Congressional Research Service Report: 'Multifamily Housing Finance & Selected Policy Issues'

WASHINGTON, Aug. 9 -- The Congressional Research Service issued the following report (No. R46480) entitled "Multifamily Housing Finance and Selected Policy Issues". Here are excerpts of the report issued on Aug. 7 and written by Darryl E. Getter, specialist in financial economics:

Summary:

A mortgage is a loan secured by the underlying real estate collateral being financed by the loan. Single-family mortgages are loans secured by a residential dwelling having at least one and no more than four separate units. A single-family mortgage borrower is typically the homeowner using the loan to purchase the residence. By contrast, multifamily mortgages are loans secured by a residential dwelling, such as an apartment building, with at least five or more separate units.

Multifamily real estate frequently refers to properties used as residential dwellings, including traditional apartment buildings, subsidized housing, housing for seniors (age-restricted, independent and assisted living), and housing for students (dormitories). Developers that want to purchase, construct, or rehabilitate these structures are likely to seek multifamily mortgages from financial institutions.

Developers are generally attracted to multifamily properties because of the potential profitability they generate in the form of rental income. Lenders also treat rental income as a key determinant when evaluating requests for multifamily mortgages.

Financing may be limited for certain multifamily projects that are unlikely to generate the cash flows commensurate with the greater financial risks. Low- and moderate-income (LMI) tenants, for example, may not be able to pay rents that would generate sufficient revenues for developers to repay their multifamily mortgage loans and meet targeted profitability levels.

Lenders specialize in pricing default risk, and they typically increase the financing costs linked to riskier loans to receive compensation for assuming the greater levels of risk. If, however, raising rents on some LMI tenants would not be a viable option to recover higher lending costs, then some affordable rental housing investments may be less attractive for developers to pursue.

Congress has provided financial incentives to develop certain multifamily projects that face challenges sustaining adequate cash flow levels to secure credit at affordable terms, which arguably may increase net social benefits. Such federal support may help reduce the amount of funds that affordable housing developers would need to borrow. For example, the Low Income Housing Tax Credit (LIHTC) can be used to cover some portion of acquisition and rehabilitation costs or state and local fees, thus facilitating some affordable housing financing. Federal entities may also provide mortgages with favorable terms, which make the loans more affordable for developers and transfer the additional financial risks to the government.

Federal agencies, such as the Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA), can offer fixed-rate mortgages with long maturity terms and guarantee the default risk. Congress chartered government-sponsored enterprises (GSEs), specifically Fannie Mae and Freddie Mac, to provide liquidity for both the single- and multifamily mortgage markets. The GSEs have mission goals to promote affordable housing for underserved groups and locations. The GSEs also offer multifamily mortgages with more affordable terms and retain more financial risk, increasing the attractiveness for developers to invest in affordable rental housing.

Investing in the higher-end rental market may be considered more profitable as the demand for and the costs to supply rental properties increase. State and local growth management regulations, for example, provide developers with greater incentive to construct mixed-use developments, and many costs may be passed on to tenants in the form of higher rents. In some locations, developers can combine the various financial support provided by FHA, USDA, tax credit incentives, and GSEs' financial risk-sharing programs to increase the profit margins, thus increasing the attractiveness for certain affordable housing investments. This strategy, however, may be less effective particularly in densely populated areas where land is scare and more expensive to develop. Hence, investments in certain rental markets may become less attractive should nonfinancial costs grow more important despite the various forms of federal support that reduce multifamily financing costs.

The GSEs' primary regulator, the Federal Housing Financing Agency (FHFA), limited their multifamily activities after placing them under conservatorship on September 6, 2008. (FHFA is authorized to make all financial business and operations decisions for the GSEs until they are financially sound to exit conservatorship.) These limitations were established to minimize further losses to taxpayers and to prevent the GSEs from controlling a large share of the multifamily mortgage market at the expense of private lenders. The effect of these limitations on the supply of multifamily mortgage credit, however, is unclear. Prior to conservatorship, the GSEs had developed their own proprietary multifamily business models and niche markets. The limitations on the GSEs' multifamily activities are likely to force them to adapt their business models, and perhaps it may be possible to observe over time some of the affected niche markets.

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Contents:

Introduction

The Basics of Multifamily Financing

The Demand for Multifamily Credit

The Supply of Multifamily Credit

The Federal Role in the Multifamily Credit Market

Federal Incentives to Finance Affordable Multifamily Structures

Commercial Financing: Limitations and Exemptions

Affordable Housing Finance: Selected Trends and Policy Issues

Combining Federal Incentives to Minimize Financing Costs

Recent Developments in Fannie Mae's and Freddie Mac's Multifamily Financing Activities

Conclusion

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Introduction

Multifamily properties--structures designed to house five or more family units--include traditional apartment buildings, subsidized housing, housing for seniors (age-restricted, independent and assisted living), and housing for students (dormitories). Multifamily real estate frequently refers to properties used as residential dwellings./1

By contrast, commercial properties include buildings used for offices, retail businesses, hotels and motels, industrial warehouses, and special purposes (e.g., self-storage facilities, churches, car washes)./2

Multifamily real estate may be considered either a separate or a subset category of commercial real estate; different industry participants may classify certain structures, such as medical and healthcare facilities, as either multifamily or commercial properties./3

Developers (or investors) are generally attracted to multifamily and commercial properties because of the profit potential generated in the form of rental income./4

Lenders also treat rental income as a key risk indicator of whether a multifamily or commercial loan would be repaid.

