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Significantly Lower 2023 HTF Allocations Reflect Recent Housing Market Changes

Published by Peter Lawrence on Thursday, June 15, 2023 - 12:00AM

Rising interest rates and the corresponding rise in mortgage rates made a big dent in the U.S. Department of Housing and Urban Development’s (HUD’s) Housing Trust Fund (HTF) allocations to states, dropping the national allocation amount to $382 million, nearly 50% less this year compared to 2022, when HUD allocated nearly $750 million.

HUD announced May 3 that $382 million would be allocated to states through the HTF. Novogradac’s annual estimate prepared earlier this year warned that the fiscal year (FY) 2023 allocation of the HTF and the Capital Magnet Fund (CMF), both of which are based on 2022 U.S. Securities and Exchange Commission (SEC) filings of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac, would be significantly lower than in years past.

The drop in CMF and HTF funds was expected as mortgage rates increased dramatically in 2022, which had a chilling effect on the housing market, which in turn results in lower GSE contributions for the HTF.

HTF Allocations Serve Those Most in Need

Established in 2008 by the Housing and Economic Recovery Act (HERA) of 2008, the HTF is designed to finance affordable housing for both extremely low-income (ELI) households (those 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). HUD regulations require all HTF funding be used for ELI households when the overall annual amount available is $1 billion or less, as is the case for 2023. The GSEs’ annual contributions to the HTF are based on 4.2 basis points of their annual new business purchases. HUD distributes the HTF funds according to the HTF formula for the 50 states, Washington, D.C., and U.S. territories. The HTF formula is particularly focused on the needs of the lowest-income renter households of the state. A state must use at least 80% of each annual grant for rental housing, up to 10% for homeownership and up to 10% for the grantee’s reasonable and administrative planning costs. HTF funds are a tool to add to the existing range of programs and funding to produce and preserve affordable housing. That HTF funds must be used to serve ELI and very low-income households, means that there is dedicated funding to provide affordable housing for those most in need.

2023 HTF State Allocations

For the $382 million FY 2023 HTF allocation, HUD provides state-by-state formula-based allocations. Each state must receive at least $3 million, with California receiving the largest allocation of $62.2 million. The table below shows the 2023 allocations per state and U.S. territory compared to the previous year’s allocations, and the HTF percentage of all HOME funds in the state (including local participating jurisdictions) for 2023. The total year-over-year decrease in HTF grants is 48.9% across all states and territories, compared to the 8.1% increase seen in 2022 over 2021 and the significant jump witnessed in 2021 over 2020 when total HTF allocations increased 114.8%.

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Serving ELI Households Will be More Difficult with Reduction in HTF Allocations

Each year, research shows that the lack of affordable housing is becoming an increasing insurmountable problem. The National Low Income Housing Coalition’s (NLIHC’s) 2023 Gap Report illustrates the hardships ELI households face when trying to find housing they can afford—there is a shortage of 7.3 million rental homes that are affordable and available to ELI households. No state was found to have an adequate supply of rental homes affordable and available to ELI households and nationwide there are only 33 affordable and available rental homes for every 100 ELI renter households. Serving ELI households is even more fraught, as the rents that are affordable to ELI households typically do not cover the development costs and operating expenses of such new housing. The nearly 50% decrease in HTF allocations means that far fewer homes targeting ELI households can be financed or preserved than in 2022 or 2021–when record-setting allocations were realized due to the then booming housing market.

Year-Over-Year Allocation of HTF Funds (2016-2023)

Even with the large decrease seen this year, the 2023 allocation is higher than any previous year, except for 2021 and 2022.

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Since 2016, more than $3 billion has been allocated through the HTF. Of that total, $1.6 billion, or 52.6%, has been allocated to the 20 states highlighted below during that period. The five states with the largest cumulative HTF allocations are:

  • California with $347.5 million,
  • New York with $207.3 million,
  • Texas with $123.3 million,
  • Florida with $102.6 million, and
  • Illinois with $90.5 million.

Year-over-year, Illinois saw the largest percentage decrease in 2023, dropping 56.9% from 2022.

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With HTF Allocations Returning to Lower Levels, Passing Affordable Housing Legislation is More Important than Ever

As expected, rising inflation and interest rate hikes have had a dampening effect on the housing market in general. The GSEs’ SEC filings, upon which HTF contributions are based, have seen a significant decrease likely due to a decline in single-family mortgage loan and refinancing purchases, especially for new refinance loans. With continued higher-than-normal inflation and interest rates, the record-setting GSE contributions to the HTF and CMF are not likely to repeat anytime soon, which means less funding is available to address the housing needs of the lowest income households. This makes the passage of legislation to address the country’s housing crisis even more important. The recently reintroduced Affordable Housing Credit Improvement Act (AHCIA) could finance the production of more than 1.9 million additional affordable rental homes over 10 years. The AHCIA includes a provision to provide a 50% basis boost to units targeted to ELI households that could finance 110,000 additional affordable rental homes over a decade. With the return of HTF allocations to pre-pandemic levels, housing advocates will need other tools such as the LIHTC to address the nation’s affordable housing crisis.

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