Multifamily Housing Finance and Selected Policy Issues

August 7, 2020 – March 8, 2023 R46480

Multifamily Housing Finance and Selected
March 8, 2023
Policy Issues
Darryl E. Getter
A mortgage is a loan secured by the underlying real estate collateral being financed by the loan.
Specialist in Financial
Single-family mortgages are loans secured by a residential dwelling having at least one and no
Economics
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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Multifamily Housing Finance and Selected Policy Issues

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

1 As of 2021, an estimated 46% 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-data-
download/.
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
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Multifamily Housing Finance and Selected Policy Issues

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.

1995), pp. 151-177.
8 For more information, see CRS In Focus IF10918, Hospital Charity Care and Related Reporting Requirements Under
Medicare and the Internal Revenue Code, by Marco A. Villagrana et al.
9 In 1998, Congress passed the Veterans Programs Enhancement Act (P.L. 105-368, 38 U.S.C. §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, GAO-
05-311R, 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.
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Multifamily Housing Finance and Selected Policy Issues

The Basics of Multifamily Financing
A mortgage is a loan secured by the underlying real estate collateral that is 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.
Developers that want to purchase, construct, or rehabilitate these structures seek multifamily
mortgages from financial institutions. This section provides an overview of the demand and
supply side mechanics of the multifamily mortgage market.
The Demand for Multifamily Credit
Multifamily properties that generate stable revenues (via collection of rents from tenants) have
predictable profitability levels, which can make them attractive investments. By contrast, the
profit potential of riskier properties, such as those experiencing above-normal vacancy rates and
rental income declines (e.g., due to neighborhood location, poor management, or upkeep), may be
less predictable yet still be attractive investments. After substantial rehabilitation, a rental
property may appeal to tenants with more stable and higher incomes and possibly fetch a higher
resale value—or it may still fail to generate the anticipated rental income, resulting in
substantially greater losses. Thus, risker financial investment opportunities may translate into
greater profits or greater losses.
Real estate properties are categorized as Class A, Class B, and Class C, which provides
developers and lenders with the financial risk characteristics of the prospective investment
properties (defined in more detail in the text box below). Restating the preceding investment
strategy, acquiring a riskier Class C property may initially be less expensive and have greater
profit potential than a less risky Class A property investment. If, however, a Class C property after
rehabilitation would continue to generate low or below-market rents, the losses are likely to be
significant. In short, developers decide whether to invest in low- or high-risk multifamily
projects.
One criterion for determining whether to invest in Class A, Class B, or Class C income-
generating properties is current and expected future performance of rents. Anticipated rent growth
is a favored metric developers use to evaluate a prospective investment’s profitability.10
Occupancy rates also provide information about anticipated rent increases or decreases. As
multifamily properties’ occupancy rates increase (decrease), the overall rental income the
properties generate is more likely to increase (decrease).11 A related concept, the property
capitalization (cap) rate, is the annual net operating income generated by the property divided by
its purchase price. In other words, the cap rate measures a property’s yield, the annual return in
the form of (rental) income generated by the investment. (The cap rate does not account for any
outstanding debt such as a mortgage amount.) The interpretation of a high cap rate, however, may
be ambiguous. Although a higher cap rate may be indicative of higher profit potential, it may also
be indicative of a limited ability to raise future rents on some tenants (e.g., the elderly, those with
higher delinquency rates, and those currently with long leases). In the latter case, the expected

10 See Peter J. Elmer and Anton E. Haidorfer, “Prepayments of Multifamily Mortgage-Backed Securities,” The Journal
of Fixed Income, vol. 6, no. 4 (March 1997).
11 The vacancy rate, which equals 100% minus the occupancy rate, can be used instead of the occupancy rate.
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profit potential would be lower if rent hikes would not be a viable option to recover some of the
financing costs.
Multifamily and Commercial Property Classifications12
Multifamily Properties

Class A properties generally have one or more of the fol owing characteristics. They tend to be newly
constructed or less than 10 years old; located in a geographical area with at least 2 mil ion in population;13
and have 200 or more units. They often include luxury-styled apartments. Class A properties are considered
investment grade because they are more likely to generate the rental income to give developers profitable
returns and reduce the likelihood of defaults on multifamily mortgages. Class A properties tend to be
inhabited by high-income earning tenants, have low vacancy rates, and be professionally managed.

Class B properties generally have one or more of the fol owing characteristics. Class B properties are older
than Class A properties, but they have been well-maintained; may have some auxiliary renovations that could
result in upgrading these properties to Class A; may be located in geographical areas consisting of 500,000 to
2 mil ion in population; and may have 100-200 units. Class B properties tend to be considered somewhat
riskier than Class A because tenants may have relatively lower incomes than tenants who rent Class A
properties.

Class C properties, also referred to as properties that fall in the Naturally Occurring Affordable Housing
(NOAH) category, generally have one or more of the fol owing characteristics.14 Class C properties may be
more than 20 years old; may need some major renovations to meet more updated standards; and may be
located in geographical areas consisting of fewer than 500,000 in population. Properties with one or more of
these characteristics may be considered below investment grade because they are more likely to generate
relatively lower market rents, thus increasing the likelihood of mortgage default. In the context of affordable
housing for low- and moderate-income tenants, a new property may be designated as Class C if the monthly
rents are lower than Class A and Class B properties within a geographical proximity.15
Commercial Properties
Commercial real estate properties are also categorized as Class A, Class B, or Class C.

Class A properties are newly built or extensively renovated buildings located in areas with easy access to
amenities.

Class B properties are similar to Class A but may need minor repairs and upgrades.

Class C properties are in poor locations, require major capital investments to improve dated infrastructure,
and are likely to have higher vacancy rates.

