Freddie Mac Social Impact Bond Program to Help Fund Affordable Housing

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The federal role in providing affordable housing takes various forms, but is mainly focused on subsidies or underwriting for private sector housing. Freddie Mac, the government-sponsored enterprise that purchases mortgage shares and pools them for resale as security investments, is a major conduit for this. In September, the corporation announced a new Social Impact Bond (SIB) product that focuses on multifamily properties, using the proceeds from loans to finance affordable housing.

The SIB program will, according to a report from Freddie’s multifamily division, direct proceeds either to Community Development Financial Institutions, Housing Finance Agencies or Small Financial Institutions operating in underserved markets. The financing loans will go for, among other things, low-income housing, transitional housing and Rental Assistance Demonstration conversions of public housing. Freddie hopes to use this new program to expand on its portfolio, which as of last year included “$271 billion of multifamily guarantees, $30 billion of unsecuritized loans, [and] more than $5 billion of multi-family mortgage-related securities.” The initiative will target 4,500 units and intends for 2,900 of them to be available for renters earning 50 percent or less of a region’s Area Median Income (AMI).

The SIB concept is not new – the process became common in the last decade, and is thought to be a more market-oriented approach to philanthropy, building an incentive structure around good social outcomes.

The SIB model has been used for affordable housing projects at the state and local levels, particularly supportive housing for the homeless. A San Francisco Public Press report studied examples in California, Ohio, Massachusetts and Colorado. The policies are generally more specific than the SIB program Freddie is unveiling, and funds and returns are tied to individuals, not projects. For instance, an SIB program in Santa Clara County, CA, delivers returns of two to five percent to investors when clients are able to successfully remain in housing for three months or longer, and becomes incrementally higher if clients avoid criminal activity. An initiative in Denver called the Housing to Health Initiative also conditions payouts on whether or not formerly homeless individuals stay out of jail and remain housed for a year. In each case, financiers work with specific housing and service providers, such as the Colorado Coalition for the Homeless.

SIBs generally deliver anticipated returns, according to a Brookings Institute brief. The majority of bond groups measured by researchers delivered a repayment plus profit to investors. There was no specific housing category, but bonds categorized as social welfare were the second highest-performing of SIBs, with $88.8 million in payouts.

This will be among Freddie’s first forays into the SIB concept; previously it introduced bond revenue as a mechanism for financing projects that met environmental impact reduction goals. The bonds in this case will be used to underwrite affordable housing, which could have a tenuous future due to the COVID-19 pandemic. While the housing market overall has performed surprisingly well despite the recession, affordable projects depend on State and Federal LIHTC and other programs that may take cuts as a result of tax revenue shortfalls.

The SIB program is geared toward multifamily rental properties (defined as those with five or more units). It also requires that eligible properties prioritize renting to prospective tenants who are in poverty and earning below 30 percent of the AMI of a given jurisdiction. Projects which set aside 20 percent of units for transitional tenants are also eligible, as are housing projects available to 60 percent AMI earners.

In fact, the program appears to be targeted at developments and partner institutions, which take a broad-based approach to improving economic opportunity in their service areas, as well as banks, which operate at local levels. For instance, eligible financing entities include Community Development Financing Institutions, which “[provide] access to financial products and services for local residents and businesses” in low-income jurisdictions and financial institutions, including credit unions, which have fewer than $10 billion in assets and operate in markets with few lenders. The program will aid minority and women-owned borrowing institutions, which finance or own affordable properties.

This article had additional reporting from Market Urbanism Report researcher Ethan Finlan.