Last month, the Federal Housing Finance Agency, the regulatory agency tasked with overseeing Fannie Mae and Freddie Mac, announced updates to both government-sponsored enterprises’ equitable housing finance plans for 2023.
The updates to the plans, initially released in June 2022 in an effort to promote the government-sponsored enterprises’ soundness in the housing finance market while providing equitable access to affordable housing, make adjustments based on initial research and findings of the government-sponsored enterprises, or GSEs, and add new actions and initiatives for the year ahead.
For affordable housing practitioners, these updated plans provide a road map for where the GSEs are headed in the year ahead.
Many of the 2023 initiatives advance consumer and single-family equitable access to housing and housing stability, particularly for underserved Black and Latino communities.
The GSEs’ acknowledgment that people of color face distinct obstacles in the housing market is a pillar of the housing plans. Beth Budnick
For example, Freddie Mac will expand utilization of its down payment assistance tool for
Black and Latino borrowers by partnering with housing counseling agencies, particularly agencies and nonprofit partners with ties to Black and Latino communities.
Fannie Mae will continue to address credit reporting as a barrier to housing for Black and
Latino borrowers through its rental payment data pilot program.
The program partners with approved vendors who collect tenants’ rent payment data from participating multifamily property owners. The vendors then format the rent payment data to credit bureaus, which can be used as a new credit score or to improve existing credit scores.
This program was piloted in six previously identified nonwhite supermajority or majority metropolitan statistical areas and will continue to focus on serving people of color in the 2023 initiatives.
The 2023 updates also have ramifications in the multifamily sector. Freddie is continuing to commit to its 9% unfunded forward program. Fannie is expanding various sponsor-elected affordable housing programs. Both updates signal important areas for continued growth for real estate finance practitioners.
Freddie Mac: 9% Unfunded Forward Program
Despite market turbulence, Freddie Mac has continued to commit to funding affordable housing through its forward commitment program, known as unfunded forwards.
The 9% unfunded forward commitment program provides permanent financing for new construction or substantial rehabilitation of affordable housing properties utilizing the 9% low-income housing tax credit.
In 2022, Freddie entered into forward commitments for approximately 20,000 units of affordable housing — exceeding the year one goal of 15,000 units.
For 2023, Freddie has committed to funding an additional 30,000 units through forward commitments. This goal is ambitious, particularly given market conditions in the beginning of 2023.
But Freddie is doubling down on the unfunded forward commitment as its model for funding the creation of new affordable housing units, as opposed to other avenues of financing the creation of new affordable housing.
In past years, Freddie had indicated it would look at construction-to-permanent financing as a tool to increase supply of new affordable housing.
But in the 2023 update, Freddie acknowledged that unfunded forwards remain the chief tool for creation of multifamily affordable housing through new construction or substantial rehabilitation.
The 2023 update notes that rather than providing liquidity for construction lending through construction-to-permanent financing, “the increased use of our expanded forward commitments is best able to impact the market now.”
Practitioners working with affordable borrowers should keep the unfunded forward at the top of their lists as a key tool for construction to permanent financing, as it removes interest rate volatility by locking the interest rate for a permanent loan at the constriction phase.
Unfunded forward closings require collaboration with construction lenders, equity investors and governmental agencies. These closings require the negotiation of subordination agreements and key loan document terms at the closing of the construction loan, at which point the interest rate for the Freddie Mac permanent loan is locked.
After construction is completed, the parties come together again for conversion of the construction loan to permanent financing, at the locked interest rate.
Fannie Mae: Sponsor-Initiated Affordability
Fannie Mae has also recommitted to affordable housing initiatives for multifamily developers in its 2023 equitable housing finance plan. Fannie will expand its pricing incentives for sponsor-initiated affordability programs.
In 2021, Fannie Mae launched its Sponsor-Initiated Affordability Initiative, which offers underwriting and pricing incentives to borrowers who agree to set aside at least 20% of units for affordable housing. At least 20% of the units must be affordable to renters at 80% area median income, or AMI, or less, as adjusted for family size, and rent cannot exceed 30% of adjusted AMI for unit size.
In 2023, Fannie Mae will continue to expand the adoption of its Sponsor-Initiated
Affordability Initiative.
In addition, Fannie intends to launch the new Sponsor-Dedicated Workforce program in the second quarter of 2023. Like Sponsor-Initiated Affordability, Sponsor-Dedicated Workforce will offer a private financing mechanism — pricing and underwriting incentives — to create and preserve workforce housing.
The program is aimed at conventional, i.e., nonaffordable, developers, who in cost- burdened markets can elect to restrict rents on a minimum of 20% of the units at levels affordable to tenants earning up to 100% AMI — versus 80% AMI — and in very cost- burdened markets, up to 120% AMI.
By increasing incentives for developers to impose rental restrictions on otherwise unrestricted units, the program will increase the supply of affordable housing.
Particularly in a time of tight budgets, Sponsor-Dedicated Workforce and Sponsor-Initiated
Affordability provide valuable pricing incentives such as lower interest rates and more flexible debt-service coverage ratio requirements.
And unfunded forwards provide the stability that affordable housing developers need as they pencil out deals and navigate high construction costs and complicated debt stacks.
Attorneys working in the GSE sector and in affordable housing can expect to see developers continuing to utilize these financing tools, which remain more critical than ever.
Evan E. Blau is a partner and chair of the agency lending and affordable housing practices at Cassin & Cassin LLP.
