Essential Function Bonds: An Emerging Tool For Affordable Housing Finance

Essential Function Bonds (or EFBs) are issued by housing authorities to finance the construction and substantial rehabilitation of affordable housing or other community facilities owned by state and local housing finance agencies. Although some state agencies issue EFBs as part of their efforts to expand affordable housing opportunities, local housing authorities have pioneered the use of this tool. As part of a broader effort to reform public housing, the Quality Housing and Work Responsibility Act of 1998 authorized new ways to leverage capital and operating funds and stimulated interest in bond financing mechanisms. Building on information from a previous study, the Joint Center for Housing Studies surveyed local housing authorities and discovered that since the last survey in 1995 when agencies reported construction or rehabilitation of 16,063 units via EFBs, the use of EFBs has surged, resulting in the construction or rehabilitation of 41,615 units of housing between 1995 and 2002. This report briefly summarizes the nation's continuing affordable housing challenges and the efforts made by local housing agencies to expand production and rehabilitation of affordable housing. It discusses the survey methods used by the Joint Center for Housing Studies as well as the growing use and acceptance of EFBs. The report contains case studies documenting EFB use, and finally briefly discusses some of the policy challenges facing local housing agencies as they seek to meet continuing housing and community development needs.