Hence, expensive financing costs may discourage investments in riskier multifamily projects. For example, properties occupied by low- and moderate-income (LMI) tenants, who are more likely to experience frequent income disruptions, may not generate the rental income streams necessary to sustain acceptable profitability levels and repay loans./5

Such multifamily properties regularly include small residential structures (5-50 units) that generate low volumes of rents, structures in older urban areas, and inner city structures in need of rehabilitation./6

Charging higher loan rates commensurate with the higher credit (default) risks may not be a viable solution if property developers cannot offset higher financing costs by raising rents on LMI tenants. This conundrum may result in affordable rental unit shortages, contributing to a reduction of net social benefits./7

Likewise, financing costs that correspond with the level of credit risk may also discourage certain commercial investments. For example, some health facilities face challenges obtaining finance for construction or renovation due to the inability to maintain sufficient or consistent levels of operating cash flows. Such facilities may include hospitals that frequently treat uninsured patients and receive little or no cost reimbursements./8

Although lenders can charge higher loan rates commensurate with higher levels of default risk, such risk-based pricing strategies may not be affordable for hospitals with thin profit margins. Consequently, this impasse may contribute to shortages of adequate health care facilities in LMI communities.

Since the Great Depression, Congress has facilitated access to credit in the single-family, multifamily, and certain commercial mortgage markets to promote quality affordable housing and sustainable communities. To facilitate the construction of affordable multifamily rental units, the Federal Housing Administration (FHA) and the U.S. Department of Agriculture (USDA) Rural Development provide financial support in the form of mortgage loan guarantees./9

Congress also created Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) to facilitate market liquidity; these entities distribute to the private sector various amounts of the credit (default) risk linked to the underlying multifamily mortgages they help finance. In addition, Congress provides subsidies to developers to reduce the costs to develop affordable rental units, which fosters the attractiveness of such investments.

Despite competing investment opportunities in the higher-end multifamily market segments, developers can overlay multiple forms of federal support to reduce financing costs such that investment in affordable housing in certain areas remains attractive. This strategy, however, may be less effective particularly in densely populated coastal areas where land is scarce and more expensive to develop. Furthermore, since their conservatorships, Fannie Mae's and Freddie Mac's multifamily businesses have also been curtailed by their primary regulator to minimize potential risks to taxpayers. Hence, investments in certain rental market segments may become less attractive to developers should various forms of federal multifamily financing support fail to keep pace with the rising trend in nonfinancial costs.

This report provides an overview of the multifamily mortgage market and selected policy issues pertaining to the development of multifamily residential structures for affordable housing. It explains investors' financing demands for distinct classes of multifamily properties, along with a description of lenders' typical underwriting requirements and mortgage terms. It then summarizes various forms of federal government support to facilitate the financing of affordable rental housing. Finally, the report discusses selected trends and policy issues pertaining to affordable housing finance.

Affordable Housing Finance: Selected Trends and Policy Issues

This section reviews multifamily investment trends as they pertain to affordable housing,/56 resulting in challenges for various federal agencies and the GSEs (since their conservatorships) to achieve mission goals that address housing cost burdens. A cost-burdened household is one with a monthly housing cost--either to own or rent--that exceeds 30% of its monthly income./57

A household is moderately cost burdened if the ratio of monthly housing costs divided by monthly income is greater than 30% but less than 50%; it is severely cost burdened if the ratio exceeds 50%. The share of the population falling into one or more of these categories may increase as rents or prices of smaller entry level single-family homes rise. Increases in the percentages of cost-burdened households is indicative of a shortage of affordable housing.

Combining Federal Incentives to Minimize Financing Costs

Prior to more contemporary urbanization trends, differences in rents among the various property classes reflected more segmentation between higher-end and LMI rental markets./58

Between 2004 and 2016, HUD reports that an unprecedented 10 million households became renters./59

Following a rise in the demand for rentals, average monthly rents increased and national vacancy rates declined in certain regions and metropolitan areas./60

Class A apartment rents and occupancy rates subsequently increased nationwide./61

As more renters were priced out of the Class A market, middle- and upper-income renters sought lower rents. Consequently, the demand and rents subsequently increased for Class B and Class C apartments, meaning that these properties did not experience a filtering down to the affordable segments of the market./62

Filtering down is the process in which LMI households inherit older properties to own or rent, which are expected to be less expensive than when they were newly constructed./63

Instead, some research has demonstrated that rising rents (and housing prices) in densely populated urban areas has resulted in the filtering up of Class C properties./64

