Despite a capital markets meltdown, Fannie Mae and Freddie Mac are still providing debt financing at reasonable rates, and even the FHA is emerging as a viable alternative for tax credit developers, said panelists at AHF Live.
Affordable housing debt from Fannie Mae and Freddie Mac has been unaffected by the conservatorship. For 9 percent transactions, Fannie Mae is still providing loans with 90 percent loan-to-value, debt-service coverage ratios (DSCRs) of 1.15x, and 30-year amortizations.
One major difference between the two is that Freddie Mac routinely provides 35-year amortization, while Fannie Mae won’t consider 35-year terms as much as it once did.
Lender spreads on unfunded forward commitments for 9 percent tax credit deals from the agencies are about 380 basis points (bps) over the yield on the 10-year Treasury, for an all-in rate of about 7.6 percent. Funded forward commitments are being quoted at about 75 bps less, closer to 7 percent, as of early November.
But quotes are not holding for very long these days. “Spreads are changing by the minute,” said Phil Melton, senior vice president at Grandbridge Real Estate Capital.
Tax-exempt bond deals are having the roughest time. Fannie Mae is not actively quoting floating-rate bond transactions, unable to figure out how to price them due to the volatility in the bond markets. The lenders still doing bond transactions are quoting them at pretty high rates, though. “For tax-exempt bonds, the all-in rates are around 7.5 percent, and there are not a lot of transactions that will work at that level,” said Melton.
Freddie Mac has made some moves recently to expedite its processing of affordable housing transactions, noted Tom Booher, executive vice president at PNC MultiFamily Capital. Freddie Mac has moved to a delegated risk-share program, recently announcing that all of its affordable housing deals must be done through the delegated model.
While only three companies, PNC, Wachovia, and Centerline, enjoy fully delegated status, five other lenders are close to graduating from the pilot phase. By graduating to fully delegated status, companies can originate Freddie Mac loans more quickly and with more certainty than it could under the former “prior approval” process.
The Federal Housing Administration (FHA) has also become a viable source of financing for tax credit developers thanks to some sweeping changes recently made to its multifamily programs. The changes should speed up deal cycle times significantly and remove many barriers that forced affordable housing developers to avoid the FHA for more on those changes, visit www.housingfinance.com/ahf/articles/2008/nov/1108-finance.htm.
There’s a lot to love about the FHA’s programs, especially as the market for construction financing has all but dried up, noted Carolyn McMullen, who runs the Midwest region for FHA lender Prudential Huntoon Paige. The FHA’s Sec. 221(d)(4) program, a construction-to-permanent loan, is nonrecourse, features 40-year amortization, and 1.11x DSCR.
“FHA is the greatest money out there, but it’s a difficult process,” said Jim Sari, CEO of affordable housing developer The Landmark Group. “They’ve got 40-year, 1.11x money, and they can’t give it away, so that tells you they’ve had an underwriting problem. I’m hopeful the new changes will help.”
Sec. 221(d)(4) loans were being quoted in the 7 percent to 7.3 percent range in early November. That figure doesn’t take into account the additional mortgage insurance premium, which raises the rate by about 45 bps.
Other forms of capital available to developers are drying up. Some states facing budget shortfalls are seeing smaller housing trust funds. And the Federal Home Loan Banks’ Affordable Housing Program, a fund tied to the profits of member banks, has significantly diminished in the last year.