Use Housing Finance Agency Reserves for Affordable Homes
Role: Generate Capital
Policy: Use Housing Finance Agency Reserves for Affordable Homes
What are housing finance agency reserves?
Every state has a chartered housing finance agency (HFA) that helps to support the state's goals for developing affordable homes by administering housing programs, issuing bonds to raise funds for affordable homes and allocating federal Low-Income Housing Tax Credits. Some municipalities have also established housing finance agencies that play a similar role at the local level. In the course of their operations, HFAs generate income - typically through the fees charged on outstanding bonds and the spreads between the cost of funds to the HFA and the rates charged to borrowers. This income is generally used to support ongoing program operations and to build reserves that improve the agency's financial strength and bond rating.
[1] State HFA Factbook: 2005 NCSHA Annual Survey Results. Washington, DC: National Council of State Housing Agencies. Table 6: Agency Reserves.
Policy: Use Housing Finance Agency Reserves for Affordable Homes
What are housing finance agency reserves?
Every state has a chartered housing finance agency (HFA) that helps to support the state's goals for developing affordable homes by administering housing programs, issuing bonds to raise funds for affordable homes and allocating federal Low-Income Housing Tax Credits. Some municipalities have also established housing finance agencies that play a similar role at the local level. In the course of their operations, HFAs generate income - typically through the fees charged on outstanding bonds and the spreads between the cost of funds to the HFA and the rates charged to borrowers. This income is generally used to support ongoing program operations and to build reserves that improve the agency's financial strength and bond rating.
What problems are solved by the use of reserves for housing? It is important for HFAs to establish and maintain adequate reserves. These reserves help HFAs to uphold the high bond ratings that enable them to borrow money at lower rates and also provide a buffer against fluctuations in the annual appropriations process. Unfortunately, HFAs that accumulate high levels of reserves also become vulnerable to diversion of these funds by the state or locality for non-housing purposes or for housing-related activities outside of the agencies' authority. In 2005, for example, 10 state HFAs were required to use reserve funds for non-agency purposes. [1] While similar data are not available for local HFAs, it is likely that many experience similar fund transfers. These diversions of funds from the HFA's reserves redirect and deplete resources that could otherwise be available to support affordable homes. By establishing a policy of regularly evaluating their reserves to determine whether funds may be made available to support ongoing HFA housing programs, HFAs can better meet the housing needs of the communities they serve and reduce the chances that HFA income or reserves are diverted for non-housing purposes. Where is the use of HFA reserves most applicable? Some state and local agencies have not yet been in business long enough to build up substantial reserves, and these HFAs may need to focus on building a reserve fund before they can begin allocating reserves for affordable homes. On the other end of the spectrum, agencies that continually see a portion of their reserves diverted to the state General Fund may want to propose ways in which these funds can be utilized to support additional investments in affordable homes. Agencies in between these extremes may wish to regularly consider whether a portion of reserves could be made available for affordable homes without jeopardizing the HFA's bond rating. While there is no single measure that policymakers can use to determine an agency's capacity to allocate additional reserve funds for HFA programs, agencies with low debt-to-equity ratios are more likely to have reserves that could safely be tapped without affecting their bond rating. |
Solutions in Action |
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Photo courtesy of the New York City Housing Development Corporation New York City's innovative Mixed-Income program, also known as 50/30/20, finances developments in which 20 percent of units are rented at affordable rates to low-income families, 30 percent are rented at affordable rates to middle-income families, and the remaining 50 percent are rented at market rates. Funding sources include tax-exempt private activity bonds, Low-Income Housing Tax Credits, and local subsidies in the form of one percent second mortgages. The New York City Housing Development Corporation (HDC) commonly uses its reserves to finance these second mortgages. The Aspen in East Harlem (pictured above), a 234-apartment building that opened in 2004, was financed through this program. As part of the Aspen's financing, HDC used its reserves to provide a second mortgage of $2.75 million. Visit the Gallery to learn more about The Aspen. |
Learn more about use of HFA reserves Go back to learn about other policies that generate capital |
[1] State HFA Factbook: 2005 NCSHA Annual Survey Results. Washington, DC: National Council of State Housing Agencies. Table 6: Agency Reserves.
Role: Generate Capital
Policy: Use Housing Finance Agency Reserves for Affordable Homes
In the course of their operations, state and local Housing Finance Agencies (HFAs) generate income -- typically through the fees charged on outstanding bonds and the spreads between the cost of funds to the HFA and the rates charged to borrowers. This income is generally used to support ongoing program operations and to build reserves that improve the agency's financial strength and bond rating.
