Comment Detail

Comment

March 17, 2016

Alfred M. Pollard, General Counsel
Attention: Comments/RIN 2590-AA27
Federal Housing Finance Agency
Eighth Floor
400 7th Street, SW
Washington DC, 20219

Comments: RIN 2590-AA27 Enterprise Duty To Serve Underserved Markets; Proposed Rule

Dear Mr. Pollard:

On behalf of Preservation of Affordable Housing, Inc. (POAH), I appreciate the opportunity to comment on the notice of proposed rulemaking on the Enterprises’ Duty To Serve Underserved Markets published by the Federal Housing Finance Agency in the Federal Register on December 18, 2015.

POAH is a national nonprofit specializing in the acquisition, rehabilitation, and long-term preservation of at-risk affordable housing. Since its founding in 2001, POAH has successfully preserved or built nearly 9,000 units of affordable rental housing in 9 states and the District of Columbia at more than 75 properties, yielding a current real estate portfolio worth nearly $1 billion. POAH’s comments below derive from this extensive experience financing the acquisition, renovation or construction, and preservation of affordable multifamily housing.

POAH strongly supports the implementation of the duty to serve the affordable housing preservation market, and its comments focus on that segment of the proposed rulemaking. In general, we would request that FHFA structure the Duty to Serve to ensure that the Statutory Activities (preservation as traditionally understood) are fully addressed before awarding credit for other worthy, but “non-core” activities (new construction, energy efficiency, homeownership affordability). We support FHFA’s inclusion of an “extra credit” mechanism for mixed-income properties, but would argue that such credit should also be given to properties which are mixed-income by virtue of their support for ELI households – an area of housing need which by any measure is more urgent than those targeted by the FHFA’s currently proposed “mixed-income” definition.

We expand on these general positions in our responses to selected questions from the request for comments, below.

1. How much discretion should the Enterprises have in selecting activities— Core Activities and Additional Activities—to serve the underserved markets?

We appreciate FHFA’s proposal for a relatively broad definition of “preservation of affordable housing”, and feel each of the proposed Core and Additional Activities are worthy ones which benefit, or could benefit, from the Enterprises’ engagement. That said, given the breadth of potential Activities, we are concerned that the GSEs may elect to focus on new construction activity, for example, at the expense of supporting the statutorily prescribed preservation activities. For that reason we would ask FHFA to include a stronger requirement for the GSEs to address the Statutory Activities. At a minimum, FHFA should specify criteria it will use to evaluate the reasons an Enterprise may cite for electing not to pursue a given Statutory Activity.

5. Should Duty to Serve credit be given under the loan products assessment factor for an Enterprise's research and development activities that may not show results in their initial phase, but which may be necessary for long-term product planning and development for underserved markets?

We feel FHFA should consider giving credit for activities in the R&D stage, in order to promote the Enterprises’ continual development of new products to serve underserved markets. We would recommend that FHFA give such credit only in the context of a well-developed product concept which can be expected to reach the marketplace within a reasonably short window of time, perhaps two years.

9. Should public input be sought on the Enterprises' proposed Underserved Markets Plans and, if so, is there a more effective approach than the proposed approach?

Yes. We strongly support FHFA’s proposed process for review and comment by both the public and FHFA, and for subsequent plan revision by the Enterprises. Public review and comment can play a critical role in ensuring FHFA has full access to stakeholder feedback about the adequacy of the Enterprises’ underserved markets plans.

28. Should FHFA require that preservation activities extend the property's regulatory agreement that restricts household incomes and rents for some minimum number of years, such as 10 years, beyond the date of the Enterprises' loan purchase? If so, what would be an appropriate minimum period of long-term affordability for the extended use regulatory agreement?

Yes. FHFA should require that preservation extend regulatory affordability restrictions for at least 20 years beyond the date of the Enterprises’ loan purchase. FHFA should also give additional credit for longer terms of affordability, either in evaluating a given activity, or by broadening the proposed “extra credit” mechanism.

29. Should Enterprise purchases of permanent construction takeout loans on new affordable multifamily rental properties with extended-use regulatory agreements that will keep rents affordable for a specified long-term period, such as 15 years or more, receive credit under the affordable housing preservation market? What would be an appropriate period of long-term affordability for the extended-use regulatory agreements?