12 See Joint Center for Housing Studies of Harvard University, Rental Market Stress: Impacts of the Great Recession
on Affordability and Multifamily Lending, July 2011, at https://www.urban.org/sites/default/files/publication/27011/
1001550-Rental-Market-Stresses-Impacts-of-the-Great-Recession-on-Affordability-and-Multifamily-Lending.PDF;
“What is Class A, Class B, or Class C Property,” Realty Mogul, at https://www.realtymogul.com/knowledge-center/
article/what-is-class-a-class-b-or-class-c-property; and Commercial Real Estate Finance Company of America,
“Multifamily Property Classifications,” at http://www.crefcoa.com/property-classifications.html.
13 A primary multifamily market may be loosely defined as having approximately 5 million or more people; a
secondary market having approximately 2 million-5 million people; and a tertiary market having fewer than 2 million
people. See Les Shaver, “Defining the Market,” Multifamily Executive, May 1, 2011, at
https://www.multifamilyexecutive.com/business-finance/defining-the-market_o.
14 See Fannie Mae, Multifamily Market Commentary: 2018 Multifamily Affordable Market Outlook—A Long Way to
Go, February 2018, at https://www.fanniemae.com/media/23056/display.
15 As well as being in a class all by itself, Class D properties may also be considered a subset of Class C properties.
Class D properties are older, not well-maintained, and may even need to be demolished and rebuilt. Class D properties
may be located in high-crime areas and have far more neglect than Class C. For more information, see Les Shaver,
“Defining the Market,” Multifamily Executive, May 1, 2011, at https://www.multifamilyexecutive.com/business-
finance/defining-the-market_o; and Commercial Real Estate Finance Company of America, “Multifamily Property
Classification,” at http://www.crefcoa.com/property-classifications.html.
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Developers commonly seek financing for their multifamily investments. Some lenders, however,
may not be willing to assume added or above-normal credit (default) risk of not being repaid,
usually associated with loans secured by riskier multifamily investments. In these cases, some
lenders may be willing to provide loans at higher financing charges commensurate with the
higher risk levels. After factoring in the higher financing costs, some developers may consider the
potential profitability to be less attractive and, therefore, consider other investments. Multifamily
financing sources along with typical lending requirements, which may factor into developers’
investment decisions, are described in the next section.
The Supply of Multifamily Credit
Commercial banks have historically been the principal source of credit for commercial and
multifamily finance, particularly for Class A and some Class B properties.16 Multifamily
financing, in the form of direct loans or debt security issuances, may also be obtained through
some credit unions, life insurance companies, pooling structures such as bank participations and
syndications, commercial mortgage-backed securities (CMBS), and institutional investors either
directly or via real estate investment trusts (REITs). Private-sector lenders are more willing to
provide financing for Class A and some Class B investments because properties in higher-end
neighborhoods can fetch higher rents and experience lower vacancy rates and, therefore, fewer
disruptions to rental income streams. Consequently, a broader array of private-sector funding
arrangements exists for the less risky Class A and Class B properties, which may translate into
more competitive multifamily mortgage rates. Lenders use various arrangements to fund
multifamily loans for investment-grade properties; some are summarized in the text box below.
Not only are underwriting requirements for multifamily and single-family mortgages different,
but lenders can also shift more financial risk to multifamily borrowers. For the sake of
comparison, single-family mortgage underwriting typically requires borrowers to have acceptable
credit scores, loan-to-value (LTV) ratios, and debt-to-income ratios.17 Furthermore, a typical
single-family mortgage is a 30-year fixed-rate loan that can be repaid prior to maturity term if, for
example, a borrower wants to refinance to a lower interest rate. A fixed-rate loan over several
decades combined with the ability to prepay the loan ahead of schedule without penalty ensures
that borrowers’ mortgage payments remain fixed or can be lowered. Single-family mortgages,
therefore, shift the risk of sudden changes in cash flow to lenders. A lender risks a sudden loss in
cash flow if, after a fall in mortgage interest rates, a single-family borrower refinances to the
lower rate. After a rise in mortgage interest rates, a lender would lose the opportunity to earn a
greater rate of return if a borrower continues to repay the loan as scheduled at the lower rate.18

16 A commercial bank is an institution that obtains either a federal or state charter, which allows it to accept deposits
insured by the Federal Deposit Insurance Corporation (FDIC), which can subsequently be used to fund multifamily and
commercial mortgage loans.
17 Credit scores and loan-to-value ratios (which are lower if borrowers make acceptable downpayments) are better
predictors of borrower default in the single-family mortgage market. Lenders, however, have also adhered to minimum
debt-to-income requirements. For more information, see Karan Kaul, Laurie Goodman, and Jun Zhu, Comment Letter
to the Consumer Financial Protection Bureau on the Qualified Mortgage Rule, Urban Institute, September 17, 2019, at
https://www.urban.org/research/publication/comment-letter-consumer-financial-protection-bureau-qualified-mortgage-
rule; and CRS In Focus IF11761, The Qualified Mortgage (QM) Rule and Recent Revisions, by Darryl E. Getter.
18 For more on the components of a consumer loan, see CRS In Focus IF10993, Consumer Credit Markets and Loan
Pricing: The Basics, by Darryl E. Getter. For more on how the Fannie Mae and Freddie Mac isolate the prepayment
and default risk components of a single-family mortgage, see CRS Report R45828, Overview of Recent Administrative
Reforms of Fannie Mae and Freddie Mac, by Darryl E. Getter.
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Funding Multifamily Loans
Funding loans refer to how lenders acquire funds that are subsequently lent to borrowers. The fol owing describes
selected options lenders use to fund multifamily and commercial loans.

