AHP Proposed Rule: Making Your Voice Heard
The Federal Housing Finance Agency (FHFA) released a Notice of Proposed Rulemaking to amend the Affordable Housing Program (AHP) regulation. The proposed amendments will affect how the Federal Home Loan Bank of New York (FHLBNY) members, its housing partners, and other community stakeholders use the AHP program and how affordable housing is funded across our region.
We have prepared a summary of the proposed amendments and provided additional information about the proposals that we believe will most affect members’ and housing providers’ strategies for meeting community needs.
Creating affordable housing is the work of many hands,
and it takes many voices to ensure the sustainable success of the AHP.
The comment period closed on June 12, 2018. You may view comment letters on the FHFA website.
The proposed rule to amend the AHP regulation offers some benefits, but it also poses a number of challenges. The primary challenge is the proposed “outcomes” framework — it requires that a significant proportion of the program’s funds go toward projects that meet priorities established by the FHFA. The outcomes framework increases the complexity of the AHP and limits the Federal Home Loan Banks’ ability to respond to local affordable housing needs.
Change to the Core of the AHP
The proposals would substantially change many aspects of the Affordable Housing Program, which includes the competitive grant program and set-aside programs for down-payment and closing cost assistance for homebuyers, such as FHLBNY’s First Home Club℠ program.
In particular, the proposals would:
Allow FHLBanks greater flexibility in supporting homeownership by allowing them to allocate up to 40% of the programs’ total funding to set-aside programs, increasing the maximum subsidy per unit in these programs to $22,000, and eliminating the requirement for homeowners to be bound by 5-year retention agreements;
Allow FHLBanks to design and offer Targeted Funds — competitive programs, in the mold of the existing competitive AHP, that address particular district needs; and
Substantially change the way the competitive AHP (now called the General Fund) evaluates applications and makes awards, as the table below describes:
|Current Scoring System:
Allows FHLBanks to adapt categories and definitions across the country and make improvements over time.
7 FHFA scoring categories
|Proposed Outcome Framework:
FHLBanks can set their own scoring system. However, they must annually achieve outcomes specified by the FHFA. The steps a FHLB could take to ensure compliance with the outcome requirements would render the decision process less transparent for participants.
Impact on Housing Providers
What will the impact be on our AHP project sponsors?
The competitive and administrative processes for receiving and disbursing AHP funds would become more complex and less transparent for affordable housing providers.
While the proposal to allow a General Fund and Targeted Funds for the AHP competitive program appears to offer greater flexibility, the practical implications of the proposed outcome framework actually makes the AHP less flexible to meet local needs.
By controlling at least 65 percent of the entire year’s AHP contribution, FHFA outcome requirements will drive the types of projects that receive AHP funds.
Because FHLBanks will want to avoid the consequences of not meeting required outcomes, the FHFA priorities will drive scoring, and thus overshadow local affordable housing needs. The result of the proposed outcome framework is that it creates a national, prescriptive program that reduces flexibility for an FHLBank to respond to local affordable housing needs and leverage local opportunities.
Proposed Solution: Maintain the current AHP scoring model and allow FHLBanks more flexibility for allocating points and responding to affordable housing needs.
The proposed outcome framework may force FHLBNY to diverge from the long-standing practice of selecting AHP projects according to their score in the competitive application alone. The proposed rule would allow an FHLBank to “re-rank” applications and select lower-scoring applications in order to achieve the outcome requirements. FHLBNY would make every effort possible to adjust and avoid a possible re-ranking, but if it were to still occur, the process for selecting competitive projects would be more complex and less transparent.
In practice, there may be one or more cycles of re-ranking needed to comply with FHFA outcome requirements. This is because substituting one project for another may satisfy compliance with one of the FHFA outcome requirements, but not all of those requirements.
The uncertainty associated with re-ranking would also make it challenging for FHLBNY to provide meaningful technical assistance to affordable housing providers to help them prepare a competitive AHP application.
Proposed Solution: Maintain the current AHP scoring model, which is transparent and incentivizes, rather than requires, certain types of projects. Eliminate the proposed outcome framework, which would eliminate the need for project re-ranking.
