Fannie Closes the Gap

AFFORDABLE HOUSING FINANCE • April/May 2009

Agency battles Freddie, mulls return to tax-exempt bond market

BY JERRY ASCIERTO

Fannie Mae is offering competitively priced debt for the affordable housing industry as it mulls a return to the taxexempt bond credit-enhancement market.

While Freddie Mac held a pricing advantage on affordable housing deals as 2008 came to an end, Fannie Mae has closed the gap, and the two were about even in early March.

Immediate funding deals for tax credit properties were quoting in the mid- to upper-6 percent range. But rates on forward commitments from Fannie Mae remain high. Interest rates for funded forward commitments are in the high-7 percent range, and prices were above 8 percent for unfunded forward commitments in early March.

“They’re pricing in a significant amount of risk premium into forward pricing at the moment,” says Phil Melton, a senior vice president focused on affordable housing at Grandbridge Real Estate Capital. “That’s driven by the fact that there are a significant amount of forwards that are not converting at the time that they’re supposed to.”

Forward commitments are loans on 9 percent tax credit deals undergoing new construction or substantial rehabilitation. In a funded forward, Fannie Mae agrees to purchase the permanent loan and also provides funds to the deal’s construction lender; an unfunded forward commitment provides a rate lock and commitment to fund the permanent mortgage once construction is complete.

Fannie Mae has also tightened its credit standards on immediate fundings for 9 percent deals in pre-review markets, or weaker markets where Fannie assesses deals on a case-by-case basis. Deals are being underwritten at 75 percent or 80 percent loan to value (LTV) and 1.25x debt-service coverage ratios (DSCRs) in pre-review markets, as opposed to the 90 percent LTV and 1.15x DSCR the program offered.

But even for deals in strong markets, Fannie Mae will often only go to 85 percent LTV and 1.20x DSCR, as of late February.

TE bond redux?

Fannie Mae’s on-again, off-again relationship with variable-rate bond credit enhancements may soon take another turn.

The company is thinking about reentering the market for floating-rate tax-exempt bond deals, which would be welcome news to an affordable housing industry beset by funding shortfalls.

While the high-level discussions hadn’t resulted in a formal announcement as of early March, indications are that the company will re-enter the market toward the beginning of the second quarter, industry sources said on condition of anonymity.

While fewer and fewer new construction 4 percent deals are penciling out these days, there is still healthy demand for variable-rate bonds for preservation deals from nonprofits and housing authorities, and from existing bond deals in need of restructuring or refunding.

Freddie Mac has stayed in the variable-rate tax-exempt bond market fairly consistently (a brief two-week exit in 2008 notwithstanding), growing its market share. Fannie Mae, though, took itself out of the market for much of 2008, frustrating many Delegated Underwriting and Servicing (DUS) lenders who had relied on that business in the past.

Pricing on Freddie Mac variablerate bond credit enhancements with an interest-rate hedge like a swap was in the mid- to high-5 percent range for 10- and 15-year deals in late February. In contrast, prices for 10- and 15-year fixed-rate bond deals ranged from the low- to high-6 percent range.

But having both Fannie and Freddie in the variable-rate bond credit- enhancement sector would not only boost liquidity for these deals but also help drive competition, which could result in better rates and terms for borrowers.

Conventional deals

While Freddie Mac dominated pricing on conventional loans in the last few months of 2008—by as much as 75 basis points (bps) on some deals— the momentum has shifted in favor of Fannie Mae.

As interest in Fannie Mae’s mortgage- backed securities continues to heat up, its pricing was inside of Freddie’s by as much as 50 bps or more in late February.

These extreme shifts in pricing between the government-sponsored enterprises (GSEs) over the last three months have surprised many industry watchers.

“I’ve never seen the pendulum swing between Fannie and Freddie so quickly and so much,” says Don King, who heads GSE production for CWCapital, a DUS lender. “It’s a wild time.”

This is good news for borrowers. As of late February, Fannie Mae was pricing many conventional 10-year deals below 6 percent.

Top deals were pricing at 5.75 percent, with 75 percent to 80 percent LTV ratios and 1.25x DSCR, though many deals were closer to 6 percent with tighter underwriting.

Early indications are that the GSEs will begin charging a slight premium for portfolio loans, providing an incentive for borrowers to go the securitized route. The GSEs are under a regulatory mandate to shrink their portfolios starting next year, so they’ve put more emphasis on their securitized programs.

While both GSEs continue to rein in their credit standards, what company can offer the best deal will continue to shift.

“They’re moving in the same direction but at different velocities, and at any given point in time, one is more conservative than the other,” says King. “The one thing I can guarantee is that within a month it will change.”

2008 multifamily numbers

Fannie Mae released its 2008 multifamily numbers in early February. The company financed about $35.5 billion in multifamily rental housing last year through its lender and housing partners. About $21.8 billion of that overall number came from its DUS lenders, down from $30.1 billion in 2007.

The company claims that a full $19.17 billion in financing last year went to units affordable to those earning up to 60 percent of the area median income.