What Freddie Mac is Doing About the Rental Affordability Crisis
Read your local newspaper or visit any social media platform and you’ll hear countless stories of families under pressure from climbing prices and wages that just don’t keep up. Rents, for example, which fell in some markets during the pandemic, rose on average nearly 10% last year, and Freddie Mac’s Multifamily Outlook shows that we’re likely to see an average of a 4% increase in 2022.
What we are witnessing is the pairing of new inflationary pressures with a long-run supply shortage in multifamily housing. Freddie Mac has raised concerns about this for more than a decade. Making matters worse is an even more pronounced shortage in single-family housing, where inventories are at all-time lows and prices are at all-time highs. In short, people have few good options when the cost of their housing goes up.
In 2019, the last year for which we presently have good data, about half of renters were already cost burdened, meaning they spent 30% or more of their income on rent. Worse, nearly a quarter were severely cost burdened, spending at least half their income on rent. Imagine the pressure yet another rent hike puts on a family’s budget and what it means for someone working to make ends meet. Or consider the added commuting stress and diminished time with family when forced to move further outside of town. In many cases, renters seek out less expensive housing, which may not meet their needs.
This crisis is the fundamental challenge confronting the rental housing markets, and as a leader in multifamily housing with a very strong commitment to our mission, Freddie Mac is committed to doing more. Here’s what we’ve done so far:
First, we are the market leader in financing what we call “Targeted Affordable Housing,” or properties that are subsidized or rent restricted based on local, state, or federal government programs. Freddie Mac alone has purchased $60 billion of loans to support financing for these highly affordable properties since 2015. Together, the agencies dominate this space. Our indispensable lending is often the glue that holds the most affordable part of the market together. Many housing transactions that involve multiple sources of state, local, federal, nonprofit and private sector financing simply wouldn’t pencil out absent our financing and specialized skills in this area.
Second, we are leading the market in supporting workforce-affordable housing properties that are affordable at moderate incomes. We measure this by calculating what rents are for a property in comparison to the median income where a property is located. An affordable rent is considered to be no greater than 30% of a person’s income.
Since 2015, about 70% of the units we financed through loan purchases were affordable at 80% of area median income (AMI) and nearly 95% were affordable at 120% of AMI. Rents at these properties are generally not subsidized or subject to government rent and income restrictions. They are subject to market pressures, but generally represent Class B and Class C properties that will remain affordable by comparison with newly constructed or luxury properties. And unlike certain market participants that will lend dollars to borrowers based on projected rent increases, Freddie Mac underwrites to the rents in place at the time a loan is originated. As a result, no rent increases are necessary in order for the multifamily operator to meet their routine property maintenance and loan obligations.
Third, as the largest secondary market participant, we are doing what we can to address supply. This includes supporting the preservation of existing housing stock and encouraging the development of new units. Since 2018, we have invested nearly $1.7 billion in equity, not debt, to support the creation or rehabilitation of thousands of low-income housing units in the nation’s most underserved communities. We also preserved 60,000 units including 25,000 that are affordable to those with very low incomes through our cash preservation loan.
Separately, we have helped bring tens of thousands of new, affordable housing units online using “forward commitments,” which provide multifamily operators with the ability to lock in financing for affordable housing developments prior to completion of substantial rehabilitation or new construction. This eliminates the risks of changing interest rates, providing certainty that allows many affordable multifamily properties to get off the drawing table. Last year, we supported more than more than 20,000 new units this way.
Finally, Freddie Mac pioneered new, market-based products that provide attractive financing for multifamily operators that agree to maintain affordable rents and provide services to renters, even when there is no regulatory requirement to do so. We’ve purchased more than a billion dollars in loans through our Tenant Advancement and Master Financing Commitments that help prevent rent increases, or in some cases reduce rents from market rate, through the terms of our loan agreements.
Taken together, these efforts are a tremendous force in the market and are helping tens of thousands of households find quality rental housing at an affordable price every year. Yet, they are not in themselves a complete solution.
For that, we have to address the elephant in the room: supply. To broadly take on affordability, there is an unquestioned need for a concerted effort of all housing market participants aimed at increasing the quantity and quality of affordable housing.
As a secondary mortgage market participant, Freddie Mac’s ultimate purpose is to provide affordability, liquidity and therein stability to housing finance. In short, we buy loans. Through that process we broadly encourage and incentivize affordability. We don’t build or run multifamily properties, and we aren’t a legislature that can set housing policy or regulation. We do, however, recognize the need for all these parties to work together on this problem.
Freddie Mac looks forward to doing more to meet this challenge and continuing to responsibly serve our mission of making home possible for more renters across the country.
©2023 by Freddie Mac.
Making Home Possible – and Sustainable
Carol Khalil, Vice President of Corporate Sustainability
Making Good on Our Duty to Serve
Corey Aber, Vice President of Multifamily Mission, Policy and Strategy
Simone Beaty, Senior Director, Product Owner, Single-Family Acquisitions Division