In our last blog, we discussed the different types of funding available for affordable housing. But understanding the funding options is just the beginning—it’s equally important to understand where funding for these programs comes from, how the money is distributed, and who controls how much. In this blog, we’ll dive deeper into the biggest funding players in the affordable housing world and understand how each functions.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are two of the leading sources of mortgage financing in the nation. Charted by congress, their goal is to provide stability and liquidy to the affordable housing market. They work by providing readily available funds to banks and mortgage lenders that finance housing. Typically, they buy mortgages from lenders, hold them in portfolios, or package them into mortgage-backed securities (MBS) to sell.

The funds Fannie and Freddie pay for these mortgages typically returns to a local bank or lenders, pushing down interest rates on home loans significantly. This ensures families and developers are able to buy single or multi-family homes or apartment buildings with a continuous supply of liquidity for their mortgage. 

While the two share a similar process and have similar goals and outcomes, the main difference is the source of their funding. Fannie Mae typically purchases loans from larger banks and credit unions like JPMorgan Chase, and Wells Fargo, while Freddie Mac purchases them from smaller banks like AmeriFirst and ChoiceOne Bank.

Percentage share of mortgage originations acquired by Freddie and Fannie (2002 - 2022 Q2)
Source: National Mortgage Database (NMDB), Federal Housing Finance Agency

In 2022, the purchase caps for Fannie and Freddie individually were $78B, making for a combined $156B. With this loan volume, Fannie and Freddie make up 62% of the mortgage market—making them one of the largest funding sources in America.

Low Income Housing Tax Credit (LIHTC)

Created by the U.S. Department of Urban Housing and Development (HUD), LIHTC is another federally funded program that operates through the federal tax code and was authorized through the Tax Reform Act of 1986. This program gives investors tax credits to make equity investments in affordable housing to finance the development, construction, and renovation of affordable housing units. These equity investments take the weight off of developers to search for other costly ways of financing, such as bank loans.

Source: NOVOGRADAC

There are two types of credits available: a 9% credit and a 4% credit—calculated by the amount of equity generated and a competitive application process. Each has a different process and structure but both have the same goal of building or rehabilitating properties for low-income housing. Credits can be redeemed over the course of 10 years and are given to states by the IRS, after which, states distribute the credits through Housing Finance Agencies (HFAs). Criteria for awarding these credits are updated annually through each state’s Qualified Allocation Plan—outlining priorities and scoring criteria. A few examples of criteria may include households with children, project location, and public housing waiting lists.

Each year, LIHTC costs the federal government an estimated $10.9B, with a certain amount allocated for each state. Additionally, LIHTC is usually used in combination with other federal programs. The federal program HOME Investment Partnerships provides $3M annually for HUD to distribute among jurisdictions for gap financing with LIHTC.

State Housing Finance Agencies (HFAs)

Unlike LIHTC, Fannie, and Freddie, State Housing Finance Agencies (HFAs) are chartered by individual states to assist with affordable housing needs. They are typically independent entities under the National Council of State Housing Agencies and are led by directors appointed by each state's governor. Rather than offering one single program, they work with the federal government to allocate several programs to its residents, including LIHTC and Fannie and Freddie.

Increase in impact of State HFAs over the years in housing finance
Source: NCSHA

HFAs receive their funding in one of three ways: through tax-exempt bonds, through LIHTC, and other federally-authorized programs such as Housing Bonds, Housing Credits, and HUD’s HOME program.

Source: NCSHA

Although HFAs work closely with the federal government and use federal resources, which programs are to be offered and what funds are to be allocated are determined at the state level.

Aside from these federal programs, check out our whitepaper to learn how technology, policy, and construction can work together to help our nation’s affordable housing crisis.

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