As noted in response to #1 above, we are concerned that FHFA impose additional protections to ensure the Enterprises fully address the Statutory Activities (i.e., preservation as traditionally understood). If FHFA can ensure the Statutory Activities are fully addressed, we would support the inclusion of financing for new affordable rental properties as a credit-eligible activity within the duty to serve the “preservation” market. We would recommend a minimum affordability period of 20 years or more – the provision of affordable, stable long-term financing is one area where the Enterprises play a key role, by ensuring FHA is not the only player in the market.

31. In what ways, including potential responsible changes to their underwriting and reserve requirements, could the Enterprises prudently extend their support for Section 8-assisted properties?

In our experience, the Enterprises have typically not permitted borrowers to underwrite any amount of budget-based Section 8 rent which was in excess of market rents, and have required onerous so-called “overhang” reserves for projects with market-based Section 8 rents in excess of LIHTC maximum rents. Given the number of existing Section 8 properties in each category which must be preserved, and the historic commitment of HUD and the Congress to continue to fund their Section 8 contracts, these policies are needlessly restrictive and can make it difficult or impossible to execute preservation transactions with Enterprise-backed financing. The Enterprises should not require overhang reserves, and should permit borrowers to underwrite the full amount of Section 8 rent revenue, to promote preservation of these critically important, deeply affordable properties. In addition, given typically extremely low historic vacancy at many Section 8 properties, the Enterprises should permit borrowers to underwrite vacancy as low as 3%, with sufficient historic support for such an assumption.

41. Should FHFA allow the Enterprises to resume LIHTC equity investments? Would the resumption of LIHTC equity investments by the Enterprises benefit the financial feasibility of certain LIHTC projects or would it substitute Enterprise equity funding for private investment capital without materially benefiting the projects?

Yes – we would support the resumption of the Enterprises’ LIHTC investment activities. We do not anticipate that the Enterprises would crowd out private investment capital – rather, we anticipate that the Enterprises, which do not value CRA benefits, would not be active in low-yield CRA markets, and would focus their investments in non-CRA (often rural) markets, providing new capital and better LIHTC pricing in those underserved markets.

42. If FHFA allows the Enterprises to resume LIHTC investments, should FHFA limit investments to support for difficult to develop projects in segments of the market with less investor demand, such as projects in markets outside of the assessment areas of large banks or in rural markets or for preservation of projects with expiring subsidies? Are there other issues that FHFA should consider if limiting the types of LIHTC projects appropriate for equity investment by the Enterprises?

FHFA should require that Enterprise LIHTC investments be made through LIHTC partnerships which include the provision that, after the 15-year compliance period, the Enterprise’s partnership interest will be disposed in the interest of the property’s long-term affordability (and not to maximize the Enterprise’s financial return from disposition). The absence of such a priority for the Enterprises’ pre-recession LIHTC partnership investments continues to present a challenge for the long-term preservation of those properties.

Beyond that requirement, FHFA should not restrict the Enterprises’ LIHTC investments. We expect that the Enterprises will respond to pricing in the markets, and target their investments in non-CRA markets where credit pricing tends to be lower (and where their presence would be most beneficial) – this mechanism is likely to be more effective than any regulatory limits FHFA could devise.

43. If FHFA permits the resumption of LIHTC equity investments, should Duty to Serve credit be provided only for LIHTC equity investments in projects with expiring subsidies or projects in need of refinancing, or should Duty to Serve credit also be given for LIHTC equity investments in new construction projects with regulatory agreements that assure long-term rental affordability?

As noted above, we are concerned that the first priority under the “Affordable Housing Preservation” Duty to Serve be the Statutory Activities – but to the extent that the Enterprises are satisfying that priority, we support the proposal to give Duty to Serve credit for new construction LIHTC projects.

44. If FHFA allows the Enterprises to resume LIHTC investments, should FHFA limit such investments to those that promote residential economic diversity, for example, by investing in LIHTC properties located in high opportunity areas, as proposed to be defined in § 1282.1, to address concerns raised about the disproportionate siting of LIHTC housing (non-senior) in low-income areas and the effect on residential segregation?

No. FHFA should defer to state LIHTC allocating agencies’ judgments regarding the appropriate siting of LIHTC developments, and should provide Duty to Serve credit for investments in LIHTC developments without reference to location.

