Fannie Mae and Freddie will be allowed limited re-entry into the Low Income Housing Tax Credit (LIHTC) market as equity investors, effective immediately, the Federal Housing Finance Agency (FHFA) recently announced. The LIHTC, established in the Tax Reform Act of 1986, is the primary government program available to address the shortage of affordable rental housing through the creation and preservation of affordable units in underserved areas throughout the country.
FHFA’s decision was based on several factors, including furthering Fannie and Freddie’s mission to support affordable housing and ensuring that they could provide a countercyclical role in the LIHTC market in the future if needed.
“This decision demonstrates our commitment to supporting affordable rental housing in a controlled and thoughtful manner intended to stabilize the market and not to compete with private investors,” says Mel Watt, director of the FHFA. “Most of the Enterprises’ investments will be used to facilitate transactions that support underserved markets and complement our Duty to Serve (DTS) priorities.”
Both Fannie and Freddie will be subject to an annual investment limit of $500 million, less than a 5 percent marketshare for each. Within this funding cap, any investments above $300 million in a given year are required to be in areas that have been identified by FHFA as markets that have difficulty attracting investors. These investments are designed to preserve affordable housing, support mixed-income housing, provide supportive housing, or meet other affordable housing objectives.
FHFA engaged in significant stakeholder outreach about whether Fannie and Freddie should be authorized to re-enter the LIHTC equity market, including a specific request for comments on this topic in FHFA’s proposed DTS rule in 2015. Going forward, FHFA will continue to evaluate their participation in the LIHTC equity market annually.
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