There is nothing wrong with the generation of revenue by HFAs. In fact, it is one of their great strengths, as it makes them substantially less vulnerable to the vagaries of the annual appropriations process. Reserves also reduce financing costs by raising bond ratings, and protect against the possibility of losses from bond defaults. Unfortunately, a significant number of state housing finance agencies report that portions of their fiscal reserves are taken by the state for activities unrelated to the agencies' standard housing programs.
Policy: Use Housing Finance Agency Reserves for Affordable Homes
In the course of their operations, state and local Housing Finance Agencies (HFAs) generate income -- typically through the fees charged on outstanding bonds and the spreads between the cost of funds to the HFA and the rates charged to borrowers. This income is generally used to support ongoing program operations and to build reserves that improve the agency's financial strength and bond rating.
There is nothing wrong with the generation of revenue by HFAs. In fact, it is one of their great strengths, as it makes them substantially less vulnerable to the vagaries of the annual appropriations process. Reserves also reduce financing costs by raising bond ratings, and protect against the possibility of losses from bond defaults. Unfortunately, a significant number of state housing finance agencies report that portions of their fiscal reserves are taken by the state for activities unrelated to the agencies' standard housing programs.
| Click on the topic areas below to learn how to ensure that HFA reserves are used for affordable homes: Avoid diversion of HFA reserves or income for non-housing uses Monitor reserve funds to ensure they are used productively Develop a shared understanding of optimal reserve levels |
Role: Generate Capital
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Avoid Diversion of HFA Reserves or Income for Non-Housing Uses
Similarly,
the Virginia Housing Development Authority was asked to purchase a
portfolio of state affordable housing loans, resulting in a transfer of
$41 million to the state general fund and the capitalization of a new
$19 million state revolving loan fund.
In other cases, however, the reserves are diverted for non-housing uses. For example:
In all, 10 state housing finance agencies reported in 2005 that they were required to use fiscal reserves for non-agency purposes: Alaska, Connecticut, Hawaii, Illinois, New Jersey, Rhode Island, South Carolina, Tennessee, Virginia, and Wisconsin. No comparable data are available for local HFAs, though it is likely that similar diversions take place.
The diversion of HFA reserves for non-housing uses is clearly problematic for states and localities experiencing affordable housing challenges, as it depletes funds that could otherwise be available to support affordable homes. Moreover, the very source of HFA reserves are fees and spreads that, while necessary for HFAs' ongoing operations, lead to a reduction in the net availability of bond funds for affordable homes. (That is, if HFAs did not need reserve funds, they could charge less in fees and spreads, freeing up additional funding to cover more of the project's costs and reducing the rent tenants must pay.) At a minimum, therefore, policy-makers should work to ensure that HFA reserves remain dedicated to affordable homes.
HFAs with large reserves need to strike a balance between maintaining their issuer rating and financial position and using reserves or ongoing revenue to expand affordable housing programs. Policymakers should work collaboratively with housing finance agencies in their states and localities to identify optimal reserve levels and determine whether some portion of the agencies' reserves or program revenues can support the jurisdiction's overall plans for increasing the availability of homes affordable to working families.
[1] State HFA Fact Book: 2005 NCSHA Annual Survey Results. 2006. Washington, D.C.: National Council of State Housing Agencies (NCSHA).
[2] Fewer State Housing Finance Agency Raids in 2004 Due to Improving Economic Conditions. August 2004. New York, NY: Moody's Investors Service.
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Avoid Diversion of HFA Reserves or Income for Non-Housing Uses
Photo credit: John Booz, courtesy of Valerie Denney Communications |
A number of HFAs have experienced diversions of funds from their reserves, or from ongoing operating income, to fund the programs of other agencies or to bolster the state General Fund. While the incidence of such diversions has declined somewhat in recent years, due to improved economic conditions for states, such diversions nevertheless continue. Sometimes, the uses for which reserves are diverted are still related to housing. For example, the Oregon Housing and Community Services agency was asked to spend $3.8 million of its reserves to cover a shortfall in the agency's homeless programs, which are usually funded through the state's general fund. |
In other cases, however, the reserves are diverted for non-housing uses. For example:
- The Alaska State Legislature has appropriated approximately $50
million a year from the Housing Finance Corporation's reserves for a
variety of purposes, including water and sewer projects, human services
programs, new university dormitories, and school funding.
- The Hawaii Housing and Community Development Corporation reports that over $200 million has been transferred from its reserves to the state's general fund over the past 15 years.
- Approximately $5 million was transferred from the Illinois Housing Development Agency's Affordable Housing Trust Fund to the state's general revenue fund in 2005.