Lending Spreads and Rol overs. Lenders that retain loans in their portfolios may fund their longer-term
mortgage assets via rollovers, a continuous series of shorter-term borrowings. Banks employ this funding
method with deposits, repaying depositors in periodic intervals. Rather than rely solely on their depositors,
some banks may also acquire short-term loans from other banks or short-term money markets. The profits,
also called lending spreads, from loans held in portfolio are generally computed as the difference between the
higher rates and fees charged by the lender for the mortgage loans and the lower interest rates that are paid
on the successive sequences of shorter-term borrowings.

Private placement. After a multifamily loan is originated, a private placement occurs when a broker finds
financiers to directly purchase it. Financiers may consist of banks, finance companies, insurance companies,
hedge funds, foundations, pension plans, university endowments, and other high-net-worth individuals or
entities. The Securities and Exchange Commission (SEC) promulgates the regulatory guidance for private
placement activities. The SEC exempts securities from standard registration requirements that are not
offered to the public; however, only accredited investors may purchase private placement offerings. An
accredited investor includes anyone who has (1) earned income exceeding $200,000 (or $300,000 joint
income) or (2) a net worth of $1 mil ion (excluding the value of the person’s primary residence). Funding via
private placement reduces costs and delays associated with sponsoring securitizations, SEC registration, or
compliance with prudential requirements for depository institutions. Funding via private placement has
reportedly risen, particularly among bank and nonbank lenders.19

Participations. Other loan funding structures allow for the coordination of multiple financial institutions such
as banks to jointly fund a set(s) of pooled loans. For example, suppose a regional real estate developer goes
to a local bank for a loan. If the small bank is unable to offer the loan, rather than surrender the developer to
a larger bank, the small bank may offer to coordinate with other local banks to jointly provide the loan using
a loan participation (syndication) structure. The local bank would originate the loan, thus acting as the sponsor
or lead bank of the participation arrangement. The sponsor typically retains the largest portion of the loan
and sells smaller portions (shares) to other institutions. This structure allows the sponsor to maintain control
of the customer relationship and overcome funding limitations. The other banks in the participation may use
their shares to diversify geographical concentration risks in their lending portfolios.

Structured Financing. Another type of joint funding structure initially creates a trust to hold pooled assets
(e.g., mortgage loans) and subsequently issues securities to fund the trust’s assets. The funding structure’s
lead arranger or sponsor selects the assets to place in the trust and then determines how many shares to
issue to investors. Two structures typically used to fund multifamily mortgages are commercial mortgage-
backed securities (CMBSs) and real estate investment trusts (REITs), which are discussed in the section entitled
“Joint Lending: Privately Sponsored Pools and Conduits.” Despite their functional equivalence, a CMBS is
treated as a lending arrangement (i.e., loan participation) in which participating shareholders have no
ownership or equity interests in the borrower’s primary business, whereas a REIT is treated as equity shares
to investors that are principally engaged in a profit-sharing venture with ownership interests.20
By contrast, multifamily and commercial mortgages are underwritten based on the current and
anticipated cash flows (predominantly in the form of rental income) generated by the properties,

19 Financial technology (fintech) firms frequently refer to nondepository firms that use various technological formats to
deliver financial services to customers. For more information about recent private placement trends, see Scott
Bauguess, Rachita Gullapalli, and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2017, Securities and Exchange Commission (SEC), August 2018, at
https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf.
20 Loan participation shares and investment securities are functionally equivalent structures to fund assets and share
financial risks. Because participation shares and investment securities receive different regulatory and tax treatments,
legal criteria are applied to determine whether issuances used to fund longer-term assets should be construed as part of
a large lending transaction or investment (ownership) securities. For more information, see Dennis Scholl and Ronald
L. Weaver, “Loan Participations: Are They ‘Securities’?” Florida State University Law Review, vol. 10, no. 2 (Spring
1982), pp. 215-234; Securities Exchange Commission (SEC), “Real Estate Investment Trusts (REITS),” at
https://www.sec.gov/fast-answers/answersreitshtm.html; Nareit, “Guide to Mortgage REITs,” at https://www.reit.com/
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the primary collateral source to back the loans.21 Rental income streams vary extensively by
geographical location in light of the surrounding jobs and businesses, meaning that the underlying
risks of multifamily mortgages cannot be standardized. For this reason, lenders evaluate the
default risk of multifamily mortgages using the following metrics.
 The debt service coverage ratio (DSCR) is the annual net operating income
divided by annual total debt service (principal and interest). A lender typically
requires a DSCR of 1.25 or higher because it indicates that a borrower has the
ability to service the mortgage obligation.22
 The initial amount of equity that a developer has invested in the property is
reflected by the LTV ratio. A mortgage becomes underwater when the current
property value declines far below the outstanding loan balance amount, which
provides a borrower with the financial incentive to default. Therefore, the dollar
amount of a multifamily mortgage tends to be 80% or less of the property
value—or have a LTV ratio of 80% or less—forcing the developer to have an
ownership stake of at least 20% in the financed property.
Empirical research has shown that the DSCR and LTV ratio are key factors to predict default.
Specifically, developers are far more likely to default on their multifamily mortgages if they
simultaneously experience negative cash flows and negative equity (underwater) positions, which
usually occur after substantial declines in property values.23
Multifamily and commercial mortgage terms essentially shift the risk of sudden cash flow
disruptions that can result from interest rate movements to borrowers. Multifamily mortgages are
also much larger in size than single-family mortgages. For this reason, interest rate fluctuations
have even greater cash flow implications for lenders: (1) actual and large cash flow losses if
borrowers refinanced into cheaper loans, or (2) foregone cash flows if borrowers repay loans for
numerous years at below current market rates. Multifamily (and commercial) mortgages—unlike
most single-family mortgages—offered by private-sector lenders typically have shorter maturities
(e.g., five years), prepayment penalties (i.e., the risk of losing yield if the borrower repays the
loan ahead of schedule), and adjustable (floating) rates.24
Multifamily mortgages are also likely to include loan covenants, which are contractual
requirements to assure that a borrower’s initial financial standing at underwriting remains in place
over the life of the loan.25 Loan covenants may require a borrower to provide audited financial
statements, maintain a minimum cash reserve, maintain a constant DSCR or debt-to-net assets

