Affordable Housing Finance

FINANCE

Freddie Mac

Giving and Taking Away

AFFORDABLE HOUSING FINANCE • October 2009

Debt offerings pace industry; potential LIHTC sale raises alarm

BY JERRY ASCIERTO

Walker & Dunlop provided $11.45 million in permanent Freddie Mac financing for Avalon Park, a seniors and family low-income housing tax credit deal in Atlanta in July.

While Freddie Mac’s debt offerings continue to feature attractive rates, the company’s potential sale of its low-income housing tax credit (LIHTC) portfolio has sent chills throughout the affordable housing industry.

In the last two years, Freddie Mac has transformed from one of the nation’s biggest LIHTC investors into one of the biggest sellers. The company has been marketing its tax credit portfolio throughout the summer and fall through Meridian Capital, according to several industry sources.

Reports vary regarding the sale’s progress, with some saying that Freddie Mac is just testing the waters, and others claiming that a sale will be consummated in the fourth quarter. But the potential sale is a leading cause of concern for a market struggling to attract investors.

As one affordable housing player puts it, “If Freddie Mac sells, you’re talking about crushing the tax credit market next year.”

Industry groups such as the Affordable Housing Tax Credit Coalition have lobbied for restrictions to be put in place on such a sale. The most notable is that a sale not be made to current investors or firms that have bought credits in the past decade.

But some question whether targeting dormant investors is enough. “The existing investor base is rather thin and largely inactive, so the fact that they’re targeting investors who have never invested in the asset class is exactly the same thing the rest of the syndicators are doing right now,” says Thomas Booher, an executive vice president at Pittsburghbased PNC MultiFamily Capital. “The syndication industry has a lot of legitimate concern that they are targeting the same new investors.”

Ironically, the unique business model of the government-sponsored enterprises (GSEs) makes such a sale necessary. The GSEs are technically publicly traded companies, and they have a fiduciary obligation to maximize shareholder value. Monetizing the billions in tax credits they hold is not a luxury then, but the letter of the law.

Still, Freddie Mac’s conservator, the Federal Housing Finance Agency (FHFA), would need to approve any such sale, and would have to weigh the effect such a sale would have on the market. When asked about a possible sale in August, a FHFA representative said no transaction had been approved.

Forwards high

As housing finance agencies begin to dole out Tax Credit Assistance Program (TCAP) and credit exchange funds, a flurry of new construction deals should begin appearing in the fourth quarter. And many developers will likely steer Freddie’s way, due to the rates and terms it offers on forward commitments.

Freddie Mac is quoting unfunded forward commitments at around 8.5 percent— 100 basis points better than what Fannie offers—and some of its underwriting terms are more favorable than its chief rival, as of mid-September.

“You’ll see more business go Freddie’s way because of the slightly better rate, but also, Freddie is going to give you a 35-year amortization in pretty much every market,” says Tim Leonhard, who heads up the affordable housing debt platform for St. Paul, Minn.-based Oak Grove Capital.

The forward commitment rates from the GSEs are high by historical standards. But both companies are trying to make their forward commitments available for securitized executions, which would lower the interest rates. Those product migrations—a Mortgage-Backed Securities-eligible forward commitment, and a Capital Markets Execution-eligible forward commitment—aren’t expected to materialize this year though.

Bonds and immediates

For well more than a year, Freddie Mac has had the variable-rate bond credit enhancement market to itself, as Fannie pulled that product from its shelves and instead focused on fixed-rate deals. And for well more than a year, that suited Freddie just fine: Variable-rate executions were priced much better than fixed.

But the price of a fixed-rate bond credit enhancement has slowly but surely come down this year and is competitive with floating-rate deals. Fixed-rate credit enhancements from both GSEs are sitting in the 5.5 percent to 5.75 percent range, neck and neck with the all-in rates on a floating-rate execution, as of mid-September.

Last year, Freddie Mac raised some of its fees for variable-rate deals, including liquidity and guarantee fees, which has also added to the parity between fixed and floating.

“You’re not getting a significant economic benefit by going to a swap anymore,” says Phil Melton, a senior vice president focused on affordable housing for Charlotte, N.C.-based Grandbridge Real Estate Capital. “For a long time, swaps were significantly more attractive, but it’s starting to come back.”

The GSEs are also on par regarding rates for immediate fundings, which are in the 5.75 percent to 6 percent range for 10-year and 15-year deals. The Federal Housing Administration’s Sec. 223(f) refinancing program is slightly lower, at around 5.5 percent, as of mid-September.

“If the property is operating well and with rates where they are, it’s a good time to consider a refinance,” says Stephen Farnsworth, senior vice president of multifamily finance for Walker & Dunlop.

Walker & Dunlop acquired its Freddie Mac license when it merged with Column Guaranteed in January. Although it hasn’t seen many new construction deals, the company has been busy converting some Freddie Mac forward commitments that were originated at Column. In July, the company provided two permanent loans totaling $11.45 million for Avalon Park, a LIHTC deal built in 2007 that contains 175 units for families and another 136 units for seniors in Atlanta.