Fannie Mae had a big year for affordable housing production in 2011, as the agency rejuvenated its offerings and re-engaged the market.

The company is on track to record about $1.75 billion in volume for the year spread among preservation, New Issue Bond Program (NIBP), and lowincome housing tax credit (LIHTC) deals, according to preliminary estimates by agency lenders. The figure would far surpass Freddie Mac's estimated $1.1 billion.

It's a stark turnaround for Fannie Mae, which had fallen behind in recent years on both bond credit enhancements and immediate fundings for preservation. Freddie Mac's aggressiveness on bond deals made it a clear front-runner for NIBP business, and its Targeted Affordable Housing network also outpaced Fannie on preservation deals throughout 2010.

But in 2011, Fannie Mae sharpened its approach, undergoing a dramatic reorganization that made its turnaround times much more swift. Fannie also made several changes to existing programs and even introduced a couple of new ones, which should pay dividends in 2012.

At the same time, Freddie grew a little less competitive in terms of underwriting flexibility when it started securitizing all of its immediate fundings through the Capital Markets Execution program. The end result was a banner year for Fannie.

“We're definitely going to far exceed 2010's production,” says Bob Simpson, a vice president who leads the affordable housing arm of Fannie Mae. “At the beginning of the year, we really set out to focus on providing our lenders with more flexible products, we wanted to get more competitive on pricing, and to make sure, above and beyond everything else, that we provided the best execution."

In the latter half of the year, the company rolled out an adjustable-rate mortgage (ARM) product, the ARM 7-6. The variable-rate loan includes embedded caps and an option to convert it into a fixed-rate mortgage in the second year. Rates for the seven-year loan are set off the one-month LIBOR, and leverage goes up to 80 percent loan-to-value (LTV).

“It's an attractive option for affordable borrowers looking to acquire or refi- nance properties but want the option of going back in for new credits in a couple of years,” says Simpson. “It provides a lot of flexibility to borrowers, and we're seeing a lot of traction in that area."

Fannie's focus on preservation deals manifested in a few ways in 2011.

It made borrower-friendly tweaks to its moderate-rehab program, removing the cap on per-unit dollar amounts, and became more willing to consider 35-year amortizations and partial interest-only periods.

Simpson also expects to see more interest in Fannie's Green Refinance Plus product, which was rolled out in June in a partnership with the Federal Housing Administration (FHA).

The product, built on an existing risk-sharing agreement with the FHA, is attractive for owners looking to improve their properties but need more proceeds than can be found in the traditional immediate funding. The Green Refinance Plus program tops out at 85 percent LTV and offers a debt-service coverage ratio as low as 1.15x.

Preservation deals will remain Fannie Mae's bread and butter in 2012, especially given the wave of maturing tax credit and Sec. 8 deals.

“Preservation deals are really where Fannie wants to make its mark, which is a great long-term view,” says Phil Melton, head of affordable housing debt production for Centerline. “It's incredible how easy it's been to work with them on preservation deals."

More competition in 2012

As the banking industry returns to health, borrowers should see more debt options in the market in 2012.

Freddie Mac is reportedly working on enhancements to its preservation product, and Community Reinvestment Act-motivated banks are growing more aggressive. And the bond creditenhancement arena may get more competitive as the private-placement market begins to return in earnest.

“I think competition's going to heat up across the spectrum in 2012. We're already seeing more competition on the immediate side,” says Simpson. “We haven't seen it on the private-placement side yet, but I keep hearing that the private-placement market is coming back, and we fully expect that it will."

While the LIHTC market has improved, Simpson does have some concerns for 2012, particularly regarding the production of new affordable housing. Many state and local resources continue to grow scarcer, and the growing need for preservation that the company hopes to capitalize on also makes new construction deals a little more challenging.

“Gap financing has really been reduced over time, and you're probably going to start seeing that really impacted at the local level in 2012,” says Simpson. “New construction is going to continue to face some headwinds, because of that lack of gap financing, and also because there's more competition for credits by existing properties."