Freddie Mac Moves into New Territory

Secondary market organization continues aggressive financing of tax credit projects, steadily increases role as provider of bond credit enhancement

• Growing interest in Freddie’s tax credit financing program
• Freddie’s flexible execution plans
• GMAC aims high with Freddie’s help
• Loan underwriting under pressure

Affordable housing developers may finally reap the benefits of competition in the provision of forward commitments for permanent financing. For years, Fannie Mae has been the only active provider of such commitments, but Freddie Mac is coming on strong.

Freddie has talked about doing forward commitments for tax credit and tax-exempt bond deals for years, but talk turned to action in 2000 when the firm did four deals worth $49 million under its pilot program.

Freddie Mac announced that its forward-commitment business in second quarter 2001 totaled $42 million, and will help create nearly 1,000 new affordable rental units in Tennessee, Texas and New York. Six forward commitment deals closed in June alone.

“Our forward-commitment pilot is an important segment of our targeted initiatives and products that specifically serve families with low and very low incomes, and families living in underserved areas,” said Douglas Westfall, director of Freddie Mac’s Multifamily Affordable Housing Group.

Deals include Freddie Mac’s decision to purchase a $2 million, 30-year permanent mortgage with a 30-year amortization period at the end of an 18-month forward-commitment term from Laureate Capital for Rocky Top Apartments in Knoxville, Tenn. Through Collateral Mortgage Capital, Freddie Mac agreed to purchase an $8 million, 20-year permanent mortgage with a 30-year amortization period at the end of a 24-month forward commitment term for Timber Run Apartments, a to-be-built 192-unit property in Spring, Texas, which is 25 miles north of Houston. Other deals include the purchase of a permanent mortgage from Legg Mason Real Estate Services for Medford Landings, a to-be-built 112-unit property in Long Island, N.Y. Freddie Mac will purchase a $4 million, 18-year mortgage with a 30-year amortization period at the end of an 18-month forward commitment term on the completion and lease-up of the property.

Freddie Mac also agreed to purchase three separate permanent mortgages from NorthMarq Capital on the completion and lease-up of three to-be-built properties in Texas: Cedar Park Townhomes, a 226-unit property in Cedar Park, a submarket of Austin; Pointe Townhomes, a 168-unit property in Fort Worth; and Hunter’s Glen Apartments, a 144-unit property in San Antonio.

Growing interest in Freddie’s tax credit financing program

There is a high level of interest in the tax credit financing program among Freddie Mac’s lender base, said Westfall. The number of consolidations within the industry is pairing up strong affordable housing institutions with Freddie Mac’s Program Plus lenders. Recent examples include Wells Fargo’s acquisition of First Security and PNC Bank’s acquisition of TRI Capital Corp.

Westfall plans to leave the tax credit forward-commitment program in its pilot stage until “all the kinks are tweaked out.” The program most likely will go permanent within the next couple of years. He also is looking into a conventional forward commitment product for lenders this year and a preservation/moderate rehabilitation product in 2002.

Westfall asserts that Freddie Mac is serious about financing housing that uses bonds and tax credits to serve people earning less than 60% of median income. Freddie has renamed and expanded its affordable housing operation, he said. What once was called the Public Finance Department is now the Multifamily Affordable Housing Group, which Westfall heads.

The new operation has a broader mission than the old Public Finance Department, including development of new products for financing affordable housing and coordination of efforts with Freddie’s single-family affordable housing operations. Westfall said new headquarters staff members are being hired to manage product development and assist field offices with loan processing.

Lenders also speak highly of Freddie Mac’s new efforts to finance more affordable housing.

The successful start of the forward-commitment program follows several years of growth in Freddie Mac’s bond credit enhancement business. In 2000, it did $1.2 billion in credit enhancements. Most of that business was in the form of substitute credit enhancements for outstanding bond issues. The firm did 13 new issues and refundings for a total of $263.7 million.

Of the $49 million in forward commitments, all were for bond deals eligible for 4% tax credits. Now, however, Freddie is processing two transactions using taxable financing and 9% tax credits. Westfall expected Freddie Mac to provide credit enhancement for a lot more new issues in 2001, and that most of them will be fixed-rate deals.

Freddie’s flexible execution plans

While some lenders say the Freddie Mac program may offer more loan proceeds than the Fannie Mae program, Westfall does not make that claim. Instead, he emphasizes Freddie Mac’s willingness to work things out with borrowers.