The convergence of rents may also indicate that market segmentation among property classes is fading in certain localities. Rising construction costs and lack of scale (i.e., volume of tenants paying rent) may also sway greater investment toward the higher-end rental markets where aggregate revenues from rents are sufficient and more sustainable. (For details on some of these factors influencing multifamily developments, see the text box at the end of this section.) As multifamily development costs have risen at a faster pace than low and moderate incomes, more Class C properties are being repurposed for higher-end renters or owners rather than being filtered down into affordable rental properties./65

Specifically, some developers have demonstrated greater willingness to convert Class C structures to condominiums rather than rehabilitate rent-controlled apartments./66

Consequently, developers frequently rely on a variety of strategies to foster the investment in or construction of affordable rental units./67

For example, developers may combine an LIHTC with an FHA-insured multifamily mortgage, which lowers both the initial loan amount and the financing costs and, therefore, enhances an investment's rate of return./68

Mixed-income multifamily projects can target renters with a range of incomes so that the higher rents paid by higher-income renters cross-subsidize the lower rents paid by LMI-renters, and still meet the eligibility requirements for LIHTCs./69

Such strategies combined with various federal incentive programs may increase the viability of affordable multifamily construction in some locations; however, they may be less effective in densely populated areas where land is scare and more expensive to develop./70

In light of the difficulty raising rents on some tenants to generate more revenue, lowering some of the nonfinancial costs--particularly various regulatory costs--may increase the attractiveness to invest in housing for LMI renters./71

In 116th Congress, legislation has been introduced to lower residential construction costs and to increase incentives to develop affordable housing:

* H.R. 4351, the Yes In My Backyard (YIMBY) Act, and its Senate companion, S. 1919, would encourage lowering residential construction costs. YIMBY would require state and local governments that apply for federal housing development funds through the Community Development Block Grant (CDBG) program to report whether they have enacted policies to reduce regulatory costs and fees for developers, thus providing greater economic incentive to invest in and deliver more affordable Class B and Class C multifamily properties./72

* H.R. 3077, the Affordable Housing Credit Improvement Act of 2019, and its Senate companion, S. 1703, include modifications to the LIHTC program that would expand financial support for affordable housing investments./73

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Some Factors Arguably Influencing Multifamily Investment Decisions

The bullets below summarize some of the costs, which have been rising for several decades, and other factors arguably influencing multifamily developers' investment decisions./74

* According to the National Association of Home Builders, regulations account for 32% of the total cost of developing multifamily housing./75 State and local governments impose regulations on property developments and impact fees, which are collected to pay for some or all of the public services provided to the new development. Developers may gravitate toward the higher-end purchase and rental markets to recoup costs.

* Many state governments and local municipalities encourage (and some require) construction of more mixeduse developments./76 Many states generate property tax revenues from these communities, thus they have passed legislation mandating their cities and counties to develop plans for rising population growth. Such requirements encourage developers to construct mixed-use properties, which incorporate parking, open space, housing, and public transportation, among other essentials to accommodate growing populations./77 Some economists have found evidence to suggest that these laws may lead to increases in development costs that are subsequently passed on to consumers in the form of higher house or rent prices, thus creating a challenge to supply residential units for certain segments of cost-burdened renters./78

* Certain multifamily construction projects may be less likely to occur if a low population density is not expected to generate a sufficient volume of rental income necessary to cover development costs./79 The number of USDA-supported rental homes via its Section 515 program has declined, and no new properties have been financed in the past several years. Furthermore, many of the remaining Section 515 loans are reaching maturity and projected to leave the portfolio in the next few decades./80 Once a Section 515 loan is fully repaid, the tenants are no longer eligible for USDA rental assistance, and in some instances, the homes may no longer be affordable for the current tenants. Developers may not find rural apartment investments as profitable as other alternatives particularly when the population density is too low to generate a sufficient volume of tenants to maintain below-market rents./81

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Recent Developments in Fannie Mae's and Freddie Mac's

Multifamily Financing Activities

In the multifamily mortgage market, Fannie Mae and Freddie Mac purchase mortgages and transfer a portion of (or share) the default risks to the private sector, although they have different underwriting and risk-sharing business models.

* Fannie Mae primarily relies on its Delegated Underwriting and Servicing (DUS) business model when purchasing multifamily mortgages./82 Under the DUS process, Fannie delegates to its pre-approved group of lenders (that sell multifamily mortgages to Fannie Mae) the responsibility of assessing borrowers' creditworthiness (i.e., the likelihood of loan delinquency or default). The lenders, following Fannie Mae's standardized underwriting and servicing guidelines, close and service the approved loans on Fannie Mae's behalf. The lenders are also required to enter into mortgage default loss sharing agreements with Fannie Mae, which fosters alignment of their incentives to perform prudential underwriting. Fannie Mae offers two types of loss sharing agreements. A pro rata loss sharing agreement requires the lender to assume one-third of the losses and Fannie Mae assumes the remaining two-thirds./83 A tiered-basis loss sharing agreement requires lenders to bear the initial 5% of the unpaid principal balance and then share any remaining losses up to a prescribed limit./84 On October 24, 2019, Fannie Mae introduced Multifamily Connecticut Avenue Securities (MCAS), a multifamily credit risk transfer program that has similarities to Freddie Mac's multifamily risk-sharing approach./85

