Affordable Housing Finance

FINANCE

Fannie Mae

Business as Usual, Mostly

AFFORDABLE HOUSING FINANCE • January 2009

Debt financing unaffected by conservatorship, as Fannie’s underwriting grows more conservative

BY JERRY ASCIERTO

Fannie Mae is still providing debt financing for affordable housing, despite a capital markets meltdown and its placement in a conservatorship in early September.

For 9 percent transactions, Fannie Mae continues to provide loans with 90 percent loan-to-value (LTV) ratios, and 1.15x debt-service coverage ratios (DSCRs). Unfunded forward commitments for 9 percent lowincome housing tax credit deals feature all-in rates of about 7.6 percent, as of late November. Funded forward commitments are quoted at about 75 basis points (bps) less, closer to 6.9 percent.

But quotes aren’t holding for very long. “Spreads are changing by the minute,” says Phil Melton, senior vice president at Grandbridge Real Estate Capital, a Fannie Mae Delegated Underwriting and Servicing (DUS) lender.

That’s because DUS lender spreads were changing in concert with the benchmark 10-year Treasury note, which grew volatile. As the yield on the 10-year Treasury tumbled from around 4 percent at the beginning of November to 3.1 percent Nov. 20, Fannie increased its spreads from around 360 bps to 440 bps to keep rates at the same level.

“The dynamics between Treasury and spread are moving in lockstep,” says Melton. “We’re also seeing that Fannie and Freddie paper is becoming more challenging to trade and that the cost of borrowing for the agencies is getting pricier, so that’s being priced into the market.”

On the conventional side, Fannie Mae continues to offer up to 80 percent LTV financing, and its rates are reasonable. Ten-year deals had spreads in the 330- to 340-bp range as of early December, when the 10-year Treasury yield was at about 2.7 percent, resulting in an all-in rate of around 6 percent. Seven-year conventional deals were being quoted around 6.1 percent.

Underwriting changes

While debt financing rates have stayed pretty consistent since the conservatorship was announced, aspects of Fannie Mae’s underwriting continue to grow more conservative.

Beginning Nov. 14, it removed the “strong market” designation from its underwriting criteria. That designation listed certain markets, such as Seattle, Los Angeles, and Portland, Ore., where lenders could underwrite conventional deals at a 1.20x DSCR, and acquisition loans as low as 1.15x DSCR.

Now, no market is considered “strong,” and a 1.25x DSCR is the baseline for all Fannie loans. For preservation deals, such as refinancing or acquisition loans on a property with rent restrictions, it means a 1.25x DSCR, regardless of location. The change does not affect the DSCR of forward commitments.

Fannie Mae also added Las Vegas to its list of “pre-review” markets, where deals are assessed by the company on a case-by-case basis as opposed to the delegated lender model, on Nov. 14. Other pre-review markets include Houston and Phoenix, which were added to the list in September, and Midwest markets like Detroit and Cleveland.

The changes reflect Fannie Mae’s concern for the economy, as well as its lack of competition, experts say.

Tax-exempt bonds

Fannie Mae was in and out of the variable-rate bond credit-enhancement arena for most of 2008. As of late November, Fannie was again out of the market, unable to figure out pricing due to the volatility in the bond markets.

“We have largely stepped away from that arena right now, until we feel like the market has settled out,” says Byron Steenerson, president of DUS lender Alliant Capital. “We had about $100 million in bond business in the pipeline, and then when Fannie pulled out, it all vaporized.”

Fannie Mae is quoting fixed-rate credit enhancements of bonds, but the problem is that there’s no demand for the bonds. Bond buyers spooked by volatility have exited the market. The market for long-term, 10-year, fixed-rate bonds was nonexistent, and deals were not getting done in November.

Business rolls, development slows

DUS lenders are reporting robust business for the year, as Fannie Mae is one of the few players in the market still providing debt. Alliant’s overall Fannie Mae volume is up about 35 percent this year, mainly due to a much-improved client retention rate that in the past was decimated by aggressive conduit lenders. The company hopes to originate about $500 million in Fannie Mae volume by the end of 2008.

Alliant expects rates to hold fairly steady heading into 2009.

“I get a sense that rates may drift up, but I don’t think you’ll see a dramatic rise,” says Steenerson. “We are budgeting based on a 50-bp rise for next year.”

While the conservatorship has not slowed down the pace of business, it has slowed down product development at the company. Fannie Mae had been working on a construction-topermanent loan program, piloting the concept with several of its large lenders. But the conservatorship slowed the momentum of that program, which the company had hoped to roll out in the fourth quarter of 2008.