- The West Virginia Housing Development Fund was asked to fund up to $48 million in economic development projects. [1]
In all, 10 state housing finance agencies reported in 2005 that they were required to use fiscal reserves for non-agency purposes: Alaska, Connecticut, Hawaii, Illinois, New Jersey, Rhode Island, South Carolina, Tennessee, Virginia, and Wisconsin. No comparable data are available for local HFAs, though it is likely that similar diversions take place.
The diversion of HFA reserves for non-housing uses is clearly problematic for states and localities experiencing affordable housing challenges, as it depletes funds that could otherwise be available to support affordable homes. Moreover, the very source of HFA reserves are fees and spreads that, while necessary for HFAs' ongoing operations, lead to a reduction in the net availability of bond funds for affordable homes. (That is, if HFAs did not need reserve funds, they could charge less in fees and spreads, freeing up additional funding to cover more of the project's costs and reducing the rent tenants must pay.) At a minimum, therefore, policy-makers should work to ensure that HFA reserves remain dedicated to affordable homes.
HFAs with large reserves need to strike a balance between maintaining their issuer rating and financial position and using reserves or ongoing revenue to expand affordable housing programs. Policymakers should work collaboratively with housing finance agencies in their states and localities to identify optimal reserve levels and determine whether some portion of the agencies' reserves or program revenues can support the jurisdiction's overall plans for increasing the availability of homes affordable to working families.
| You are currently reading: Avoid diversion of HFA reserves or income for non-housing uses Other pages in this section: Monitor reserve funds to ensure they are used productively Develop a shared understanding of optimal reserve levels |
[1] State HFA Fact Book: 2005 NCSHA Annual Survey Results. 2006. Washington, D.C.: National Council of State Housing Agencies (NCSHA).
[2] Fewer State Housing Finance Agency Raids in 2004 Due to Improving Economic Conditions. August 2004. New York, NY: Moody's Investors Service.
Role: Generate Capital
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Monitor Reserve Funds to Ensure They are Used Productively
New York City announced a 10-year, $7.5 billion plan to address the city's need for affordable homes. The multifaceted plan calls for the preservation of 73,000 affordable homes to benefit 220,000 people, and the development of an additional 92,000 new affordable homes to benefit another 280,000 people. Among other sources of funding, the plan utilizes $540 million in funding from the reserves of the New York City Housing Development Corporation (HDC), a local housing finance agency in New York City. In November 2007, HDC committed another $53 million of its reserves to affordable housing projects.
While there is no one measure that policymakers can use to determine whether a housing finance agency's reserves can be utilized to support additional investments in affordable homes - and some level of trust of housing finance agency staff is essential - one broad measure to consider is the agency's debt-to-equity ratio, which varies significantly from agency to agency.
Agencies with lower debt-to-equity ratios are more likely to have funds that could safely be tapped to support a greater investment in affordable homes without unduly impacting their bond rating (and thus their cost of capital). It is also important to note that most tax-exempt bonds for housing come with credit enhancement from the Federal Housing Administration, Fannie Mae, Freddie Mac or others, which means the bonds can carry a very high rating notwithstanding the finance agency's own general rating.
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Monitor Reserve Funds to Ensure They are Used Productively
New York City announced a 10-year, $7.5 billion plan to address the city's need for affordable homes. The multifaceted plan calls for the preservation of 73,000 affordable homes to benefit 220,000 people, and the development of an additional 92,000 new affordable homes to benefit another 280,000 people. Among other sources of funding, the plan utilizes $540 million in funding from the reserves of the New York City Housing Development Corporation (HDC), a local housing finance agency in New York City. In November 2007, HDC committed another $53 million of its reserves to affordable housing projects.
While there is no one measure that policymakers can use to determine whether a housing finance agency's reserves can be utilized to support additional investments in affordable homes - and some level of trust of housing finance agency staff is essential - one broad measure to consider is the agency's debt-to-equity ratio, which varies significantly from agency to agency.
Agencies with lower debt-to-equity ratios are more likely to have funds that could safely be tapped to support a greater investment in affordable homes without unduly impacting their bond rating (and thus their cost of capital). It is also important to note that most tax-exempt bonds for housing come with credit enhancement from the Federal Housing Administration, Fannie Mae, Freddie Mac or others, which means the bonds can carry a very high rating notwithstanding the finance agency's own general rating.
| You are currently reading: Monitor reserve funds to ensure they are used productively Other pages in this section: Avoid diversion of HFA reserves or income for non-housing uses Develop a shared understanding of optimal reserve levels |
Role: Generate Capital
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Develop a Shared Understanding of Optimal Reserve Levels
This dialogue can build productive working relationships across government branches, helping legislators and the executive branch better understand the necessary reserve levels, the negative effects of diverting HFA reserves for non-housing uses, and when HFA reserve funds may be available to expand affordable housing programs.