* Freddie Mac relies on its pre-approval business model that consists of its own team of in-house underwriters./86 Freddie Mac internally re-underwrites and approves multifamily mortgages prior to purchasing them from lenders. Freddie Mac subsequently issues and sells certificates referred to as K-Certificates (or KDeals), thus offloading various amounts of default loss risk to private-sector investors (e.g., REITs, pension funds, hedge funds)./87

Freddie Mac's K-Deals have similarities to Fannie Mae's MCAS.

FHFA, as the GSEs' conservator, currently has the powers of management, boards, and shareholders./88

FHFA issues annual scorecards, which communicate the annual priorities and expectations that it sets for the GSEs with respect to both of their single-family and multifamily mortgage businesses while under conservatorship./89

FHFA has issued various directives for the GSEs' multifamily programs. FHFA's 2013 Conservatorship Scorecard reduced the GSEs' new multifamily purchase volumes by 10% from the 2012 caps to shrink their multifamily operations and risks to taxpayers./90

FHFA subsequently directed the GSEs to limit their 2014 multifamily purchase volumes at or below the 2013 caps./91

In addition, FHFA excluded mission-driven purchases from counting toward the cap to encourage GSE support in the affordable housing and underserved market segments./92

By purchasing mission-driven multifamily mortgages that support affordable rental housing, the GSEs are less likely to crowd out (impede) private-sector lender participation by offering cheaper borrowing rates for multifamily loans. In 2016, FHFA also excluded loans that would finance certain energy and water efficiency (i.e., green loans) from the multifamily purchase caps to retain focus on mission goals.

On September, 13, 2019, FHFA revised its directive regarding the multifamily purchase caps, increasing them from the 2018 caps of $35 billion each to $100 billion each for Fannie Mae and Freddie Mac;/93 however, 37.5% of the GSEs' loan purchases must be mission driven. All multifamily mortgage purchases will count toward the cap--no exemptions or exclusions./94

In short, FHFA's current policy would arguably tailor the GSEs' multifamily programs to promote the availability of affordable rental units for LMI and other historically underserved renters-- while making a reasonable economic return--rather than crowd out multifamily loans that private-sector lenders would be willing to originate./95

The GSEs must still satisfy their annual mission-driven goals./96

The FHFA established three multifamily housing mission-driven goals for the GSEs' 2018 through 2020 purchases:/97

1. The annual benchmark level for the low-income multifamily housing goal was set at 315,000 units for Fannie Mae and for Freddie Mac. A low-income family is defined as having an income of less than or equal to 80% of area median income (AMI)./98

2. The annual benchmark level for the very low-income multifamily housing goal was set at 60,000 units for Fannie Mae and for Freddie Mac. A very low-income family is defined as having an income of no greater than 50% of AMI.

3. The annual benchmark level for the small multifamily property goal was set at 10,000 units for Fannie Mae and for Freddie Mac. A small multifamily property is defined as a property with 5 units to 50 units.

The FHFA also provided an updated comprehensive definition of mission-driven multifamily purchases./99

Examples of additional eligible mission-driven mortgage purchases for the GSEs include properties subsidized by the LIHTC program; loans on properties covered by a Section 8 Housing Assistance Payment contract, which limits tenant incomes to 80% or below of AMI; and loans of properties in which a Public Housing Authority or nonprofit affiliate is the developer (borrower) that reserves units for occupancy by tenants with limited income or the rents that may be charged for those units./100

Limiting the GSEs' multifamily activities to market segments with more apparent credit gaps is intended to reduce the likelihood of crowding out private lenders' activities in market segments with less apparent credit gaps./101

From an economics viewpoint, however, a lending cap arguably may be considered an arbitrary policy tool that might exacerbate any existing shortage of multifamily lending if set at levels that are retrospectively found to be "too low" or overly restrictive. The extent to which the GSEs crowd out private lenders may be difficult to determine without sufficient data./102

To address the potential crowding out of private-sector lending opportunities, one policy option might be to require multifamily developers to demonstrate the inability to obtain credit elsewhere, similar in manner to the "credit elsewhere" requirement placed on applicants for loans insured by the Small Business Administration./103

Another policy option might be a tax on the GSEs' net income derived from multifamily lending, which could be applied to increase the cost to originate multifamily loans that the private sector arguably might have originated./104

Such a tax could take a variety of forms, such as increased GSE contributions to the Housing Trust and Capital Magnet Funds, higher capital requirements, additional fees to Treasury for an explicit guarantee, or other arrangements as determined by policymakers. Should the GSEs be restored to well-capitalized, profit-maximizing firms, a tax on profitability--as opposed to a cap on profitability--may allow greater flexibility for them to address both profit (duty to shareholders) and mission-driven objectives that on occasion may be in conflict./105

