June 15, 2018

Improving a Key Part of the Affordable Housing Financing System

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The Federal Home Loan Banks’ Affordable Housing Program (AHP) is a vital but little-known part of the system of financing affordable homes. One-sixth of all Low-Income Housing Tax Credit properties that Enterprise Community Investments has syndicated in the past five years, for example, have included AHP funding. 

The Federal Housing Finance Agency (FHFA) has now proposed amending some of AHP’s rules. The proposal could dramatically change how organizations across the country might access AHP funds to support the provision of affordable, well-designed rental homes, and so Enterprise has submitted comments to the FHFA.  

Established by Congress in 1989 as part of broader reforms to the banking system after the Savings & Loan crisis, AHP funds both homeownership for low-income people and affordable rental housing acquisition, development, and preservation. Between 1990 and 2016, the Federal Home Loan Banks (FHLBs) have awarded $5.4 billion to support 827,000 affordable housing units, including more than 500,000 affordable rental homes in over 10,000 properties. 

The 11 FHLBs [1], each of which covers a set of states, are currently allowed to set aside up to 35 percent of their annual funds for homeownership. The rest of the funds are competitively allocated based on a scoring system weighted to reflect the affordable housing priorities determined by each FHLB within its district. 

AHP frequently provides an important source of gap financing in Housing Credit developments. When the equity raised by the sale of Housing Credits does not cover the total development costs (as is often the case), AHP funds can close some or all of difference between Housing Credit equity and the amount covered by a permanent mortgage on the property. 

More than half of all AHP-assisted projects in 2016 also used the Housing Credit. Thus, even though AHP covers only a small share of the costs of providing affordable rental housing—from an average of 3.4 percent of development costs in Atlanta to 11.4 percent in Pittsburgh—the grants can be critical to a project. 

In the proposed rule, FHFA recommends creating a new outcomes-based scoring system and allowing Banks to establish competitively allocated “Targeted Funds” to address district-specific housing needs. It calls for increasing significantly the share of units in a development that are set aside for special-needs populations, with an expanded definition of “special needs” that includes formerly incarcerated people, victims of domestic violence and abuse, and unaccompanied youth. The rule also encourages targeting housing for other underserved populations who may not need services, including agricultural workers, veterans, and multi-generational households. 

The proposed rule raises, from 35 to 40 percent, the share of AHP funds that can be used to support homeownership, and it encourages the use of that “set-aside” for rehabilitation of owner-occupied properties in addition to helping first-time homebuyers. It would streamline aspects of the program’s compliance regime by recognizing overlaps with the Housing Credit and other federal funding programs and relying on the effective oversight and monitoring those programs already have in place.

In our comments, we noted that when AHP has been successfully used as a source of funds for developing or preserving affordable rental housing, it has been a needed subsidy to close financing gaps, but the primary funding source, most often the Housing Credit, drives decisions about location, scale and targeting of the development. We suggested that simplification of the compliance regime should be extended to the underwriting process as well, consistent with AHP’s relatively small share of overall development costs. We also strongly encouraged the adoption of the flexibility shown by other funding sources to address fluctuating costs during the development process and comparable discretion at the bank level to address problems that might arise during the compliance period. We recommended that the current 35 percent cap on homeownership set-asides be retained, consistent with substantial need to increase the supply of affordable rental housing, and sought to keep current threshold scoring requirements (20 percent of units) for special needs populations out of concern that the 50 percent minimum set-asides proposed might jeopardize project feasibility and runs counter to current efforts to create diverse mixes of residents.

We also explored the strengths and weaknesses of the proposed to allow FHLBs to establish competitively allocated Targeted Funds to address district-specific housing needs. They may prove difficult to implement and insufficiently flexible to respond to emergent needs, but they may also serve as a mechanism to ensure compliance with the new outcome-based scoring system. 

Similarly, we encouraged FHFA to provide additional, detailed guidance to Banks if it chooses to proceed with the new scoring systems it has proposed, in order to achieve the flexibility it wants to achieve through the change. It remains an open question whether the proposed system is enough of an improvement on the current one to warrant the structural change. Given that uncertainty, we suggested FHFA might consider incorporating the desired flexibility into the existing scoring structure.

We believe that the rulemaking process now under way offers an opportunity to make the overall development process and compliance period of affordable housing more efficient and cost effective.  We look forward to ongoing engagement with FHFA as they finalize the rule.


[1] The FHLBs are a system of regional banks headquartered in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka and are named after their headquarter locations.