Freddie Mac is providing competitively priced debt for the affordable housing industry as it mulls securitizing some of its affordable housing products.
Immediate fundings on 9 percent tax credit deals were being quoted in the mid- to upper-6 percent range as of late April, a rate that has stayed constant since the fourth quarter of 2008.
Forward commitments from Freddie Mac, both funded and unfunded, are being priced at around 570 basis points (bps) over the 10-year Treasury, for an all-in rate of about 8.5 percent, as of late April. Fannie Mae is offering better rates on funded forward commitments, closer to the high-7 percent range, but its pricing on unfunded forward commitments is about the same as Freddie.
For variable-rate tax-exempt bond (TEB) credit enhancements, Freddie Mac pretty much has the market to itself: Fannie Mae continues to not quote any variable-rate TEB deals. Freddie Mac was offering a spread of 330 bps on a 15-year swap execution as of late April.
The buzz in the lending community is that Fannie Mae will continue to skip the variable-rate market altogether and instead focus on creating a fixed-rate market that's more competitive with floating-rate offerings. And the early returns were that fixed-rate bond credit enhancements from Fannie were pricing at nearly the same level as variable-rate deals from Freddie.
Freddie Mac has also tightened up its underwriting standards on affordable housing deals this year. The company is taking a close look at individual markets as well as where a tax credit property is in the 15-year compliance period. If a property is within its initial 15-year compliance period, debt-service coverage ratios (DSCRs) will be lower. But those properties that are beyond their 15-year economic life will have to increase the DSCR by at least 5 bps.
“Each property is being looked at for functional obsolescence and geographic location,” says Phil Melton, an affordable housing lender with Grandbridge Real Estate Capital. “Those two factors are kind of dictating where you end up.”
Securitized affordable housing loans
At press time, Freddie Mac expected to have its first issuance under the Capital Markets Execution (CME) program by the beginning of June. The program, wherein Freddie Mac loans are bundled together and sold to investors as securities, is targeted at conventional multifamily deals.
The main advantage of the CME program to borrowers is a better rate than a portfolio loan, often by as much as 25 bps.
But the company has begun thinking about securitizing affordable housing loans as well. Since Freddie Mac is under a government mandate to shrink its portfolio beginning in 2010, it is looking at ways to keep liquidity flowing without holding more loans on its balance sheet.
“We're looking to see how we can expand to fit some of the more niche products into securitization,” says David Brickman, Freddie Mac's vice president of multifamily CMBS/capital markets.
On affordable housing deals, the company has a bit of a head start through its Tax-Exempt Bond Securitization program, which constitutes a large volume of its affordable business. “However, a not insignificant portion of our affordable business does go on balance sheet,” says Brickman. “And we're thinking all the same things as far as, are there ways we could structure, securitize, and sell our affordable mortgages?”
So, borrowers looking for an immediate funding of a 9 percent tax credit deal in the future may see a similar decrease in rates as their market-rate brethren are seeing in the CME program. Since it's only in the planning stage—and since affordable housing deals often have more complicated financing structures than market-rate deals—it's hard to say whether there will be much of a pricing advantage when that program is modified, Brickman says.
Still, the shift to securitized programs is perhaps the biggest change to how the government-sponsored enterprises (GSEs) approach multifamily loans since being taken over by the government. It's bittersweet news for borrowers: While securitized loans often offer better rates, the loan documents are less flexible than those for portfolio loans.
Affordable group buildout
Freddie Mac also continues to build out its Targeted Affordable Housing (TAH) group, a delegated, risk-sharing model similar to Fannie Mae's Delegated Underwriting and Servicing program. The program is a contrast to Freddie Mac's conventional lending platform, where deals are assessed on a case-by-case basis.
This group of lenders has become critical to Freddie Mac's affordable housing pipeline, since they are the only Freddie Mac Sellers/Servicers that can originate affordable housing deals.
TAH lenders must originate a number of affordable housing loans before graduating to “fully delegated” status, which means that they don't have to seek prior approval before closing a loan.
In the first quarter of 2009, Citibank became the fifth fully delegated lender in the program, joining Prudential, PNC, Wachovia, and Centerline. Also in the first quarter, Deutsche Bank Berkshire Mortgage joined the program, and as of late April, Grandbridge was close to joining the group as well.
Conventional loan update
Although Fannie Mae smoked Freddie Mac on pricing in the first quarter—at times by as much as 50 bps—Freddie has aggressively responded, adjusting its pricing in April to reclaim the lead.
Freddie Mac's portfolio loans are pricing at about the same levels as Fannie Mae's, but the difference is in the securitized offerings. Freddie Mac's CME program is now offering rates on standard 10-year deals of around 5.25 percent, while Fannie Mae's mortgage-backed securities pricing is closer to 5.5 percent.
Still, Fannie Mae had a great first quarter. Agency lenders such as CWCapital, whose volumes are typically split equally between the two GSEs, saw that split tip 80/20 in favor of Fannie Mae in the first quarter.