Affordable housing might be a priority for the government, but that doesn’t mean banks share the same view. According to a recent CoStar article, 11 federal home loan banks say that government pressure to fund their housing programs could threaten their stability.
The Biden administration requires federal banks to contribute money through grants for affordable housing initiatives. According to a White House press release, the president proposed that “each Federal Home Loan Bank double its annual contribution to the Affordable Housing Program, which will raise an additional $3.79 billion for affordable housing over the next decade and assist nearly 380,0000 households.”
Banks and the Affordable Housing Program
Home loan banks include Fannie Mae and Freddie Mac, government-sponsored enterprises charged with making the housing market more efficient while contributing to affordable housing development. Other consortium members include commercial banks and other financial companies that offer to make loans to federal banks as collateral in exchange for their business.
However, the 11 federal banks say Biden’s plan amounts to sheer bad business and made a counterproposal. They sent a letter to the U.S. Treasury, suggesting regulators make it easier for bank members to access the grants.
According to the Council of Federal Home Loan Banks, a trade association that serves as the banks’ public voice, the government program yielded $725 million in 2023 for multifamily housing development and individual homeowners and borrowers.
Federal banks are currently required by law to meet the 10% threshold for affordable housing. Last year, they voluntarily started setting aside 15% of net income for the program. However, If banks doubled their contributions to the Affordable Housing Program from 10% to 20% of net income, as President Biden proposed, the banks claim their ability to fulfill their core financial mission could be compromised.
“We are opposed to any approach that could weaken our capital position, as this would ultimately diminish our ability to fulfill our statutory mandate of providing liquidity to the financial system and supporting housing finance and community development,” said an Aug. 29 letter written by the 11 board chairs.
U.S. Senator Catherine Cortez Masto of Nevada, who introduced the 20% contribution legislation in 2021, contends that while banks claim financial hardship, they have still “paid millions to executives and board members” over the past year.
Reforming Housing Grant Rules
The Affordable Housing Program is not new. It was started in 1989, and the money it generates, along with other home loan bank programs, helps prospective buyers who earn 80% or less of an area’s median income become homeowners. It also supports rental housing in which at least 20% of units are for households at or below 50% of an area’s median income.
The 11 bank presidents claim in their letter that reforming housing grant rules would make it easier for smaller member banks to access the funding. The letter also proposes making it easier for community development financial institutions to access the banks’ Community Investment Program, which provided $4.2 billion in housing loans last year.
Best Banks for Real Estate Investors
As long as a real estate investor is successful, most banks will be willing to veer away from their standard playbook to accommodate them. However, when choosing a bank, knowing exactly what role you want them to play is important, as each has strengths and weaknesses.
Some banks are superconservative regarding loans for investment properties or business lines of credit related to real estate. Most are more amenable to high-net-worth individuals with high credit scores.
“Large banks like Chase offer standard loan products for standard clients,” said Terence Young, a commercial mortgage broker with eFunder, in a statement to BiggerPockets. “They are not going to change their lending criteria for an average-net worth borrower. However, my high-net-worth clients will audition banks like them and Bank of America to see who will offer them the lowest rate because they want their business.
Young continues:
“A lower-income borrower is just happy to get a loan from whoever will give it to them, sometimes regardless of the rate. That’s where community banks and credit unions come in. They get an incentive from the government to offer loans that the larger banks won’t touch. For investors scaling their portfolio with smaller houses, they can be a tremendous asset because they are invested in the community and want to see small businesses succeed. They will take more of a holistic approach to lending, analyzing deals on a case-by-case basis, instead of a one-size-fits-all loan product.”
How Real Estate Investors Can Benefit From Affordable Housing Initiatives
Affordable housing can be lucrative for investors, particularly developers, thanks to tax credits when a certain percentage of units in a rental building are dedicated to lower-income households and rented below market. While many investors balk at affordable housing, thinking only of Section 8 and the problems it has been known to entail, there are many other ways investors can benefit from affordable housing.
Renting to adults 65 or older
The 65+ population has grown 34%, from 43 million in 2012 to 58 million in 2022. Government rental assistance provides essential support to low-income older adults; details can be found on the HUD website.
HUD also provides funding for “owners of eligible developments with a grant to convert some or all of the dwelling units in the project into an Assisted Living Facility (ALF) or Service-Enriched Housing (SEH) for elderly residents aging in place.”
Renting to veterans with disabilities
According to the U.S. Department of Veterans Affairs website:
“HUD provides rental assistance vouchers for privately owned housing to veterans who are experiencing homelessness. VA case managers may connect these veterans with support services such as healthcare, mental health treatment, and substance use counseling to help them in their recovery process and with their ability to maintain housing in the community.”
Supportive housing for persons with disabilities
Investors can provide housing for people and property owners with disabilities, with federal home modification grants available for housing veterans with disabilities, provided you own and live in the home. However, investors who rent a unit of their small multiunit home to a veteran family member with disabilities will also be eligible for the grants. These also cover homes you intend to buy but do not yet own. State and local home modification grants are less restrictive.
Final Thoughts
Affordable housing is the most incentivized it has ever been. The government is keen to partner with investors and developers to build and offer low-cost housing. The Federal Housing Administration (FHA) and Federal Financing Bank (FFB) Risk-Share Program provides capital to state and local housing finance agencies (HFAs), enabling them to ensure multifamily loans at reduced interest rates and create and preserve high-quality, affordable rental homes.
Funding is available across the board for affordable housing projects. Whether you want to build large multifamily apartment buildings, buy and renovate two to four units, rent to low-income veterans or tenants with disabilities, or build an ADU with FHA-insured financing, there appears to be a deluge of government funds to help investors accomplish their goals—despite some banks opposing the extra money they are being asked to provide.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
