The Federal Housing Finance Agency yesterday released a final rule: Enterprise Duty to Serve Underserved Markets. The rule is a product of the Housing and Economic Recovery Act of 2008 (HERA) creating an amendment to the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. The long-awaited final rule (there have been two separate proposed rules over the years) addresses and implements Fannie Mae’s and Freddie Mac’s duty to serve three specific underserved markets: manufactured housing, rural housing, and preservation of affordable housing. The general structure of the rule is based on a point system for GSE participation in the three underserved markets.

Since going into conservatorship, Fannie and Freddie have been unable to participate as equity investors in the LIHTC market as they once did. While the most recent proposed rule did not directly address whether Fannie and Freddie should be allowed to resume LIHTC investor participation, it did ask several related questions. FHFA received comments on whether the two Enterprises should be allowed to gain credit under the duty to serve point system should they ever resume as LIHTC investors. After considering several viewpoints from comments, FHFA has determined that the Enterprises should only be able to invest in targeted areas mainly two reasons:

  • Certain markets in the country have a healthy LIHTC demand, having avoided any sharp decline in pricing while other parts of the country, particularly rural, greatly lack demand for LIHTC equity investments
  • Rural projects lack economies of scale and profit potential necessary for attracting LIHTC equity investment from large commercial lenders
  • Restricting GSE investment to particular areas prevents distortion of LIHTC equity pricing and pricing out of private investors

The final rule states that Fannie and Freddie are eligible to receive credit towards Duty to Serve requirements for LIHTC investments in rural areas only. FHFA is further considering to what extent serving high-needs rural regions and populations would garner additional credit.

Note, however, the distinction: this final rule states that should the Enterprises ever be permitted to invest in LIHTCs, the investments in rural areas would be eligible to receive Duty to Serve credit. The rule does not permit Fannie and Freddie to actually participate as LIHTC investors. Permission to do that has yet to be granted by FHFA.