Authored by Jonathan Needell, President and Chief Investment Officer
November 4, 2021
Fannie Mae and Freddie Mac (the “Enterprises”) have been experiencing a prolonged period of federal oversight ever since the two Enterprises were placed under the watch of the Federal Housing Finance Agency (FHFA) in 2008.
While both entities have had their ups and downs since then, the FHFA recently announced that it would increase each Enterprise’s multifamily cap to $78 billion, totaling $156 billion for 2022. This record 50-year cap rise is a serious win for borrowers in the multifamily space, and it favors affordable housing stakeholders in particular.
As an experienced real estate investment firm with a strategic focus on the affordable housing sector, Kairos Investment Management Company has seen how this sector’s fundamentals continue to strengthen – even in the wake of a global pandemic. Since 2016, we have been investing in affordable housing within the U.S. through our impact strategy, which includes LIHTC, senior housing, manufactured housing, and self-regulated market rate communities.
Based on our experience in this realm, here is why we believe that the recently announced FHFA guidelines are potentially advantageous to affordable housing borrowers.
1. The percentage of the Enterprises’ multifamily lending that must be allocated toward affordable units has increased.
In 2022, at least 50% of Fannie Mae and Freddie Mac business is required to be affordable to renters at or below 80% AMI, a new high for this qualification. Also, at least 25% of the Enterprises’ multifamily business must be affordable to residents at 60% of AMI or below. This is a significant increase from the 20% of the Enterprises’ multifamily business required to be affordable to residents at 60% of AMI in 2021.
The higher requirement is indicative of FHFA’s commitment to encouraging the purchase and development of affordable units throughout the country, particularly in areas where demand is greatest, and supply is constrained.
2. FHFA has increased the number of affordable housing units that would qualify for “mission-driven” loans.
FHFA has widened the qualifications of a mission-driven loan (a loan offered by institutions that are committed to supporting job-creating enterprises in underbanked and low-income communities where other financial opportunities may be limited or include rates that are not favorable to the borrower). The criteria for this type of loan have been expanded to include loans on affordable units in cost-burdened renter markets that are affordable at 100% AMI, as well as loans on affordable units in very cost-burdened markets that are affordable at 120% AMI.
The more liberal definition of a mission-driven loan is allowing a greater number of multifamily properties to qualify for Enterprise loans, adding funding to the affordable housing sector in a profound way for 2022.
3. Fannie Mae and Freddie Mac loans are required to favor sustainability initiatives in affordable properties.
Increased sustainability has been a goal for multifamily and affordable housing stakeholders for some time. In fact, a major tenet of Kairos’ impact strategy is to make environmental impact investments in water conservation, energy efficiency, and waste reduction improvements in properties. FHFA is now helping to achieve this goal by rewarding sustainability measures in the properties for which Fannie Mae and Freddie Mac will lend.
Under the agency’s new guidance, loans would also qualify as mission-driven if they are under Fannie Mae’s Green Rewards or Freddie Mac’s Green Up/Green Up Plus programs as long as affordability and energy/water savings metrics have also been met. This would mean Enterprise issued debt for these affordable properties would benefit from lower interest rates.
In addition to enabling more properties to operate in an increasingly cost-efficient and environmentally sound way, this sustainability guideline is likely to appeal to affordable housing investors, tenants, and local officials.
Despite past hiccups with Fannie Mae and Freddie Mac, the newly issued FHFA limits point to an even brighter future for the affordable sector. By raising the lending cap on affordable multifamily properties, expanding the definition of a mission-driven loan to apply to more assets and incentivizing loans in sustainable communities, these initiatives are positioned to propel affordable housing lending well beyond 2022.
*There are no guarantees that any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. The views and opinions expressed in this article are solely my own.
For questions, contact investor relations at investorreporting@kimc.com or 949-800-8500.
