In February of 2024, HUD and Treasury announced an indefinite extension of the Section 542(c) Housing Finance Agency Risk-Sharing Initiative offered through HUD’s Federal Housing Administration (FHA) and Treasury’s Federal Financing Bank (FFB). The Risk-Sharing Initiative allows HFAs to originate mortgages for new construction or rehabilitation of properties with affordable housing rental units. HUD and the HFA share the risk of any potential loss resulting from default. With the FHA insurance credit enhancement in place, the Federal Financing Bank will purchase the mortgage, enabling the HFA to recoup their capital and make other investments in their communities. More recently, HUD and Treasury announced a new interest rate collar program to provide greater certainty for new construction and substantial rehab funded through the Risk-Sharing program and FFB.

To better understand how this new policy change would impact HFAs, the National Council of State Housing Agencies (NCSHA), in partnership with Center for Public Enterprise, released a survey to NCSHA members on their current use of the Risk Share program. A total of 22 agencies responded to the survey. 

Strong Support for Risk Share & FFB

The results reveal strong support among HFAs for Risk Share and FFB as a tool to increase multifamily production. HFAs appreciated that they can use FFB as a funding source to free up internal resources to go further in making additional loans.  Most respondents reported appreciating the lower cost of capital, with the FFB interest rate and loan to value levels typically being favorable to other products. FFB also permits longer loan terms and amortization periods than other products. HUD delegates underwriting to HFAs, resulting in a simplified process and lower barriers to participation for borrowers relative to other HUD programs.

Since 2001, the Risk Share program has helped 28 HFAs finance or refinance over 1,771 loans, totaling nearly $18.7 billion in principal and supporting more than 210,247 affordable rental homes. Surveyed agencies expect to use Risk Share to fund over 100 projects representing nearly 10,000 units in 2024 alone. 

Agencies take advantage of FFB and Risk Share for both new construction as well as preservation. Of the agencies responding to the survey, slightly more than half said they primarily use the program for preservation with the remainder using it primarily for new construction.

Generally, HFAs reported using Risk Share and FFB in conjunction with Low-Income Housing Tax Credit (LIHTC) developments, and respondents appreciated that the program pairs well with other soft sources such as HOME, National Housing Trust Funds, CDBG, and other state and local funds. One agency noted that they have typically used FFB-funded loans in refinance transactions involving properties with Section 8 contracts, including public housing properties converting to RAD.  

Optimism for the New Rate Collar 

The majority of respondents enrolled in both Risk Share and FFB expect that the new interest rate collar proposed by HUD and Treasury would help make the program more attractive to borrowers and could increase the amount of new construction and substantial rehab. The lack of interest rate certainty when converting to permanent financing was identified as a key barrier stopping HFAs from using Risk Share and FFB for new construction.

HFAs are eagerly awaiting further details on the program, including the precise interest rate spread to expect from the rate collar. Additional guidance on how to execute with FFB would be helpful for HFAs unfamiliar with their products and structure. 

And yet, despite the improvements under the rate collar, many respondents still identified the lack of a true forward rate lock as a barrier limiting uptake by borrowers in their state. For example, a forward rate commitment is often a requirement of LIHTC equity investors. Without such a guarantee, it can be hard to pair Risk Share and FFB loans with LIHTC projects. Some agencies have gotten around this issue by hedging interest rate risk, for example through an interest rate swap to secure a fixed rate, but this process involves additional costs to the agency. One agency suggested that if the rate collar provided enough certainty, they would consider using Risk Share and FFB for all new 9% LIHTC new construction/substantial rehabilitation deals as an alternative to funding these loans from their working capital. 

Barriers to Participation 

Four respondents indicated that they do not currently participate in Risk Share or FFB. The reasons ranged from not believing their agency would meet HUD’s requirements for the programs, not having enough staff time or resources to run the program, to feeling that the loans made by the agency were too small to justify the added expense of the Risk Share program. 

Three respondents indicated that their agencies participate in Risk Share, but have not sought approval for FFB. Two noted that demand from developers in their states for Risk Share loans have been low, with developers preferring alternate bank financing. One indicated that without a forward rate lock, pursuing FFB financing was not a high priority for the agency. 

