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Fannie Mae, Freddie Mac’s Duty to Serve Plans Seek to Address Affordable Housing Crisis in Traditionally Underserved Areas

Published by Karen Destorel on Friday, January 4, 2019

Journal cover January 2019   Download PDF

Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, as mandated by the duty to serve (DTS) provisions implemented by the Housing and Economic Recovery Act (HERA) of 2008, recently released proposals to implement modifications to their DTS plans. 

The plans, which were open for public comment, have the potential to help direct affordable housing investment toward some of the nation’s hardest-to-serve markets. After reviewing the proposed modifications, the Federal Housing Finance Agency (FHFA) published the updated GSEs plans in December 2018. 


Released in January and May 2018 by Fannie Mae and Freddie Mac, the GSE’s DTS plans were created in response to the Congressional mandate in HERA, which requires the GSEs to serve three historically underserved markets–manufactured housing, affordable housing preservation and rural housing. The DTS final regulations, finalized in December 2016, requires the GSEs to increase “liquidity for mortgage investments and improving the distribution of investment capital available for residential financing for very low-, low-, and moderate-income families in those markets.”

As important as increased mortgage debt liquidity is, FHFA’s decision to permit the GSEs to resume low-income housing tax credit (LIHTC) equity investment should be noted here as well, given its significance both to the nation’s affordable rental housing market and the DTS. The LIHTC is the most important source for capital for affordable housing preservation and rural rental housing (and as will be shown later an important funding source for affordable housing in Indian Areas), and expanding and strengthening the LIHTC would go a long way in assisting the GSEs in meeting their DTS requirements. 

Examining the Proposals 

So far, the GSEs’ approaches in implementing their DTS provisions have been encouraging. Combined with the GSEs’ affordable housing goals, the Housing Trust Fund and the Capital Magnet Fund, the proposed plan modifications would help direct the GSEs’ activities toward affordable housing investments to address some of the nation’s hardest to serve markets. Because Freddie Mac proposes just one modification to correct a miscalculation, public comment for this modification was not deemed necessary by its regulator FHFA.

Fannie Mae submitted 22 modifications to FHFA, of which four were open to public comment. The third modification, which the FHFA approved, is of particular interest because it directly increases the amount of affordable housing available in rural areas:

Invest in LIHTC Properties Activity–Rural Housing. For the third modification, Fannie Mae proposes to make LIHTC equity investments in 20 properties in 2018, 30 properties in 2019 and 30 properties in 2020. The Novogradac LIHTC Working Group, consisting of LIHTC community participants, reviewed and commented on the modification above. The LIHTC Working Group commended Fannie Mae for modifying its plan to include investing in 80 LIHTC properties in rural communities beginning in 2018 and through 2020, up from the 15 LIHTC equity investments originally called for during this timeframe. The relatively low costs of housing in rural areas compared to the nation as a whole belies the difficulty households in these areas face in finding affordable homes. In rural areas, and other hard-to-serve markets, government intervention is usually required to build affordable housing.

Because rural housing markets are less attractive areas to invest in–banks, in particular, do not focus on these markets because they are outside of their traditional assessment areas in which they are evaluated under Community Reinvestment Act (CRA) examinations–and affordable rural rental housing depends heavily on the availability of equity generated by the LIHTC, this modification by Fannie Mae will be particularly impactful. 

Reporting on Underserved Markets

Just how serious is the situation in underserved markets? Freddie Mac plans to release an eight-part series of research reports focusing on underserved markets. Three of the five reports released already–LIHTC in Rural Middle Appalachia, LIHTC in Indian Areas, and Opportunity Incentives in LIHTC Qualified Allocation Plans–examine how the LIHTC has been used and can be better used, in the service of underserved markets.

The rural Middle Appalachia and Indian Areas reports reveal that these two areas share many similarities. Both are difficult to serve due to characteristics of their populations (low-density, low-income and high poverty rates, small rental populations) and geographies (the areas in question are difficult to define, infrastructure difficulties). In both areas, for the affordable rental housing that exists, the LIHTC is the primary source of funding. Since the LIHTC is the principal funding source this presents a hardship because these areas do not draw a lot of investor interest, thereby depressing the price that can be achieved per credit and ultimately the amount of housing that can be created. 

