In some ways, Freddie Mac’s Targeted Affordable Housing (TAH) network has been a victim of its own success.
Freddie Mac continues to process New Issue Bond Program (NIBP) deals hand over fist, while a dropping 10-year Treasury sent a fresh wave of refinancings in its direction in the second quarter. Meanwhile, the TAH program has shifted back to a prior-approval model—a move that freed up the network to start off ering aff ordable housing deals through the securitized Capital Markets Execution program.
Taken separately, these are all very positive developments for borrowers and TAH lenders alike. Even as its overall multifamily volume fell last year, Freddie Mac’s TAH program grew from $1.4 billion to $1.5 billion. And that pace hasn’t slowed.
“Because 2010 was so extraordinary in terms of volume, some of that spilled over into the first quarter, so we had a stronger first quarter compared to other years,” says Christine Hobbs, director of Freddie Mac’s aff ordable housing division. “And since the NIBP is slated to conclude at the end of the year, we’ll probably see another rush of business in the third and fourth quarters."
But taken together, the wave of NIBP deals, refinancings, acquisitions of expiring Year 15 deals—and especially the move back to prior approval— means the company’s processing time continues to lag.
According to lenders with both agency licenses, Freddie was about three weeks behind Fannie Mae in terms of deal cycle timelines as of mid- June. And in a falling rate environment, where borrowers are looking to lock a rate as early as possible, it’s becoming a competitive disadvantage.
What’s more, the improving tax credit market has boosted deal flow in the 4 percent space, and that also cuts into the company’s resources given Freddie’s dominance in the tax-exempt bond credit-enhancement market.
“With the increased appetite from the investor community, you’re seeing deals get done in areas where a deal wouldn’t get done this time last year,” says Tim Leonhard, who heads up the aff ordable housing debt platform for St. Paul, Minn.-based Oak Grove Capital. “So, the combination of NIBP and increased investor demand on 4 percent deals is really leading to a logjam."
The good news is, Freddie Mac has started using some third-party underwriters to help break the logjam, especially on plain vanilla deals, like a 10-year refinancing. And right now, owners are refinancing anything they can get their hands on.
The benchmark yield on the 10-year Treasury dropped about 50 basis points from early April to mid-June, taking allin rates with it. A standard 10-year government- sponsored enterprise (GSE) immediate funding was pricing in the low 5 percent range in mid-June.
In the preservation space, the GSEs are running neck and neck. Last year, Freddie Mac began allowing deals with long-term Sec. 8 contracts, and loan terms of 10 years or more, to use above-market Sec. 8 rents when sizing the loan. In the past, underwriters had to use the lowest of lowincome housing tax credit (LIHTC), Sec. 8, or market rents, but this new approach allows for higher proceeds. Though Fannie Mae hasn’t responded in a programmatic way, it’s willing to do the same on a case-bycase basis.
“At the end of the day, they can match each other’s pricing and terms on any deal they really want,” says Leonhard. “The playing field is about as level as it’s been in the past decade—there’s usually a clear favorite, but they’re looking at preservation very similarly at the moment."
Oak Grove is seeing a lot of NIBP business this year, and, as the general LIHTC market improves, the lender’s volume has been growing. The company expects to put out more than $500 mil lion in aff ordable housing debt this year, up from $305 million in 2010.
“You’re seeing traditional bond acquisition rehabs with 4 percent credits, and you rarely saw that last year unless the property benefited from a Sec. 8 contract," says Leonhard.
Freddie continues to win the lion’s share of NIBP deals, for a few reasons. First, Fannie Mae exited the variablerate bond credit-enhancement space in late 2007, which steered borrowers to Freddie. Second, Freddie had more aggressive underwriting terms for so long—doing 35-year and even 40-year amortizations, for instance—that borrowers naturally flocked there.
Another consideration is that big banks with both agency licenses tend to steer bond business Freddie’s way. Since the TAH network isn’t a risk-sharing program, it’s a cleaner execution for banks that want to stay clear of loss-sharing arrangements on their balance sheets.
But on the fixed-rate bond side, it’s a much more competitive market. Freddie Mac will routinely off er 35-year amortizations on any deal with new credits. Fannie Mae is also willing to do it for the right deal, but it’s an exception to the rule—lenders have to get a waiver from Fannie Mae to off er 35 years.
Other than that, the GSEs are virtually identical in their fixed-rate bond credit-enhancement programs.
Meanwhile, Freddie Mac has made some changes to the leadership of its multifamily division. Mike May, who led Freddie Mac’s multifamily division since 2006, will vacate his post in July, to be replaced by David Brickman, who was previously head of multifamily CMBS.
In addition, the head of Freddie Mac’s multifamily asset management division, Daryl Hall, retired in May. Freddie Mac then named Mike Lipson, former CEO of Berkadia Commercial Mortgage, as senior vice president of multifamily asset management in June.
The moves underscore a continued “brain drain” at the GSEs. Last year, Freddie Mac lost Mitch Kiff e, an 18-year company veteran and head of multifamily loan production.
The fear from many in the industry is that the companies will increasingly lose valuable human capital as Congress fiddles with GSE reform. And since the GSEs continue to dominate the market— accounting for more than 60 percent of all multifamily permanent debt last year—their staffing issues aff ect the industry at large.
Many are now calling on Congress to come up with a solution sooner rather than later to limit any disruption. “We can’t just suddenly end the GSEs, but we also can’t say, ‘Let’s keep thinking about it,’” says Shekar Narasimhan, managing partner at Washington, D.C.-based Beekman Advisors. “The bottom line is that it won’t hang together. People don’t wait around in dying places, don’t hang around a funeral home after a funeral."