what-reit/types-reits/guide-mortgage-reits; and CRS In Focus IF10736, Collateralized Loan Obligations (CLOs) and
the Volcker Rule, by Darryl E. Getter.
21 Similarly, lenders require single-family property borrowers who intend to rent their dwelling units to show proof of
anticipated streams of income the property would generate, such as tenant rental agreements.
22 Economists have found that cash flow may be a more significant determinant of default risk in the multifamily
mortgage market. See Kerry D. Vandell, “Multifamily Finance: Pathways to Housing Goals, Bridge to Mortgage
Market Efficiency,” Journal of Housing Research, vol. 11, no. 2 (2000), pp. 319-356.
23 For more information, see Lawrence Goldberg and Charles A. Capone, “A Dynamic Double-Trigger Model of
Multifamily Mortgage Default,” Real Estate Economics, vol. 30, no. 1 (2002), pp. 85-113.
24 In some cases, lenders may initially offer balloon mortgages (i.e., mortgages with interest-only payments except for
the final payment, which consists of the last interest and total principal payments), and subsequently offer more
favorable terms following increases in occupancy rates.
25 See Richard K. Green, “Multifamily Mortgages,” in Introduction to Mortgages and Mortgage-Backed Securities
(Elsevier, 2014).
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ratio, limit new acquisitions or asset sales, or some or all of the above.26 Some loan covenants
may explicitly or implicitly require borrowers to raise tenants’ rents to avoid breaching
contractual requirements. In short, loan covenants (as well as collateral requirements) allow
lenders to monitor changes in borrowers’ financial conditions and, therefore, better anticipate
changes in default risk.
In sum, single-family mortgages face both default and cash flow risks if borrowers prepay loans
after interest rates fall. Federal support for the single-family mortgage market is generally in the
form of default guarantees; lenders typically can transfer default risks to the federal government
and retain cash flow risks. By contrast, multifamily and commercial loans have default risks.
Lenders monitor default risks using loan covenants and shift interest-rate risks to borrowers via
loan terms. For higher-risk multifamily investments, the federal government may assume greater
financial risks that would be passed on to developers, which is discussed in the next section.
The Federal Role in the Multifamily Credit Market
In some niche rental markets, the ability to raise rents commensurate with current market rents on
low-income tenants is limited. Furthermore, estimating property cap rates and DSCRs is more
challenging if tenants are likely to have higher delinquency and turnover rates.27 Mortgages that
finance higher-risk multifamily property investments are likely to have higher interest rates and
more stringent loan covenants and LTV requirements than less risky property investments. Higher
financing costs may reduce the potential profitability and, therefore, the attractiveness of higher-
risk investment opportunities.
Federal Incentives to Finance Affordable Multifamily Structures
The federal government encourages developers and lenders to invest in affordable, higher-risk
multifamily properties by offering various incentives, such as those included in the list below.28
 The Federal Housing Administration (FHA), which is part of the U.S. Housing
and Urban Development (HUD), is a federal government agency that insures the
default risk for single-family residential mortgages and multifamily mortgages.29
FHA-insured structures include multifamily rental or cooperative housing for
low- and moderate-income individuals, nursing homes, assisted living facilities,
and hospitals.
 Congress chartered Fannie Mae and Freddie Mac, government-sponsored
enterprises (GSEs), to provide liquidity for mortgage markets, thus promoting
homeownership for underserved groups and locations.30 The Federal Housing

26 See Charles Zimmerman, “An Approach to Writing Loan Agreement Covenants,” Journal of Commercial Banking
Lending, vol. 58 (1975), pp. 2-17.
27 Predicting the income generated by some properties, such as dormitories or nonprofit institutions (e.g., churches,
shelters), may also be more difficult under certain circumstances.
28 For information about federal programs that would also include financial support given directly to tenants, see CRS
Report RL34591, Overview of Federal Housing Assistance Programs and Policy, by Maggie McCarty, Libby Perl, and
Katie Jones.
29 See HUD, “Multifamily Housing,” at https://www.hud.gov/program_offices/housing/mfh. With some exceptions,
most FHA-insured multifamily mortgage programs do not have explicit affordability requirements.
30 In single-family mortgage markets, the GSEs purchase mortgages from loan originators and retain the default risk
(for a fee). They subsequently issue bond-like securities (i.e., mortgage-backed securities) to private-sector investors
who assume the risk that borrowers may choose to repay their mortgages ahead of schedule (prepayment risk). Since
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Finance Agency (FHFA), the federal agency that regulates the GSEs for
prudential safety and soundness, sets and ensures that the GSEs meet affordable
mission goals for LMI households as mandated in their congressional charters.31
Specifically, the FHFA sets both single- and multifamily housing goals for the
GSEs (including a new “duty-to-serve” three underserved markets: manufactured
housing, affordable housing preservation, and rural housing) in addition to the
affordable housing goals previously established by the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.32
 Fannie Mae and Freddie Mac are also statutorily required to contribute a portion
of their profits to the Housing Trust Fund (HTF) and the Capital Magnet Fund
(CMF), which are permanent funding streams that do not rely on annual
congressional appropriations and are dedicated to affordable housing activities
for low-income households.33 Specifically, the GSEs must set aside 4.2 basis
points (0.042%) of the unpaid principal balance of new single- and multifamily
mortgage purchases for the funds, in which most of the funding by statute must
be used for rental housing. HTF funds are subsequently awarded to state and
state-designated entities for developing or maintaining affordable housing.34
CMF funds provide competitively awarded grants to Community Development
Financial Institutions and nonprofit housing developers for affordable housing
and community economic development.35
 The Low Income Housing Tax Credit (LIHTC) subsidizes construction costs for
developers of affordable housing for low-income renters. The tax credits are
claimed over a 10-year period. Because developers need upfront financing to
complete construction, they typically sell the 10-year stream of tax credits to
financiers (e.g., corporations, financial institutions) in exchange for financing. By
reducing the total amount of financing that developers would otherwise have to
secure, tenants can be offered units in these properties at more affordable rents.36

