Affordable Housing Finance

FINANCE

FREDDIE MAC

Affordable Housing Debt Grows Less Affordable

AFFORDABLE HOUSING FINANCE • October 2008

BY JERRY ASCIERTO

Freddie Mac is raising its price of debt for tax credit deals, both in permanent loans for 9 percent developments and credit enhancements of tax-exempt bonds.

Given the troubles of the low-income housing tax credit (LIHTC) market and the difficulty of finding construction financing, the higher prices will exacerbate the already difficult environment facing affordable housing developers this year.

Freddie Mac, along with Fannie Mae, had provided sub-6 percent fixed-rate debt for 9 percent LIHTC deals for much of this year. But in a two-week span in August, Freddie Mac raised pricing by 21 basis points on 15-year permanent loans for 9 percent LIHTC developments.

The company was quoting spreads of about 240 to 250 basis points, making the all-in rate around 6.25 percent, as of Aug. 28. In June, the company was quoting about 5.9 percent for such an execution. The price increases from both government- sponsored enterprises (GSEs) come as continued heavy losses in the singlefamily sector sparked fears of a government bailout, sending the companies’ stocks into a tailspin.

Many in the industry expect these price increases to be a harbinger of what’s to come through the remainder of 2008. “We anticipate seeing relatively small but probably pretty steady pricing increases for the immediate future,” said Tom Booher, senior vice president of agency lender PNC MultiFamily Capital.

Credit enhancements spike

It’s not just 9 percent transactions that have grown more costly. The tax-exempt bond market was also hit by price increases from the GSEs this summer.

For a brief time this year, Freddie Mac followed Fannie Mae’s lead and stopped providing liquidity for variable-rate bonds due to profitability concerns. In mid-July, Freddie Mac exited the market for about a week—a short duration compared to Fannie Mae’s on-again off-again relationship with variable-rate bonds this year.

When Freddie Mac re-entered the market, it had doubled its liquidity fee— which guarantees that Freddie Mac will buy the bonds should there be no investor interest—from 25 to 50 basis points. What’s more, Freddie Mac raised the application fee for variable-rate bond transactions to 1 percent, up from 0.1 percent, of the loan amount.

For a typical variable-rate swap bond transaction, Freddie Mac was quoting spreads of about 175 basis points over the 15-year swap rate, for an all-in rate of about 5.4 percent. But figuring in trustee and issuer fees, that rate goes up to about 5.6 percent.

The higher fees have neutralized Freddie Mac’s competitive advantage in variable-rate bond transactions, though many borrowers perceive Freddie Mac to be a more stable option given Fannie Mae’s wavering commitment to that market this year.

“Freddie Mac had a fairly decent pricing advantage over Fannie Mae, but they have increased pretty much to the level that Fannie’s at,” said Don King, CWCapital’s national program director of agency lending. “While they did leave the market, it was only for a matter of days, so there’s a little higher comfort level with Freddie from the stability standpoint.”

Conventional pricing goes up, too

For a conventional Freddie Mac 10- year fixed-rate loan, Freddie Mac is quoting around 250 basis points over the benchmark 10-year Treasury note, for an all-in rate of about 6.3 percent as of Aug. 28. In early June, Freddie Mac was quoting spreads of about 210 basis points, and by late July, that figure had crept up to about 225 basis points.

The price spikes will force many to turn away from fixed-rate loans since the only way to go below 6 percent is with an adjustable-rate mortgage (ARM). “The attractiveness of capped ARMs is coming back,” said Phil Melton, a senior vice president with agency lender Grandbridge Real Estate Capital.

Freddie Mac, for instance, is offering floating-rate loans in the low 5 percent range, with many borrowers opting for an embedded interest-rate cap of about 6.5 percent to protect against inflation.

By going to a capped ARM product, borrowers are able to increase their proceeds by about 3 percent on average, as well as lower their interest rate by about 100 basis points compared to a fixed-rate execution.

“That’s making up for a lot of what you’d be losing with the higher pricing on the standard 10-year fixed rate,” said King. “A very high percentage of our current pipeline of business are being quoted as capped ARMs, especially over the last 30 days.”

Shorter-term floating-rate loans are also becoming more popular as a way of waiting out the current price increases in fixed-rate long-term loans. “You could do a five-year deal with a minimum prepayment, so if spreads do come back in and you want to roll out to a long-term note, you could,” said Dana Brome, a senior managing director in the Hartford, Conn., office of Holliday Fenoglio Fowler, L.P.

Scuttled deals

PNC MultiFamily Capital reports a sharp drop in affordable housing deals this year. The tax-exempt bond business has been PNC’s bread and butter in the past, but this year, the company has seen about a 50 percent drop in such transactions.

“A lot of investors have been shying away from wanting too much 4 percent bond business in any particular investment pools,” said Booher of PNC MultiFamily Capital. “We’ve found it more difficult to find the right bond deals to do.”

CWCapital has also seen a drop in affordable housing debt as a result of the credit crunch. “We’re looking at a lot of deals that are being delayed as a result of problems finding equity and, in some cases, finding construction financing,” said King.

In August, PNC MultiFamily Capital became the third fully delegated lender in Freddie Mac’s Targeted Affordable Housing program, joining Wachovia and Centerline. By graduating to fully delegated status, the company can originate Freddie Mac affordable loans more quickly and with more certainty than it could provide under the current “prior approval” process.

The company would usually figure in an extra 15 to 30 days in the deal cycle to provide time for Freddie Mac to review the transaction. By going fully delegated, the company can eliminate that back-end review.

CWCapital, also a member of Freddie Mac’s Targeted Affordable Program, expects to achieve fully delegated status by November.