Lower Prices, Higher Barriers

AFFORDABLE HOUSING FINANCE • June 2008

BY JERRY ASCIERTO

Freddie Mac is lowering its pricing even as its credit standards grow more conservative in the first half of 2008.

Lender spreads, which reached a high of about 250 basis points over the 10-year Treasury in March, began to creep down in early April.

“For many weeks now, we’ve had regular price increases of five basis points a week,” said Jack Leighton, a regional director for Freddie Mac, at the APARTMENT FINANCE TODAY Conference in Phoenix in April. “Today, we announced an eight basis point decrease, which is a big decrease for us.”

Freddie Mac’s price reduction is more evident on longer-term deals. For a typical 10-year deal, Freddie Mac is quoting about 220 basis points over the yield on the 10- year Treasury. The 10-year Treasury rate was about 3.8 percent as of April 24, making the all-in rate around 6 percent, a historically attractive rate.

As its pricing drops, Freddie Mac’s credit standards are growing more conservative.

In early April, Fannie Mae moved to a standard 1.25x debt-service coverage ratio (DSCR), and down to 1.20x in strong markets. Last year, Fannie Mae had lowered that threshold to a standard 1.20x and down to 1.15x in strong markets. Freddie’s underwriting has followed this trend with the same upward movement in DSCRs in the spring, industry watchers report.

Acq-rehab uptick

While price reductions have made 10- year deals more affordable, five-year deals still remain relatively expensive. This is because Freddie Mac is trying to rebalance its loan portfolio toward longer-term deals.

“Freddie Mac has been overwhelmed with five-year loan requests,” said Don King, CWCapital’s senior vice president and national program director of agency lending. “Part of that is the enormous amount of acq-rehab deals they’ve been doing, which has been a very successful program for Freddie.”

Freddie Mac’s acquisition-rehabilitation and acquisition-upgrade products, rolled out in the fall, have been wellreceived by the industry: Freddie Mac processed about $800 million in such deals in 2007, in the span of just three months.

Part of that success is due to timing. The high cost of land is scuttling many new construction ventures, so more developers are concentrating on repositioning deals. But part of it is due to the attractiveness of the products themselves.

The acquisition-rehabilitation product is aimed at substantial rehabs of up to $30,000 per unit and features a loan-tovalue (LTV) ratio of 86 percent and a DSCR of 1.15x (down to 1.10x for the interest- only portion of the loan). The acquisition upgrade product, aimed at more cosmetic rehabs of up to $10,000 per unit, features an LTV of up to 86 percent, and a DSCR of 1.20x (down to 1.15x for the interest- only period).

CWCapital has seen much interest in those programs. Of the 21 Freddie Mac deals on which the company was quoting prices in late April, 14 were for either the acquisitionupgrade or acquisition-rehab programs.

Fewer LIHTC deals

Prudential Affordable Mortgage Co. has been part of Freddie Mac’s Targeted Affordable program since September 2006, and in its first full calendar year of production, closed about $94 million in loans under the program.

The company expected to receive fully delegated status by the end of the first half of 2008. By becoming fully delegated, lenders can originate targeted affordable loans without first seeking Freddie Mac’s approval, which speeds up deal cycle times.

Due to continued weakness in the pricing of low-income housing tax credits, Prudential is seeing far fewer new tax credit deals this year. Last year, about two-thirds of the company’s affordable business was in new tax credit deals, but so far in 2008, that figure has been closer to 20 percent.

Prudential is instead focusing on deals that are not dependent on new tax credits, like the refinancing of existing tax credit developments, 501(c)(3) bond deals, and Sec. 8 preservation efforts.

“The composition of the business has completely changed, but it’s proving to be a very good year,” said Paige Warren, president of Prudential Affordable Mortgage Co. The company expects to close about $200 million in 2008 through Freddie Mac’s Targeted Affordable program.

Prices on loans for tax-exempt bond deals have been more stable than on taxable deals, Warren said. For tax-exempt bond deals, pricing has increased about 25 basis points to 30 basis points in the last six months, while price increases for taxable deals have followed the pricing trend of the conventional Freddie Mac loans in the last six months.

“So much of our business these days is in the synthetic fixed-rate and swap programs, and swap rates are so low,” said Warren. “The all-in [swap] rates are still in the low 5 percent range, and that’s up about 25 or 30 basis points from where it was last fall.”

Looking out

CWCapital has been ramping up its agency-lending business after joining Freddie Mac’s Targeted Affordable program in the spring of 2007, and the Program Plus network in the fall. Last July, the company hired King, Craig West, and Scott Baker, all government-sponsored enterprise veterans previously with Column Financial, to lead the division. Between November and April, the company added seven employees to the program, and it expects to add another seven through the rest of the year.

The company closed nearly $250 million combined in affordable and conventional Freddie Mac deals in 2007, all in the second half, and hopes to process more than $500 million in 2008.

King believes that Freddie Mac’s outlook for the rest of 2008 is bright, as the acquisition-rehabilitation products continue to attract interest and other sources of liquidity wait on the sidelines. “There will be some period of time while the conduits ramp up and prove themselves out again before they’re really going to be in a position to compete with Freddie and Fannie,” King said.