2012 under the direction of their primary regulator, the Federal Housing Finance Agency (FHFA), the GSEs developed
programs that transfer to the private sector some of the credit risks linked to their single-family mortgage purchases.
See CRS Report R45828, Overview of Recent Administrative Reforms of Fannie Mae and Freddie Mac, by Darryl E.
Getter; and CRS Report R44525, Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions, by
Darryl E. Getter.
31 FHFA was created by P.L. 110-289, the Housing Economic and Recovery Act of 2008.
32 P.L. 102-550, Title XIII; see 12 U.S.C. §§4561-4564.
33 See CRS Report R40781, The Housing Trust Fund: An Overview, by Katie Jones.
34 See HUD, “About the Housing Trust Fund,” at https://www.hudexchange.info/programs/htf/about/.
35 See U.S. Department of the Treasury, Community Development Financial Institutions Fund: Capital Magnet Fund,
at https://www.cdfifund.gov/programs-training/Programs/cmf/Pages/default.aspx; CRS Report R47217, Community
Development Financial Institutions (CDFIs): Overview and Selected Issues, by Darryl E. Getter; and CRS Report
R47169, Community Development Financial Institutions (CDFI) Fund: Overview and Programs, by Donald J. Marples
and Darryl E. Getter.
36 Investor may refer to developers, as used in this report, or to financial firms such as banks and other entities that want
exposure to multifamily investments. To reduce confusion, the term financier in this report refers to lenders and
financing companies that want exposure to multifamily investment risk. For example, a developer may be able to sell a
$1.00 tax credit to a financier for $0.90 of financing. The developer subsequently uses the $0.90 to finance construction
of the property. The financier yields the difference between what it paid for the tax credit ($0.90) and the reduction in
its tax liability, which equals the tax credit’s face value ($1.00). The financier also often receives tax benefits related to
any tax losses generated through the project’s operating costs, interest on its debt, and deductions such as depreciation.
See CRS In Focus IF11335, The Low-Income Housing Tax Credit: Policy Issues, by Mark P. Keightley; and CRS
Report RS22389, An Introduction to the Low-Income Housing Tax Credit, by Mark P. Keightley.
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 The U.S. Department of Agriculture (USDA) supports multifamily rental housing
in rural areas through programs such as the Section 515 Rural Rental Housing
Loans, a direct lending program for nonprofit or for-profit rural housing
developers, and the Section 538 Guaranteed Rural Rental Housing Program, a
loan guarantee program that focuses on partnerships between the USDA and
qualified lenders.37
 The Federal Home Loan Bank (FHLB) system is a cooperative GSE created to
provide liquidity to its membership, which consists of mortgage lenders—such as
banks, credit unions, and insurance companies—that retain mortgages in their
lending portfolios that are engaged in housing finance and some agricultural and
small business lending. Each FHLB must set aside 10% of net income for
affordable housing and community investment.38 The funds are subsequently
awarded to each FHLB’s member financial institutions as grants on a competitive
basis to support the acquisition, construction, or rehabilitation of affordable
single- and multifamily housing.
The federal government can encourage investments in higher-risk properties in underserved areas
by reducing developers’ financing costs and assuming some or all of the interest rate risks that
otherwise would be borne by lenders.39 Federally backed multifamily mortgages (e.g., purchased
by the GSEs, insured by FHA, or insured or loaned by the USDA) have some terms and features
similar to those of single-family residential mortgages. For example, Fannie Mae and Freddie
Mac offer fixed-rate loans that amortize (i.e., the principal amount declines over the life of the
loan) for up to 30 years, which reduces the monthly payment compared to borrowers with
multifamily mortgages of shorter maturities. FHA-insured multifamily mortgages are fully
amortizing with 40-year maturities, and developers are allowed to refinance an existing
multifamily loan into a lower interest rate.40 Such mortgage terms, which may also allow for
refinancing into lower market interest rates, can help sustain profitability of various multifamily
projects that otherwise might be bypassed due to the higher financing costs.
Commercial Financing: Limitations and Exemptions
The private sector generally provides funding for commercial and higher-end multifamily
properties. By contrast, the federal role in the multifamily and commercial credit markets is
primarily limited to properties that support specific mission goals. The federal presence in the

