Agency Lenders Get Relief, Gain Focus
Now that the Federal Finance Housing Agency (FHFA) has released their revised and expanded definition of “affordable” property, the agency lenders, Fannie Mae and Freddie Mac have received their sought after increase in lending capacity and a sharpened focus for their multifamily lending activities.
Of the three categories of loans exempt from the agency lending caps—manufactured housing, properties consisting of 5 to 50 units, and affordable housing—affordable has long been the largest exempt category, and it just got a whole lot larger.
FHFA has redefined the meaning of affordable housing to move well beyond properties specifically designated for low income tenants. David Brickman of Freddie Mac describes this as a “mandate to lend on naturally-occurring affordable housing properties.” In essence the FHFA has focused the Agency Lenders to pay attention to funding exempt, or partially exempt loans for “workforce housing”, that is, on units affordable for low to middle income tenants.
Affordable is now defined as any unit in a complex that that is rented at a rate that does not exceed 30% of a defined income level. Nationally, the new income limit is now 60% of the Area Median Income (AMI). Acknowledging significant differences in the cost of living between various markets in the country, FHFA also designated 25 markets as High Cost, and 24 markets as Very High Cost. In High Cost Markets the individual unit rent must be affordable to a household earning up to 80% of AMI, while in the Very High Cost Market it must be affordable to households earning up to 100% of AMI. (see complete list of designations here)
The new rules, for the first time, allow for the prorated exclusion of a portion of any loan from the lending cap, for those units that are rented at a rate deemed affordable under the new rules. The percentage of units in the complex that meet the new affordable criteria, determines the percentage of the loan that is exempt from the lending caps.
So, what are the market implications for these changes? In the short run expect a shift in the funding of Class A properties away from the agencies to CMBS, life companies and banks. In the long run, with Fannie and Freddie competing vigorously in the affordable space, we may well see owners of Class C properties improving the condition of their properties to meet agency condition standards. It may also provide owners with an incentive to slow rent increases when nearing the affordable rent limit for their location to maintain the exempt portion of their loan.
At a time when housing affordability has become a crisis in many markets, this should be welcome news.