In some ways, Freddie Mac’s Targeted Affordable Housing (TAH) network has been a victim of its own success.
Freddie Mac continues to process New Issue Bond Program (NIBP) deals hand over fist, while a dropping 10-year Treasury sent a fresh wave of refinancings in its direction in the second quarter. Meanwhile, the TAH program has shifted back to a prior-approval model—a move that freed up the network to start offering affordable housing deals through the securitized Capital Markets Execution program.
Taken separately, these are all very positive developments for borrowers and TAH lenders alike. Even as its overall multifamily volume fell last year, Freddie Mac’s TAH program grew from $1.4 billion to $1.5 billion. And that pace hasn’t slowed.
“Because 2010 was so extraordinary in terms of volume, some of that spilled over into the first quarter, so we had a stronger first quarter compared to other years,” said Christine Hobbs, director of Freddie Mac’s affordable housing division. “And since the NIBP program is slated to conclude at the end of the year, we’ll probably see another rush of business in the third and fourth quarters.”
But taken together, the wave of NIBP deals, refinancings, acquisitions of expiring Year 15 deals—and especially the move back to prior approval— means that the company’s processing time continues to lag.
According to lenders with both agency licenses, Freddie was about three weeks behind Fannie Mae in terms of deal cycle timelines as of mid-June. And in a falling rate environment, where borrowers are looking to lock a rate as early as possible, it’s becoming a competitive disadvantage.
What’s more, the improving tax credit market has boosted deal flow in the 4 percent space, and that also cuts into the company’s resources given Freddie’s dominance in the tax-exempt bond credit-enhancement market.
“With the increased appetite from the investor community, you’re seeing deals get done in areas where a deal wouldn’t get done this time last year,” said Tim Leonhard, who heads up the affordable housing debt platform for Oak Grove Capital. “So, the combination of NIBP and increased investor demand on 4 percent deals is really leading to a logjam.”
The good news is, Freddie Mac has started using some third-party underwriters to help break the logjam, especially on plain vanilla deals, like a 10-year refinancing. And right now, owners are refinancing anything they can get their hands on.
The benchmark yield on the 10-year Treasury dropped about 50 basis points from early April to mid-June, taking all-in rates with it. A standard 10-year government-sponsored enterprise (GSE) immediate funding was pricing in the low 5 percent range in mid-June.
“At the end of the day, they can match each others pricing and terms on any deal they really want,” said Leonhard. “The playing field is about as level as it’s been in the past decade—there’s usually a clear favorite, but they’re looking at preservation very similarly at the moment.”
Oak Grove is seeing a lot of NIBP business this year, and, as the general LIHTC market improves, the lender’s volume has been growing. The company expects to put out more than $500 million in affordable housing debt this year, up from $305 million in 2010.
“You’re seeing traditional bond acquisition rehabs with 4 percent credits, and you rarely saw that last year unless the property benefited from a Sec. 8 contract,” said Leonhard.
Freddie continues to win the lion’s share of NIBP deals, for a few reasons. First, Fannie Mae exited the variable-rate bond credit-enhancement space in late 2007, which steered borrowers to Freddie. And Freddie had more aggressive underwriting terms for so long—doing 35-year and even 40-year amortizations, for instance—that borrowers naturally flocked there.
But on the fixed-rate bond side, it’s a much more competitive market. Freddie Mac will routinely offer 35-year amortizations on any deal with new credits. Fannie Mae is willing to do it for the right deal, but it’s still an exception to the rule—lenders have to get a waiver from Fannie Mae to offer 35 years. And that extra five years can be a deal breaker.
Other than that, the GSEs are virtually identical in their fixed-rate bond credit-enhancement programs.