FEDERAL HOUSING FINANCE BOARD

Affordable Housing Program Regulation Finalized

After extensive outreach and deliberation, the Finance Board published a revision to the Affordable Housing Program (AHP) regulation. Originally proposed in January 1994, and then completely redrafted and published for comment in November 1996, the final rule was published in the Federal Register on August 4, 1997. The regulation takes effect January 1, 1998, and its provisions will apply to all existing projects.

The changes are about keeping the program flexible, District-friendly, and providing choice for the Federal home Loan Banks. Among the significant revisions to the AHP are:

1. the transfer of approval authority for AHP applications from the Finance Board to the FHLBanks;
2. modification of the competitive scoring process;
3. the establishment of specific standards and retention periods for monitoring;
4. clarification and expansion of the types of remedies available in the event of noncompliance.

FHLBanks may allocate a portion of their AHP funds through homeownership set-asides and will award funds that are not set aside through a competitive process. Each FHLBank’s board of directors is required to adopt a written implementation plan for competitive and set-aside funds. The plan should set forth: the applicable median income standards to be used; the requirements for homeownership set-aside programs; the Bank’s project feasibility guidelines; the schedule for AHP funding periods; any additional District eligibility requirements; scoring guidelines; time limits on use of subsidies; procedures for verification of compliance, and monitoring procedures. These plans are available to the public upon request and will provide the basis for Finance Board examinations.

Homeownership Set-asides

The regulation increases the amount that FHLBanks, after consultation with their Advisory Councils, can reserve for homeownership set-aside programs to the greater of $1.5 million or 15% of their annual AHP contribution. It also increases the amount of set-aside funds that may be allocated per household from the current $5,000 to $10,000 in order to support housing in high cost areas. Funds may be used for downpayments, closing costs, counseling or rehabilitation of a low- or moderate-income household’s primary residence. Participating families must also complete a counseling program.

Advisory Councils

The rule extends the term of Advisory Council members from two to three years and imposes a maximum limit of no more than three consecutive terms. It also provides that representatives of one type of organization shall not constitute an undue proportion of the membership and that the Councils will have diverse membership that reflects community expertise and interests.

Feasibility - The regulation provides that a project’s estimated uses of funds must equal its estimated sources of funds and that costs must be reasonable and customary in accordance with the FHLBank’s project feasibility guidelines. An FHLBank may obtain Finance Board review and approval of its initial guidelines.

Timing - AHP subsidies must be drawn down or used by a project to procure other financing within 12 months of approval of the AHP application.

Counseling costs - Competitive AHP funds may be used to pay for counseling costs where costs are incurred in conjunction with the actual purchase of an AHP-assisted unit and the cost of the counseling has not been covered by another source.

Refinancing - Any equity proceeds obtained from refinancing single family or multifamily mortgages must be used to purchase, construct, or rehabilitate AHP-eligible housing.

Retention - Owner-occupied projects are subject to 5-year retention agreements and rental projects to 15-year agreements.

District Eligibility Requirements - The rule gives FHLBanks the discretion to adopt one or more of the following additional eligibility requirements: a limit on the amount of AHP subsidy available to each member per year, or to each member, each project or each project unit in a single funding period; a requirement that the project be located within the Bank’s District; or a requirement that the member has made use of a credit product, other than AHP or CIP, offered by the Bank within the previous 12 months.

The new scoring criteria are designed to increase program simplicity and to give FHLBanks more flexibility. The rule establishes nine scoring criteria categories for a total of 100 points. Two of the criteria are District Priorities established by each FHLBank. The first District Priority can be based on one or more of the following: special needs, community development, first-time homebuyers, member financial participation, disaster areas, rural, urban, economic diversity, fair housing remedies, community involvement, lender consortia, and in-District projects. The second priority must meet a housing need recommended by the Advisory Council and adopted by the Bank.

.

In addition to the two District priorities, the regulation establishes the following seven scoring criteria which include, with some modifications, many from the previous rule:

• Targeting

• Use of donated government-owned or other properties.

• Sponsorship by a not-for-profit organization or government entity.
• Housing for homeless households
• AHP Subsidy-per-unit.
• Promotion of Empowerment
• Stability

At least five points are to be allocated to each category except targeting which must receive 20 points. The goal of the targeting criteria is to support mixed-income housing. An application for rental housing will receive the maximum number of points if 60 percent or more of the units are reserved for occupancy by households with incomes at or below 50 percent of the median income. Applications for owner-occupied housing shall be awarded points based on the percentage of units provided to households with income at or below 80 percent of the median.

FHLBanks may modify the terms of approved applications under certain circumstances if there is a change in the project that materially affects the original score and approval. Only prior to final disbursement from all funding sources may a Bank’s board increase the amount of AHP subsidy through a modification.

Monitoring

The rule divides monitoring responsibilities into initial and long-term monitoring requirements. It spells out which party -- sponsor, member, FHLBank -- is responsible for which aspect of the monitoring and in many cases, allows the Banks to rely on other entities to conduct monitoring.

During construction or rehabilitation, members and sponsors are required to report semi-annually on the project’s progress. For owner-occupied projects, within one year after disbursement members must certify that subsidies have been used according to the AHP application and that the units are subject to deed restrictions.

Within one year of receiving certifications, FHLBanks must sample projects/units to determine that: the incomes of the households in the AHP-assisted units did not exceed levels committed to in the AHP application; the subsidies were necessary and were used for eligible purposes; costs were reasonable, and AHP-assisted units are subject to a retention mechanism.

For rental projects, during construction or rehabilitation, members and owners must report semi-annually on the project’s progress. Within one year of completion, owners must: certify that services and activities have been provided; provide a list of actual tenant rents and incomes and certify that they are accurate; certify that the units are habitable (taking into account local health and safety and building codes) and maintain documentation on tenants’ rents and incomes. Members, on the other hand, must review all documentation and certify to the Bank that: the project meets its income targeting commitments, the project is habitable and that rents do not exceed maximum levels.

For their part, FHLBanks are to determine that: the above requirements have been implemented; services and activities committed to in the application have been provided; subsidies were necessary and used for eligible purposes, and costs were reasonable. For rental projects receiving Low Income Housing Tax Credits, FHLBanks may rely on monitoring by housing credit agencies, under certain circumstances outlined in the rule.

The rule clarifies the duties of FHLBanks, members, project sponsors, and project owners to recover and return to the AHP those subsidies that are not used in compliance with AHP requirements.

While the regulation does not dictate the specifics, it does require FHLBanks to have agreements in place to ensure subsidy pass-through, eligible use of subsidy in accordance with the application, recovery of subsidies in case of noncompliance and effective project monitoring. The regulation also discusses special provisions for the use of subsidized advances and direct subsidies as they relate to retention agreements and the transfer of AHP-obligations to another member.

The regulation includes a number of definitions, which clarify issues raised by the former regulation. For example, to determine median area income for owner-occupied projects, the FHLBanks will now have a choice. They may continue to use HUD’s figures for the area or may use those of the Mortgage Revenue Bond program; the United States Department of Agriculture (USDA); or other reliable federal, state or local standards that have been approved by the Finance Board. Rental housing projects may use HUD’s figures or other reliable Finance Board-approved federal, state or local standards.

Retention periods have been defined as five years from closing for an owner-occupied unit and 15 years from the date of project completion for rental projects. The definition of sponsor now requires not-for-profit organizations or public entities to have an ownership interest (including any partnership interest) in a rental project or to be integrally involved in owner-occupied projects.

For further information about any aspect of this new rule please contact Richard Tucker at the Finance Board (202/408-2848).