As we’ve noted before on this blog, housing policy is an all-of-government issue that involves a veritable “alphabet soup” of various federal departments and agencies. One of the most important ingredients in this soup is the Federal Housing Finance Agency (FHFA), an independent federal agency created in the aftermath of the 2007-08 housing market meltdown to strengthen the beleaguered housing finance system.
As part of its portfolio of housing finance work, the FHFA is closely involved in regulating financing for multifamily housing across the country. This blog serves as a brief overview of the FHFA, its relationship to government-sponsored enterprises (GSEs), and the agency’s role in multifamily housing finance policy.
What is the FHFA and what are the GSEs?
Established by the Housing and Economic Recovery Act of 2008 (HERA), the Federal Housing Finance Agency is the successor regulatory agency to the Federal Housing Finance Board (FHFB) and the HUD Office of Federal Housing Enterprise Oversight (OFHEO). Its current acting head is Sandra Thompson, who has also been nominated to hold the position on a permanent basis.
Created to both absorb and expand upon the regulatory authority of its predecessors, the FHFA supervises, regulates, and oversees three government-sponsored enterprises (GSEs) involved in the secondary mortgage and housing finance markets. These GSEs are the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 11 Federal Home Loan Banks (FHLBanks). Fannie and Freddie expand the housing finance markets by buying and insuring mortgages made by banks and other lending institutions, while the FHLBanks provide direct loans to other banks and specialized grants and loans for affordable housing.
FHFA’s relationship to the GSEs
Under its statutory authority, the FHFA has the power to put the GSEs under the agency’s conservatorship, a state intended to “stabilize troubled institutions with the objective of maintaining normal business operations and restoring financial safety and soundness.” The FHFA has held Fannie Mae and Freddie Mac in conservatorship since September 2008, giving the agency the powers of the GSEs’ management, boards, and shareholders.
Under these conditions, the boards and management teams at Fannie and Freddie must consult with the agency and obtain FHFA approval for major decisions relating to the management and operation of the GSEs. The FHFA thereby can set goals and standards for the GSEs to follow when purchasing mortgages – for example, setting the total number of units that must be available to low-income and very low-income families. Likewise, the FHFA can also reject proposals from the GSEs that fail to meet the agency’s standards, as was the case earlier this month when the FHFA rejected Fannie and Freddie’s “Duty to Serve” plans for failing to advance affordable housing goals for underserved markets.
The FHFA also publishes an annual Conservatorship Scorecard, setting priorities and expectations for GSE activities related to the strategic goals set by the agency for Fannie and Freddie. The 2022 scorecard – the first to be released under the Biden administration – established climate risk, equity, and “affordable homeownership and rental opportunities” as top priorities for the GSEs.
During the Trump administration, then-director Mark Calabria – a libertarian economist and Cato Institute alum – worked aggressively with Congressional Republicans to accelerate the end of FHFA’s conservatorship of Fannie and Freddie. Following the Supreme Court’s ruling last year in Collins v. Yellen – in which the Court granted President Biden the authority to fire the FHFA director – Calabria was dismissed and replaced as acting head of the agency by Sandra Thompson, who has stated she would “defer to Congress” on the GSEs’ eventual exit from conservatorship.
The GSEs’ role in Multifamily Housing Policy
All three of the GSEs are involved in varying capacities in the multifamily housing market.
Fannie Mae, which is the largest guarantor of mortgages in the U.S., has stated that “financing affordable rental housing is at the heart of what we do”. The enterprise has a dedicated multifamily mortgage business (the Delegated Underwriting and Servicing, or DUS, program) focused on providing high-quality, affordable housing to families with annual incomes at or below the median income of the areas where they live. Fannie Mae purchases, guarantees, and securitizes multifamily housing loans issued by a network of 23 large financial institutions and mortgage lenders. A key component of the DUS program is risk-sharing, wherein private lenders retain some of the underlying credit risk (“skin in the game”) when they sell loans to Fannie Mae. Lenders must also adhere to Fannie Mae’s credit, underwriting, and monitoring standards.
Freddie Mac’s multifamily program – which supports renting to more than 43 million households – has similar basic parameters to Fannie Mae’s, wherein the enterprise purchases and securitizes apartment loans from a network of risk-sharing private lenders. In contrast to Fannie Mae’s work with large lenders, Freddie Mac’s multifamily program works with smaller lenders focused on specific geographic areas, loan sizes, and housing facilities, and also transfers the vast majority of risk to its private sector partners. Most of the multifamily loans financed by the enterprise support “affordable rental housing for low- and moderate-income households who earn no more than area median income”.
The 11 FHLBanks, through the federal Affordable Housing Program (AHP), offer annual competitive grant funds and advances with reduced interest rates to support the finance, acquisition, construction, and rehabilitation of community housing projects. In 2020, more than two-thirds of the AHP/FHLBank-funded competitive projects were multifamily developments
Levers of Influence for the FHFA
Based on the above information, there are many possible venues for the FHFA to exert its regulatory authority and influence over multifamily housing finance policy. Below are a select few examples.
- Loan purchase volume caps: Under its conservatorship powers, the FHFA can expand purchase caps on the loans purchased by Fannie and Freddie. For example, in October 2021, the FHFA expanded the annual amount of multifamily loans each GSE could purchase to $78 billion in 2022, up from $70 billion in 2021. Public interest groups – including the Center for Responsible Lending (CRL), Americans for Financial Reform (AFR), and National Community Stabilization Trust (NCST) – have urged the FHFA to permanently remove these caps, citing the potential for the agency and GSEs to vastly expand the supply of affordable rental properties to low- and very-low-income families.
- Mission-driven business requirements: Under its conservatorship powers, the FHFA can set affordability requirements for the multifamily loans purchased by Fannie and Freddie. FHFA rules for 2022 stipulate that at least 25 percent of the GSEs’ multifamily business be affordable to residents at or below 60 percent of area median income, up from 20 percent in 2021.
- Benchmark Goals for GSEs: The FHFA can issue rules for Fannie and Freddie establishing a benchmark level of mortgages for multifamily units for low and very-low income families to be purchased by the GSEs in a given year. The latest FHFA goals urge the GSEs to purchase mortgages on multifamily properties totalling to at least 415,000 low-income and 88,000 very low-income multifamily rental units, a move supported by public interest groups like the Center for Responsible Lending, Americans for Financial Reform, and National Community Stabilization Trust.