Freddie Mac will soon add affordable housing products to its Capital Markets Execution (CME), the company's securitized mortgage program.

Market-rate borrowers have long enjoyed a significant discount on the interest rate by choosing the CME program over the portfolio execution. And soon, affordable housing borrowers will be given that option as well.

Before it can offer the product, Freddie Mac has to make some big changes to its Targeted Affordable Housing (TAH) program.

Previously, TAH lenders shared the risk and were delegated to make the loans without prior approval from Freddie Mac, unlike Freddie's conventional business.

But Freddie Mac is now moving the TAH program to prior-approval, transitioning one lender at a time.

The decision was driven by “our desire to use our securitization product more fully, to be able to offer that product to targeted affordable transactions, and that did not successfully work inside of a risk-share model,” says Christine Hobbs, director of affordable housing in McLean, Va.-based Freddie Mac's multifamily division. “The securitization model manages risk in a different way, so it was redundant.”

While not every affordable housing debt product will be eligible for CME, immediate fundings on Sec. 8 properties will likely be the first to join the program.

Prudential Mortgage Capital Co., one of the largest TAH lenders, will transition to prior approval in September.

“It will allow us on preservation deals, like a Sec. 8 taxable deal, to tap into their CME pricing,” says Paige Warren, a managing director who oversees affordable housing lending at Newark, N.J.-based Prudential. “We're also hopeful that if we've got deals that show pretty deep targeted affordability, that there may also be some flexibility there as well.”

Once existing TAH lenders are transitioned, Freddie Mac will begin to add more lenders to the program, the company said.

More proceeds for some preservation deals

It's not just pricing that should improve in the near future; an underwriting change announced in July should increase the proceeds for some preservation deals.

Freddie Mac now allows properties with long-term Sec. 8 contracts and loan terms of 10 years or more to use above-market Sec. 8 rents when sizing a loan. In the past, underwriters had to use the lowest of low-income housing tax credit (LIHTC), Sec. 8, or market rents.

There are conditions of course. The Sec. 8 contract should be longer than the loan term, and the property will have to meet certain exit tests as to whether it can refiat conforming levels.

“This allows you to underwrite the above-market portion, as long as the property meets certain exit test requirements,” says Warren. “It's recognizing the stability of that contractual income and allowing you to recognize that income now for sizing purposes. In theory, it will increase proceeds.”

New Issue Bond Program

Freddie Mac has also been busy with the New Issue Bond Program (NIBP), a federal government initiative designed to help out the struggling tax-exempt bond market.

The program—a collaboration between the Treasury Department, the Department of Housing and Urban Development, and the governmentsponsored enterprises (GSEs)—gave state and local housing finance agencies the ability to provide low-rate debt on fixed-rate bond deals.

Credit enhancements done on the NIBP were being quoted in the 5.6 to 5.75 range as of mid-July. That's a 50- to 60-basis point discount from doing a standard Freddie Mac variable-rate execution hedged with swaps.

In June, Prudential originated the first new credit enhancements under the program through Freddie Mac—the first standalone deal and the first portfolio transaction. The standalone credit enhancement totaled $4.8 million for the 100-unit Highlands Apartments in Newnan, Ga., and the pool transaction— for three properties in Washington, D.C.—totaled about $26 million.

“The discount for the Treasury backing is providing proceeds that are filling gaps in deals that otherwise wouldn't have worked,” says Warren.

Prudential has another five NIBP credit enhancements in underwriting and another four that are in the application stage.

Backward commitment

While preservation deals remain a focus at the GSEs, the same can't be said of new construction deals for 9 percent LIHTC properties.

The GSEs continue to price their forward commitment product out of the market, with rates well above 9 percent. In contrast, banks can offer mini-permanent loans in the mid-7 percent range.

Forward commitments are loans on new construction or properties undergoing 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 a commitment to fund the permanent mortgage once construction is complete.

“We continue to do some forwards but probably less than we did a few years ago,” says Hobbs. “We've been busy also in successfully converting a number of the forwards we originated a couple of years ago.”

When asked whether Freddie Mac is working on lowering the price, Hobbs adds, “At this point I don't anticipate any significant changes in the program.”

For its part, Fannie Mae is similarly vague about why a governmentowned entity with a mission of providing liquidity and affordability has all but abandoned a key program that provides liquidity to affordable housing projects.

“It's obviously a complicated issue, and we recognize that it's a challenge, and we're in the process of reviewing it,” says Bob Simpson, vice president of multifamily affordable in Fannie Mae's Housing and Community Development division. “That's the best I can tell you.”