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Established by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for Federal Home Loan Banks
$130 million allocated in 1998, subsidies generally ranged from $4,000 to $8,000 per unit
The AHP was created as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to provide direct subsidies and reduced rate loans to the FHL Bank system member institutions. The banks use the funds to finance the purchase, construction or rehabilitation of owner occupied or affordable rental housing for very low to moderate income households.
Affordable Housing Program regulation changes now cater more to local housing needs
Regulation Changes
After seven years experience operating the program, the Federal Housing Finance Board, which oversees the 12 Federal Home Loan Bank districts, adopted new regulations which significantly changed the competitive application process and monitoring requirements. They also increased the local discretion of the 12 Federal Home Loan Bank district offices in the scoring and selection of applications in three crucial areas:
1. Local discretion in establishing two of the nine scoring criteria;
2. Local discretion in setting the point value for each criteria;
3. Local discretion in determining the method (fixed formula variable, etc.) for awarding points under each criteria.
Prior to the adoption of new regulations, each district FHLB evaluated and scored applications before forwarding them to the Finance Board for approval. All applications had to meet centrally adopted minimal thresholds and were scored based on a fairly uniform scale. These new regulations were designed to make the AHP more responsive to local needs and to reduce management and oversight.
The Affordable Housing Program
The AHP provides direct subsidies and subsidized reduced rate loans to FHL Bank system member institutions, who then finance the purchase, construction or rehabilitation of owner occupied or affordable rental housing for very low to moderate income households. Each year, Home Loan Banks contribute the greatest of 10 percent of their net income or $100 million to the Affordable Housing Program. The allocation for 1998 was $130 million, with subsidies generally ranging from $4,000 to $8,000 per unit. The AHP has awarded some $640 million since its creation, helping to finance nearly 165,000 units of affordable housing.
Typically, nonprofit community-based organizations or local governments form relationships with Home Loan Bank member institutions (commercial banks, savings and loans, credit unions or insurance companies) and work together to develop projects that leverage AHP subsidies. Member institutions are the only ones who can actually submit the application, not the nonprofit developer or investor. Applications can be submitted twice each year at dates selected by the FHLB district. Applicants are typically notified within two months if they have received funds. The program is very competitive. Each region typically receives three to five times the number of applications they con fund.
The subsidies are generally used in conjunction with other sources of funding, like: Low Income Housing Tax Credits, HOME, CDBG or Supported Housing Programs. It often provides a convenient source of "gap" financing. Funds cannot be disbursed until full funding is already committed. FHLB funds can be used for most purposes including construction or rehabilitation and related soft costs (architect, attorney. etc.), acquisition, closing costs, homebuyer down-payment assistance and developer's fees (within limits). Funds cannot be used for reserves, social services, operating costs or off-site improvements.
Projects must meet eligibility criteria before a district scores an application. Eligibility is reviewed based on issues like, fair housing, feasibility, income of tenants or homeowners, and uses of funding. A few FHLB districts have also added threshold criteria related to cost and underwriting issues.
The Scoring System
Each application is scored based on a 100-point system. The Federal Finance Board established nine criteria:
- Donated property
- Nonprofit or government sponsor
- Targeting (to lower income)
- Homeless
- Empowerment
- Subsidy per unit
- Community stability
- First district priority (from a list of 10 possibilities)
- Second district priority (open to local discretion)
The Finance Board requires "targeting" to receive a minimum of 20 points and a minimum of five points in each other category. Each of the 12 Federal Home Loan Bank districts establishes its point system within these parameters.
Establishing Scoring Criteria
The central Housing Finance Board still requires nine scoring criteria. While seven of those are defined, two of them are left to the Federal Home Loan Bank district to establish. One district priority must come from a list of 10 possibilities, while the second district priority is totally open to local discretion. In fact, each of the 12 regions has a different second priority. For example, the Dallas region has the second district priority (for five points) for member financial participation, while the Pittsburgh region has its local priority (at 25 points) for owner occupied rehabilitation or projects in Appalachia.
While the scoring for the two district priorities varies by region, together they typically total 35 to 45 of the 100 points possible for each application.
District priorities are typically established by the district board of directors, based on recommendations from an advisory hoard. Each district has an advisory board selected by the district board of directors. These advisory boards are made up of 5 to15 people representing nonprofit and for-profit developers, government agencies and housing advocates. Advisory board members can serve for up to three consecutive three-year terms. Advisory boards are charged with advising the board and staff of the regional Federal Home Loan Banks on local housing needs and methods for addressing them and they play an active role in defining the district priorities and the points assigned to them.
Setting Point Value
The Finance Board requires eight of the nine criteria to receive a minimum of five points and one targeted criteria to receive a minimum of 20 points. Otherwise, there is substantial local discretion on assigning points to the nine scoring criteria. This can substantially affect how a project will score. For example, a typical urban SRO project would have a difficult time scoring above 65 points and therefore being funded in Atlanta, which emphasizes home ownership arid economic diversity in its point system. It would, however, likely score above 75 and be funded in Chicago, which emphasizes special needs and empowerment. Topeka emphasizes nonprofit involvement, support services and special needs.
Real estate investors and developers should look carefully at the point system before applying to make sure their project even has a chance to be eligible. The minimum score required to receive funding can vary substantially by round from 65 to 80 points. It would be unusual for a project scoring under 65 points to be funded. Since each district has points related to the amount of AHP requested, a project that is marginal in points, if feasible, could request less funding in order to improve its chances.
As in establishing district priorities, the district advisory boards typically have substantial influence over the point systems and should be consulted by investors and developers.
Awarding points
Each district can devise its own means for scoring. For example, some districts score targeting based on a formula that compares the affordability levels of each of the applications in any round and others on a baseline criteria, such as below 50 percent of median income scores the maximum points. Empowerment is particularly variable because points can be awarded under a wide range of activities. Some regions chose higher points for certain activities, some prefer applications that document a holistic approach and others targeting of services to very low-income and special needs populations. Applicants should remember that some sections, such as community stability and empowerment, may have scoring criteria not fully articulated in the application. They should speak with district staff before completing those sections.
Monitoring
In addition to decentralizing authority and revising the scoring system, the new regulations also aim to clarify and standardize monitoring requirements and strategies to contend with noncompliance. The minimum period the owners must maintain and report affordability, has been reduced to five years for homeowner units and 15 years for rental units. These "retention" requirements also make the reporting less frequent and somewhat easier. The regulation changes also expand the options for dealing with non-complying properties.
Typically AHP monitoring is less onerous than HOME, Supported Housing or Tax Credit reporting. However, developers should still understand the reporting requirements and make sure internal systems are in place to meet them.
Investor Involvement
The Affordable Housing Program has become a valuable tool in the package available to improve distressed communities. The change in regulations makes it more important for real estate investors to maintain communication with your local Federal Home Loan Bank district staff and advisory board members. Find out who is on the district advisory board and make sure they understand your community's or population's needs. Study the scoring system and give advisory board members your opinions of the system. The Federal Housing Finance Board intends for these regulatory changes to make the process more locally driven and your involvement and comments should be welcome.
From information provided by Federal Home Loan Banks and reports written for the Enterprise Foundation.
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