37 See U.S. Department of Agriculture (USDA), “Multifamily Housing Programs,” at https://www.rd.usda.gov/
programs-services/all-programs/multi-family-housing-programs; USDA, “Multifamily Housing Direct Loans,” at
https://www.rd.usda.gov/programs-services/multi-family-housing-direct-loans; and USDA, “Multifamily Housing
Loan Guarantees,” at https://www.rd.usda.gov/programs-services/multi-family-housing-loan-guarantees.
38 See Federal Housing Finance Agency (FHFA), “FHLB Affordable Housing and Community Development:
Affordable Housing Program,” at https://www.fhfa.gov/PolicyProgramsResearch/Programs/AffordableHousing/Pages/
Affordable-Housing-Home-Loan-Banks.aspx.
39 Commercial banks may be awarded credits stemming from the Community Reinvestment Act (P.L. 95-128, 12
U.S.C. §§2901-2908), which are taken into account when banks apply for charters, branches, mergers, and acquisitions,
among other things. For more information, see CRS Report R43661, The Effectiveness of the Community Reinvestment
Act, by Darryl E. Getter.
40 Ginnie Mae sells, in the form of mortgage-backed securities, the prepayment risk for FHA- and USDA-insured
multifamily mortgages.
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higher-end single-family mortgage market, which includes nonconforming residential and non-
owner occupied and investment mortgages, is also uncommon (see the textbox below).41
Limited Federal Support for Certain Single-Family Mortgages
Federal support for single-family mortgages used to acquire secondary homes or investment rental properties is
limited. FHA’s single-family program is limited to owner-occupied principal residences.42 FHA generally insures
only one principal residential mortgage per borrower. FHA does not insure investment property mortgages.
Likewise, veterans are required to personally occupy their VA-insured properties.43 Federal and federally related
entities provide financial support for condominium projects that are built primarily to house residents, keeping
with their mission goals, rather than for the benefit of investors (landlords). For example, HUD has established an
owner-occupancy range with a floor of 30% and a cap of 75%, allowing for the flexibility to set limits to address
different project circumstances.44 Fannie Mae and Freddie Mac require a minimum of 50% owner occupancy for
condominium projects.45
Although federal intervention in the multifamily mortgage market is conducive to developing
more traditional multifamily structures, the demand for mixed commercial and residential real
estate developments has grown over several decades. Mixed-use real estate typically refers to
three or more uses in the same or adjoining structures to allow residents, tenants, visitors, and
patrons to live, shop, work, and interact in public recreational spaces.46 As construction boomed
in 2017, reaching an all-time high of $1.26 trillion in construction spending, mixed-use walkable
community developments made up a substantial portion of this spending.47 Mixed-use
developments, unlike single-purpose developments, provide more diversification of revenue
streams for investors’ portfolios because tenant diversity reduces the likelihood that they would
simultaneously become delinquent paying rent or vacate.
Because federal intervention is largely stipulated for affordable residential housing, certain
mixed-use properties may pose challenges for some federal entities to provide financial support.

41 Nonconforming mortgages exceed the conforming loan limit, which is the maximum mortgage amount that Fannie
Mae’s and Freddie Mac’s charters allow them to purchase. The conforming loan limit is adjusted annually.
42 See HUD, Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans Handbook
(4155.1), Chapter 4, Section B, at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/
4155.1.
43 See VA, Lenders Handbook: VA Pamphlet 26-7, Chapter 3, at https://benefits.va.gov/warms/pam26_7.asp.
44 See HUD, “Project Approval for Single-Family Condominiums,” 84 Federal Register 41846-41877, August 15,
2019. The Housing Opportunity Through Modernization Act (HOTMA; P.L. 114-201, 130 Stat. 782) required FHA to
establish an owner-occupancy requirement by October 27, 2016. Prior to 2008, FHA required the owner-occupancy
rate to be as high as 80%; the rate was lowered after the passage of P.L. 110-289. See FHA Mortgagee Letter 2016-15,
October 23, 2016, at https://www.hud.gov/sites/documents/16-15ML.PDF. The current floor was set to accommodate
newly constructed projects in which units have not been sold. The cap, however, was set to limit the credit risk to the
Mutual Mortgage Insurance Fund (MMIF), which holds the proceeds collected in the form of insurance premiums that
are used to reimburse lenders after defaults on FHA-insured single-family mortgages. If HUD determines that a lower
owner-occupancy rate is causing distress to the MMIF, then it will raise the requirement for certain projects closer to
the 75% cap. For more information about the MMIF, see CRS Report R42875, FHA Single-Family Mortgage
Insurance: Financial Status of the Mutual Mortgage Insurance Fund (MMI Fund), by Katie Jones.
45 See Fannie Mae, Fannie Mae Selling Guide, at https://singlefamily.fanniemae.com/media/21821/display; and
Freddie Mac, Freddie Mac Single-Family Seller/Servicer Guide PDF, at https://guide.freddiemac.com/ci/okcsFattach/
get/1002095_2.
46 See Adam Ducker, “How to Invest in Mixed-Use Real Estate Projects,” Real Assets Adviser, vol. 5, no. 1 (January 1,
2018), at https://irei.com/publications/article/invest-mixed-use-real-estate-projects/; and Federal Reserve Bank of
Minneapolis, What Does “Mixed-Use Development” Mean? December 1, 1998, at https://www.minneapolisfed.org/
article/1998/what-does-mixeduse-development-mean.
47 See Adam Robinson, “Why Is Mixed-Use the Newest Gem in U.S. Development?” National Real Estate Investor,
May 3, 2018, at https://www.nreionline.com/development/why-mixed-use-newest-gem-us-development.
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For example, a horizontal mixed-use arrangement consists of multiple buildings each with a
single use.48 Horizontal mixed-use developments may be easier for federal entities to provide
financial support because many multifamily structures can be isolated from the other adjoining
commercial structures. By contrast, a vertical mixed-use structure combines different uses in the
same building, such as a storefront on the ground level and apartment units above. For vertical
property arrangements, it may become more difficult to determine what percentage of federal
financial support is being applied to finance affordable housing versus commercial space.
The restrictions on financing commercial and other nonresidential spaces vary by type of federal
entity, as summarized below.
 By their federal charters, Fannie Mae and Freddie Mac are not authorized to
receive cash flows from mixed-properties mortgages, thus limiting their
purchases of commercial or multifamily mortgages with a large percentage of
commercial or nonresidential space.49 For this reason, certain older (Class C)
small-unit (typically 5-50 units) properties, usually eligible for GSE mortgages,
may occasionally conflict with their multifamily mission requirements and
commercial lending restrictions when designed for vertical mixed-use with one
or more noncontiguous commercial components.50 In response, Fannie Mae’s and
Freddie Mac’s guidelines currently cap the amount of space that a project may
use for commercial or other nonresidential purposes to 35%.51
 HUD established a range—a floor of 25% and a cap of 55%—for the percentage
of space that a mixed-use property development can allocate for commercial or
other nonresidential uses and still be eligible for mortgage insurance.52 The
Housing Opportunity Through Modernization Act (HOTMA; P.L. 114-201, 130
Stat. 782) gives HUD greater flexibility (than that of the GSEs) to set higher
commercial and nonresidential caps as long as it considers the prevailing
economic conditions in the locality, property’s location, and number of family

