When Bob Simpson was named head of Fannie Mae's affordable housing division in April 2010, he was given a tall order.
The division had fallen behind in recent years due to the bureaucratic inefficiencies inherent in any large organization. Deals were taking too long to close, and Fannie Mae was losing deals as a result.
So, Simpson oversaw a dramatic reorganization that separated the affordable program from the larger conventional multifamily operations. Fannie Mae now has dedicated affordable production, pricing, and underwriting teams, and it's paying dividends. What was once a weakness is now a strength—lenders and borrowers report that Fannie's deal cycle times are among the quickest in the business.
Simpson has helped breathe new life into the division in other ways. For instance, the company has modified its mod-rehab program to make it much more borrower-friendly than it had been in the recent past. AFFORDABLE HOUSING FINANCE recently sat down with Simpson to find out what's happening in the rejuvenated division.
Q: So how's business? What kind of year are you having relative to 2010?
A: We're having a great year; volume has been extremely strong, and we're running far ahead of last year's pace. I think it's fair to say that in 2009 and 2010 we didn't have great years. We certainly lost deals that we didn't want to lose, and I'm not sure all of our lenders were entirely enthused with our execution. But once we reorganized our business channels, it gave us the ability to really focus on the affordable multifamily debt execution, to take into account that these deals are different from conventional deals, they're sometimes more complex. It gave us the opportunity to renew our focus on building an execution that was quicker, more consistent, and had more certainty than we think any other execution in the market today.
Q: What's new? Are you working on program modifications? What can borrowers expect to see from Fannie Mae this year?
A: Between now and the next three or four years, there's this incredibly large window of opportunity to do preservation deals with expiring Sec. 8 contracts, and we're just beginning to see that. So we've been placing a strong focus there, and we've been getting some really good response in the market to what we're doing around mod rehab. We're being much more flexible on tenant-in-place mod-rehab transactions. First of all, we don't cap the rehab amount in our mod-rehab transactions— we've actually gone as high as $50,000 per unit. Secondly, we'll consider a two-year interestonly (IO) period. And we'll also do 35-year amortizations if it's a strong deal in a good market. That's something we didn't do six months ago. For us to look at IO and the longer amortization, the loan term has to be 15 years or longer. An optimal scenario is mod rehab with new tax credits and a new Sec. 8 contract.
Q: Have you been able to benchmark how much the reorganization has improved efficiency?
A: So far we're trending in a very good direction. As we look at our production on a month-to-month basis, we're definitely very busy, and that's probably the best sign that it's working. We now have a dedicated affordable credit team, a dedicated production team, and a pricing team that just prices affordable transactions. And one of the benefits of having that focus and a very quick turnaround time— we normally turn around deals within three to five days—is that it gives us the ability to be flexible on a transactionby- transaction basis. Because we can turn deals around fast, we can take a deep look at transactions that might be a little more complicated.
Q: From what you're seeing, is tax credit pricing out there strong enough for the industry to survive without the exchange program?
A: The markets are slowly recovering. What I'm more concerned about is the availability of gap financing, and the different state and local programs that help the 9 percent deals pencil out. And I think there's some uncertainty as to what happens with 4 percent deals after the New Issue Bond Program (NIBP) goes away. In the 9 percent space, average prices are in the 80s, but you still see a pretty big disparity between Community Reinvestment Act (CRA) markets and non-CRA markets.
Q: What are you seeing on the taxexempt bond side of things? Is that market starting to recover?
A: Most of what we're seeing is NIBP deals. We're seeing a huge uptick in the number of fixed-rate bond credit enhancements that we're doing, which is where you see a lot of the mod rehab taking place. Outside of that, though, we haven't seen a lot of it.
Q: Have you added any new lenders to your affordable network over the last six months?
A: We added Great Lakes Capital in the latter part of 2010 and the California Community Reinvestment Corp. earlier this year. And we're actually seeing deals from every one of our lenders, so our production is very strong, but it's also very broad-based across our network.
Q: What do you want borrowers to know about Fannie Mae's affordable housing division?
A: No. 1, that we're back in business, that we are committed to providing the quickest, most consistent, certain execution in the market. And that we're going to be aggressively pursuing every deal, including fixed-rate bond credit enhancements. We'll always be competitive on price and proceeds, but we prefer to win deals on execution and in the market environment we're in today— where you're seeing a lot more acquisition, acquisition rehab, refinancing, preservation—that speed and certainty is really important to lenders and borrowers. If you have a hard deadline to close a deal, we think we're the best option to get that deal done. There's a lot of certainty in our execution.