Affordable housing through state agencies
HUD risk sharing: Section 542(c) state HFA loans and 542(b) partner loans
Under Section 542(c), a qualified state or local housing finance agency underwrites and services an affordable apartment loan, FHA fully insures it, and the agency agrees to repay HUD a set share (10% to 90%) of any loss. Under 542(b), HUD shares risk with other qualified partners, including Fannie Mae and Freddie Mac. The MIP is 0.25% times FHA's share of the risk.
What risk sharing is
Section 542 of the Housing and Community Development Act of 1992 told HUD to try new forms of credit enhancement for affordable apartments by sharing risk with other institutions. Two programs came out of it:
| Section 542(c) | Section 542(b) | |
|---|---|---|
| Partner | Qualified state and local housing finance agencies (HFAs) | Qualified participating entities (QPEs), which HUD’s premium notice says include Fannie Mae and Freddie Mac |
| Who underwrites and services | The HFA | The partner |
| FHA share of risk in the 2025 premium table | 50%, 75% or 90% | 50% |
| MIP, upfront and annual | 12.5, 18.75 or 22.5 bps | 12.5 bps |
| Regulation | 24 CFR Part 266 | Not covered by Part 266 |
| FY2026 initial endorsements | 70 loans, $1,730,333,600 | 3 loans, $54,300,000 |
In both, FHA insures the whole loan to whoever holds it. Separately, the partner contracts to reimburse HUD for its share of any loss. That is why these loans sit in HUD’s file of FHA-insured mortgages even though no MAP lender made them, and why HUD’s production reports count them in its totals. The panel beside this page counts the active 542(c) loans in HUD’s file.
How 542(c) splits the risk
| Approval level | HFA share of loss | Underwriting standards |
|---|---|---|
| Level I | 50% to 90%, in 10% steps | The HFA’s own, disclosed to HUD; loans approved without further HUD review |
| Level II, loan at 75% or more of cost or value | 25% | Approved by HUD, reviewed every five years |
| Level II, loan under 75% of cost or value | 10%, or 25% at the HFA’s option | Approved by HUD |
To qualify, an agency needs an issuer credit rating or general obligation bond rating of A or better, or must otherwise show it is a sound and experienced housing finance agency, and must be a HUD-approved multifamily mortgagee.
What projects qualify
- Affordable housing, defined in the rule by reference to the low-income housing tax credit test in section 42(g) of the Internal Revenue Code.
- Five or more units on one site. The units may be detached, semi-detached, row houses, apartment buildings or mobile home parks (excluding the homes).
- New construction or substantial rehabilitation, or
- Acquisition or refinance of an existing project if it preserves affordable housing for at least 20 years, occupancy has averaged at least 93% over 12 months, the loan being refinanced has not been in default in the last 12 months, and a capital needs assessment is done with repairs and reserves funded.
Loans generally must fully amortize. The rule allows exceptions for construction loans and for Level I agencies with HUD-approved standards, where a loan with a term of at least 17 years can amortize over up to 40.
What the premium cut meant
The 2025 premium notice kept risk-sharing premiums at 25 basis points times FHA’s share. Fully insured programs dropped to the same 25 basis points, from between 50 and 95 for market-rate deals. Risk sharing’s premium edge over a fully insured 223(f) or 221(d)(4) is therefore now only the difference between 25 and FHA’s fraction of 25.
Limits worth knowing
- No 223(a)(7) streamlined refinance: Risk Share loans are excluded by statute.
- No 241(a) supplemental loan on a Risk Share first.
- No Middle Income option: Mortgagee Letter 2026-1 excludes Section 542 loans.
- Terms, rates, reserves and affordability covenants vary by agency, because each HFA sets them (Level I) or has its own HUD-approved standards (Level II). Ask the agency for its current term sheet.
If you are weighing a state agency’s risk-share execution against a MAP lender’s fully insured loan on a tax credit deal, compare the agency’s term sheet with the fully insured terms on the 223(f) and 221(d)(4) pages, and see who is active in your state on the lenders page.
Sources
- 24 CFR Part 266, Housing Finance Agency Risk-Sharing Program for Insured Affordable Multifamily Project Loans
- 12 U.S.C. 1715z-22, Section 542 of the Housing and Community Development Act of 1992
- 90 FR 45789, Changes in Mortgage Insurance Premiums for FHA multifamily programs (Sept. 23, 2025)
- HUD MAP Guide, Handbook 4430.G, 2020 edition, sections 3.6.1 and 3.8.1
- HUD Mortgagee Letter 2026-1, Middle Income Housing option (excludes Section 542)
- HUD Office of Multifamily Housing, FY2026 production summary
- HUD, Multifamily FHA insured mortgages, active file
Checked against these sources on October 30, 2026. HUD changes program rules by Mortgagee Letter and Federal Register notice; the lender's commitment governs any loan.
Short answers
Who makes a 542(c) risk-sharing loan?
A state or local housing finance agency that HUD has approved for the program, not a MAP lender. The agency underwrites, closes and services the loan and handles asset management. A borrower applies to the agency directly.
Why do risk-sharing loans appear in HUD's list of FHA-insured loans?
Because FHA insures them in full. The HFA's risk share is a separate agreement with HUD in which the agency reimburses HUD for its share of any loss, so to the bondholder or investor the loan is an FHA-insured loan like any other.
What is the MIP on a risk-sharing loan?
25 basis points multiplied by the share of risk FHA keeps, both upfront and annually. At a 50% split that is 12.5 basis points, at 75% it is 18.75, and at 90% it is 22.5.
Can a risk-sharing loan be refinanced with 223(a)(7)?
No. The MAP Guide says Risk Share loans are not eligible for 223(a)(7) by statute, and they cannot carry a 241(a) supplemental loan either. A refinance would go through the HFA or another program.
What is the difference between Level I and Level II?
A Level I agency takes 50% to 90% of the risk in 10% steps and uses its own underwriting standards without further HUD review. A Level II agency uses HUD-approved standards and takes 25% of the risk, or 10% or 25% at its option when the loan is under 75% of cost or value.