48 See Howard Blackson, Don't Get Mixed Up on Mixed-Use, PlaceMakers, PlaceShakers and Newsmakers, April 4,
2013, at http://www.placemakers.com/2013/04/04/mixed-up-on-mixed-use/.
49 In the past, the GSEs’ regulator has required them to disinvest from pools that contain both multifamily properties
and nonresidential commercial properties based on permissible activities as described in the Federal Home Loan
Mortgage Corporation Act of 1970 (P.L. 91-351, 84 Stat. 450). See Office of Federal Housing Enterprise Oversight,
Report to Congress, June 16, 2006, at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/
OFHEO_Report_Congress-2006.pdf; and John Zipperer, “Fannie, Freddie Have Limited Appetite For Mixed-Use,”
Affordable Housing Finance, January 1, 2006, at https://www.housingfinance.com/policy-legislation/fannie-freddie-
have-limited-appetite-for-mixed-use_o.
50 The GSEs’ multifamily mortgage products used to provide financing for small-unit properties (e.g., 5-50 units)
arguably fills a credit market gap that exists because private-sector lenders are unwilling to assume the credit risk for a
property that may not generate a sufficient volume of rental income. See Philip Langdon, “Yes, You CAN Finance
Mixed-Use Development,” Public Square—Congress for the New Urbanism, July 31, 2017, at https://www.cnu.org/
publicsquare/2017/07/31/yes-you-can-finance-mixed-use-development; “Freddie Mac Small Balance Multifamily
Loans,” Multifamily Loans—Capital Markets Advisors, at https://www.multifamily.loans/freddie-mac-small-balance-
apartment-loans; and “Optigo Small Balance Loans Program,” Freddie Mac Multifamily, at https://mf.freddiemac.com/
product/sbl.html.
51 See Fannie Mae, Fannie Mae Selling Guide, at https://singlefamily.fanniemae.com/media/21821/display; and
Freddie Mac, Freddie Mac Single-Family Seller/Servicer Guide PDF, at https://guide.freddiemac.com/ci/okcsFattach/
get/1002095_2.
52 See HUD, “Project Approval for Single-Family Condominiums,” 84 Federal Register 41846-41877, August 15,
2019.
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units in the project. For this reason, HUD stated that it established a cap of 55%
to accommodate more mixed-use developments.
 The USDA’s Rural Business Cooperative Service Agency has the authority to
insure commercial loans to finance private agriculturally related businesses
located in rural areas, among other restrictions.53 In addition, the Farm Credit
System is another GSE authorized to provide a secondary market for agribusiness
real estate mortgage loans, rural housing loans, and rural cooperative loans.54
These exemptions address the difficulty that agricultural commercial businesses
may encounter while trying to borrow under certain circumstances when lenders
face greater challenges predicting the potential revenues that certain collateral
(i.e., agricultural products) could generate.55
As mixed-use development growth trends continue, the GSEs, FHA, and other federal entities
arguably may need to periodically evaluate the extent to which their federal commercial lending
restrictions may affect their ability to achieve affordable housing objectives.
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

53 The Consolidated Farm and Rural Development Act of 1972 (P.L. 92-419) authorized the Business and Industry
(B&I) Guaranteed Loan Program. See Department of Agriculture: Rural Business-Cooperative Service and Rural
Utilities Service, “Guaranteed Loanmaking and Servicing Regulations,” 81 Federal Register 35984-36027, June 3,
2016; and USDA, Business & Industry Loan Guarantees, at https://www.rd.usda.gov/programs-services/business-
industry-loan-guarantees.
54 See Farm Credit Administration, at https://www.fca.gov/.
55 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.
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, “Defining Housing Affordability,” HUD USER, PD&R Edge, August 14, 2017, https://www.huduser.gov/
portal/pdredge/pdr-edge-featd-article-081417.html.
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-Center-
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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

Community-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 For more information, see Tanya Zahalak, Multifmaily Economic and Market Commentary, Fannie Mae, February
2020, https://www.fanniemae.com/media/33271/display.
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-realpage-
class-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
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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
Given the difficulty of 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 The 117th Congress considered measures to increase
incentives to develop affordable housing.
 On December 29, 2022, Congress passed H.R. 2617, which included some
provisions from the Yes In My Back Yard Act (H.R. 3198 and S. 1614), which
would have established a competitive grant program to be administered by HUD.
The provisions would have required state and local governments that apply for
federal housing development funds through the Community Development Block
Grant (CDBG) program to develop policies to improve inclusionary zoning
practices and reduce regulatory costs and fees for developers, thus reducing
obstacles to the production of affordable housing.72
 The 117th Congress also debated modifications to the LIHTC program that would
have expanded financial support for affordable housing investments. Those
provisions may be reintroduced in the 118th Congress.73

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://archives.hud.gov/news/2019/
pr19-014.cfm.
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 Brian Schatz, “Schatz Secures $85 Million to Address National Housing Crisis, Help Build More Affordable
Housing,” press release, December 20, 2022, at https://www.schatz.senate.gov/news/press-releases/-schatz-secures-85-
million-to-address-national-housing-crisis-help-build-more-affordable-housing; and Yonah Freemark, “How Federal
Policymakers Can Promote Affordable Housing Production in Exclusionary Communities,” Urban Institute, January
20, 2023, at https://www.urban.org/urban-wire/how-federal-policymakers-can-promote-affordable-housing-production-
exclusionary. For more information about the CDBG program, see CRS Report R43520, Community Development
Block Grants and Related Programs: A Primer, by Joseph V. Jaroscak.
73 For more information, see CRS Insight IN12070, The Low-Income Housing Tax Credit: Lowering the 50% Bond
Threshold to 25%, by Mark P. Keightley.
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Some Factors Arguably Influencing Multifamily Investment Decisions
The bul ets 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 col ected 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 mixed-
use 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
ful y 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
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.

