Interest rates are up and the purchase-heavy market is here to stay for a while. To meet this demand, mortgage lenders and originators may be considering adding or expanding their partnerships with the nation’s housing finance agencies (HFAs). These programs offer conventional and government-backed purchase mortgage products as well as downpayment assistance.

State and local HFAs support the purchase, development and rehabilitation of affordable homes and rental apartments for low- and moderate-income families. These agencies play a crucial role in providing affordable housing across the country. (And yes, HFA is not to be confused with FHA or Federal Housing Administration loans.)

“You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.”

Not all housing finance agencies are alike. How they operate and function can vary widely. Typically, HFAs act as independent organizations overseen by a board of directors that’s appointed by an elected official. For state-level HFAs, the governor is usually the appointing authority.

You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.

Shapes and sizes

Let’s begin by distinguishing HFA models. Some of these agencies operate as full-scale mortgage banking institutions with in-house loan origination, secondary marketing, servicing and other centralized business units required to conduct mortgage lending. A small number of HFAs are approved seller-servicers through Freddie Mac, Fannie Mae and Ginnie Mae. They do not rely on a lender as the master servicer.

Some HFAs are more focused on multifamily finance or niche products to serve their specific market. Some have a contractual partnership with a mortgage lender or another HFA to conduct some or all the activities required to manage a first-mortgage product offering and downpayment assistance. This partnership creates a master servicer that is the conduit to buy all of the loans originated through the HFA’s program by partner lenders.

You may know or already work with some of these institutions. For instance, U.S. Bank is a master servicer that works with more than 40 state and local HFAs across the country. HFAs with servicing capabilities include the Idaho Housing and Finance Association, as well as ServiSolutions, which is a division of the Alabama Housing Finance Authority. Lakeview Loan Servicing, one of the nation’s largest servicers, also works with multiple state HFAs.

To work with an HFA or its master servicer, an originating lender will need the systems and process support to sell whole loans and comply with the agency’s policies and procedures. Lenders will need to complete an application obtained from the HFA or its master servicer, in addition to paying an application review fee. In most cases, it is similar to being approved to deliver loans to a correspondent.

Questions will be asked about your company’s financial condition, production levels, quality control and appraisal process. Be prepared to provide information on any active legal actions, audit reports, resumes of key personnel, proof of insurance and other details. In addition, there may be less common requirements, such as actual office presence in a specific state.

Pots of money

Congress established the tax-exempt bond program in 1968 to fund affordable housing, allowing for the creation of many of the state housing finance agencies. This provided state HFAs with a vital funding source. Tax-exempt bond financing can produce below-market interest rates on 30-year fixed-rate mortgages for first-time homebuyers. This is especially important in a rising-rate environment like today’s.

In 2019, state HFAs financed more than 64,200 mortgages in the U.S. with these bond programs. These agencies also built or rehabilitated more than 46,200 affordable rental units through multifamily bonds. When Congress created the bond program, each state could issue these low-interest bonds up to a cap of $50 per state resident. Due to program effectiveness along with strong lobbying efforts, this limit has grown over the years to $120 per capita in 2023.

Some HFAs also rely on the to-be-announced (TBA) secondary market. The TBA market is a mechanism to obtain pricing for the future sale of securities and is a common form of mortgage-backed securities trading. HFAs can supplement their tax-exempt bond programs by leveraging this standard taxable source of funding.

In addition, many state and local agencies benefit from other federally funded programs. The Community Development Block Grant program received $3 billion in funding in 2023, while the Home Investment Partnerships Program was funded at $1.5 billion. These programs can pay for specific housing needs, such as downpayment assistance and home improvements.

Tax-exempt bond programs generally require additional documentation. Beyond credit qualification, the lender will need to provide documented proof of the borrower’s maximum household income and first-time homebuyer status. Therefore, if a lender is participating in a program that is funded by the sale of tax-exempt bonds, expect to see a loan delivery checklist that contains more documentation for each file.

One example is the need to ensure that a borrower signs the recapture notice. Borrowers may be subject to recapture — a tax to the federal government for the benefit of a lower-interest mortgage. Recapture tax is rarely sought but is required to be paid if all three of the following conditions occur: the home is sold within nine years of being purchased; the borrower’s income exceeds allowable limits at the time of sale; and the borrower profits from the sale.

Rolled-up sleeves

Downpayment assistance programs are an important tool to support first-time homebuyers and purchase-market production. More than ever, originators need to offer these programs. Even if a borrower is ultimately able to qualify without downpayment assistance, the originator has demonstrated their value and is likely to earn future referrals by having more ways to help the client qualify.

Many large banks have stopped participating in some or all state HFA programs. This is due to slim profit margins that don’t support the additional resources needed to ensure the quality of loans. Even the more nimble independent mortgage banks have been vocal in recent years about the lack of consistency in program guidelines, processing, required technology support or manual workarounds.

Anyone interested in expanding homeownership opportunities in underserved communities should applaud the government-sponsored enterprises (GSEs) and advocacy groups for their efforts to bring more consistency to downpayment assistance programs. In the past few years, there has been silent but impactful work to develop standard subordinate legal documents for these programs.

This will reduce the time and expertise needed by a lender to review documents and comply with GSE requirements for downpayment assistance. Docutech and DocMagic were part of the legal team that created these documents, which are now available for the 16 states that are currently using them as pilot participants.

Another advancement is the HFA1 tool that’s now available through the National Council of State Housing Agencies. This tool indicates the alignments and differences for programs offered by 23 state HFAs. Lenders will find details on mortgage and downpayment assistance qualification, closing, delivery and other instructions.


Despite the complexity of participating in dozens or hundreds of programs, it can be beneficial and lucrative for lenders and originators who can patiently put the required support in place and build a name for themselves as experts in the field. HFA websites will often post lists of their best lenders to refer potential homebuyers.

Real estate professionals who work in the first-time homebuyer market will look for an originator with the widest product menu and the ability to make deals work by explaining to the borrower how they might benefit from a subsidy for the downpayment or closing costs. These subsidies could feature deferred payments, payments forgiven over time or grants that will never need to be repaid. ●

  • Dottie Sheppick

    Dottie Sheppick is a founding partner of Specialty Mortgage Product Solutions LLC, which serves clients on affordable, builder and first-time homebuyer programs. Sheppick has 30 years of experience in niche lending, including her last corporate position as Bank of America’s senior vice president and affordable housing executive. Prior to that, she was the director of housing impact at Fannie Mae. Sheppick is well known for her entrepreneurial approach to developing products and programs for underserved markets.

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  • Theresa Hagman

    Theresa Hagman is a founding partner of Specialty Mortgage Product Solutions LLC. Hagman has 30 years of national fulfillment experience, with a proven record of maintaining operational excellence while driving down loan expenses. She has specialized in governance and compliance, with an emphasis on bond, construction and renovation products. She has a bachelor’s degree in political science from San Diego State University and a J.D. from the Ventura College of Law.

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