Freddie Mac Offers Cheap Loans to Affordable-Housing Landlords
Using market incentives instead of government subsidies, the initiative could open new ways of creating and maintaining middle-class housing
A new Freddie Mac initiative is using market incentives to persuade real-estate firms to preserve affording housing. PHOTO: ALESSANDRA DA PRA/ASSOCIATED PRESS
May 3, 2018 8:00 a.m. ET
Freddie Mac , the country’s largest backer of apartment loans, will offer low-cost loans to real-estate owners willing to keep their buildings affordable to middle-class families for years to come.
The move could open up a new approach to creating and preserving middle-class housing. It uses market incentives rather than government subsidies to persuade real-estate companies to preserve units for the middle of the rental market, an area of concern for policy makers in recent years.
“The supply of workforce housing is rapidly declining. There’s an urgent need to preserve what’s there and find ways that you can effectively create more,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division.
The initiative will offer lower interest rates to landlords who agree to rent the majority of units in a building at levels affordable to tenants making 80% or less of the area’s median income, a range that typically includes nurses, teachers and police officers. The units must remain affordable for the term of the loan, typically about a decade.
To start, Freddie will back up to $500 million of loans to Bridge Investment Group, a Salt Lake City-based landlord with roughly 30,000 apartments around the country. Bridge has identified 38 metropolitan areas for investment.
Bridge recently closed on its first property for the project, a 352-unit apartment community in the Tampa, Fla., area. Roughly 82% of the units in the building are considered affordable to tenants making 80% or below of the area’s median income, meaning a two-person household that earns about $41,000 or less, according to federal guidelines.
As part of the deal, Bridge will renovate the units and common areas and add a community center and a soccer field.
The Tampa metropolitan area is still relatively affordable, but costs have been rising even as it remains one of the poorest major metros in the country. Average monthly rents increased 1.2% in the first quarter to $1,028, according to Reis Inc., ranking it 11th among 79 major metros for fastest rent growth during the period.
“Players have raised rents to justify returns, and many residents have been priced out” of central areas, said Inna Khidekel, managing director of the capital markets group at Bridge. Now, she said, even many of the suburban areas “are at risk of no longer being affordable.”
Freddie Mac’s apartment lending helps it fulfill a mandate from the Federal Housing Finance Agency to lend to underserved communities, because renters tend to be less wealthy than homeowners. Freddie doesn’t make development loans, but backs loans for purchases of existing buildings.
Roughly two-thirds of the $73 billion of multifamily loans Freddie purchased in 2017 went to apartments affordable to households making less than 80% of the area median income. Still, that is down from three quarters of its loans that went to such units in 2013.
More than 60% of U.S. renters earn less than 80% of the area median income, according to Bridge.
That partly reflects the fact that the vast majority of new apartment construction has been at the high end, catering to a growing pool of affluent, professional renters in urban areas.
Mr. Brickman acknowledged that Freddie normally has no oversight over whether owners will raise rents sharply after the mortgage giant makes its loans. As the top end of the market has become saturated, investors increasingly have been focused on buying midprice buildings, renovating them and raising rents.
“There’s nothing about our typical loan that prevents someone from raising rents,” he said.
This has left middle-income tenants increasingly vulnerable to rising rents. Rents for nonluxury apartments rose 19% over the past five years, according to Reis, and vacancy rates now sit at 3.5%, compared with 6% for luxury units.
Most affordable housing is created using low-income housing tax credits, a program created in the 1980s that gives tax breaks to investors to generate equity for projects. Traditionally, the program has limited the incomes of residents to 60% of the area median income, or those considered lower-income. Changes passed by Congress in March could generate a small number of middle-income units, but the new tax law is expected to diminish the program’s overall effectiveness, according to industry leaders.
One limitation of Freddie Mac’s new initiative is that it will generally only restrict rents, not the income levels of the people who live there—although Bridge has agreed to monitor income levels in the Tampa-area building. In theory, as can happen with rent-controlled units, tenants could become more affluent over time and still hold on to their affordable units.
“If you’re not in some form of a true subsidized program, income verification is impossible,” said Dave Borsos, vice president of capital markets at the National Multifamily Housing Council. “At minimum, you’re still providing a valuable service in terms of keeping your rents at that level.”