An example from Iowa illustrates how increasing cooperation between state legislatures and state housing finance agencies can prevent the raiding of HFA reserves for non-housing purposes. In 2004, Iowa faced a shortfall in Medicaid funding and considered appropriating $15 million of the Iowa Finance Authority's (IFA) reserves to fill this gap. Working with key legislators, IFA was able to demonstrate the negative effect this transfer would have on its ability to leverage millions of dollars in bonds for affordable housing. To further build understanding, IFA provided information on the impact of its current services, including associated cost savings, and educated the legislature about the remaining unmet affordable housing needs within the state. As a result, the legislature not only declined to raid IFA's reserves, but also unanimously approved an additional appropriation of $7 million to allow IFA to establish two revolving loan funds financing supportive housing for seniors and people with disabilities. [1]
The Pennsylvania Housing Finance Agency (PHFA) has tapped into its reserve funds for affordable housing each year since 1987. In 2003, PHFA committed $15 million of its reserves for the Homeownership Choice Program, which finances new construction of single-family homes in distressed neighborhoods. This program both revitalizes communities and provides affordable homeownership opportunities. [2] PHFA also uses reserve funds to provide downpayment assistance to low-to-moderate-income homebuyers, and to fund affordable rental homes for people with SSI-income levels. [3]
[1] Reversal of Fortune: From Scoop to Support. [PDF] Iowa Finance Authority 2004 NCSHA award submission.
[2] Second Set of 'Economic Stimulus' Programs Passed. May 1, 2004. Northeast Pennsylvania Business Journal.
[3] Three-Year OLMSTEAD V L.C. Progress Report. 2002. Washington, DC: National Association of Protection and Advocacy Systems, Inc.
Policy: Use Housing Finance Agency Reserves for Affordable Homes
Develop a Shared Understanding of Optimal Reserve Levels
Photo credit: Todd France Photography |
Legislatures and Executive Branch officials should work collaboratively with HFAs to reach a consensus on optimal reserve levels and the appropriate uses for funds that may exceed those levels. As part of this process, it may be useful to regularly review the current level of HFA reserves, how those reserves have been used and have changed from the prior year, and how the HFA's reserves compare with those of other HFAs. HFAs should be invited to identify the optimal level of reserves needed to ensure good bond ratings and support the HFA's ongoing operations. To the extent reserves reach and exceed this optimal level, an opportunity may be available to channel additional annual income into affordable housing programs. |
An example from Iowa illustrates how increasing cooperation between state legislatures and state housing finance agencies can prevent the raiding of HFA reserves for non-housing purposes. In 2004, Iowa faced a shortfall in Medicaid funding and considered appropriating $15 million of the Iowa Finance Authority's (IFA) reserves to fill this gap. Working with key legislators, IFA was able to demonstrate the negative effect this transfer would have on its ability to leverage millions of dollars in bonds for affordable housing. To further build understanding, IFA provided information on the impact of its current services, including associated cost savings, and educated the legislature about the remaining unmet affordable housing needs within the state. As a result, the legislature not only declined to raid IFA's reserves, but also unanimously approved an additional appropriation of $7 million to allow IFA to establish two revolving loan funds financing supportive housing for seniors and people with disabilities. [1]
The Pennsylvania Housing Finance Agency (PHFA) has tapped into its reserve funds for affordable housing each year since 1987. In 2003, PHFA committed $15 million of its reserves for the Homeownership Choice Program, which finances new construction of single-family homes in distressed neighborhoods. This program both revitalizes communities and provides affordable homeownership opportunities. [2] PHFA also uses reserve funds to provide downpayment assistance to low-to-moderate-income homebuyers, and to fund affordable rental homes for people with SSI-income levels. [3]
| You are currently reading: Develop a shared understanding of optimal reserve levels Other pages in this section: Avoid diversion of HFA reserves or income for non-housing uses Monitor reserve funds to ensure they are used productively |
[1] Reversal of Fortune: From Scoop to Support. [PDF] Iowa Finance Authority 2004 NCSHA award submission.
[2] Second Set of 'Economic Stimulus' Programs Passed. May 1, 2004. Northeast Pennsylvania Business Journal.
[3] Three-Year OLMSTEAD V L.C. Progress Report. 2002. Washington, DC: National Association of Protection and Advocacy Systems, Inc.