The comeback that began in 2010 just kept on coming. The
affordable housing debt industry posted another strong year in
2011, as historically low interest rates drove refinancing and
acquisition opportunities, and the New Issue Bond Program (NIBP)
resuscitated the 4 percent market.
For owners, developers, and lenders alike, there was a lot to
cheer about in 2011. Low-income housing tax credit (LIHTC) prices
rebounded in a big way, climbing up in a year when both LIBOR and
the 10-year Treasury were dropping down to rock-bottom lows.
“It was a very good year: Historically low
rates, improvements in tax credit equity pricing, and the NIBP were
all huge factors, ” says Tim Leonhard, managing
director of affordable housing debt at Oak Grove Capital.
“And there were many firms who
haven't purchased affordable multifamily assets
in years that came back to the market last year.”
Oak Grove more than doubled its affordable housing volume last
year, a surge led by the two dozen NIBP deals the company
originated. And like many agency lenders, the company continued to
see a strong market for preservation loans—a
wave of expiring Year 15 deals captured some of the lowest interest
rates in history.
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AHF's Top Lenders on Prezi
Underwriting also improved a little more as the year went on. At
the beginning of 2011, most permanent loans were being underwritten
at a minimum 1.20x debt-service coverage ratio (DSCR) and a maximum
30-year amortization. By the end of the year, the strongest
borrowers were seeing a 1.15x DSCR and 35-year amortizations.
That trend grew stronger in early 2012, as whispers of 40-year
amortizations and DSCRs under 1.15x were being heard in the
nation's strongest markets. But it
wasn't just permanent lenders that processed
deals hand over fist last year. Construction lending also surged as
many national, regional, and local banks grew healthier and
re-engaged the market in earnest.
“We never stopped lending throughout the
economic downturn, but a fair number of our competitors
did,” says Kyle Hansen, executive vice president of
U.S. Bank. “Over the last year, we saw a number
of competitors return to the market, and competition increased
considerably, especially in the larger cities and coastal Community
Reinvestment Act (CRA) markets.”
Despite the increased competition, though, the lessons of the
most recent downturn are still fresh for many. After purging their
balance sheets of troubled loans, most banks
aren't in any rush to push the underwriting
envelope. And after a few difficult years searching for
construction debt, developers are more focused on certainty of
execution than shopping for an interest rate
that's five basis points lower.
“As more capital returns to the market, it
does put pressure on underwriting, but having just come through the
downturn, borrowers and lenders alike are very focused on
underwriting that will withstand the test of time,”
says Hansen. “Developers are probably more
focused than ever before on consistent access to capital versus
every last benefit on the underwriting side.”
Another trend that characterized 2011 was the idea among a
growing number of lenders that affordable housing could be a highly
profitable enterprise. Many large banks, whose affordable housing
strategies had been driven by compliance in the past, are stepping
outside their CRA footprints to reap greater profits.
“We've been actively
calling out of footprint in conjunction with our community
development corporation, our internal equity source, and marketing
a joint debt and equity execution,” says Hansen.
“We're a healthy institution
that's very interested in increasing our lending
activities broadly, and if we can do that profitably out of
footprint, then we're going to actively do
Like U.S. Bank, JPMorgan Chase Bank also hopes to increase its
community development lending operations this
year— not because federal regulators say it has
to, but because the bank wants to. The bank grew its affordable
housing volume by more than 11 percent last year and hopes to grow
another 15 percent this year.
A stream of new products has fueled that trajectory. In
mid-2010, JPMorgan Chase rolled out its first
construction-topermanent loan program for 9 percent LIHTC deals,
and last year it began offering a similar product on taxable and
tax-exempt bond deals as well.
“The business has proven out to be successful,
and one that has opportunity to grow. But to grow the business, we
need to move outside of our footprint states,” says Ed
Sigler, head of community development real estate at JPMorgan
Chase. “There are places like Boston,
Minneapolis, and Nashville where we're not
currently active because they're not part of our
footprint, but we think they're good markets and
there are good deals there.”
JPMorgan Chase is happy with its penetration in the CRA hot
spots in which it lends. But those same major metros
don't have an endless well of good affordable
housing deals—prompting the
firm's wandering eye.
“We have a decent share of the pie within our
markets, and so rather than go too far down the market, it might be
a better strategy from a business point of view to look outside of
the market,” says Sigler.