Conclusion

Investors typically borrow when acquiring financial or physical assets, thus to be attractive, their expected returns must be greater than their financing (borrowing) costs. It follows that developers, when considering multifamily property investments, evaluate whether the expected rental income streams would exceed the costs to finance their purchases, construction, or rehabilitation. For this reason, achieving affordable housing policy objectives is challenging because LMI tenants may not be able to pay market-level rents, which in turn translates into higher financing costs commensurate with the higher lending risks. The federal government supports the financing of affordable housing by sharing various amounts of credit and interest rate risks with lenders, which lowers developers' financing costs. Nevertheless, nonfinancial costs (e.g., rising construction costs particularly those associated with mixed-use development trends) may be rising at a faster pace relative to financial costs, thus dampening the impact of existing federal government programs. As nonfinancial costs continue to rise, the expected rental income factor is likely to have a large influence on multifamily investment decisions.

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Footnotes:

1 As of 2019, an estimated 37% of renters were living in apartment buildings. See National Multifamily Housing Council (NMHC), "Quick Facts Data Download: Resident Demographics, Household Characteristics, What Type of Structure Do Renters Live In?" at https://www.nmhc.org/research-insight/quick-facts-figures/quick-facts-datadownload/.

2 Residential condominiums are typically sold in units and financed by single-family mortgages rather than multifamily mortgages. Commercial condominiums that are used for small businesses are financed by commercial mortgages.

3 Federal banking agencies define commercial real estate as a real estate-related transaction that is not secured by a single 1-to-4 family residential property. Office of the Comptroller of the Currency (OCC), Treasury; Federal Reserve System; Federal Deposit Insurance Corporation (FDIC), "Real Estate Appraisals," 83 Federal Register 15019-15036, April 9, 2018. Although people do not live in hospitals, meaning that these could be classified as commercial properties, the Department of Housing and Urban Development (HUD) classifies mortgages to hospitals as one of its multifamily programs. See HUD, "Office of Healthcare Programs," at https://www.hud.gov/ federal_housing_administration/healthcare_facilities; and HUD, "Office of Hospital Facilities," at https://www.hud.gov/federal_housing_administration/healthcare_facilities/section_242.

4 In this report, the terms developers, investors, and multifamily borrowers are used interchangeably as demanders of financing; by contrast, lenders (e.g., banks) are discussed as intermediaries that supply financing. Although discussions about multifamily finance in many instances refer to banks as partners or investors, this report avoids that convention to clearly distinguish between the demand and supply sides of the multifamily mortgage market.

5 The term low- and moderate-income (LMI) can be used to refer to those households earning below certain thresholds such as 50% or 80% of median household income; it may refer to certain eligibility requirements in the context of certain assistance programs. This report uses the term LMI broadly and will note when referring to more specific contexts.

6 For a discussion of historical credit gaps in the multifamily mortgage market, see HUD, "The Secretary of HUD's Regulation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)," 60 Federal Register 61846-62005, December 1, 1995.

7 James R. Follain and Edward J. Szymanoski, "A Framework for Evaluating Government's Evolving Role in Multifamily Mortgage Markets," Cityscape: U.S. Department of Housing and Urban Development, vol. 1, no. 2 (June 1995), pp. 151-177.

8 For more information, see CRS In Focus, Hospital Charity Care and Related Reporting Requirements Under Medicare and the Internal Revenue Code, by Marco A. Villagrana, Edward C. Liu, Margot L. Crandall-Hollick, and Joseph S. Hughes.

9 In 1998, Congress passed the Veterans Programs Enhancement Act (P.L. 105-368, 38 U.S.C. Sec.2051), which authorized the Department of Veterans Affairs (VA) to establish a pilot loan guarantee program for the construction or rehabilitation of multifamily transitional housing projects specifically designed to provide housing for homeless veterans. For information pertaining to program implementation, see U.S. Government Accountability Office (GAO), Veterans Affairs Homeless Programs: Implementation of the Transitional Housing Loan Guarantee Program, GAO05-311R, March 16, 2005, at https://www.gao.gov/products/gao-05-311r; and VA, "Notice of Funds Availability (NOFA): Inviting Applications for Section 601 Loan Guarantees for Multifamily Transitional Housing," 71 Federal Register 18813-18821, April 12, 2006.

56 For more information on the wider range of federal programs aimed at affordable housing, please see CRS Report RL34591, Overview of Federal Housing Assistance Programs and Policy, by Maggie McCarty, Libby Perl, and Katie Jones.

57 See HUD, Affordable Housing, at https://www.hud.gov/program_offices/comm_planning/affordablehousing/.

58 See Kim Parker et al., What Unites and Divides Urban, Suburban, and Rural Communities, Pew Research Center, May 22, 2018, at https://www.pewsocialtrends.org/wp-content/uploads/sites/3/2018/05/Pew-Research-CenterCommunity-Type-Full-Report-FINAL.pdf.

