HUD Releases Housing Trust Fund Interim Rule

Published by Michael Novogradac on Thursday, February 5, 2015 - 12:00am

On Jan. 30, HUD released the interim regulations for the Housing Trust Fund (HTF), which was created by the Housing and Economic Recovery Act of 2008 (HERA) to support the production of affordable housing for very low-income families.  HUD originally released proposed HTF regulations on Oct. 29, 2010 and a proposed HTF allocation formula on Dec. 4, 2009.

Because the Federal Housing Finance Agency (FHFA) suspended Fannie Mae and Freddie Mac contributions to the HTF and its related program, the Capital Magnet Fund (CMF), shortly after they were created, the HTF currently has no funding.  However, on Dec. 11, 2014, FHFA Director Mel Watt announced that Fannie Mae and Freddie Mac would start setting aside HTF and CMF contributions based on their new business purchases in 2015, and the HTF funds should be transferred to HUD sometime in early 2016. According to our initial estimate , based on the past four quarters of Fannie Mae’s and Freddie Mac’s new business purchases, we expected about $260 million to go to the HTF in its first year, and that funding would be available in early 2016.

However, the administration’s fiscal year (FY) 2016 budget estimates that only $120 million will be allocated to the HTF in FY 2016. This estimate is notably lower, in part because an additional $61 million will come out of the assessment to capitalize the Treasury’s HOPE Reserve account.

HUD will solicit comments on this interim rule after the initial round of funding is made available. Below is our initial analysis of the interim rule, which we will explore in greater detail in an upcoming webinar.

Even though the HTF is a new section in HUD’s regulations and for the most, part a separate program, the HTF interim rule borrows much of the regulatory framework from the recently revised HOME Investment Partnership (HOME) Program regulations, so those members of the affordable housing community familiar with that program should be familiar with these regulations.

HUD will allocate HTF funding to states (including D.C., Puerto Rico and other territories) through a needs-based formula, with each state getting a minimum of $3 million. The National Low Income Housing Coalition has released its estimate of how much funding each state will receive based on the formula. Each state will then develop an allocation plan, similar in concept to the low-income housing tax credit (LIHTC) qualified allocation plan, to distribute its HTF allocation to specific developments.

In order to be eligible for HTF funding, each state must first identify the agency that will administer the funding. For most states, that will likely be the state housing finance agency (HFA).  But in the states where the HFA doesn’t administer HOME or where a state housing trust fund exists, it may be the HOME- or state housing trust fund-administering agency.  Some states—including New York, Ohio and Massachusetts—have already identified their HTF allocating agency, but many are still in the process of doing so.

Similar to the LIHTC, states will be given discretion over how they use HTF funds to meet their local housing needs, but each allocation plan must meet certain requirements set by HERA and HUD. One of these is the needs must be consistent with those identified Consolidated Plan process (ConPlan) used for HOME and other HUD funding. Any preference given to a particular segment of the population also must be consistent with the ConPlan. Furthermore, and unlike LIHTC, because the HTF funding is considered federal financial assistance, federal cross-cutting requirements such as Davis-Bacon and environmental reviews will apply. Each state’s HTF allocation plan must also set a cap on per-unit subsidies received with HTF dollars.

Under HERA, no less than 75 percent of HTF funding must be used to support affordable housing for extremely low-income (ELI) households, meaning they earn less than the greater of 30 percent of the area median gross income (AMGI) or the federal poverty line. All of the funding must benefit households earning at or below 50 percent of AMGI (i.e., very low-income or VLI). According to the interim rule, in years where less than $1 billion is available through the HTF, all of each state’s HTF funding must support ELI families. It appears likely the HTF will be below that threshold for several years.

HERA also directs that most HTF funding be used for affordable rental housing. According to the interim rule, no less than 80 percent of the HTF funds allocated to each state must be used for affordable rental housing. No more than 10 percent can be used to support sustainable homeownership for first-time homebuyers (the rule sets no minimum for support to homeownership). Up to 10 percent can be used to cover administrative costs.

HTF funding can be awarded to development in a variety of ways, including grants, equity investments, loans, advances, interest subsidies, deferred payment loans and other assistance approved by HUD. The interim rule also lays out specific project costs that are eligible for HTF support, including hard development costs, certain soft costs such as architectural and engineering fees, acquisition costs, refinancing costs, relocation costs and certain operating costs.  Units receiving HTF assistance cannot bear a rent that is more than 30 percent of the greater of 30 percent of AMGI or the federal poverty line.  The interim rule does not implement the “Brooke Rule,” which limits household rent payments to 30 percent of the adjusted household income.

In a significant change from the 2010 proposed regulations, the interim rule increased the maximum amount that each state can use for operating assistance, from 20 percent to 33.3 percent. Given that the cost of operating a unit serving ELI households is often more than the maximum rent allowable, allowing more HTF to go to operating assistance will help more LIHTC-financed housing to reach ELI households.

In another related change, states will generally be allowed to use HTF money to capitalize operating reserves for up to 30 years, which is the mandatory period of affordability for all HTF-assisted properties and matches with the LIHTC extended-use period. However, if funds are appropriated from the annual federal government discretionary budget to the HTF, states will only be able to use those funds to capitalize operating reserves for five years or less.

Summary of key changes from the 2010 proposed rule

Based on input received during the public comments period, HUD made the following other key changes from the proposed regulations:

  • Allowed HTF funds to support the rehabilitation of public housing through the Rental Assistance Demonstration (RAD) program or the Choice Neighborhoods initiative;
  • Removed the relaxed commitment deadline of HTF funds used for transit-oriented development;
  • Removed provisions that would require all HTF-supported units to meet Energy Star and Water Sense certifications;
  • Instead of just reserving all HTF funds to support ELI households in the first year of funding, the interim rule reserves all HTF funding for ELI housing if the total annual funding is below $1 billion;
  • Provided an alternate process for HUD to make allocations if there is not enough annual HTF funding to give every state at least $3 million.

On Jan. 27, Rep. Ed Royce (R-Calif.), introduced H.R. 574, “Pay Back the Taxpayers Act of 2015,” legislation to prevent Fannie Mae and Freddie Mac from making contributions to the HTF and CMF while in conservatorship or receivership, and require any payments that have already been set aside to instead be used to reduce the federal budget deficit. The bill had 12 original co-sponsors, all Republicans. While it’s certainly possible and perhaps likely that the House Financial Services Committee or the full House will pass this bill, it’s unlikely to pass the full Senate.  And even if it were to pass the Senate, the president would very likely veto it.