How Banks Can Support Affordable Housing

*This article was published in Bank Director magazine’s first quarter 2025 issue.

It’s no secret that the decades-long U.S. housing shortage has intensified in recent years due to ongoing economic volatility and the aftermath of the Covid-19 pandemic.

The U.S. was short 3.8 million housing units in 2020, according to the U.S. Census Bureau’s 2020 Housing Vacancy Survey, up from 2.5 million in 2018. The pandemic-era rent surge furthered the gap in affordable housing supply; the amount of cost-burdened renter households — those spending more than half of household income on housing and utilities — hit a new high of 12.1 million in 2022, up 1.5 million from pre-pandemic levels, according to a 2024 report from the Joint Center for Housing Studies at Harvard University.

Multifamily housing development has sought to plug parts of the nationwide housing gaps. Part of this is evidenced by multifamily mortgages increasingly taking up space in banks’ loan portfolios. Multifamily loan assets reported by banks and thrifts reached nearly $625 billion in the second quarter of 2024, according to the Federal Deposit Insurance Corp., more than four times the total in the first quarter of 2009. During the same period, Freddie Mac’s securitization platforms and capabilities expanded from two to seven, with cumulative issuance growing from $2.3 billion to $693.1 billion, according to the agency’s second quarter 2024 securitization overview. Institutions with between $1 billion and $250 billion in assets have become increasingly important lenders, growing their market share from a combined 48% at the end of 2009 to 64% in the second quarter of 2024, according to multifamily loan data reported by FDIC-insured commercial banks.

The Role for Smaller Institutions
This underscores the opportunity for community and midsize regional banks to be part of the solution that addresses the critical need for affordable housing in the U.S. Currently, the market is dominated by nonbank lenders and larger banks that specialize in multifamily securitization products or programs. However, there are regulatory and financial benefits that smaller institutions can realize by investing and lending more in affordable housing.

For instance, financing affordable housing helps banks meet their Community Reinvestment Act (CRA) objectives and take advantage of federal and local tax credits. Additionally, there is structural support and incentives for this lending through embedded affordable housing objectives at federal housing agencies and in federal and state-level regulations. These government agencies, such as Freddie Mac, provide considerable support through securitization programs that are continuously modified to expand access to institutions, big and small, across the country.

Freddie Mac’s core mission is to provide liquidity, stability and affordability to the U.S. housing market. The primary means of achieving their mandate is through their lender network. The lender network originates new loans, while Freddie Mac undertakes credit underwriting in-house, purchases the loans and pools them for risk distribution through securitization. Outside this lender network, Freddie’s structured products allow banks to pool and sell multifamily loans by converting them into liquid, tradeable, guaranteed securities that can be retained or sold to third-party investors. These securitization platforms give seller institutions the means to achieve liquidity and capital management efficiency throughout the origination to securitization continuum. In simplified terms, selling loans to a securitization program generates liquidity and reduces risk-weighted assets that can result in higher capital ratios, including common equity tier 1 capital, a regulatory capital ratio.

Getting Involved
Capital markets firms with agency CMBS structured products specialization can serve as strategic advisors and consultants to banks looking to lean into the affordable housing space. A critical element of securitization is partnering with a trusted firm that has the expertise, experience and collaborative relationship with the agency. This relationship allows a seller institution to benefit from smart and effective guidance throughout the securitization process: from pool identification and due diligence, deal pricing and structuring, loan servicing negotiation and determination, and deal offering documentation to securities creation, distribution and placement.

As the U.S. continues to address the housing shortage and the agencies evolve their platforms over time, more and more banks should be able to meaningfully contribute to the solution for the affordable housing crisis while efficiently managing the liquidity and capital that the effort requires.