Fannie Mae and Freddie Mac:The Fight for Affordable Housing, New York Law Journal

By Evan E. Blau, Cassia R. Schaeffer and Katelyn Squicciarini

Rising interest rates, building material costs and unprecedented inflation have exacerbated America’s fight to keep housing affordable.

We seem to be moving further and further away from the foundational aspect of home ownership as part of the ‘American Dream.’

Whether by choice or force, America has gravitated more and more to a renter’s society. And this transition has placed an even greater emphasis on providing safe and adequate affordable housing in the multifamily market.

Since their inception, Fannie Mae and Freddie Mac, the nation’s largest lenders in this space, have been mission oriented in championing affordable housing across the country.

Much has been said and written about Fannie Mae and Freddie Mac’s role leading up to and then following the Great Recession.

In 2008, Congress passed legislation establishing the Federal Housing Finance Agency (FHFA) as the regulatory oversight body of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Part of this legislation tasked the FHFA with the ability to establish housing mission goals with an emphasis on affordable housing.

As part of their oversight, the FHFA establishes a yearly volume of mortgages that both Fannie Mae and Freddie Mac are allowed to purchase from a limited number of licensed lenders who have approvals to underwrite, originate and sell multifamily mortgages to Fannie and Freddie.

These amounts, known as “volume caps,” have historically prioritized the affordable housing mission of both entities. Since their inception, these volume caps have gradually increased and the transactions that qualify as mission driven affordable housing have evolved.

In fact, in 2017, 2018 and the first three quarters of 2019, multifamily purchase volume caps excluded mission driven affordable housing transactions. This structure enabled Fannie and Freddie to exceed their allocable volume cap by prioritizing and originating these types of financings.

In other words, they both could purchase excess mortgage loans beyond their caps if the loans qualified as mission driven affordable housing. During this period, the FHFA provided volume caps ranging from $35 billion to $36.5 billion annually for both lenders.

However, because of the ability of Fannie and Freddie to exclude mission driven affordable housing from the set volume cap, they were able to nearly double their production each year, demonstrating the strong market demand for such transactions.

From the fourth quarter of 2019 through today, the FHFA has provided a total volume cap number and percentage of volume that must be mission driven affordable housing. In other words, there is no longer a concept of an excluded loan volume from the set cap.

In 2021 and 2022, the FHFA set the volume cap for Fannie and Freddie at $70 billion and $78 billion each, respectively. With both figures, the FHFA also mandated that 50% of the loan volume had to be mission driven affordable housing or other mission-oriented business.

These percentages were up from the 2019-2020 structure which required that 37.5% of each entity’s volume be mission driven affordable housing.

Additionally, the FHFA required that at least 20% (in 2021) and then 25% (in 2022) of all loans purchased be affordable, which it defined as being at 60% of Area Median Income (AMI).

FHFA’s report to Congress on the 2021 volume caps released on June 15th showed that each lender was able to utilize its volume cap of $70 billion while originating over 55% mission-driven volume.

While the definition of mission driven affordable housing has changed slightly over time to be more inclusive of certain transactions that otherwise would not qualify for traditional affordable housing programs, such as the low-income housing tax credit program or Section 8 Housing Assistance Payments Contracts, it has evolved to address the present-day reality of the affordable housing crisis and the modern trends of the multifamily market.

In prior years, the FHFA used a baseline threshold to describe affordable mission driven transactions as those at or below 80% of AMI.

In announcing the 2022 lending volume caps, the FHFA allowed some flexibility for certain transactions to be classified as mission driven affordable housing where the rents are affordable at 100% to 120% AMI in certain cost burden areas, and some transactions could be included on a case-by-case basis.

This flexibility allows Fannie and Freddie to satisfy their affordable mission goals while making loans to assist burgeoning workforce housing needs.

Certain transactions can also be included in the definition of mission driven affordable housing if certain affordability and energy/water reduction metrics are satisfied. This inclusion helps incentivize property owners to make environmentally conscious improvements while providing affordable housing.

Prioritizing affordable mission driven transactions has increased the interest of the investment community, too, as investors have gravitated toward multifamily housing, especially affordable housing.

Today’s investment community is socially conscious and is prioritizing transactions that have an Environmental, Social and Governance (ESG) component.

This is an ever-evolving term, similar in many ways to the concept of mission driven affordable housing transactions in that both aim to make a socially conscious investment through debt or equity.

This significant overlap will certainly lead to positive change in the form of new affordable housing developments and positive enhancements and upgrades to existing buildings funded by Fannie and Freddie loans, as well as investor equity aimed at ESG investing.

While the loan volume, role and prominence of Fannie and Freddie has changed and evolved in their rich history, one constant has been their prioritization of mission driven affordable housing transactions.

Both have certainly grown and evolved since the Great Recession — not only in increasing their loan production, but also the proportion of those transactions which focus on combating the affordable housing crisis.

While it is hard to speculate where the future of these entities lies, their continued direction will be on prioritizing affordable housing and mission driven business.

Given this, they will continue to be on the front lines combatting America’s affordable housing crisis.

Evan E. Blau and Cassia R. Schaeffer are partners and Katelyn Squicciarini is associate at Cassin & Cassin.