Beth R. Budnick is an associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
FHFA Plans Forecast The Year Ahead In Affordable Housing, Law 360
Last month, the Federal Housing Finance Agency, the regulatory agency tasked with overseeing Fannie Mae and Freddie Mac, announced updates to both government-sponsored enterprises’ equitable housing finance plans for 2023.
The updates to the plans, initially released in June 2022 in an effort to promote the government-sponsored enterprises’ soundness in the housing finance market while providing equitable access to affordable housing, make adjustments based on initial research and findings of the government-sponsored enterprises, or GSEs, and add new actions and initiatives for the year ahead.
For affordable housing practitioners, these updated plans provide a road map for where the GSEs are headed in the year ahead.
Many of the 2023 initiatives advance consumer and single-family equitable access to housing and housing stability, particularly for underserved Black and Latino communities.
The GSEs’ acknowledgment that people of color face distinct obstacles in the housing market is a pillar of the housing plans. Beth Budnick
For example, Freddie Mac will expand utilization of its down payment assistance tool for
Black and Latino borrowers by partnering with housing counseling agencies, particularly agencies and nonprofit partners with ties to Black and Latino communities.
Fannie Mae will continue to address credit reporting as a barrier to housing for Black and
Latino borrowers through its rental payment data pilot program.
The program partners with approved vendors who collect tenants’ rent payment data from participating multifamily property owners. The vendors then format the rent payment data to credit bureaus, which can be used as a new credit score or to improve existing credit scores.
This program was piloted in six previously identified nonwhite supermajority or majority metropolitan statistical areas and will continue to focus on serving people of color in the 2023 initiatives.
The 2023 updates also have ramifications in the multifamily sector. Freddie is continuing to commit to its 9% unfunded forward program. Fannie is expanding various sponsor-elected affordable housing programs. Both updates signal important areas for continued growth for real estate finance practitioners.
Freddie Mac: 9% Unfunded Forward Program
Despite market turbulence, Freddie Mac has continued to commit to funding affordable housing through its forward commitment program, known as unfunded forwards.
The 9% unfunded forward commitment program provides permanent financing for new construction or substantial rehabilitation of affordable housing properties utilizing the 9% low-income housing tax credit.
In 2022, Freddie entered into forward commitments for approximately 20,000 units of affordable housing — exceeding the year one goal of 15,000 units.
For 2023, Freddie has committed to funding an additional 30,000 units through forward commitments. This goal is ambitious, particularly given market conditions in the beginning of 2023.
But Freddie is doubling down on the unfunded forward commitment as its model for funding the creation of new affordable housing units, as opposed to other avenues of financing the creation of new affordable housing.
In past years, Freddie had indicated it would look at construction-to-permanent financing as a tool to increase supply of new affordable housing.
But in the 2023 update, Freddie acknowledged that unfunded forwards remain the chief tool for creation of multifamily affordable housing through new construction or substantial rehabilitation.
The 2023 update notes that rather than providing liquidity for construction lending through construction-to-permanent financing, “the increased use of our expanded forward commitments is best able to impact the market now.”
Practitioners working with affordable borrowers should keep the unfunded forward at the top of their lists as a key tool for construction to permanent financing, as it removes interest rate volatility by locking the interest rate for a permanent loan at the constriction phase.
Unfunded forward closings require collaboration with construction lenders, equity investors and governmental agencies. These closings require the negotiation of subordination agreements and key loan document terms at the closing of the construction loan, at which point the interest rate for the Freddie Mac permanent loan is locked.
After construction is completed, the parties come together again for conversion of the construction loan to permanent financing, at the locked interest rate.
Fannie Mae: Sponsor-Initiated Affordability
Fannie Mae has also recommitted to affordable housing initiatives for multifamily developers in its 2023 equitable housing finance plan. Fannie will expand its pricing incentives for sponsor-initiated affordability programs.
In 2021, Fannie Mae launched its Sponsor-Initiated Affordability Initiative, which offers underwriting and pricing incentives to borrowers who agree to set aside at least 20% of units for affordable housing. At least 20% of the units must be affordable to renters at 80% area median income, or AMI, or less, as adjusted for family size, and rent cannot exceed 30% of adjusted AMI for unit size.
In 2023, Fannie Mae will continue to expand the adoption of its Sponsor-Initiated
Affordability Initiative.
In addition, Fannie intends to launch the new Sponsor-Dedicated Workforce program in the second quarter of 2023. Like Sponsor-Initiated Affordability, Sponsor-Dedicated Workforce will offer a private financing mechanism — pricing and underwriting incentives — to create and preserve workforce housing.
The program is aimed at conventional, i.e., nonaffordable, developers, who in cost- burdened markets can elect to restrict rents on a minimum of 20% of the units at levels affordable to tenants earning up to 100% AMI — versus 80% AMI — and in very cost- burdened markets, up to 120% AMI.
By increasing incentives for developers to impose rental restrictions on otherwise unrestricted units, the program will increase the supply of affordable housing.
Particularly in a time of tight budgets, Sponsor-Dedicated Workforce and Sponsor-Initiated
Affordability provide valuable pricing incentives such as lower interest rates and more flexible debt-service coverage ratio requirements.
And unfunded forwards provide the stability that affordable housing developers need as they pencil out deals and navigate high construction costs and complicated debt stacks.
Attorneys working in the GSE sector and in affordable housing can expect to see developers continuing to utilize these financing tools, which remain more critical than ever.
Evan E. Blau is a partner and chair of the agency lending and affordable housing practices at Cassin & Cassin LLP.
Beth R. Budnick is an associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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Evan E. Blau
Partner
212.798.0121
eblau@cassinllp.com
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