Fannie Mae and Freddie Mac are creating a suite of loan programs for the development and maintenance of inexpensive apartments that working Americans can afford without cash subsidies from federal housing programs.
Fannie Mae has a new program that supports new apartments built under local “inclusionary zoning” guidelines. Freddie Mac is offering lower interest rates on loans for properties that commit to saving energy, bringing down tenant utility bills. And both agencies continue to provide flexible financing for the kind of older apartment properties that are most likely to be priced affordably.
“That’s the kind of business that has been our bread and butter,” says Bob Simpson, vice president of multifamily lending for Fannie Mae.
Housing markets produce fewer inexpensive apartments
There are now roughly 5.5 million units of “naturally occurring affordable housing” in the U.S., according to research by CoStar. Often these apartments are less expensive simply because they are a little older than newer units. But every year that number of inexpensive apartments gets smaller.
“Rent growth has outpaced income growth for several years,” says Simpson.
Every year, 120,000 apartments that were once affordable for renters earning an average income become unavailable. For every new unit built through subsidized affordable housing programs, two affordable apartments are lost, either through obsolescence or rising rents, according to Simpson.
Fannie Mae and Freddie Mac are trying to remedy the situation through loan programs designed to help property owners continue to operate these properties efficiently at lower rents.
Freddie Mac has created two rehab products, each specifically designed to help owners maintain and fix up aging, inexpensive apartments. These loans offer low interest rates to owners who commit to complete modest renovations, which sometimes cost as little as $5,000 per unit.
Freddie Mac also offers lower interest rates on loans for apartments properties if the owners commit to making those properties at least 15 percent more energy efficient. Because tenants often pay for their own utilities, much of the savings flow to them. “It works out to much lower utility costs for the tenants,” says David Leopold, vice president for Freddie Mac Multifamily. Freddie Mac will also pay for a “green assessment” to identify what would be the most effective renovations to save energy.
Fannie Mae and Freddie Mac’s apartment lending is already targeted toward these naturally-occurring, affordable apartments. “Last year, 90 percent of the units we financed were affordable to households earning the median income,” says Leopold. “We are dedicated to serving that segment of the market.”
The Federal Housing Finance Agency, which that oversees Fannie Mae and Freddie Mac, also strongly encourages them to serve these less expensive apartments. The conservator has limited the total volume of loans Fannie Mae and Freddie Mac can make on apartment buildings to $36.5 billion apiece. But loans don’t count towards that cap if they finance apartments priced to be affordable to households earning 60 percent of the area median income (AMI) in most areas. And that figure rises to 80 percent in high-cost housing markets and to 100 percent in very high cost markets.
Inclusionary zoning creates new supply
Both Fannie Mae and Freddie Mac also offer low interest rates to support the creation of new affordable housing though government programs—mainly the federal low-income housing tax credit program, which creates roughly 50,000 new units of affordable housing a year. That’s significant, but not enough to replace lost affordable stock.
Fannie Mae offers low interest rates on loans for new apartment properties that participate in local “inclusionary zoning” programs. Many state and cities governments, including those in New York and Seattle, now bargain with developers, offering the right to build more new luxury apartments if the developers agree to include some affordable units as well. The interest rates that Fannie Mae offers to these “inclusionary” apartment properties are somewhere between its regular, competitive interest rates and the 13-to-39-basis-point discount the agency offers to federal low-income housing tax credit properties.
“We’ve been extremely happy with the response,” says Simpson. “We get inquiries from borrowers on a consistent basis.”