Fannie and Freddie Will Soon Start Funding the Housing Trust Fund—Now What?
Today the Federal Housing Finance Agency, the federal regulator of Fannie Mae and Freddie Mac, announced that it would lift its suspension of mandatory funding to the Housing Trust Fund (HTF) and the Capital Magnet Fund (CMF), two programs that were created by Congress in 2008 to increase the supply of affordable housing in the U.S. As originally envisioned, both programs would receive funding through a modest assessment on Fannie's and Freddie's ongoing business. FHFA suspended those obligations in 2008 when Fannie and Freddie were put into government conservatorship.
FHFA’s announcement comes at a critical moment. As we recently argued in American Banker, both the HTF and the CMF are essential tools in the fight against housing insecurity. On this very night, an unprecedented 19 million families in the U.S. are either homeless or pay more than half of their monthly income on housing—often leaving them just one unforeseen event from losing their home.
So, what’s next for the programs? Below we provide a high-level summary of how each program works, how money will flow to communities and what we can expect in the coming months.
How much money will flow to the two funds?
According to the Housing and Economic Recovery Act of 2008, the law that created both the HTF and the CMF, money will flow to the two programs through a 4.2 basis point assessment (.042 percent) on new business purchases at Fannie Mae and Freddie Mac. The fee cannot be redirected or passed along to borrowers, so this is considered a “price of doing business” for Fannie and Freddie, not a tax on homeowners. FHFA ordered the companies to begin setting aside those funds in January 2015, but money will not start flowing to communities until 2016 at the earliest.
Based on recent purchase volumes at Fannie and Freddie, we expect about $400 - $500 million to go to the two funds each year. Sixty-five percent of that funding will go to the HTF, while the remaining 35 percent will go to the CMF.
How will the Housing Trust Fund work?
Money in the HTF will be disseminated to states through a needs-based formula to support the construction, preservation and operation of housing that’s affordable to the highest-need families in the community. At least 75 percent of the funds allocated to each state must support extremely low-income families, defined as families earning less than 30 percent of the area median income. At least 90 percent of the funding must be used for rental housing, while no more than 10 percent of can be used to support sustainable homeownership. States and local governments can use the HTF money for several different types of assistance, including grants, equity investments, loans or advances, interest subsidies and deferred payment loans.
The HTF will be administered by the Department of Housing and Urban Development (HUD). While the program’s rules have not yet been finalized, HUD’s proposed rules would divvy up the funding among states based on the following criteria. To see how these criteria could translate to state-by-state allocations, here’s a helpful tool from the National Low-Income Housing Coalition.
- Share of the country’s total unmet housing need for extremely low-income families (worth 50 percent of the formula)
- Share of the country’s total unmet housing need for very low-income families (worth 12.5 percent of the formula)
- Share of the country’s total families with “worst case housing needs” (worth 25 percent of the formula)
- Share of the country’s total very low-income families that pay more than half of their income on rent (worth 12.5 percent of the formula)
- Adjustments based on the relative cost of real estate construction in each state
- Adjustments to ensure that each state receives at least $3 million in each round of funding
HUD’s proposed rules included additional restrictions on the use of HTF funds to cover operating costs (capped at 20 percent per grant) and preferential treatment for properties that leverage other federal subsidies, such as Low-Income Housing Tax Credits or Project-Based Rental Assistance contracts. In general, HUD expects that the HTF will function much like the HOME Investment Partnership Program, which allocates grants to local governments to provide gap financing and other support to local community development projects.
How will the Capital Magnet Fund work?
The CMF helps registered Community Development Financial Institutions (CDFIs) and nonprofit housing organizations leverage private funds to finance their affordable housing activities. Unlike the HTF, funds have already been disseminated through the CMF. The federal government appropriated $80 million to jump-start the program in 2010, which leveraged $1 billion in public and private investment and helped build or preserve more than 6,800 affordable homes.
The CMF is administered by the Treasury Department, which allocates grants to eligible organizations on a competitive basis. The grant must be used primarily for the preservation, rehabilitation or purchase of affordable housing, but up to 30 percent of the money can be used for economic development activities or community service facilities in low-income neighborhoods. Grants must be leveraged at least 10 times by other funding sources. Notably, grantees leveraged the federal investment 12 times in the initial round of funding.
Since most CDFIs and housing organizations face a growing backlog of promising projects in need of capital support, applications for CMF funding are highly competitive. For example, the Treasury Department received 230 applications for the initial round of funding, but could only award grants to 23 organizations.
A Meaningful Step Forward
America’s low-income families are in the midst of a growing housing insecurity crisis. The 19 million families who are housing insecure have to sacrifice and make difficult trade-offs simply to keep a roof over their heads. Some have to settle for overcrowded or unsafe housing, while others are left with impossible choices: make rent or buy groceries, pay the electric bill or put gas in the car to get to work. And many are just one unforeseen event—an illness, a job loss, even a drop in hours at work—from seeing an eviction notice on their front door.
By our estimate, about 95 percent of housing insecure renters are very low-income—meaning they earn less than 50 percent of the area median income—which is the primary population that the HFT and CMF were created to serve. Today’s announcement is a significant step toward addressing this crisis, but more must be done to bring it to an end once and for all.
The Enterprise Public Policy team works to safeguard, expand and improve programs that end housing insecurity. Learn more about our public policy efforts.