“We offer a very flexible execution that allows us to work with the needs of the borrower. We make sure underwriting issues are dealt with as they come up, versus waiting until the back end,” Westfall said.

Freddie also offers competitive fees and loan pricing, which indirectly helps borrowers obtain more proceeds, he said. In particular, he said, legal fees are fixed as long as deals don’t involve an “extraordinary” amount of unforeseen work.

Pricing and terms vary from deal to deal, depending on the project and the characteristics of the borrower, Westfall said. While this creates some uncertainty, it also “gives us the ability to fine tune the pricing and give borrowers credit for the individual strengths of their deal,” Westfall said.

In the future, Westfall hopes to find a way to streamline the forward commitment program and possibly eliminate the requirement for a construction lender to post a letter of credit during construction.

He also hopes to convince more of Freddie’s 37 Program Plus lenders to make forward commitments for bond and tax credit deals. “We want participation by lenders who have made a commitment to the business. They need to have the right capacity,” he said.

Berkshire Mortgage Finance closed the first deal under Freddie Mac’s new forward-commitment program for bond and tax credit properties in May 2000. The $8.1 million floating-rate tax-exempt bond credit enhancement forward commitment will finance the construction of Timber Point Apartments in Houston, Texas. The borrower is Timber Point Limited Partnership, a single-asset entity backed by Robert Picerne and the Picerne companies.

GMAC aims high with Freddie’s help

Among Freddie Mac lenders, few have set affordable housing lending goals as ambitious as GMAC Commercial Mortgage’s. It recently set up a new Affordable Housing Group dedicated to building the company’s volume of affordable housing business outside the HUD area, including Fannie Mae and Freddie Mac programs.

In the past four years, before the group was founded, GMAC had underwritten 15 affordable housing projects totaling $176 million, thanks to the efforts of Marilyn Brandt, vice president.

When the new group was formed, Brandt was named its manager. In addition to Fannie and Freddie programs, the group also taps into a new conduit for acquiring unrated tax-exempt multifamily bonds operated by Newman Capital, LLC, an offshoot of Newman & Associates, a GMAC affiliate that also is based in Denver.

Brandt sees great promise in Freddie Mac’s growing interest in affordable housing, including the new forward-commitment program it launched last year.

GMAC closed the first forward commitment for a fixed-rate bond credit enhancement under the program. “I have been very happy working with Freddie. The time frame was excellent, and they were very responsive,” she said.

The Freddie Mac forward-commitment program is a pilot program, so all deals must get the okay from the firm’s headquarters. But still, Brandt said, Freddie Mac showed flexibility on underwriting and was able to make decisions quickly through the close involvement of executives at headquarters.

Freddie’s flexibility was important to Brandt. For example, one project had some soft money from local HOME funds, but there was a delay in nailing down the details of a subordination agreement for that funding. Freddie was willing to close before the subordination agreement was worked out, she said.

From start to finish, the deal took four months to close. Once the deal had the go-ahead from headquarters, processing the commitment took three to four weeks, she said.

How does the Freddie Mac program compare to Fannie Mae’s forward-commitment program?

“Freddie has a little bit of an edge” now that Fannie has tightened its loan parameters. Now, the same deal will get more loan proceeds with Freddie Mac, Brandt said.

Freddie Mac is well known for refusing to quote general loan terms and pricing, since it tends to quote terms and rates depending on the specifics of each deal. However, Brandt said the firm’s pricing is very competitive.

Loan underwriting under pressure

Loan terms were under pressure in the last half of 2001 because of rising operating costs and the decline in equity prices for tax credit projects. As of late 2001, however, Freddie Mac was not planning to tighten its current loan-to-value limits and debt service coverage ratios. Current limits are a minimum of 1.15x debt service coverage ratio (DSCR) for 9% tax credit deals and 1.20x DSCR for tax-exempt bond deals.

To make deals work with lower equity pay-ins, sponsors are looking for additional subordinate debt, as well as additional support from governmental grants, said Scott Suttle, executive vice president of Berkshire Mortgage, Bethesda division.

Suttle adds that Freddie has responded with the flexible sizing of subordinate taxable tails to maintain a workable level of overall debt. Freddie, however, will not change its underwriting criteria in the near future.

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