Burden Would Fall on Certain Project Types
The proposal to establish a set of national regulatory outcomes for AHP introduces a risk for unintended consequences. For example, the FHFA’s clear intention is to encourage the development of projects that serve special needs and homeless populations. FHLBanks would be able to designate these populations as priorities. The catch, though, is that FHLBanks would only be deemed to have satisfied these priorities in the cases where projects reserve at least 50 percent of its units for these populations. (The current regulatory threshold is at least 20 percent of units.) Because the state funding agencies in the FHLBNY district all have thresholds lower than 50 percent of units, many worthy projects would be at risk of missing out on critical gap financing from the AHP. These state agencies recognize that current best practices do not advocate further institutionalizing these populations.
Hence it would be especially risky for a FHLBank to prioritize serving special needs or homeless populations. An additional concern with the proposal to establish a set of national outcomes is that those requirements would be ingrained in regulation and therefore not adaptable to future affordable housing needs and funding priorities.
Lastly, any other type of project that does not explicitly address the FHFA-established priorities would be at greatest risk of being eliminated from competition, even if it would have otherwise scored highly on the program’s scoring criteria. In particular, these would be large urban projects involving new construction or adaptive re-use.
Proposed Solution: Maintain the current AHP scoring methodology that allows FHLBanks the flexibility to amend district priorities, as needed. Also maintain the minimum threshold of reserving at least 20 percent of the units for homeless and/or special needs households in order for a project to receive these points.
Need For Subsidy
The proposed rule offers relief for how the need for AHP subsidy is evaluated when a project receives federal rental assistance that includes funds for supportive services that cannot be bifurcated. However, the proposal does not offer the same relief to projects that do not fit this circumstance. As a result, it will continue to be challenging to award AHP funds to projects that rely on project cash flow to fund supportive services (unless those projects include federal rental assistance as previously described).
This is particularly challenging in light of the proposal to increase the minimum threshold of the units required to be reserved for special needs and homeless households in order to receive credit for serving those priority areas. These projects are more likely to include supportive services as an integral component of their operational feasibility.
Additionally, the proposed rule would continue to require that project sponsors provide sufficient documentation to justify why debt financing is not used for projects with cash flow amounts that exceed FHLBNY benchmarks.
Proposed Solution: Allow FHLBanks to evaluate the facts and circumstances of each project’s need for subsidy.
The proposed rule introduces unnecessary administrative burdens for affordable housing providers by adding new provisions that require:
Projects to pursue a cure for noncompliance before a project modification may be considered.
Affordable housing providers to demonstrate that all members of the project development team, including all affiliates and team members, such as the general contractor, satisfy FHLBank sponsor capacity requirements.
Affordable housing providers to subject their organization’s assets and other financial resources for review by the FHLBank when evaluating if the repayment of AHP is needed to cure noncompliance of a project.
Proposed Solution: Allow the FHLBanks to evaluate the facts and circumstances of each project and each affordable housing providers’ track record of performance.
Impact on Financial Institutions
What will the impact be on our member financial institutions?
Importantly for members, a risk to the transparency and perceived fairness of the competitive AHP is also a risk to members. Our members are not just conduits to the program’s funds; they are the program’s face to the development community and other local stakeholders, and, for many members, participation in the program is part of their day-to-day business.
The other proposals most relevant to members are a change in the maximum grant amount available for individual households through the down payment products, and eliminating the need for retention agreements for owner-occupied units.
Maximum per Unit Grant
The proposed rule would increase the maximum grant from $15,000 per household to up to $22,000 per household for set-aside programs, such as FHLBNY’s First Home Club℠ program, that provide down-payment and closing cost assistance.
Proposed Solution: The FHLBNY supports this proposal for increased flexibility to provide a higher grant amount, which may benefit households requiring a deeper subsidy, such as those living in high cost areas and those with lower incomes.
Retention Agreements for Owner-Occupied Housing
The proposed rule would eliminate the current requirement for a five-year retention for owner-occupied housing, including owner-occupied housing assisted through the competitive Affordable Housing Program and down payment products.
Proposed Solution: Allow each FHLBank to determine the circumstances in which it is appropriate to require a retention agreement. For example, eliminating the five-year retention agreement is a beneficial amendment for households that need a moderate amount of AHP to purchase, rehabilitate or construct a home. However, for households requiring a larger amount of AHP, a retention agreement may be a prudent way to prevent “flipping” or other misuse of funds.
Report from the President: A Stable Partner for the Recovery Ahead
FHLBNY Announces First Quarter 2021 Operating Highlights
Enhancements to the Refundable Municipal Letter of Credit for Members Participating in the New Jersey Department of Banking and Insurance GUDPA Program
A Review of Housing Statistics at the End of 2019
Five Ways to Manage Your Balance Sheet in a Volatile Rate Environment