59 See HUD, America's Rental Housing 2017, PD&R Edge, February 5, 2018, at https://www.huduser.gov/portal/ pdredge/pdr-edge-featd-article-020518.html.

60 See HUD, Spotlight on First Quarter Regional Rental Market Conditions, PD&R Edge, July 11, 2016, at https://www.huduser.gov/portal/pdredge/pdr-edge-spotlight-article-071116.html; HUD, Apartment Demand for the Next 15 Years: Can We Meet the Need? PD&R Edge, September 25, 2017, at https://www.huduser.gov/portal/pdredge/ pdr-edge-featd-article-092517.html.

61 See Julia Bunch, "Class A Rents Rebound Nationwide; Class B Still Top Performer," UNITS Magazine, May 2019, at https://www.naahq.org/news-publications/units/may-2019/article/class-rents-rebound-nationwide-class-b-still-topperformer.

62 See Swapnil Agarwal, "Five Steps to Smart Multifamily Investments," National Real Estate Investor, October 10, 2018, at https://www.nreionline.com/multifamily/five-steps-smart-multifamily-investments; Yuen Yung, "2017-2018 Forecast: Class B and C Apartments Will Rule," Business & Finance, June 21, 2017, at https://www.multifamilyexecutive.com/business-finance/20172018-forecast-class-b-and-c-apartments-will-rule_o; Kim O'Brien, "Occupancy Gains Largest Among Class C Apartments in Current Cycle," at https://www.realpage.com/ analytics/occupancy-gains-largest-among-class-c-apartments-current-cycle/; and Jeremiah Jensen, "RealPage: Class-C is now the Cream of the Multifamily Crop," Housing Wire, at https://www.housingwire.com/articles/43847-realpageclass-c-is-now-the-cream-of-the-multifamily-crop.

63 See Stuart S. Rosenthal, "Are Private Markets and Filtering a Viable Source of Low-Income Housing? Estimates from a 'Repeat Income' Model," American Economic Review, vol. 104, no. 2 (2014), pp. 687-706.

64 See Lena Edlund, Cecilia Machado, and Maria Micaela Sviatschi, Gentrification and the Rising Returns to Skill, National Bureau of Economic Research, Working Paper no. 21729, January 2019, at https://www.nber.org/papers/ w21729.pdf.

65 See Joint Center for Housing Studies of Harvard University, America's Rental Housing 2017, at http://www.jchs.harvard.edu/sites/default/files/harvard_jchs_americas_rental_housing_2017_0.pdf

66 See Mark Noack, "Condos to Replace rent-Controlled Apartments," Mountain View Voice, May 18, 2018, at https://www.mv-voice.com/print/story/2018/05/18/condos-to-replace-rent-controlled-apartments.

67 The LIHTC program serves households that make an average of 60% of area median income (AMI); however, it still does not serve extremely low-income households without relying on additional federal rental assistance programs. See Corianne Payton Scally, Amanda Gold, and Nicole DuBois, The Low-Income Housing Tax Credit: How It Works and Who It Serves, Urban Institute, July 2018, at https://www.urban.org/sites/default/files/publication/98758/ lithc_how_it_works_and_who_it_serves_final_2.pdf.

68 FHA has reported that approximately 30% of the transactions related to its insured-multifamily mortgage portfolio consists of borrowers that also rely on the LIHTC. See HUD, "FHA Expands Pilot Program to Accelerate Financing of Low-Income Housing Tax Credit Projects," press release, February 21, 2019, at https://www.hud.gov/press/ press_releases_media_advisories/HUD_No_19_014.

69 See Testimony of Katherine M. O'Regan, "America's Affordable Housing Crisis: Challenges and Solutions," U.S. Congress, Senate Committee on Finance, Increasing Access to Affordable Housing, 115th Cong., 1st sess., August 1, 2017, at https://www.finance.senate.gov/imo/media/doc/01aug2017OReganSTMNT.pdf.

70 See Urban Land Institute and Enterprise, Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals, 2014, at http://uli.org/wp-content/uploads/ULI-Documents/BendingCostCurve-Solutions_2014_web.pdf.

71 See Office of Policy Development and Research, "Why Not In Our Community?": An Update to the Report of the Advisory Commission on Regulatory Barriers to Affordable Housing, HUD, February 2005, at https://www.huduser.gov/portal/Publications/wnioc.pdf; and Joseph Gyourko and Raven Molloy, Regulation and Housing Supply, National Bureau of Economic Research, Working Paper no. 20536, October 2014, at https://www.nber.org/papers/w20536.pdf.

72 See Denny Heck, "Representatives Heck and Hollingsworth Introduce 'Yes In My Backyard' Act in House," September 17, 2019, at https://dennyheck.house.gov/media-center/press-releases/reps-heck-and-hollingsworthintroduce-yes-in-my-backyard-act-in-house; and Sen. Todd Young, "Young Introduces Yes In My Backyard Act to Encourage Communities to Cut Regulations and Increase Housing Supply, June 20, 2019, at https://www.young.senate.gov/newsroom/press-releases/young-introduces-yes-in-my-backyard-act-to-encouragecommunities-to-cut-regulations-and-increase-housing-supply.

