The Federal Housing Finance Agency has granted Fannie Mae and Freddie Mac limited re-entry into the Low Income Housing Tax Credit market as equity investors, effective Nov. 16.

The LIHTC was established by the Tax Reform Act of 1986 to provide multifamily property owners and investors with an incentive to create and maintain quality affordable housing. Under the program, qualified properties are allocated federal tax credits and investors are able to invest in those properties to take advantage of the tax credit.

FHFA said its decision about the government-sponsored enterprises was based on several factors, including furthering the Fannie Mae/Freddie Mac mission to support affordable housing and ensuring that they could provide a countercyclical role in the LIHTC market in the future if needed.  

“This decision demonstrates our commitment to supporting affordable rental housing in a controlled and thoughtful manner intended to stabilize the market and not to compete with private investors,” FHFA Director Mel Watt said in a statement.

Most of the Fannie Mae/Freddie Mac investments will be used to facilitate transactions that support underserved markets and complement FHFA’s Duty to Serve priorities, he added. That program calls for Freddie Mac and Fannie Mae to facilitate a secondary market for mortgages on housing, including seniors housing, for very low-, low- and moderate-income households.

Freddie Mac said it expects to close its first investment in January, the same month that its Duty to Serve program goes into effect.

Both Fannie Mae and Freddie Mac will be subject to an annual investment limit of $500 million, less than a 5% market share for each, according to the FHFA. Within this funding cap, any investments of more than $300 million in a given year will be required to be in areas that have been identified by FHFA as markets that have difficulty attracting investors. Those investments will have the goal of preserving affordable housing, supporting mixed-income housing, providing supportive housing or meeting other affordable housing objectives, according to the FHFA.

“Few programs are as mutually beneficial as LIHTC. It incentivizes private investment in affordable housing, delivers much-needed cash equity to owners of affordable properties and, most importantly, encourages the development and preservation of critical affordable housing in underserved areas throughout the country,” David Brickman, executive vice president and head of Freddie Mac Multifamily, said in a statement.

“Ultimately, we seek to provide better access to investment capital for developers, particularly those operating in underserved areas that are overlooked by other investors,” added David Leopold, vice president of targeted affordable sales and investments at Freddie Mac Multifamily.

Fannie Mae said its return to the LIHTC market will expand the company’s efforts to increase and improve affordable housing stock and help those markets most in need of support.

“We look forward to expanding the productive relationships we have with key partners in the LIHTC industry and enhancing our product line to offer equity financing solutions to support the ongoing needs of the market,” said Dana Brown, director of multifamily customer engagement and program lead for Fannie Mae LIHTC investment activities.

The FHFA said it will evaluate Fannie Mae’s and Freddie Mac’s participation in the LIHTC equity market annually.