We support a balanced approach to the nation’s Fair Housing challenge: Even as we work to improve access to high opportunity areas, we must continue to expand opportunity and investment in lower-income areas and areas of minority concentration. LIHTC investments have been shown to have significant positive impacts in these communities, both as freestanding investments and in the context of concerted revitalization efforts.

45. Should FHFA consider permitting the Enterprises to act as the guarantor of equity investments in projects by third-party investors provided any such guarantee is safe and sound and consistent with the Enterprise's Charter Act? If so, what types of guarantees should the Enterprises offer?

Yes – the Enterprises could promote the availability and value of LIHTC investment capital by guaranteeing LIHTC equity funds. This activity would be a logical extension of their participation in the market, and would help to attract new investors and new capital into the market.

51. Should Enterprise support for multifamily properties that include energy improvements resulting in a reduction in the tenant's energy and water consumption and utility costs be a Regulatory Activity?

We are concerned with the impact of utility costs on housing affordability, and would be supportive of the inclusion of Enterprise support for efficiency improvements as a Regulatory Activity. We would urge FHFA to broaden the description of qualifying improvements in this category to encompass improvements that reduce utility costs for master-metered or owner-paid utilities for nonprofit-controlled properties, given that mission-driven nonprofit owners (like POAH) can redirect energy and water savings to address a property’s capital or program needs, or to advance other affordable housing development efforts.

53. Should the Enterprises require the lender to verify before the closing of an energy improvement loan that there are reliable and verifiable projections or expectations that the proposed energy improvements will likely reduce the tenant's energy and water consumption and utility costs and, if so, what standards of reliability, verifiability and likelihood of reduced consumption and costs should be required?

FHFA and the Enterprises should be careful not to impose new, potentially burdensome requirements for the form and content of utility cost savings projections which could discourage owners or lenders from participating. We recommend as one potential solution that FHFA adopt the same standard as that which FHA is now using to establish eligibility for an MIP reduction for energy efficient projects: the owner must evidence that the project has achieved, or the owner must certify that it will pursue, achieve and maintain, an industry-recognized standard for green building; and the project must achieve a score of 75 or better in EPA’s Portfolio Manager tool. This standard has the virtue of being clear, predictable, and not overly prescriptive.

54. Should the Enterprises be required to verify, after the closing of an energy improvement loan, that the energy improvements financed actually reduced the tenant's energy and water consumption and utility costs and, if so, how can they verify this?

As noted in #53 above, we recommend the use of the Portfolio Manager score to ensure that as renovated, the property meets at least a baseline efficiency standard after improvements are made. If necessary, The Enterprises could require a comparison between Portfolio Manager scores before and after improvements to evaluate impact.

55. What if any ongoing monitoring should be required to measure the effectiveness of financed energy improvements in reducing tenants' energy and water consumption and utility costs?

As noted in #53 above, we recommend the use of the Portfolio Manager score to ensure that as renovated, the property meets at least a baseline efficiency standard after improvements are made. We would not recommend a requirement for ongoing monitoring beyond the initial confirmation that the proposed improvements have been made. This is for two reasons: First, owners and borrowers have little control over future resident utility costs, which are driven by market utility pricing and individual households’ consumption patterns; and second, the requirement to gather and report usage data can represent a significant burden for some properties and could dissuade owners from participating.

56. For the proposed requirement that the reduced utility costs will offset the upfront costs of the improvements within a reasonable time period, should a reasonable time period be defined and, if so, how?

We would not recommend the imposition of a requirement for projected savings to offset upfront costs within any defined period of time, for a number of reasons. First, since FHFA proposes to limit this activity to improvements that reduce resident costs (and not owner costs), owners will not be able to apply the savings to amortize their upfront investments – so there is no obvious reason why the payback period is relevant to the analysis. Second, financial savings are only one element of the return from efficiency investments – others may include improved resident comfort, maintenance savings, or reduced carbon emissions – and so we would recommend against focusing exclusively on the payback period.

66. Should Enterprise support for affordable homeownership preservation be a Regulatory Activity?

As noted above, we are concerned that the first priority under the “Affordable Housing Preservation” Duty to Serve be the Statutory Activities – but to the extent that the Enterprises are satisfying that priority, we support the proposal to give Duty to Serve credit for affordable homeownership preservation activities.

