Proposed Rule Holds Significant Potential for the Future of Affordable Rental Housing

Published by Peter Lawrence on Thursday, February 11, 2016 - 12:00am

On Dec. 10, 2015, the Federal Housing Finance Agency (FHFA) proposed a rule outlining the obligation that Fannie Mae and Freddie Mac serve three traditionally underserved markets: affordable rental housing preservation, rural housing and manufactured housing. Collectively, this obligation is known as the “Duty to Serve.” FHFA established the Duty to Serve regulation after a Congressional directive in the Housing and Economic Recovery Act of 2008. FHFA issued an advance notice of proposed rulemaking in 2009 on this obligation, but it did not release a proposed regulation until December. The proposed rule holds a number of implications for affordable rental housing, including Fannie Mae and Freddie Mac’s role in the low-income housing tax credit (LIHTC) market.

About the Rule

The proposed rule would provide Fannie Mae and Freddie Mac Duty to Serve credit for eligible activities that increase the liquidity of mortgage investments, improve the distribution of investment capital available for mortgage financing for very low-, low- and moderate-income families in those underserved markets. Under the proposed rule, Fannie Mae and Freddie Mac would each be required to submit to FHFA a draft underserved markets plan covering a three-year period.

For affordable housing preservation, Duty to Serve credit would be provided for statutory activities that Fannie Mae and Freddie Mac undertake related to preservation of affordable housing assisted under various federal vouchers, subsidy, credit or insurance programs, as well as comparable state and local affordable housing programs.

In addition to providing Duty to Serve credit for financial products assisting in the preservation of these statutory programs, FHFA proposed to provide the Duty to Serve credit for creating loan pools from small banks and community-based lenders to help finance small multifamily rental properties and retrofitting rental properties to increase energy efficiency, as well as HUD’s Rental Assistance Demonstration Program and Choice Neighborhoods Initiative.

Fannie Mae, Freddie Mac, Duty to Serve and LIHTCs

The proposed rule did not explicitly indicate that the FHFA would allow Fannie Mae and Freddie Mac to become equity investors in LIHTC properties, as they were able to before the housing crash in 2008. Indeed, the question whether FHFA and the U.S. Treasury will allow Fannie Mae and Freddie Mac to become LIHTC investors again is a separate policy issue from the Duty to Serve proposed regulation and any related credit under it. For example, it is possible that the federal government may allow Fannie Mae and Freddie Mac to guarantee LIHTC investments while not giving them any consideration under the Duty to Serve regulation. However, it did ask for public comment on the issue.

On Dec. 22, FHFA conducted a webinar to explain, answer questions, and provide clarifications on its proposed changes to the rules. During that webinar, in response to a question from Novogradac & Company LLP about whether FHFA intends to allow Fannie Mae and Freddie Mac (the enterprises) to resume investing in LIHTC homes, FHFA responded:

FHFA has not included anything in their proposed rule that would permit the resumption of tax credit equity investments or tax credit guarantees by the enterprises. However, since the Duty to Serve statute specifically lists low‐income housing tax credits under the affordable housing preservation market criteria, and it includes investments generally as one of the assessment criteria, FHFA is requesting comment in the proposed rule on whether it should consider permitting the enterprises to make tax credit equity investments, and if so, on what terms.

We are particularly interested in learning if there are underserved segments of the tax credit equity market, such as for properties located in rural or non‐CRA areas, or for mixed‐income properties that may benefit from the enterprise‐resumed participation in tax credit equity investment.

Fannie Mae and Freddie Mac were significant equity investors in the LIHTC marketplace prior to 2008, comprising 35 to 40 percent of the total LIHTC investment market, but halted investment when Fannie Mae and Freddie Mac became subject to corporate AMT in 2007 and as a result of being placed into government conservatorship a year later. In 2008, however, Congress and the Bush administration established that Fannie Mae and Freddie Mac had a particular duty to serve very low-, low- and moderate-income households in underserved markets. Unlike most LIHTC investors, Fannie Mae and Freddie Mac were not motivated by the Community Reinvestment Act (CRA), and as a result they were more able to invest in rural areas and preservation transactions. While the gap in LIHTC equity pricing inside and outside of CRA hotspots has dramatically narrowed since Fannie Mae and Freddie Mac exited the market, it is unlikely that the equity pricing for rural and affordable housing preservation developments will be as competitive as new construction in high CRA demand areas over the long term.

Furthermore, Fannie Mae and Freddie Mac could play a helpful role in providing liquidity to the LIHTC investment market by becoming LIHTC investment guarantors, encouraging non-CRA motivated investors to enter the market.

Community Urged to Comment

In addition to the question of allowing Fannie Mae and Freddie Mac to resuming investing in the LIHTC market, the proposed Duty to Serve is significant to the affordable rental housing community, particularly as it regards affordable housing preservation and rural housing investment.

FHFA will accept public comments on the proposed rule until March 17.The LIHTC Working Group will submit a comment letter on the proposal. If you wish to share your comments with the LIHTC Working Group, or are interested in joining, please visit