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

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.