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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2017

Duty to Serve

Freddie Mac’s plan spurs focus on affordable multifamily housing

Duty to Serve

Freddie Mac’s proposed Duty to Serve plan seeks to bring liquidity, stability and cost-effectiveness to housing markets that have been underserved for generations. While Freddie Mac serves all segments of the rental-housing market, Duty to Serve focuses on one of the more challenging sectors: affordable housing.

In order to embrace this challenge, a core component of the proposed plan is to develop solutions for more affordable rental opportunities in specific markets. Commercial mortgage brokers who work with multifamily properties — as well as borrowers, sellers and servicers — should understand the details of how the government-sponsored enterprise (GSE) is looking to boost housing opportunities in underserved areas across the country.

For some, talk of an affordable-housing crisis may seem overblown. After all, the U.S. economy has rebounded significantly since the 2008 recession, the financial markets are hitting record highs and unemployment is at its lowest level in a decade. But those indicators fail to reflect a growing hardship facing millions of Americans — namely, the inability of working families to find safe, decent and affordable housing.

The affordable-housing crisis is one that transcends age, race and geography. And it’s a crisis that is growing. In 2015, the Joint Center for Housing Studies at Harvard University found that 27 percent of all renters were severely “rent burdened,” meaning they spent more than half their income on rent. This compares to 20 percent of renters in 2000 and only 12 percent in 1960.

A perfect storm of circumstances brought us to this point. Demand for rental housing continues to be very strong. In virtually every demographic cohort, from millennials to baby boomers, renter households are poised to grow because of a range of economic and demographic factors. This demand is not being met by increased supply, however. Freddie Mac research confirms that, even when taking single-family housing starts into account, the U.S. is facing an annual shortfall of about 400,000 housing units.

Those looking for affordable-housing options find themselves in even more dire straits. Nationally, there are only 7.3 million affordable rental units to serve 11.2 million households living on very low incomes. Historically, roughly 90 percent of the multifamily loans Freddie Mac finances in any given year support workforce housing, which are low- and moderate-income households that earn no more than their area’s median income.

In 2008, Congress challenged the GSEs to do more. The Housing and Economic Recovery Act established direction for Freddie Mac and Fannie Mae to increase liquidity and improve the distribution of capital available for mortgage financing in three specific underserved markets — rural housing, manufactured housing and affordable-housing preservation. Freddie Mac’s overseer, the Federal Housing Finance Agency (FHFA), began implementing this requirement last year, when the agency published its Duty to Serve final rule.

Regarding multifamily properties, the rule directed Freddie Mac to develop loan products and flexible underwriting guidelines that will facilitate a secondary market in the three underserved markets. This year, Freddie Mac published a proposed plan, a three-year blueprint for working with the multifamily housing industry and other stakeholders, to provide working families with expanded rental opportunities in these underserved areas. It followed months of outreach and dialogue with key stakeholders to better understand and address the needs of these sectors.

Manufactured housing

Manufactured homes serve more than 17 million Americans and are an important source of workforce housing. According to Prosperity Now, formerly known as the Corporation for Enterprise Development, 12 percent of low-income households live in manufactured housing.

Freddie Mac Multifamily purchased its first manufactured-housing community (MHC) loan in October 2014. Since then, it has provided $2.1 billion in financing, making housing available for more than 53,000 families in more than 265 MHCs across 31 states. Today, Freddie Mac Multifamily is one of the top sources of funds for the nearly 38,000 MHCs nationwide, according to Datacomp’s JLT market reports.

Even when taking single-family housing starts into account, the U.S. is facing an annual shortfall of about 400,000 housing units.

The Duty to Serve rule calls on Freddie Mac to continue supporting MHCs, with a specific focus on resident-owned manufactured communities (ROCs). These arrangements give families an ownership role in their communities; may protect them against excessive rent increases; and encourage maintenance, investment and pride in their homes and neighborhoods. Freddie Mac’s plan includes steps to conduct research, promote a greater understanding of the market and help to attract private capital, while also using this research to pilot new ROC-specific loan products and increase purchase opportunities.

During a series of public sessions about underserved-market proposals, tenant rights were named as one factor for creating a stable tenant base which, in turn, will create stability in the market. Duty to Serve includes undertaking a research effort to identify tenant-protection frameworks across all 50 states, and a report on the gaps between those protections and the ones identified in the Duty to Serve regulations. Freddie Mac also will look to create a pilot program for borrowers who implement qualifying-tenant protections.

Rural housing

Affordable housing is essential to the stability, economic development and viability of rural communities. While rural areas are socially, economically and geographically diverse, they face many common challenges.

The presence of industries that historically supported local economies and growing populations — such as manufacturing, lumber and agriculture — have diminished, for example, resulting in economic hardship. In addition, rural populations are aging as younger generations leave in search of job opportunities. As a result, rural areas have disproportionately high rates of unemployment, underemployment and poverty.

Through research and outreach to rural-market participants, Freddie Mac often heard about these challenges. There are other hurdles as well, such as aging housing stock, limited access to public utilities in some areas, minimal construction financing and limited public subsidies. As a result, increased financing for rental-housing developers in rural areas will be a focus.

Duty to Serve calls for collaboration with the U.S. Department of Agriculture (USDA) to provide third-party financing for various programs. Freddie Mac plans to reengage in the Low-Income Housing Tax Credit (LITHC) equity market, subject to FHFA approval.

There also are plans to support the single-family rental market, which comprises nearly half of rural rental housing. Finally, Duty to Serve calls for foundational research in order to promote a better understanding of rural markets and attract private capital to support the housing needs of rural communities nationwide.

Affordable-housing preservation

Affordable housing is in limited supply, and preservation is critical to ensuring low- and moderate-income Americans have safe, decent and affordable places to live. Freddie Mac Multifamily is already the nation’s leading source of financing for the preservation of workforce and affordable rental housing. New workforce housing is difficult to build, given the high costs of land and construction, and existing units are being steadily lost because of multiple factors. For every affordable apartment created, two are lost due to deterioration, abandonment or upgrades to more expensive housing, according to the National Housing Trust.

Freddie Mac’s Targeted Affordable Housing program — which provides financing options for properties tailored to low- and very low-income families — had a record loan amount of $6.3 billion in 2016. Additional preservation financing was accomplished through other multifamily offerings, such as conventional and small-balance lending. Duty to Serve encourages further expansion of market leadership.

Past experience and ongoing conversations with industry participants make it clear that the near future may bring headwinds for affordable-housing preservation, including rising interest rates, reduced LIHTC equity pricing and a potential reduction in vital public subsidies. These potential near-term challenges make Freddie Mac’s support even more important to this market, and they are why innovative options are being proposed to reduce financing costs and close capital-funding gaps.

The Duty to Serve plan also will entail a targeted effort to increase liquidity at small financial institutions, which are a key source of financing for smaller, unsubsidized, affordable-housing properties. Moreover, the plan aims to leverage the success of Freddie Mac’s Green Advantage products, which help reduce tenant utility bills and promote affordability by producing an annual energy- and water-efficiency study for the benefit of the broader market. The plan would also identify ways to support the USDA in its efforts to preserve long-term affordability for rural renters.

•  •  •

Freddie Mac Multifamily embraces the opportunity to focus on the most difficult parts of the rental-housing market. Duty to Serve calls for working with a range of stakeholders to promote affordable-housing preservation, affordable rural housing and manufactured housing.

The activities outlined in the plan may change based on several factors, including public input, FHFA comments, charter requirements, safety and soundness considerations, and market and economic conditions. You can download the full proposal and submit comments through the FHFA website at


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