FHFA Increases GSEs’ Annual LIHTC Equity Investment Cap to $850 Million Each, White House, Treasury and HUD Announce Additional Measures to Promote Affordable Housing
Published by Peter Lawrence on Wednesday, September 1, 2021 - 12:00AM
Today, the Federal Housing Finance Agency (FHFA) announced it will be increasing the annual low-income housing tax credit (LIHTC) equity investment limits for the housing government sponsored entities (GSEs) Fannie Mae and Freddie Mac by $350 million each to $850 million each for a total of $1.7 billion, effective immediately. In addition, FHFA announced that the portion of the GSE LIHTC equity investments required for mission-related investments was increased from 40% ($200 million) to 50% ($425 million). The announcement was a part of a broader White House, Treasury, HUD and FHFA announcement of immediate steps to increase affordable housing supply about 100,000 homes.
At the end of 2017, FHFA approved the GSEs limited re-entry into the LIHTC market as equity investors, with a cap of $500 million in investments per year for each GSE, of which $200 million was targeted for mission-related investments requiring prior FHFA approval. Most of that targeted $200 million was for LIHTC equity investments in rural areas as defined under the GSEs’ Duty to Serve (DTS) mandate to serve rural housing markets. At the time, the GSEs’ reemergence in the LIHTC equity market meant greater availability of equity investment and better equity pricing, especially in areas outside traditional Community Reinvestment Act (CRA) assessment areas to address the affordable rental housing needs of underserved markets. The GSEs’ participation also buoyed the investor market in the wake of tax reform, which lowered the corporate tax rate from 35% to 21% among other tax law changes, dampening the LIHTC equity investment market. The $500 million cap set in 2017 for each GSE for a total of $1 billion represented nearly 7% of the estimated 2017 LIHTC equity investment market.
Today’s Cap Increase
The new $850 million cap for each GSE today, for a total of $1.7 billion, means that the GSEs would have an estimated 7.5% market share, based on a projected $22.5 billion LIHTC equity investment market for 2021, given the recent LIHTC changes Congress enacted in the December 2020 tax law. It’s worth noting that before they were placed under conservatorship in 2008, the GSEs accounted for 35-40% of the annual LIHTC equity market share. So this increase in annual GSE equity investment is still far below the GSE’s pre-2008 market share. FHFA also noted in today’s announcement that it will continue to re-examine the annual investment caps to make adjustments as necessary. If Congress were to increase LIHTC allocations in the forthcoming reconciliation bill, a further increase the annual GSE investment caps would be necessary to maintain that 7.5% market share.
Of the $425 million in mission-related investments, FHFA’s news release notes such investments are “required to be in areas that have been identified by FHFA as markets that have difficulty attracting investors.” FHFA is narrowing what LIHTC investments qualify as mission-related to:
- Rural rental housing as specified under the DTS rule to serve rural markets
- Higher leverage or higher risk preservation properties (generally 4% LIHTC properties)
- Supportive housing properties
- Mixed-Income new construction properties
Other Recent FHFA Changes
Today’s announcement is the latest in a series of changes proposed by FHFA, many were initiated after a Supreme Court decision in June paved the way for President Joe Biden to install a new FHFA director. Shortly after the Supreme Court decision was announced, former FHFA director Mark Calabria resigned and was replaced by acting FHFA director Sandra Thompson June 23.
Since 2016, the GSEs have been required to address the needs of traditionally underserved markets. In May, FHFA proposed a new DTS Underserved Markets Plan for 2022-2024 for Fannie Mae and Freddie Mac. Thes DTS goals are mandated by the Housing and Economic Recovery Act of 2008 and requires that the GSEs serve very low-, low- and moderate-income families in three underserved markets: manufactured housing; affordable housing preservation; and rural housing. The rule creates an evaluation process that occurs in three-year cycles, and its objective is to increase the liquidity of mortgages in underserved markets. It is FHFA’s responsibility to evaluate the GSEs’ performance by performing a quantitative assessment of whether the GSEs achieved its benchmarks, and then performing a qualitative assessment of the impact the GSEs had in underserved markets, and finally performing as assessment of extra credit-eligible activities undertaken by the GSEs. Extra credit activities include creating economically diverse neighborhoods, through means such as promoting affordable housing in high opportunity areas. It is expected that a report about this assessment will be issued this month.
Following May’s DTS proposal, FHFA proposed new housing goals August 18 for the GSEs for 2022-2024. FHFA proposed an increase in mortgage purchases of low-income multifamily properties from an annual goal of 300,000 in 2018 to 415,000 units annually for 2022 through 2024. FHFA also proposed two subgoals : annually, mortgages must be purchased for very-low-income properties with 88,000 units, up from the current requirement of 60,000 units; and, an increase in the small multifamily low-income properties goal of 10,000 to with 23,000 units.
Beyond with today’s announcement and the other proposed changes, there are likely still additional changes in store at FHFA. As critical institutions of the housing finance system, future decisions FHFA will make concerning the GSEs will have longstanding impacts.
Other Administration Housing Policy Announcements
As described in today’s White House fact sheet, the administration announced several other housing policy changes to promote affordable housing, including:
- Reinstating partnership between Treasury’s Federal Financing Bank (FFB) and the U.S. Department of Housing and Urban Development (HUD) Oct. 1 to enable the section 542 Federal Housing Administration (FHA)-Housing Finance Agency (HFA) multifamily Risk-Sharing Program loans to obtain lower financing costs, similar to what loans securitized by Ginnie Mae can receive (FHA-HFA risk-share loans are not eligible for Ginnie Mae securitization under current law). This partnership was terminated in 2019 under the Trump administration after being originally established by the Obama administration in 2015. According to the National Council of State Housing Agencies (NCSHA), the partnership financed more than 25,000 affordable rental homes.
- Announcing forthcoming $383 million Notice of Funding Availability under the 2021 Capital Magnet Fund (CMF) round, a substantial increase from the $175 million for the 2020 CMF round.
- Announcing FHFA and HUD policies that would:
- Make financing more available for manufactured housing,
- Make financing more available for 2-4 unit properties,
- Prioritize homeownership in the sale of FHA-insured properties,
- Promote the sale of distressed HUD properties to nonprofits,
- Leverage federal funding to spur state and local action on affordable housing production,
- Explore GSE mortgage activity to determine effect on exclusionary zoning, and
- Launch listening sessions on zoning best practices.