Recommendations to Strengthen the Program

In addition to a true forward commitment and interest rate certainty, respondents highlighted other changes that could improve the program, including:

• Increase the use of e-signatures for application documents. Universal e-sign on all FFB and Risk Share related documents would enable more timely execution of loans. Different HUD offices are already in the midst of implementing this approach. For example, HUD Multifamily has permitted e-signatures for owners and management agents of HUD-assisted projects since 2020, a policy adopted during the COVID-19 pandemic. 

• Permit agencies to receive longer term firm approval letters. Currently, HUD issues a firm approval letter that is only effective for one year following its issuance. The timeline to close a Risk Share loan can often be 2-3 years following the firm approval letter. HUD could permit lenders to request a longer term firm approval letter to avoid unnecessary extension requests. 

• Improve FFB closing processes and timelines. Agencies reported that it can take up to an additional 30 days to lock in the rate with FFB and close after all loan documents have been signed and executed, resulting in an additional month of construction interest for borrowers. If FFB could permit locking a rate before all loan documents are finalized and could close nearer to the date when the documents are final, it would significantly improve the experience for borrowers. Permitting agencies to switch easily from traditional Risk Share to an FFB / Risk Share loan if the interest rate environment is suitable would also increase uptake by HFAs. 

• Permit 542(c) loans to serve households at 80 percent of area median income (AMI). Currently, Risk Share loans are permitted for projects that guarantee 20 percent of units at 50 percent of AMI or 40 percent of units at 60 percent of AMI, mirroring the requirements of the LIHTC program. Expanding the range of incomes that would qualify to meet the affordability requirement could increase the pipeline of future projects. 

Risk Share & FFB in Action

Risk Share, in combination with FFB, have helped fund affordable housing throughout the country. Below are a few examples of the types of projects this crucial program helps enable. 

Denver, Colorado – Valor on the Fax

(Rendering via Brothers Redevelopment)

Valor on the Fax is a 72-unit project in Denver that the Colorado Housing and Finance Agency (CHFA) financed with FFB Risk Share in 2024. This project was developed by a local non-profit agency and will house and offer services to residents with traumatic brain injuries. The project site was obtained by the City and County of Denver, who offered it for development through an RFP. The respondent selected, Brothers Redevelopment, selected the CHFA FFB Risk Share loan for the financing due to the ease of execution and rate offered.

Chicago Heights, IL – Otto Veterans Square

(Rendering via HED)

The Housing Authority of Cook County hosted a ribbon-cutting ceremony in September 2024 to celebrate the opening of Otto Veterans Square, a 9% LIHTC affordable housing development for veterans located in downtown Chicago Heights, IL. Otto Veterans Square is the first proposal for new development in Chicago Heights to emerge from the Downtown / East Side Choice Neighborhood Plan and is also consistent with the comprehensive plan for the downtown area for mixed-use development.

The $30.8 million, four-story project contains 82 units targeting veterans who are at risk of becoming homeless. All units have project-based rental assistance from the housing authority. The project initially closed in February of 2023 and the Illinois Housing Development Authority provided a $4.835 million FFB first mortgage, in addition to other state and federal resources.    

Risk Share & FFB Enable Further Innovation

FFB Risk-Sharing is a powerful financing tool, and housing finance agencies have used it to experiment with new models to expand housing production in their state, including:

Mixed-Income Public Development

The mixed-income public development model originated in Montgomery County, pioneered by the Montgomery County Housing Opportunities Commission (HOC). HOC is both a public housing authority and local HFA and has used FFB & Risk Share as part of a model to boost housing production beyond the units created through any annual LIHTC awards. HOC established a model that utilizes public ownership, low-cost construction debt (through a revolving Housing Production Fund), low cost senior debt (such as FFB Risk-Share), and tax relief. This model enables HOC to develop projects with at least 30% of units income-restricted without the use of LIHTC or tax-exempt bond cap.

Affordable Housing Preservation

As projects approach the end of their LIHTC affordability period many states rely on tax exempt bonds and 4% LIHTC to preserve and recapitalize these essential affordable housing units. Increasingly, however, states are running up against their limit on tax exempt private activity bonds. Per Novogradac’s Volume Cap Scarcity Map: 20 states have reached their bond cap limit and 11 states are rapidly approaching it, with only 19 states undersubscribed. For states with tax exempt bond scarcity, FFB Risk Share is a mechanism to provide the low cost capital needed to preserve and extend affordability without tapping into scarce LIHTC.