82. Is FHFA's proposed definition of “high opportunity area” the most appropriate? Should the rule use DDAs to define high opportunity areas outside of metropolitan areas, or is there a better definition, such as a factor-based definition, that would be preferable for these areas?

We do not think DDAs are the best available proxy for “high opportunity areas”. DDAs represent areas where rents are high relative to incomes, and the link to opportunity is not obvious. We would recommend focusing on factors with known linkages to opportunity – one source would be the recent and well-publicized findings of Harvard’s Equality of Opportunity project, which has found correlations between opportunity and a range of factors including poverty share and racial segregation (data easily available from the Census Bureau). We’d recommend a definition that captured geographies which are either low-poverty, well-integrated, or both – and which also captured state-designated opportunity areas (see #83 below).

83. How could FHFA incorporate state-defined high opportunity areas (or similar terms) into its definition of high opportunity area? If such state-defined areas are included, how could this be implemented by the Enterprises?

We would recommend that FHFA’s definition of high opportunity areas incorporate geographies designated as high opportunity areas in state LIHTC QAPs. The Enterprises would then receive credit for loan purchases for which the borrower could document that the project was in a state-defined opportunity area at the date of the loan purchase, perhaps with a confirming letter from the QAP issuing agency.

84. Should FHFA consider other or additional definitions of “area of concentrated poverty?” For example, should FHFA consider adopting a definition similar to HUD's proposed designation of census tracts by racial and ethnic concentrations of poverty (RCAPs and ECAPs), which are census tracts with a non-white population of 50 percent or more and a poverty rate that exceeds 40 percent or is three times the average tract poverty rate for the metro/micro area (whichever is lower)?

We support FHFA’s proposed definition, which covers a wider band of lower-income neighborhoods than do HUD’s RCAP/ECAP definitions. We would encourage extra credit for mixed-income activities across this broader range of communities – not only in the most distressed communities.

85. Should FHFA consider an alternative definition of “mixed-income?” For example, should FHFA incorporate minimum thresholds for the amount of housing affordable to very low-, low-, or moderate-income households in its definition?

We strongly recommend that FHFA include an alternate category of “mixed-income” properties which would qualify for extra credit: those which contain a substantial share, perhaps 20%, of units affordable to Extremely Low Income households (earning below 30% of AMI). This is an area of desperate need, and FHFA and the Enterprises should use the proposed extra credit mechanism to encourage developers and lenders to increase support for ELI households.
With reference to FHFA’s proposed “mixed-income” definition, we suggest a slight modification to include multifamily property that serves very low-, low-, or moderate-income households where at least 25% of the units are available to households with incomes above moderate-income levels. Developments with a significant share of unrestricted units (available to households of any income) should be eligible for this credit, regardless of whether the area’s current supportable market rent is affordable to households at or below moderate income levels (generally, market rents in these communities are relatively affordable, at least in the near term).

87. How could FHFA determine whether Enterprise activities are part of or contribute to revitalization plans in areas of concentrated poverty? Are there consistent criteria FHFA could apply to determine what constitutes such a plan and whether such a plan is being implemented in an area of concentrated poverty? Are existing federal designations useful, such as the Promise Zones designation or neighborhoods that receive a CNI grant?

Local revitalization efforts take many forms, and FHFA and the Enterprises should adopt an inclusive approach to defining such efforts. In determining whether Enterprise activities are part of or contribute to revitalization plans in areas of concentrated poverty, FHFA should begin with existing federal designations including neighborhoods with Choice Neighbhorhoods grants (planning or implementation), Promise Neighborhoods grants, or Promise Zone designations. Beyond these, however, FHFA should give credit for support for properties which are part of or contribute to revitalization plans which meet state QAP definitions or local definitions, as evidenced by a letter or other documentation from the state QAP issuing agency or local government.

88. Should FHFA incorporate Enterprise efforts supporting CNI as a residential economic diversity activity, rather than as a Regulatory Activity under the affordable housing preservation market?

Given the need for concentrated support for these neighborhood revitalization efforts, we would recommend calling out efforts to support CNI developments (and previous-generation HOPE VI developments) as a Regulatory Activity, and providing extra credit for such activities.

Thank you for the opportunity to provide these comments. If you have any questions, please contact me at (617) 449-1016 or aspofford@poah.org.

Sincerely,

Andrew Spofford

Chief of Staff
Preservation of Affordable Housing, Inc.