Both U.S. Bank and JPMorgan Chase recently rolled out new bridge
loan programs, and each hopes that a combination of the new program
and new markets will keep their CRA lending
While each bank had a strong year, they were outpaced by other
major banks in 2011. Wells Fargo had a very strong year, jumping
two spots in this year's ranking to come a close
second, followed by Bank of America in third. But Citi Community
Capital continued its reign atop the pack in AFFORDABLE HOUSING
FINANCE's sixth annual Top Lenders rankings.
Citi has claimed the top spot in five of the last six years,
with 2009 being the exception. The mega-bank registered nearly half
of its $2.1 billion volume in construction lending last year, while
growing its bond credit enhancement business from $647.5 million in
2010 to $940 million.
“It was a very good year for us,”
says Steven Fayne, Citi's managing director.
“We worked hard in the New York metro and did a
tremendous amount of business in California again.”
While Citi saw its usual steady volume in the major coastal
markets, the company targeted the mid-Atlantic area as a priority
in 2011. “We put a big emphasis on that region,
especially around the D.C. metro area,” says Fayne.
“We started and ended the year with very good
production in that area.”
It wasn't just CRA-motivated banks that are
eyeing the sector as a profit center: This
year's rankings also saw more private lenders
register healthy gains. Oak Grove Capital jumped from No. 12 to No.
7, and Red Mortgage Capital advanced from No. 20 to No. 11 this
year. But the winner of this year's
“most improved” award goes to
CWCapital, who catapulted 15 spaces up the rankings to No. 10.
The jump reflects CWCapital's increasing
commitment to the affordable housing industry. Last year, the
lender started an affordable housing platform and launched a LIHTC
syndication business, hiring Andrew Weil and Justin Ginsberg away
from Centerline Capital Group to run the program, which offers all
three agency executions.
Centerline Capital Group is also reupping its focus on the
affordable housing market. Last year, the firm hired Phil Melton,
previously the head of Federal Housing Administration (FHA)
production for Grandbridge Real Estate Capital, to run its
affordable debt origination business. Centerline also restarted its
private-placement bond program and hired Jim Gillespie, previously
managing director of bond expert Red Stone Partners, to help grow
its affordable housing debt efforts.
All of Centerline's production was through
Fannie Mae last year, but that won't be the case
going forward. The firm has started an in-house FHA group, and
after allowing its Freddie Mac license to lapse, Centerline is
rejoining Freddie's Targeted Affordable Housing
Network this year.
The company has high aspirations, looking to do about $125
million in FHA, $250 million in Fannie Mae, about $75 million in
Freddie Mac, and maybe $200 million on the private-placement
market. Centerline hopes to tap into its historic expertise on the
LIHTC equity side of the market to drive production.
“We're making a very
concerted effort to drive the affordable housing debt
business,” says Melton. “This is a
strong client base that exists within Centerline, and so being able
to capitalize on that and to market through them is a pretty strong
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Love Funding is also on the rise. The FHA lender more than
tripled its affordable housing production last year, to $154
million, a record year for the firm. Part of that success was the
FHA's own desire to process more affordable
housing deals— in a more timely fashion.
“A tax credit deal will definitely get
priority now,” says Jonathan Camps, Love
Funding's managing director of production.
“The Department of Housing and Urban Development
(HUD) really wants to show developers and syndicators out there
that they can really make it work.”
While the FHA's processing timelines are
notorious, the agency began prioritizing LIHTC deals last year and
entered 2012 with momentum. At the end of 2011, HUD issued new
rules around which loans need to go through national and regional
loan committees, essentially narrowing the list down to ease the
“It's a huge
help,” says Camps. “You have this
huge slew of deals that all of the sudden don't
need to do it, and we've already seen processing
speed up quite a bit. It's had a real
And a bigger help will be arriving soon—the
FHA is ready to enact its Tax Credit Pilot Program, which would put
LIHTC deals in the fast lane for approval, above and beyond any
conventional, market-rate loan.
Last year was the continuation of a comeback, and 2012 has all
the makings of a banner year.
While the spotlight has been affixed to the largest CRA markets,
this may be the year that secondary and tertiary markets get their
share of attention. In the affordable housing world, all roads lead
back to the LIHTC market, and as yields continue to shrink in the
nation's strongest metros, financiers are
finding better opportunities off the beaten path.
“Equity prices seem to have stabilized in the
very high-demand CRA markets, and now secondary and tertiary
markets are benefiting from the fact that yielddriven investors are
telling syndicators to find deals somewhere else,” says
Sigler. “For awhile, there was a big distinction
in price between one market to another, and
that's starting to narrow.”