Bob Simpson is vice president of affordable, green, and small-loan business at Fannie Mae. He discusses the government-sponsored enterprise’s latest affordable housing products and the changes coming ahead.

What is your outlook for the debt market in 2016?

Bob Simpson
Bob Simpson

We’re very bullish about the market in 2016, especially if 2015 is any indication. We’re in the process of having another very strong year. We have an active and growing pipeline and are on pace to have our second-largest year in the affordable business in terms of volume. We feel very optimistic about what we see going into 2016. I think the market for preservation deals will continue to be robust, and we expect to see a strong mix of both acquisition and refinancing activity.

We also expect to see a lot of tenant-in-place rehab deals and we feel that will play into our competitive strength. With our delegated model, we quote fast, we close quickly.  Our mod-rehab product also allows us to be extremely flexible in meeting the borrowers’ needs during the rehab period.

What factors can disrupt the overall market?
Well, a lot of people are watching the 10 year treasury to see if interest rates will increase.  Obviously, if rates do trend up there will be an impact, especially in affordable housing where your NOI is constrained by rent restrictions. I think the broader issue is how rising costs are impacting the development of new affordable housing across the board. Interest rates are one factor, but, the costs of land, labor and materials are all increasing.  Gap financing has continued to be tight. You also have more and more existing properties that are now competing for the same tax credit dollars with new construction deals.  That’s great for the pricing of tax credit equity, but fewer new properties are being built as a result of all these factors. Historically, the tax credit program produced 100,000 to 120,000 units of new affordable housing per year. Now, based on what I’ve seen, that number is closer to 80,000 per year.

Where has Fannie Mae been seeing the most growth in its affordable housing business?
Business has been robust across the affordable housing space. It’s widespread. We rolled out a competitive bridge-loan product this year called the ARM 7-4. Basically, it provides borrowers with a seven-year variable-rate loan with a 4% embedded cap. It comes with a one-year lockout, a 1% prepay premium, and a fixed-rate conversion option. We’ve seen a tremendous amount of growth with this product for preservation deals because it provides borrowers with the flexibility of a bridge loan so they can acquire a property and turn it into a tax credit deal a year or two down the road, or they can convert it to a permanent fixed-rate loan if their plans change.

From a broader industry perspective, we’re seeing more consolidation of portfolios and more consolidation among borrowers. You see more larger portfolios that are up for sale that are being purchased by nontraditional affordable investors—especially some of the larger investment funds that have traditionally been in the conventional market. We’re seeing that growth resonate with our credit facility product. We’ve done structured credit facilities for a long time in our conventional business, and we’ve recently started doing them in the affordable space, as well. We closed our first structured affordable transaction last year, and we have a pipeline that’s growing for 2016. What makes the credit facility product work really well for affordable, especially for borrowers with larger portfolios, is that it allows for assets to be substituted in and out of the pool. You can buy and sell assets using the same facility without having to go out and get a new loan every time you do it.

The third area where we’re starting to see some pickup in growth is the mortgage-backed securities (MBS) pass-through product.

What’s new with the MBS pass-through?
Fannie Mae’s pass-through execution allows MBS to be used as collateral for either refunding existing tax-exempt bonds or financing new tax-exempt bonds issued in conjunction with 4% LIHTCs. Fannie Mae issues an MBS that serves as collateral for the bonds rather than the mortgage directly. We closed our first deal over the summer. Our pipeline is continuing to grow. 

What’s happening in the small-loan arena?
We’re continuing to be aggressive. We put a pre-pay option for our small loans and we are comfortable with the volume growth we are seeing.  We’re focused on secondary and tertiary markets in the small loan space. We believe our role is to provide liquidity to affordable small loan properties in the markets where it is most needed, and today we think the second and tertiary markets are where we are going to be able to do that. 

What are you doing on the green financing front?
Earlier this year, the Environmental Protection Agency recognized Fannie Mae Multifamily for its leadership by naming us its Energy Star partner of the year for developing green loan programs. We think there will be consistent growth in the green financing business. Being able to make energy-efficient improvements that reduce your operating expenses is really important for affordable housing where rents are restricted. We offer two programs. The first is our Green Rewards program, where we’ll allow up to 50% of the projected energy- and water-cost savings in the underwritten NOI calculation. To put it simply, we give borrowers credit for making energy-efficient improvements by increasing their proceeds. 

Second, we’ve created a green mortgage-backed security. We think it’s important to stimulate the development of an MBS investor base that’s focused on purchasing green MBS. If your property has a green build certification, we can provide a 10–basis point discount in pricing.

The bottom line is that for a typical $13 million loan, the combination of our green-loan products can save a borrower more than $350,000 over the life of the loan. We think that far exceeds anything that’s currently being offered in the secondary market.

What products or program tweaks are you working on for 2016?
We’ve introduced a lot of product enhancements in the market this year—ARM 7-4, MBS pass-through, and a floating-rate bond execution – that we hadn’t had in the past. So, we’ll be working on getting traction from these enhancements for the remainder of the year and into 2016.

That said, we are always looking for ways to innovate.  And one of the new products that we are excited to be rolling out is a targeted balance sheet execution for preservation deals that may require more extensive rehab and tenant displacement than a typical mod-rehab deal.  For borrowers with a demonstrated history of successful tenant-in-place rehab work, we will be able to fully fund a permanent loan on properties that require significant tenant displacement during the rehab period.  It’s a great product that eliminates the need for a construction loan during the renovation process and we are starting to see a lot of interest in it.