In rural Middle Appalachia, Freddie Mac’s research revealed that there are approximately 656 LIHTC properties comprised of 25,236 subsidized homes. Overall, LIHTC-financed housing accommodates a higher percentage of the multifamily households in rural Middle Appalachia than it does in the United States, more than 25 percent compared to approximately 15 percent, respectively. Standout statistics of rural Middle Appalachia include:

  • A shrinking population compared to the United States as a whole–this region’s population decreased 0.6 percent from 2010 to 2016 while the U.S. grew by 3.2 percent–and a density of 62.3 people per square mile, compared to the national average of 90.2 people per square mile. 
  • Median incomes that are considerably lower than both the United States as a whole and all rural areas. Rural Middle Appalachian renters earn a median income of $21,004, which is 59.7 percent of the U.S. median renters’ income and 78.6 percent of rural renters’ incomes. 
  • Almost 25 percent of rural Middle Appalachian population lives in persistent poverty counties (PPCs), counties where the poverty rate “has exceeded 20 percent for the past 30 years.” Nearly one-fifth (17 percent) of the nation’s 386 PPCs are located in rural Middle Appalachia. 

In Indian areas, there are more than 2,000 LIHTC properties, comprised of more than 80,000 homes, but still, there is a gap between the supply of affordable housing and demand for such homes. For the purpose of DTS, it is difficult to assess household characteristics as there is little to no demographic and population data that matches the geographic definition of DTS Indian areas. As best as the Freddie Mac analysis can do with the data available, Indian areas face similar obstacles to providing affordable rental housing as rural Middle Appalachia: 

  • Density is an issue, as DTS Indian areas have an average population density of 21.8 people per square mile, compared to 26.6 people per square mile on all reservations and the national average of 90.2 people per square mile. 
  • Median income for households in American Indian and Alaskan Native Areas (AIAN) areas was $39,719 in 2016, 31 percent lower than the national average. As for median wealth, Native Americans were at just 8.7 percent of the national average. Substandard technological infrastructure makes improving ones economic standing difficult.
  • More than one in four Native Americans are living below the poverty line and four of the 10 poorest counties in the country are on Indian reservations. Persistent poverty is also a concern, as 18.1 percent of the nation’s PPCs contain at least one Indian reservation and 20.6 percent of all Native Americans live in a PPC. 
  • Housing is of very low quality and found to be in desperate need of rehabilitation with residents lacking basic utilities, and more than 120,000 tribal homes lacking basic sanitation. 
  • While a large percentage of Native Americans identify as renters (46.3 percent), on reservations, 32.7 percent of households are renters with 22.9 percent of these households renting in multifamily buildings. 

What’s Next 

Given that nearly 13 percent of the nation’s affordable housing stock has been lost due to demolition, obsolescence or conversion to market rate housing, according to Harvard’s Joint Center on Housing Studies, it is important that the GSEs provide low-cost financing and innovative financial products to assist in the preservation of the existing U.S. affordable housing inventory. In addition to the DTS plans and modifications, the investments being made by the GSEs since reentering the market will go a long way in addressing the affordable housing needs faced by lower-income households. 

Since September, Freddie Mac closed three LIHTC funds, one each with Boston Financial, Hudson Capital and Enterprise Community Investment. Each fund will provide as much as $100 million to create and preserve affordable housing throughout the country, focusing on areas that have been underserved. Fannie Mae also announced new funds: in the fall of 2018 it pledged to invest as much as $145 million with Cinnaire, Ohio Capital Corporation for Housing and Midwest Housing Equity Group; in June 2018 a $26 million investment with The Richman Group was announced; and, in February 2018 an $100 million commitment was made to a fund with Raymond James. 

To serve these areas, more research and data is needed. The Freddie Mac reports are significant, as they illustrate the need present in underserved areas and how hard it is to provide affordable housing. One of the Novogradac LIHTC Working Group’s recommendations was to gather additional information and analysis of LIHTC pricing trends in rural areas, particularly analysis that compares and contrasts the pricing trends before Fannie Mae’s LIHTC investment activity and the projected impact on tax credit pricing after Fannie Mae’s initial planned investment of 20 LIHTC properties for 2018. 


Again, it’s important to emphasize the significance of the GSEs resuming their LIHTC investments in a range of developments that create new housing and preserve federally assisted housing across a broad geography. The strengthening of the LIHTC, through measures such as the Affordable Housing Credit Improvement Act, would help to bolster the GSEs activities and make significant progress toward addressing this country’s affordable housing crisis. 

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