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-community-
why-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; Michael Feinberg, Rural America Is Losing Affordable Rental
Housing at an Alarming Rate, Housing Assistance Council, March 2, 2022, https://ruralhome.org/wp-content/uploads/
2022/03/rural_research_brief_usda_rural_rental_housing.pdf; and CRS Report RL31837, An Overview of USDA Rural
Development Programs, by Tadlock Cowan.
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Multifamily Housing Finance and Selected Policy Issues

 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 K-
Deals), 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

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-Report-
FINAL-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/sites/g/files/koqyhd191/files/migrated-files/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 K-
Deals, 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
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Multifamily Housing Finance and Selected Policy Issues

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, initially to reduce
financial risks while under conservatorship and more recently to sharpen the focus on mission
goals. 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 In 2016, FHFA began specifying the types of multifamily loans that would
count toward the annual caps to retain the GSEs’ focus on mission goals. Furthermore, 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 other words, the GSEs’ multifamily programs have been
tailored 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 might be willing to originate.93
The GSEs must still satisfy their annual mission-driven goals, which are also established by
FHFA.94 The FHFA establishes three multifamily housing mission-driven goals for the GSEs with
a benchmark amount of rental property purchases. A benchmark goal is established for a low-
income family, defined as having an income of less than or equal to 80% of area median income
(AMI);95 for a very low-income family, defined as having an income of no greater than 50% of
AMI; and for small multifamily properties, defined as a property with five units to 50 units. FHFA

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-Shrinking-
Role-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 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. §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.
§§1451, 1716 note.
94 The GSEs’ primary regulator is required by the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (P.L. 102-550, title XIII, §1302, October 28, 1992, 106 Stat. 3941) to establish annual housing goals for
mortgages purchased by the GSEs. See FHFA, “Federal Housing Finance Agency Charter: Federal Housing Enterprises
Financial Safety and Soundness Act of 1992,” at https://www.fhfa.gov/Government/Documents/Federal-Housing-
Enterprises-Financial-Safety-and-Soundness-Act.pdf.
95 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.
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previously stated these goals in terms of thousands of rental units. However, it has made revisions
to this framework. On December 14, 2022, FHFA finalized a rule to establish the benchmark
levels for multifamily housing goals using a new percentage-based methodology.96 The three
subgoals will each be established as a percentage of the total number of affordable multifamily
properties financed by the GSEs each year. Because new developments may occur over the period
that can increase the infeasibility to meet a housing goal defined in terms of units, the percentage-
based methodology lessens the need to amend the benchmarks after publication of the final rule.
The FHFA also provided an updated comprehensive definition of mission-driven multifamily
purchases.97 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.98
For calendar year 2023, the FHFA has established the multifamily volume caps for both Fannie
Mae and Freddie Mac at $75 billion each, for a total of $150 billion.99 At least 50% of the
multifamily business must be mission driven according to the definitions established by the
FHFA.100 The FHFA established three multifamily housing mission-driven goals for the GSEs’
2023-2024 purchases:101
1. The annual benchmark percent of all goal-eligible units in multifamily properties
financed by mortgage purchases by the GSEs that would be affordable for low-
income (less than or equal to 80% of AMI) families is set at 61%.
2. The annual benchmark percent of all goal-eligible units in multifamily properties
financed by mortgage purchases by the GSEs that would be affordable for very
low-income (of no greater than 50% of AMI) families is set at 12%.
3. The annual benchmark percent of all goal-eligible units in multifamily properties
financed by mortgage purchases by the GSEs that would be considered small
multifamily properties affordable to low-income families is set at 2.5%.
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.102 From an economics viewpoint, however, a lending cap arguably

96 FHFA, “FHFA Finalizes 2023-2024 Multifamily Housing Goals for Fannie Mae and Freddie Mac,” press release,
December 14, 2022, at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Finalizes-2023-2024-Multifamily-
Housing-Goals-for-Fannie-Mae-and-Freddie-Mac.aspx.
97 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.
98 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.
99 See FHFA, “Fact Sheet: 2023 Multifamily Caps for Fannie Mae and Freddie Mac,” at https://www.fhfa.gov/Media/
PublicAffairs/PublicAffairsDocuments/2023-Multifamily-Caps-Factsheet.pdf.
100 See FHFA, “Appendix A: Multifamily Definitions,” at https://www.fhfa.gov/Media/PublicAffairs/
PublicAffairsDocuments/2023-Appendix-A-11102022.pdf.
101 See FHFA, “2023-2024 Multifamily Enterprise Housing Goals,” 87 Federal Register 78837-78846, December 23,
2022.
102 See FHFA, “Fannie Mae & Freddie Mac Multifamily Businesses,” at https://www.fhfa.gov/
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Multifamily Housing Finance and Selected Policy Issues

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.103 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.104 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.105 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.106
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

PolicyProgramsResearch/Policy/Pages/Reducing-Fannie-Mae—Freddie-Mac-Multifamily-Businesses.aspx.
103 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://newslink.mba.org/mba-
newslinks/2019/september/mba-newslink-tuesday-9-17-19/mba-survey-life-insurance-cos-could-fund-additional-10b-
in-multifamily-lending-in-2020-2/.
104 See CRS Report R45878, Small Business Credit Markets and Selected Policy Issues, by Darryl E. Getter.
105 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.
106 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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Multifamily Housing Finance and Selected Policy Issues

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.

Author Information

Darryl E. Getter

Specialist in Financial Economics

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