The low-income housing tax credit (LIHTC) industry can breathe a little easier this year: Freddie Mac is not actively pursuing a sale of its tax credit portfolio.
Rumors abounded throughout 2009 that both government-sponsored enterprises (GSEs) were trying to sell parts or all of their LIHTC portfolios.
The rumors sent chills throughout the affordable housing industry given how dramatically the prices of LIHTCs had fallen. The fear was that flooding the market with more credits would eat into what was already a tepid demand.
Those rumors were partially confi rmed when news broke in November that the Treasury Department had blocked Goldman Sachs' bid to buy a significant amount of Fannie Mae's LIHTCs.
But in a wide-ranging interview with Hanley Wood Business Media, the publisher of AFFORDABLE HOUSING FINANCE, Freddie Mac CEO Ed Haldeman said the company is not looking to unload its credits. In fact, the Federal Housing Finance Agency told Freddie Mac on Feb. 18 that the company may not sell or transfer the assets and that it sees no other options for disposition. As a result, the company wrote down the carrying value of its LIHTCs to zero.
During the interview, Haldeman and other company executives indicated that Freddie's preservation business will again be a focus this year, and that's no surprise given the low rates on immediate fundings, which are below 6 percent.
But the more troubling debt product for affordable housing developers has been Freddie Mac's forward commitment program, where rates are in the 8.5 percent range, according to Freddie Mac lenders. The forward commitment program, which promises a permanent loan in advance to new construction tax credit deals, was once a popular execution. Now, it largely gathers dust, even as more developers receive tax credit exchange funds and ramp up long-dormant pipelines.
“Our costing model is going to dictate where we think the risk is, and the proper reward, and a high interest rate is tough to underwrite, we understand that,” says Mike McRoberts, national head of multifamily underwriting and credit at McLean, Va.-based Freddie Mac. “Banks are very hesitant right now to do an openended construction loan. It's definitely an issue, and we're working on it.”
Freddie Mac is trying to move most of its business into its securitized debt platform, the Capital Markets Execution (CME) program. The company hopes to make Targeted Affordable Housing deals eligible for the CME program at some point this year. Market-rate CME deals enjoy an average 25 basis point interestrate discount through the program, and the rates on immediate fundings of affordable housing properties will likely see some improvement once CME-eligible.
But that pricing advantage probably won't extend to forward commitments. According to the company, a forward commitment permanent loan wouldn't go through CME until after the construction period. “It would be once the mortgage is actually originated, we'd sell it,” says Mike May, senior vice president of multifamily for Freddie Mac. “So the forward risk would still be priced.”
Duty to serve
The good news is that Freddie Mac will likely finance more units that serve lower-income populations this year. While the GSEs' proposed affordable housing goals are not yet finalized, the company expects those goals to include lower area median income (AMI) levels than they have in the past.
“We're pretty confident that they're going to be lowering the AMI for the multifamily area,” says McRoberts. He noted that the proposed goals move the previous 100 percent low-income AMI target to 80 percent, and the 60 percent “very low income” AMI target to 50 percent. “Right now, we're trying to strategically figure out how we can access that market,” says McRoberts. “When you get down to 50 percent, it's pretty deep.”
The proposed rules also give the GSEs two ways to meet their housing goals: one through an absolute dollar amount, which is the historic method, and another as a percentage of the overall market, which is a new and probably more logical option.
Spurred on by the housing goals, one new avenue that Freddie Mac will pursue this year is manufactured housing, a segment that Fannie Mae currently has to itself. In fact, manufactured housing was the only multifamily program that Fannie Mae saw some growth in last year, processing about $1.1 billion, up from $1 billion the year before.
Last year, Freddie Mac's Targeted Affordable Housing business processed about $1.4 billion, a steep decline from the $5.5 billion it did the year before. The company briefly turned some of its affordable housing lenders loose, allowing the program to be a fully delegated platform, but has since temporarily reined that in to require prior approval, like the rest of its multifamily business.
More emphasis on multifamily
Last year, more than one out of every three multifamily mortgages was a Freddie Mac origination. So, when Congress decides the fate of the GSEs next year, the future of the apartment market very much hangs in the balance.
And in the interim, Freddie Mac's commitment to the multifamily industry is growing.
“There should be no doubt that we are strongly committed to it. It's a highly profitable business that is growing well, where we have an exceptional record,” says CEO Haldeman. “One would be just crazy to think about less emphasis; in fact, we want to bring more emphasis to that business.”
To that end, the company is overhauling its multifamily systems platform, software that was built in the mid-1990s and developed for about 100 loans, or $1 billion of annual business. Seeing as how the company did $16.6 billion last year, the system was in dire need of an overhaul.
“That's going to make us a lot more efficient and move loans through the pipe more quickly, and provide better customer service,” says McRoberts.