Earlier this month, my colleague Laurie Goodman and Dan Magder of Center Creek Capital Group wrote about the need for more flexible use of subsidy financing for affordable scattered-site rentals. In July, the Federal Housing Administration (FHA) created the Small Building Risk Sharing Initiative (SBRS) under section 542(b) of the Housing and Community Development Act of 1992. Under the SBRS, FHA will share in up to half of the credit risk of financing small rental buildings. Although it is not clear from the SBRS program notice, the program will also entertain the possibility of including scattered site rentals.

Why multifamily housing is crucial to a healthy rental market

“Multifamily” housing may conjure up visions of large apartment buildings, but more than a third of the country’s rentals are in 5- to 49-unit buildings, and an additional 53 percent are in 1- to 4-unit buildings. Importantly, these small buildings are a disproportionate share of the affordable rental stock.  In addition, the units in 1- to 4-family buildings are often appropriately configured for families and found in places where they want to live. Unfortunately, they are also difficult to finance, especially with the long-term fixed-rate loans that might mitigate some of the risk of a small number of vacancies causing a major drop in rental income. The FHA program could be a welcome addition to small multifamily initiatives announced over the past year by Fannie Mae and Freddie Mac  and encouraged by their regulator, the Federal Housing Finance Agency.

How is the program financed?

Under the new program, eligible lenders—initially mission-based lenders such as Community Development Financial Institutions, but ultimately including some private lenders—will be able to obtain FHA insurance on up to 40-year financing for up to $3 million, or $5 million in high-cost areas, on a 50 percent risk-sharing basis. The financing can be used for “project acquisition, refinancing, rehabilitation (up to and including substantial rehabilitation) and/or equity take outs, but excluding new construction.” The project insured must meet the affordability standards of the Low Income Housing Tax Credit, namely that at least 20 percent of the units must be affordable to households earning 50 percent of the area median income (AMI) or at least 40 percent of the units must be affordable to households earning 60 percent of AMI.

How will we know if the program is working?

The program’s effectiveness will depend in part on whether potential users can fund the loans and at what cost, since by law loans insured under the FHA’s Section 542 risk-sharing programs cannot be securitized by Ginnie Mae. Most mission-based lenders do not have access to long-term funds.  In addition to proposing changes to the law restricting Ginnie Mae, the FHA hopes to enable mission-based lenders, like state Housing Finance Agencies under a similar risk-sharing program, to gain low-cost long-term funding through Treasury’s Federal Financing Bank (FFB), perhaps by the summer of 2016. This change would be an important breakthrough, since the FFB has traditionally only been available to finance much larger loans fully backed by a government guarantee.  Traditional lenders who would not have FFB access might nevertheless find the program useful as a tool for making loans that can garner credit under the Community Reinvestment Act.

By explicitly including acquisition, refinancing, and equity take outs in the program, the Small Building Risk Sharing Initiative will help non-profits and other affordable housing developers keep well-rehabilitated single-family rentals in lower-income communities in the affordable housing stock.  For-profit investors will have an alternative to selling off these properties without affordability limits just as the neighborhoods become more desirable. The FHA has promised a formal evaluation of the program’s effectiveness; it will be important to understand whether and how it adds to the permanently affordable single family rental stock.