73 See CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley.

74 See HUD, Office of Policy Development and Research, Preserving Affordable Rental Housing: A Snapshot of Growing Need, Current Threats, and Innovative Solutions, Evidence Matters, Summer 2013, at https://www.huduser.gov/portal/periodicals/em/summer13/highlight1.html.

75 See U.S. Congress, House Committee on Financial Services, Housing in America: Assessing the Infrastructure Needs of America's Housing Stock, 116th Cong., 1st sess., April 30, 2019.

76 See Kim Slowey, "Building a 'Sense of Community': Why Mixed-Use Developments Are Sprouting Up Across the U.S.," Construction Dive, June 23, 2016, at https://www.constructiondive.com/news/building-a-sense-of-communitywhy-mixed-use-developments-are-sprouting-u/421386/.

77 Various states, including Florida, Maryland, Virginia, and Washington, have passed their own versions of growth management regulations.

78 For more information and a literature survey, see Jerry Anthony, "The Effects of Florida's Growth Management Act on Housing Affordability," Journal of the American Planning Association, vol. 69, no. 3 (Summer 2003).

79 See Timothy Besley, "How Do Market Failures Justify Interventions in Rural Credit Markets?" The World Bank Research Observer, vol. 9, no. 1 (January 1994), pp. 27-47.

80 See Housing Assistance Council, Rural Housing for a 21st Century Rural America: A Platform for Preservation, September 2018, at http://www.ruralhome.org/storage/documents/publications/rrreports/ HAC_A_PLATFORM_FOR_PRESERVATION.pdf; Housing Assistance Council, "Maturing USDA Rural Rental Housing Loans: An Update," Rural Policy Note, August 29, 2016, at http://www.ruralhome.org/storage/documents/ policy-notes/rpn_maturing-mortgages-usda-2016.pdf; and CRS Report RL31837, An Overview of USDA Rural Development Programs, by Tadlock Cowan.

81 See Audrey Johnston, A Review of Federal Rural Rental Housing Programs, Policy and Practices, National Rural Housing Coalition, April 2017, at http://ruralhousingcoalition.org/wp-content/uploads/2017/05/Rental-Housing-ReportFINAL-04.18.17.pdf.

82 See Fannie Mae, Delegated Underwriting & Servicing (DUS), Fourth Quarter 2011, at https://multifamily.fanniemae.com/sites/g/files/koqyhd161/files/migrated-files/content/fact_sheet/wprskret.pdf.

83 In some isolated cases, Fannie Mae has purchased non-DUS mortgages (e.g., small balance loans or pools of seasoned loans) from lenders without a loss sharing agreement to meet various objectives and in situations where it may not have a long-term relationship with the lender.

84 See Fannie Mae, Form 10-K, For the Fiscal Year Ended December 31, 2018, December 31, 2018, p. 100, at https://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2018/q42018.pdf.

85 See Fannie Mae, "Fannie Mae Price Inaugural Multifamily Connecticut Avenue Securities Deal: Landmark $472.7 Million Transaction Complements Fannie Mae's Multifamily Credit Insurance Risk Transfer and Delegated Underwriting and Servicing Loss-Sharing Programs," October 24, 2019, at https://www.fanniemae.com/portal/media/ financial-news/2019/multifamily-connecticut-avenue-securities-6947.html.

86 See Freddie Mac, Multifamily Securitization Overview, June 30, 2019, at https://mf.freddiemac.com/docs/ mf_securitization_investor-presentation.pdf.

87 See Freddie Mac, Multifamily Securities, at https://mf.freddiemac.com/investors/securities.html. In addition to KDeals, Freddie Mac offers a variety of certificates that back the performance of specific types of multifamily structures to appeal to investors with varying appetites for risk. Freddie Mac may retain in its portfolio some of the multifamily default risk, such as any losses resulting from extremely unfavorable macroeconomic conditions, which is referred to as catastrophic risk. See CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by Darryl E. Getter.

88 In September 2008, the GSEs experienced losses that exceeded their statutory minimum capital requirement levels due in part to above-normal mortgage defaults. See CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by Darryl E. Getter.

89 See FHFA, "Conservatorship," press release, at https://www.fhfa.gov/Conservatorship.

90 See FHFA, "FHFA Seeks Public Input on Reducing Fannie Mae and Freddie Mac Multifamily Businesses," press release, August 9, 2013, at https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/ MultifamilyInput080913Final.pdf; and FHFA, Conservatorship Strategic Plan: Performance Goals for 2013, at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2013EnterpriseScorecard_508.pdf.

