Fannie Mae and Freddie Mac are racing against the clock— and each other—to preserve affordable housing.
“We have been doing a deal per working day since 2011,” says Bob Simpson, Fannie Mae's vice president for affordable multifamily lending.
Most of those loans have been preservation deals to acquire or rehabilitate existing assets, especially now that the Treasury's New Issue Bond Program (NIBP) is winding down this year. Fannie and Freddie's preservation loans are largely to low-income housing tax credit (LIHTC) properties passing their 11th year of operation.
Fannie Mae lenders closed $2.3 billion in affordable housing deals last year, and, driven by the preservation market, the company expects to do more this year. Freddie Mac has also made year 11 transactions a priority.
“That market has just exploded,” says Chris Hobbs, director of Freddie Mac's affordable housing division. Freddie Mac did not release current lending volume numbers, though executives say they are catching up to Fannie Mae in the refibusiness after focusing on new construction in 2011 through NIBP.
And the demand for year 11 financing should remain strong because of the continued impact of changes to the program. LIHTC investors used to have bonding requirements that restricted their ability to sell their ownership stake in LIHTC properties before the full 15-year compliance period had ended.
Now investors no longer have to post a bond, and many are selling their stakes in the properties after they have collected the full value of the property's tax credits after year 10. The sale can leave a fiscal hole, depending on the budget needs of these properties.
Fannie and Freddie's preservation programs offer five-, seven-, and 10-year loans to these properties to help fill the gap “through year 15 and a little beyond,” when the properties can be fully recapitalized, says Hobbs.
Certainty of execution
As the pipeline of preservation deals grows, so too does the timeline for getting these deals done. But it's not just loan volume slowing things down—Fannie and Freddie are both approaching deals more cautiously than in the past. Before the recession, Fannie and Freddie loans typically closed in 45 to 60 days, says Phil Melton, senior managing director of Centerline Capital's Affordable Housing Group. Now loans take 60 to 75 days to close. “It could be 90 days for complicated loans,” adds Melton.
For example, Fannie, Freddie, and Federal Housing Administration (FHA) loan programs all require some form of pre-review. That means a borrower has to go through a preliminary step before receiving the loan application to fill out. Inevitably, that takes time—“it can add five minutes to two weeks,” Melton says.
But, paradoxically, the pre-review also cuts down on surprises in the loan process, making it more likely that the loan will close on time.
Freddie's Hobbs says the company is focused on improving its processes. And Fannie likewise emphasizes its certainty of execution. “If a borrower needs to close by a date certain, we can work with our lenders,” says Simpson.
Fannie and Freddie's preservation loans can also help affordable housing become more energy efficient.
Fannie has partnered with the FHA on its Green Refinance Plus program, an enhancement to the broader Fannie Mae/FHA Risk-Share program. FHA agrees to cover the first losses from the loan, which allows the program to offer higher loan-to-value ratios and lower debt-service coverage ratios to borrowers who commit to energy improvements.
So far, Fannie Mae has closed only two loans through the program since its creation in June 2011, not exactly a deluge of deals. “I think it's going to grow—everything takes time to roll out,” says Fannie's Simpson. “Rehab and energy efficiency will always go hand in hand, whether or not it's a branded execution.”
Freddie Mac has been working on a similar program with the FHA but has not yet rolled it out. “We are certainly looking at green criteria—it fits nicely into the mod-rehab program,” says Freddie's Hobbs.
Some developers question the focus on stabilized year 11 deals.
“That's not a space that I would say is in dire need of lenders,” says Michael Moses, chief investment officer for The NRP Group, based in Cleveland.
Developers like NRP miss Fannie and Freddie's old role financing new construction for 9 percent LIHTC deals. Before the crash, the companies had active forward commitment programs on the debt side, in addition to buying LIHTCs on the equity side.
Fannie and Freddie have been active credit-enhancing bonds, especially through NIBP, which sunsets in December. But the tax-exempt bond business is beginning to see a revival thanks to a healthier private-placement market, says Moses. NRP is closing two deals to finance new affordable housing construction with tax-exempt bonds. Freddie Mac made offers to creditenhance NRP's bonds.
“They're still making somewhat of an effort ... though their programs are not competitive,” says Moses. Instead, NRP plans to privately place the bonds with commercial banks offering longer amortizations, lower debtservice coverage ratios, and lower fees. “Fortunately there are other opportunities,” he says.