Federal Home Loan: What Freddie Mac is Doing in the Face of the Rent Affordability Crisis
Read your local newspaper or visit any social media platform and you’ll hear countless stories of families under pressure from rising prices and wages that just aren’t keeping up. Rents, for example, which have fallen in some markets during the pandemic, have risen by an average of almost 10% over the past year, and Freddie Mac’s Multifamily prospects shows that we are likely to see an average increase of 4% in 2022.
What we are seeing is the pairing of new inflationary pressures with a long-term shortage in the supply of multi-family housing. Freddie Mac has been raising concerns about this for over a decade. The aggravation of things is even more pronounced shortage of single-family housing, where inventories are at historic lows and prices at record highs. In short, people have few good options when the cost of their housing increases.
In 2019, the latest year for which we currently have good data, about half of tenants were already increased cost, meaning they spent 30% or more of their income on rent. Worse still, nearly a quarter were heavily cost-burdened, spending at least half of their income on rent. Imagine the strain another rent hike puts on a family’s budget and what that means for someone working to make ends meet. Or consider the added stress of commuting and less time with family when you’re forced to travel farther out of town. In many cases, tenants are looking for cheaper housing, which may not meet their needs.
This crisis is the fundamental challenge facing rental housing markets, and as a leader in multi-family housing with a very strong commitment to our mission, Freddie Mac is committed to doing more. Here’s what we’ve done so far:
First of all, we are the market leader in financing what we call “Targeted Affordable Housing“, or subsidized or rent-limited properties based on local, state or federal government programs. Freddie Mac alone has purchased $60 billion in loans to support the financing of these highly affordable properties since 2015. Together, the agencies dominate this space.Our much-needed loans are often the glue that holds together the more affordable end of the market.Many real estate transactions involving multiple sources of state, local, federal, nonprofit, and private sector funding would not simply not possible without our funding and expertise in this region.
Second, we lead the market in supporting affordable workforce housing properties that are affordable to moderate incomes. We measure this by calculating a property’s rents relative to the median income where a property is located. Affordable rent is considered to be no more than 30% of a person’s income.
Since 2015, approximately 70% of the homes we financed through loan purchases were affordable at 80% of the regional median income (AMI) and nearly 95% were affordable at 120% of the AMI. Rents for these properties are generally not subsidized or subject to government rent and income restrictions. They are subject to market pressures, but generally represent Class B and Class C properties that will remain affordable compared to newly built or luxury properties. And unlike some market participants who will lend dollars to borrowers based on expected rent increases, Freddie Mac guarantees rents in place at the time a loan is issued. Therefore, no rent increase is necessary for the multi-family operator to meet its ongoing property maintenance and loan obligations.
Third, as the largest participant in the secondary market, we do what we can to meet supply. This includes supporting the preservation of the existing housing stock and encouraging the development of new units. Since 2018, we have invested nearly $1.7 billion in equity, not debt, to support the creation or rehabilitation of thousands of low-income housing units in the country’s most underserved communities. We have also preserved 60,000 housing units, including 25,000 affordable those on very low incomes with our cash preservation loan.
Separately, we’ve helped bring tens of thousands of new affordable housing units online using ‘term commitments’, which offer multi-family operators the ability to lock in funding for affordable housing developments before construction is completed. substantial rehabilitation or new construction. This eliminates the risk of changing interest rates, providing certainty that allows many affordable multi-family properties to come off the drawing board. Last year we supported over 20,000 new units in this way.
Finally, Freddie Mac has pioneered new market-based products that offer attractive financing to multi-family operators who agree to keep rents affordable and provide tenant services, even where there is no regulatory obligation to do it. We have purchased over $1 billion in loans through our Tenant advancement and principal financing covenants that help prevent rent increases or, in some cases, reduce rents from the market rate, in accordance with the terms of our loan agreements.
Taken together, these efforts are a tremendous force in the market and help tens of thousands of households find quality rental housing at an affordable price each year. However, they are not in themselves a complete solution.
For that, we have to tackle the elephant in the room: supply. To tackle affordability comprehensively, there is an indisputable need for a concerted effort by all actors in the housing market to increase the quantity and quality of affordable housing.
As a participant in the secondary mortgage market, Freddie Mac’s ultimate goal is to provide housing finance affordability, liquidity and stability. In short, we buy loans. Through this process, we broadly encourage and encourage affordability. We do not build or operate multi-family properties, and we are not a legislature that can set housing policy or regulation. However, we recognize the need for all of these parties to work together on this issue.
Freddie Mac looks forward to doing more to meet this challenge and continue to responsibly serve our mission to make home possible for more renters across the country.