S. Securities and Exchange Commission (SEC) filings of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac, who are required to contribute funds quarterly to the CMF and HTF. For comparison purposes, the Federal Housing Finance Agency (FHFA), which regulates the GSEs, announced that contributions to the CMF and HTF would total approximately $545 million, of which CMF would receive $191 million and HTF would receive $354 million.
The funding for the CMF and HTF comes from the GSE’s annual new business purchases and due to 2022 housing market conditions the amounts are significantly lower than last year’s record setting 2022 totals. In 2022, $336 million was allocated for the CMF round and $740 million was allocated to states through the HTF. The U.S. Treasury Department’s Community Development Financial Institutions (CDFI) Fund holds competitions for CMF funding among CDFIs and nonprofit housing organizations (including state housing agencies) and the U.S. Department of Housing and Urban Development (HUD) allocates HTF contributions to state housing agencies for the production or preservation of affordable housing and related economic development activities and community service facilities.
It should be noted that the HTF has never been funded by appropriations, and only once has there been an appropriation for the CMF, making reductions in contributions all the more detrimental. A reduction in contributions to the HTF and CMF will likely affect the housing and community development activities funded. A November 2022 report from the Congressional Budget Office (CBO) found that the CMF and HTF financed a combined 23,989 rental homes and 4,200 owner occupied properties. The same report shares that more than 13 million eligible households do not receive housing support and there is a shortage of 1.5 million affordable rental homes that are affordable and available to low-income households. Though other sources find the need for housing is much more acute—estimates range from a shortage of 4 million and 7 million homes—the takeaway is the same, more funding, not less, is needed to address the country’s housing crisis.
Since Their Inception, more than $4 Billion has been Paid into HTF and the CMF
The Housing and Economic Recovery Act of 2008 required that the GSEs contribute funds to the CMF and HTF. Though the funds were established in 2008, the GSEs were not authorized to begin contributing funds until 2014. Nearly two-thirds (65%) of the contributions are allocated to the HTF, with the other 35% are allocated to the CMF. These contributions are based on an up-front fee of 4.2 basis points (or 0.042%) on the principal balance of new mortgage guarantees made by the GSEs. Each quarter the GSEs set aside contributions, which are subject to sequestration, though previously sequestered amounts that are not needed to comply with mandatory spending sequestration may be returned. A November 2022 report from the CBO found that as of the end of 2021, payments to the funds totaled $2.7 billion for the HTF and $1.5 billion for the CMF.
The record 2022 contributions to the HTF and CMF, followed previous record-setting contributions in 2021. These high-level contributions were based on strong housing markets—in 2022, SEC Fannie Mae and Freddie Mac filings indicate they purchased nearly $1.2 trillion in single-family mortgages for the year, less than half of the $2.6 trillion in single-family mortgages purchased in 2021. Record levels of mortgage refinancings during the height of the pandemic allowed for 2021 and 2022 contributions to the HTF and CMF that were more than double 2020 contributions. Again, the increase in interest rates in 2022, and the corresponding rise in mortgage rates, have had a chilling effect on the housing market, especially for refinance loans. Per GSE filings, in 2020 and 2021, refinance loans accounted for 70% and 67%, respectively, of Fannie Mae’s business volume at acquisition, with purchase loans accounting for the balance. In 2022, the business volume percentages were reversed—purchase loans made up 62% of business volume and refinancings were just 38%. Similar ratios were reported by Freddie Mac. Still, estimates for 2023 contributions to the HTF and CMF would place funding above 2020 levels.
The funds distributed from the HTF and CMF to HUD and the CFDI Fund, respectively, are used for various housing and related community development activities. Funds from the HTF are used specifically to increase and preserve the supply of affordable rental housing for extremely low-income (ELI) families, households with incomes that are less than 30% of the area median income (AMI) or the federal poverty line, whichever is greater, and very low-income households, those with incomes of 30% to 50% AMI. When the overall amount available from the HTF is less than $1 billion, as it is estimated for 2023, all funding is reserved for ELI households.
The distribution of HTF funds to each of the 50 states, Washington D.C., and U.S. territories is based on an HTF-specific formula that measures the need for affordable housing of the lowest income households. HUD is expected to announce HTF allocations to states by early April. Once states have received their HTF allocations, such funds will be distributed to recipients according to each state’s HTF allocation plan, likely in the second half of 2023.
CMF allocations are used to finance housing and related community development activities. Housing activities that can be funded include the preservation, rehabilitation, development, or purchase of affordable rental housing or owner-occupied housing for low-income populations and communities. Up to 30% of CMF allocations can be used for economic development and community services facilities developed in conjunction with the affordable housing, such as workforce development centers and health care clinics.
The CDFI Fund makes CMF awards through a competitive process open to CDFIs and qualified nonprofit housing organizations. The CDFI Fund opened the fiscal year (FY) 2023 award round Jan. 18. The CDFI Fund did not hold a FY 2022 round due to the timeline associated with the CMF and the “significant” number of awards made in FY 2021, as detailed in the round opening announcement. That same announcement notes that rather than making the same amount allocated to the CMF available for award, the CDFI Fund decided to average two years of CMF allocations, allowing for “more predictability” in the face of lower projected contributions over the coming years. The recently opened FY 2023 round will have up to $320.6 million available for awards.
CMF and HTF are Important Tools for Addressing Nation’s Housing Issues
With HTF and CMF contributions returning to levels closer to pre-pandemic amounts and the prospects of a continued softening of the housing market due to high interest rates, additional funding for housing activities is even more crucial. Earlier versions of the reconciliation bill had included one-time allocations of $15 billion in additional HTF funding and $750 million or the CMF. Though that funding, along with other housing and community development funding, was removed from the later versions of the reconciliation bill, including the final version, enacted as the Inflation reduction Act of 2022, their inclusion in earlier proposals speaks to the importance of the HTF an CMF as a tool to address the country’s housing crisis. A number of housing bills have been introduced in recent weeks including the Decent Affordable and Safe Housing for All (DASH) Act, which would address both renter and owner-occupied housing needs. Another highly anticipated bill is the Affordable Housing Credit Improvement Act, which would greatly enhance the low-income housing tax credit. Provisions in these bills would create and enhance tools that can address the nation’s housing supply shortage and affordability crisis. The CMF and HTF are additional items in the toolbox for financing housing activities and any additional set asides for these funds should be considered in future legislation.
To stay up to date on affordable housing news, Novogradac has several resources, including the LIHTC Working Group and the Novogradac 2023 Affordable Housing Conference in San Francisco on April 27-28.