January 30, 2015

A Close Look at HUD’s New Rules for the Housing Trust Fund

Today HUD released new rules for implementation of the Housing Trust Fund (HTF), which was created by Congress in 2008 to support the construction, preservation and operation of affordable housing for America’s lowest-income families.

The HTF has sat empty since its inception, but last month federal regulators announced that money will begin flowing to the fund through fees on the ongoing business of Fannie Mae and Freddie Mac. Based on our preliminary estimates, we expect about $250-300 million to go to the HTF each year, with the inaugural round of funding coming sometime in 2016.

HUD described today’s release as an “interim rule,” since the agency will reconsider key provisions once the initial round of funding is available. Below is a high-level summary of the new rule, along with a few things to keep in mind as HUD and states implement the program in the coming year.

How Will HTF Money Flow to Communities?

According to the Housing and Economic Recovery Act of 2008 (HERA), money in the HTF must be disseminated to states through a needs-based formula. Each state will then decide how to use its HTF grant to support individual projects, within certain restrictions established by HUD.

HUD’s interim rule lays out the criteria used to divvy up the money among states. A full summary of that formula can be found here. To see how the formula translates to state-by-state allocations, here’s a helpful tool from the National Low-Income Housing Coalition.

In order to be eligible for HTF grants, each state must first identify the agency that’s in charge of allocating the funds and develop a consolidated allocation plan. Some states—including New York, Ohio and Massachusetts—have already identified their allocating agency, but many are still in the process of doing so.

States will be given significant discretion over how they use HTF funds to meet their local housing needs. But each allocation plan must, at a minimum, describe the eligible uses for HTF funds and how the state plans to distribute those funds. The plan must also set a cap on per-unit subsidies received with HTF dollars, among other requirements.

How Can States Use HTF Dollars?

Under HERA, the vast majority of HTF funding must be used to support affordable housing for extremely low-income families, meaning they earn less than 30 percent of the area median income. According to the interim rule, in years where less than $1 billion is available through the HTF—which we expect to be most years in the near term—all of each state’s HTF funding must support extremely low-income families. In years where more than $1 billion is available, at least 75 percent of each state’s HTF funding must support extremely low-income families, while the remainder must go to very low-income families (meaning they earn less than 50 percent of area median income).

HERA also limits the types of support that can be funded through the HTF. According to the interim rule, at least 80 percent of the HTF funds allocated to each state must be used for rental housing. No more than 10 percent can be used to support sustainable homeownership for first-time homebuyers (the rule sets no minimum for support to homeownership). Up to 10 percent can be used to cover administrative costs.

States can use the HTF money for several different types of assistance, including grants, equity investments, loans, advances, interest subsidies, deferred payment loans and other assistance approved by HUD. The new rule also lays out specific project costs that eligible for HTF support, including hard development costs, certain soft costs like architectural and engineering fees, acquisition costs, refinancing costs, relocation costs and certain operating costs.

The interim rule states that no more than one-third of each state’s HTF money can be used to cover operating costs. In most cases, states will be allowed to use HTF money to capitalize operating reserves for up to 30 years, which is the mandatory period of affordability for all HTF-assisted properties. However, if funds are appropriated directly from Congress to the HTF, states will only be able to use those funds to capitalize reserves for five years or less.

Properties that leverage other federal subsidies, such as Low-Income Housing Tax Credits or Project-Based Rental Assistance contracts, will be eligible for additional support through the HTF. For the most part, HTF money cannot be used for public housing, unless it’s for the rehabilitation of existing public housing through HUD’s Rental Assistance Demonstration or the Choice Neighborhoods initiative.

In general, HUD synchronized its HTF regulations with those of the HOME Investment Partnership Program, which allocates block grants to local governments to provide gap financing and other support to community development projects.

Summary of Key Changes From the 2010 Proposed Rule

The interim rule updates the draft rules that were proposed in October 2010. Based on input received during the public comments period, HUD made the following key changes from the previous draft:

  • Strengthened the income-targeting restriction to require all HTF funds to support extremely low-income families if the total annual funding is below $1 billion;
  • Expanded the restriction on operating cost assistance from 20 percent to one-third;
  • Allowed HTF funds to support the rehabilitation of public housing through the Choice Neighborhoods initiative or Rental Assistance Demonstration;
  • Removed a provision that would have loosened certain restrictions on the use of HTF funds for transit-oriented development projects;
  • Removed provisions that would require all HTF-supported units to meet Energy Star and Water Sense certifications;
  • Added a new process by which HUD can meet its minimum state allocation requirements if there is not enough money in the HTF to give every state at least $3 million.

Time to Focus on Implementation

Now that the interim rule is published, it’s time for each state to develop its strategy for using HTF dollars to meet its affordable housing needs. Enterprise looks forward to working with HUD and our public and private partners on the ground to ensure that these funds are used effectively and efficiently.

As we focus on implementation of the program, we’ll also keep a careful eye on potential roadblocks in Washington. At a hearing in the House Financial Services Committee earlier this week, several Republican members of Congress expressed strong objections to the HTF. One congressman, Rep. Ed Royce of California, even introduced legislation that would bar Fannie and Freddie from contributing any money to the fund.

The HTF is a crucial tool to address the growing affordability crisis facing America’s lowest-income renters. Instead of bickering over whether or not it should exist, we should be working together to ensure that every available dollar is put to the best possible use.

The Enterprise Public Policy team works to safeguard, expand and improve programs that end housing insecurity. Learn more about our public policy efforts.    

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