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Fannie Mae and California Housing Finance Agency Announce Successful Preservation of Affordable Rental Housing in California; Innovative Financing Structure Preserves Over 23,300 Section 236 Rental Units

Fannie Mae and California Housing Finance Agency Announce Successful Preservation of Affordable Rental Housing in California; Innovative Financing Structure Preserves Over 23,300 Section 236 Rental Units

Published 09-18-00

Submitted by Fannie Mae

A groundbreaking bond transaction between Fannie Mae and the California Housing Finance Agency (CHFA) has laid the groundwork for the successful preservation of more than 23,300 units of affordable rental housing units in 279 separate locations throughout California that could be at risk of converting to market-rate housing. Under the terms of the financing, Fannie Mae sold approximately $274 million of Section 236 mortgages to CHFA, providing CHFA the opportunity to preserve the units as affordable rental housing.

The Section 236 mortgage assistance program was created by the Department of Housing and Urban Development (HUD) in 1968 to help rental developments maintain affordable rental prices for very low-income tenants. However, clauses in the Section 236 mortgage allow for property owners to prepay the mortgage after 20 years, thereby ending affordability assistance for the property and a loss of HUD Section 8 rental assistance for many of the individual tenants. These property owners can then convert once-affordable rental units to market-rate housing, which could result in dramatic increases of rent in hundreds of communities.

HUD financed approximately 600,000 units of affordable housing under the Section 236 program across the nation. In California, some 59,000 units were built under Section 236 and related programs, of which more than 43,000 units are at risk of becoming market-rate due to prepayment clauses.

"In an effort to preserve these affordable rental housing units in California, Fannie Mae worked with one of our largest HFA customers to develop an innovative financing structure to give us the opportunity to save over 23,300 units that were at risk of converting to market rental rates," said Ted Chandler, vice president of housing and community development in Fannie Mae’s Western Regional Office headquartered in Pasadena, California. "As a result of this transaction, CHFA is now in a position to negotiate a refinancing of these at-risk properties with their owners and preserve the properties’ long term affordability."

Under this first-ever transaction, Fannie Mae financed CHFA’s purchase of the Section 236 mortgages from Fannie Mae’s portfolio by purchasing $274 million in taxable bonds issued by the state finance agency. The cash flow from the mortgages will be used to pay the interest on the bonds. The bonds are structured as monthly-pay, pass-through bonds and mirror all the characteristics of the underlying mortgage collateral.

"This is truly a first-of-its kind transaction that allows the characteristics of the mortgage portfolio to remain unchanged in the form of the bonds," said Jack Gallagher, vice president of public finance for Fannie Mae. "Fannie Mae and CHFA worked together to come up with a creative financing solution that has the potential to make a positive difference for thousands of families. We are very pleased to be able to offer a solution to this problem of expiring rental subsidies."

The cash flow, credit profile, FHA insurance, and the mortgage servicer (GMAC) remain the same for the bonds. A deduction of three basis points from the float earnings on the mortgage cash flow will be made by the Bond Trustee to pay for expenses. The Section 236 loans purchased by CHFA are pledged as collateral for the bonds.

"The loans purchased from Fannie Mae’s portfolio comprise more than half, or 54 percent, of the total number of Section 236 loans in the entire state, so the impact on the market is tremendous," said Theresa Parker, executive director of the California Housing Finance Agency. "Fannie Mae has created a very significant opportunity for affordable housing preservation. Opportunities like this are especially important given the extent of the affordable housing crisis we are experiencing here in California. This single transaction will enable CHFA to contact the 279 current property owners to work with them to find new owners who will provide affordability well beyond the term of the Section 236 program."

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