The White House today announced a meaningful change to the Department of Housing and Urban Development (HUD) and Treasury’s Federal Financing Bank (FFB) Risk-sharing program. The change will give users of the program, developers and housing finance agencies, significantly more certainty around interest rates throughout the years-long development process. This increased cost certainty will allow the program to support more new construction activity.
What is FFB/Risk-share?
The FFB/Risk-sharing program, an interagency partnership between HUD and Treasury, supports multifamily housing construction financed by housing finance agencies in a two-step process. First, HUD’s Federal Housing Administration (FHA) provides mortgage insurance, taking on 50% of the project risk. Second, the Federal Financing Bank funds the mortgage, obviating the need of the housing finance agency to issue its own bonds for the project. The FFB’s funding of the mortgage thus reduces reliance on scarce, often competitive resources, like tax-exempt bonds, and in doing so can allow housing finance agencies to increase their annual housing production volumes.
Why hasn’t FFB/Risk-share been used more for new construction?
In a typical housing construction project, there are multiple mortgages, issued at different times. First, a construction mortgage funds the construction activity: labor, materials, engineering, and so on. Once the building is completed and leased, the owner will close out the construction mortgage and acquire a permanent mortgage with a longer loan term. In the case of publicly supported construction, the loan terms can be significantly longer, often more than 30 years.
Between the start of construction and the acquisition of a permanent mortgage, however, interest rates can fluctuate—sometimes wildly. If a developer builds a project when rates are 5%, but completes it when rates are 8%, they might find themself in a bind. To counter this risk, more sophisticated developers or their lenders can hedge against that interest rate risk, such as by trading interest rate futures. But hedging is complicated, and often does not provide enough room to make every project work.
In light of this risk, especially in today’s interest rate environment, many housing finance agencies have been reluctant to underwrite projects relying on FFB construction and permanent loans. Some notable exceptions include New York City Housing Authority’s Baychester Murphy Houses, a 720 home redevelopment financed by New York City Housing Development Corporation (HDC). Montgomery County, Maryland’s first project using their new Housing Production Fund program also features a Risk-sharing mortgage.
What does today’s change do?
Today’s change to the FFB/Risk-sharing program creates a system where the Treasury itself, via the FFB, will do the hedging on the behalf of developers and housing finance agencies. When a project is approved for FFB/Risk-share, it will “lock in” a so-called rate collar, providing certainty that the eventual rate on the permanent mortgage will be within a specified range, or collar. This action allows the FFB to limit the downside risk to projects, while also giving them a piece of the upside should interest rates move in a favorable direction over the course of construction.
This added certainty will not only allow more projects to proceed in the near term, it will help housing finance agencies understand the program as a tool to rely on for new multifamily construction into the future.
Where do we go from here?
We are eager to see housing finance agencies find creative and new ways to grow their annual production volumes with more reliable and stable FFB/Risk-sharing in the tool belt. For more information on FFB/Risk-sharing, see these resources or get in touch with the Center for Public Enterprise housing team.
Additional Resources
Center for Public Enterprise: Getting your agency approved for Risk Share and FFB
National Council of State Housing Agencies: FHA-HFA Risk-Sharing Program