FHFA Ups Cap on GSE Housing Credit Investment, Prohibits GSEs from Investing in Deals If Owners Do Not Waive Qualified Contract Option
The Federal Housing Finance Agency (FHFA) today issued an announcement that it will allow the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac to invest up to $1 billion in the Housing Credit equity market in 2024, an increase from the $850 million it allowed each GSE to invest in 2023. Any Housing Credit investments the GSEs make above $500 million each year must be for developments FHFA identifies as having difficulty attracting investors, thus the increase is targeted to housing located in rural areas consistent with the GSEs’ Duty-to-Serve requirements, preservation, mixed-income properties, and supportive housing.
FHFA also announced it will require the GSEs to institute new policies to invest only in Housing Credit developments in which the owners have waived the right to a qualified contract, thereby ensuring the developments in which GSEs invest remain affordable for the full period outlined in each development’s extended use agreement. NCSHA and several other advocacy organizations have pressed FHFA to take this action to mitigate the premature loss of Housing Credit homes from the affordable housing stock. NCSHA applauds FHFA for its leadership.
The qualified contract provision in the Housing Credit statute — once a little noticed and unused option for owners of Housing Credit properties — in recent years has resulted in the loss of between 7,000 and 10,000 affordable units annually, according to data submitted to NCSHA by state Housing Credit agencies. Approximately 110,000 rental homes have been lost from the affordable housing stock cumulatively due to this loophole in the law, which allows the owner to require the state agency to find them a buyer willing to pay the “qualified contract price” for their Housing Credit property. If a qualified buyer cannot be found after one year, the owner may require the state to lift all affordability requirements on the property. Unfortunately, the qualified contract price, determined by a misguided formula in the statute, is almost always well above the property’s fair market value, making it difficult to find a buyer willing to pay the inflated price.
The qualified contract process can commence as early as Year 14, which means that properties going through the process are often lost after just 15 years (one year after the owner initiates the qualified contract process), whereas all owners enter into extended use agreements that otherwise would require affordability for at least 30 years. After one year, the owner may either sell the property without affordability restrictions or continue to operate the property as market rate after a three-year protection period for existing tenants. These properties no longer have eligibility or restricted rent requirements, and state agencies can no longer enforce any tenant protections or other commitments the developers made.
Nearly all state agencies have worked to stem these early terminations by requiring or incentivizing owners to waive their right to a qualified contract as a condition of receiving an allocation of credits, a practice supported by NCSHA in its Recommended Practices in Housing Credit Administration. Many states have gone further, instituting policies to create other qualified contract disincentives for properties financed before the state put in place waiver policies. However, as demand exceeds supply in nearly every market and rents for market-rate properties have increased, such disincentives are typically insufficient to dissuade an owner who seeks to maximize their profits.
In addition to barring the GSEs from investing in a Housing Credit property if the owner has not waived their qualified contract right, NCSHA has urged FHFA to prohibit the GSEs from acquiring multifamily loans on Housing Credit properties for which the owner maintains that right or for properties for which the owner already has taken the property through the qualified contract process. NCSHA also urges FHFA to prohibit the Federal Home Loan Banks from providing Affordable Housing Program funds to a Housing Credit property unless the owner agrees to waive their qualified contract right. NCSHA and our advocacy partners have made similar requests of HUD and USDA to take steps within their authorities to mitigate qualified contract losses.
