The U.S. Department of Housing & Urban Development (HUD) and the U.S. Department of the Treasury have jointly taken action to provide more interest rate certainty for state and local Housing Finance Agencies (HFAs) that use the Federal Housing Administration’s (FHA) risk sharing initiative with the Federal Financing Bank to finance new construction of affordable housing. Today’s actions were implemented to foster and increase the construction of affordable, new homes.
“Let’s face it–we don’t have enough affordable homes. Here at HUD, we are making changes to build new, quality, affordable homes like never before,” said HUD Acting Secretary Adrianne Todman. “Today, alongside our colleagues at the Department of the Treasury, we are announcing a crucial move that will enable our partners to use our financing to build tens of thousands more rental homes for the families we serve.”
Outlining the Plan
FHA and the Federal Financing Bank will implement a floor and a cap, called an interest rate “collar,” on the benchmark Treasury rate used to calculate the all-in rate provided to Housing Finance Agencies (HFAs). This update to the Section 542(c) Housing Finance Agency Risk-Sharing Initiative will make it easier to use the program, thereby increasing the number of new, affordable multifamily properties that can be developed using risk-sharing program financing.
The Section 542(c) Housing Finance Agency Risk-Sharing Initiative allows eligible HFAs to enter into contracts with HUD through which FHA insures multifamily mortgages originated by an HFA that are used to finance construction or rehabilitation of properties with affordable housing units. Under these contracts, HUD and the HFA share the risk of any potential loss resulting from a default of the insured mortgage. With the FHA insurance credit enhancement in place, the Federal Financing Bank will purchase the mortgage, enabling the HFA to recoup their capital and make other investments in their communities.
“The Biden-Harris Administration knows the key to reversing the affordable housing crunch is to take actions that increase housing supply. The Treasury-HUD rate collar initiative will help reduce the cost to construct more affordable housing that is so urgently needed in neighborhoods across the country,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo. “Treasury will continue to do everything in our power to make housing more affordable for Americans and unlock greater economic prosperity.”
The interest rate collar will be available for Housing Finance Agency-originated mortgages used to finance new construction or substantial rehabilitation of multifamily affordable housing for low-income individuals and families. It will be provided when an application for FHA-insured mortgage financing is conditionally endorsed by FHA. The final pass-through interest rate for the transaction upon completion of construction will be calculated using the floor and cap benchmark Treasury rates referenced above and programmatic spreads determined by the Federal Financing Bank.
“This innovative solution to rate uncertainty will increase the usefulness and reach of a program that has already developed thousands of new rental homes through collaboration among federal, state, and local housing resources,” said Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon. “It is one of many levers we’re turning to increase production of affordable rental housing for low-income individuals and families.”
A History of Risk Sharing
“We believe this important update to the risk-sharing initiative will not only increase the creation of new, deeply affordable housing for the nation’s low-income families, it will also provide additional flexibility that will make the program usable by more state and local Housing Finance Agencies and their borrowers,” said Deputy Assistant Secretary for Multifamily Housing Programs Ethan Handelman. “This change has long been sought by Housing Finance Agencies, and we’re pleased to add it to the program enhancements we’ve implemented under the Biden-Harris Administration.”
Since the Biden Administration re-started the Risk Sharing Initiative in 2021, the program has already enabled access to more than $2.7 billion in financing for the development or substantial rehabilitation of more than 16,200 affordable rental homes for low-income families, seniors, and persons with disabilities. In February 2024, FHA and the Federal Financing Bank announced they were indefinitely extending the program’s availability. FHA anticipates that approximately 38,000 additional affordable rental homes will be created or preserved through the initiative over the next ten years alone.
The State of Housing Starts
According to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), mortgage rates that averaged 6.92% in June continued to put a damper on builder sentiment. The report found that builder confidence in the market for newly built single-family homes was 42 in July, down one point from June, marking the lowest reading reported since December 2023.
“While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan.
The July HMI survey also revealed that 31% of builders cut home prices to bolster sales in July, above the June rate of 29%. However, the average price reduction in July held steady at 6% for the 13th straight month. Meanwhile, the use of sales incentives held steady at 61% in July, the same reading as June.
The month of June found the highest yearly increase in building material prices since February 2023, as inputs to residential construction, goods less food and energy, rose 0.19% according to the most recent producer price index (PPI) report published by the U.S. Bureau of Labor Statistics (BLS). The Index for inputs to residential construction, goods less food and energy, represents building materials used in residential construction. In May, the Index fell 0.26% after rising in April 0.22%. Over the year, the Index was up 2.65% in June. Year-over-year growth has continued to climb this year, June’s increase was the highest since February of 2023. Despite overall inflation declining, prices for inputs to residential construction have accelerated since the start of the year, leaving home builders to continue to deal with higher building material prices.
However, more potential buyers may be coming off the sidelines and back into the market, as Freddie Mac reported in its latest Primary Mortgage Market Survey (PMMS) that the 30-year fixed-rate mortgage (FRM) averaged 6.47%—the lowest level reported in a year.
“Mortgage rates plunged this week to their lowest level in over a year following the likely overreaction to a less than favorable employment report and financial market turbulence for an economy that remains on solid footing,” said Sam Khater, Freddie Mac’s Chief Economist. “The decline in mortgage rates does increase prospective homebuyers’ purchasing power and should begin to pique their interest in making a move. Additionally, this drop in rates is already providing some existing homeowners the opportunity to refinance, with the refinance share of market mortgage applications reaching nearly 42%, the highest since March 2022.”
Click here to read the White House’s Fact Sheet on its latest moves to enhance affordable housing.
