Are Certain Federally-Backed Loans Stunting Affordable Housing Growth?


Four years ago, Regional Plan Association argued that outdated requirements in federally-backed multifamily housing loans were impeding construction of badly needed affordable housing in denser, mixed-use settings. The report, The Unintended Consequences of Housing Finance, caught the attention of legislators and housing officials. Our view, that restrictions on the amount of commercial use that could be included in residential buildings were too low and arbitrary, raised concerns in some quarters that loosening the restrictions would cause too many loans to default because commercial projects are on average riskier than residential developments.

We noted that older neighborhoods had been disadvantaged by the restrictions, that these areas offered substantial opportunities for meeting affordable housing needs, and that the perceived risks were not supported by recent studies.  We argued that if the non-residential restrictions were ever justified, the wide-spread revitalization of older neighborhoods driven by current demographic trends called for liberalizing them.

Now, there is concrete evidence that the fears were overblown. As the debate was taking place, one of the federal housing agencies had begun a pilot program offering loans to smaller, mixed-use projects with much higher “caps” on non-residential use (up to 49%) than other federal programs.  Freddie Mac’s Small Balance Loan (SBL) program was soon expanded and has now been operational for five years.  A recent assessment of its accomplishments demonstrates a solid market for these loans and a track record of success by a number of metrics.

Consider what Freddie’s SBL program accomplished from 2014-2019:

  • Securitized 8,500 loans with unpaid principal balance totaling more than $22 billion
  • Supported housing in mixed-use projects in more than 300 metropolitan areas in 49 states
  • Built affordable housing with 94% of SBL business funding homes that are affordable to households at or below median area income, compared to 86% of total Freddie Mac business
  • Demonstrated very strong credit performance, with only $2.3 million in total losses from delinquent loans, representing less than 1 basis point (0.01%) of total issuance

Even with this success, the program is relatively small in the scheme of federal programs supporting affordable housing, and very small relative to all housing loan programs. While there is no guarantee that this success would translate to other programs, there is every reason to think it is only scratching the surface of what could potentially be accomplished.

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