91 The 2013 volume that became the 2014 cap for Fannie Mae was $30 billion; the 2013 volume that became the 2014 cap for Freddie Mac was $26 billion. See Karan Kaul, The GSEs' Shrinking Role in the Multifamily Market, Urban Institute, April 2015, at https://www.urban.org/sites/default/files/publication/48986/2000174-The-GSEs-ShrinkingRole-in-the-Multifamily-Market.pdf.

92 See FHFA, "Fact Sheet: New Multifamily Caps for Fannie Mae and Freddie Mac," press release, at https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/newmultifamilycaps-9132019.pdf.

93 See FHFA, "FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac," press release, September 13, 2019, at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Revises-Multifamily-Loan-PurchaseCaps-for-Fannie-Mae-and-Freddie-Mac.aspx.

94 For example, exemptions for multifamily loans used to finance energy and water improvements would still count toward the cap. See Kathleen Howley, "FHFA Moves to Curb Fannie Mae, Freddie Mac Green Loans for Multifamily: Regulator Raises Lending Caps for GSEs But Ends the Energy-Efficiency Carve-Out," Housingwire, September 13, 2019, at https://www.housingwire.com/articles/50147-fhfa-moves-to-curb-fannie-mae-freddie-mac-green-loans-formultifamily/.

95 The GSEs' statutory public purpose includes an "affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return." See 12 U.S.C. Sec.4501(7). Both GSE charters authorize them to perform "activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities." See 12 U.S.C. Sec.Sec.1451, 1716 note.

96 The GSEs' primary regulator is required by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (P.L. 102-550, title XIII, Sec.1302, October 28, 1992, 106 Stat. 3941) to establish annual housing goals for mortgages purchased by the Enterprises. See FHFA, "Federal Housing Finance Agency Charter: Federal Housing Enterprises Financial Safety and Soundness Act of 1992," at https://www.fhfa.gov/Government/Documents/FederalHousing-Enterprises-Financial-Safety-and-Soundness-Act.pdf.

97 See FHFA, "2018-2020 Enterprise Housing Goals," 83 Federal Register 5878-5899, February 12, 2018.

98 FHFA uses HUD-published area median incomes (AMIs) to determine affordability for the GSEs' single-family and multifamily mortgage acquisitions. AMI is a measure of median family income derived from the Census Bureau's American Community Survey.

99 FHFA, "FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac--Appendix A: Multifamily Definitions," press release, September 9, 2019, at https://www.fhfa.gov/Conservatorship/Documents/ AppendixA-Revisions-to-2019-FHFA-Conservatorship-Scorecard.pdf.

100 See CRS Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley; and CRS Report RL34591, Overview of Federal Housing Assistance Programs and Policy, by Maggie McCarty, Libby Perl, and Katie Jones.

101 See FHFA, "Fannie Mae & Freddie Mac Multifamily Businesses," at https://www.fhfa.gov/ PolicyProgramsResearch/Policy/Pages/Reducing-Fannie-Mae--Freddie-Mac-Multifamily-Businesses.aspx.

102 For example, some banks argue they would not enter the space. See PNC Real Estate, "Comment Letter: Request for Input on Reducing Fannie Mae and Freddie Mac Multifamily Business, October 8, 2013, at https://www.fhfa.gov/ PolicyProgramsResearch/Policy/Documents/Reducing-Fannie-Mae-and-Freddie-Mac-Multifamily-Businesses/ PNC_Real_Estate.pdf. Business models, however, differ by institutions; for example, insurance companies may be in favor of lending caps. See Mortgage Bankers Association, MBA Survey: Life Insurance Companies Could Fund an Additional $10 Billion in Multifamily Lending in 2020, September 16, 2019, at https://www.mba.org/2019-pressreleases/september/mba-survey-life-insurance-companies-could-fund-an-additional-10-billion-in-multifamily-lendingin-2020.

103 See CRS Report R45878, Small Business Credit Markets and Selected Policy Issues, by Darryl E. Getter.

104 Using a price incentive to raise the cost of multifamily lending activities that may not be mission driven is equivalent to applying a Pigouvian tax, a tax applied to mitigate the negative effects of an activity that imposes a cost to society. For discussions regarding the strengths and weaknesses of a Pigouvian tax, see William J. Baumol, "On Taxation and the Control of Externalities," The American Economic Review, vol. 62, no. 3 (June 1972), pp. 307-322; Earl A. Thompson and Ronald Batchelder, "On Taxation and the Control of Externalities: Comment," The American Economic Review, vol. 64, no. 3 (June 1974), pp. 467-471; and Dennis W. Carlton and Glenn C. Loury, "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, vol. 95, no. 3 (November 1980), pp. 559-566.

105 For more information regarding the proposed rule to increase the GSEs' capital requirements, see FHFA, "FHFA Releases Re-Proposed Capital Rule for the Enterprises," press release, May 20, 2020, at https://www.fhfa.gov/Media/ PublicAffairs/Pages/FHFA-Releases-Re-Proposed-Capital-Rule-for-the-Enterprises.aspx.

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View the text of the full report at https://crsreports.congress.gov/product/pdf/R/R46480