David Leopold is vice president of affordable housing production for the multifamily business at Freddie Mac. He shares the firm’s latest program changes and the trends he’ll be watching in 2017.
What are your overall expectations for the housing market in 2017?
We think multifamily will continue to grow—both the affordable as well as the conventional markets—because demand will continue to grow. Supplies are ticking up, which means more new developments that will need permanent financing. We also expect interest in acquisitions and refis to keep growing. Who doesn’t want to refi in this interest-rate environment if you can? There’s also a rising level of demand in the low-income housing tax credit (LIHTC) market to refi early. We’re seeing some tax credit deals that have interest in refinancing around year 13 and not waiting for the full 15 years to refi.
What trends did you see on the affordable side this year?
One noticeable trend was the uptick in demand for refinancings to preserve existing affordable housing. These are straight cash mortgages—sometimes with rehab. We’re projecting we’ll fund more than $1.5 billion preservation refinances this year. This part of the industry is growing.
The other big trend has been the number of high-volume developers teeing up tax credit resyndication deals. Rising demand caused more states to run out of their tax-exempt bond allocations this year than the industry has seen for a long time. Tax credit equity pricing remains high, interest rates have remained low, and both have been fairly predictable.
The main risk to developers teeing up a resyndication deal is their ability to predict the interest-rate environment that will exist when they close the renovation loan with a permanent loan.
We responded by rolling out a specific product called the Bridge-to-Resyndication. Bridge-to-Resyndication is a taxable cash mortgage for acquisition that’s coupled with our Tax Exempt Loan purchase product. It’s getting traction because we can lock the rate for the tax-exempt loan when we close the bridge or at any point during the bridge, which means we’re providing predictability and taking out what is probably the largest risk in a resyndication.
Will Freddie Mac be introducing any new affordable housing program or making key changes to existing programs?
Yes. The first is a new innovation in our tax-exempt loans (TELs), which we originally rolled out as an immediate (loan) and later expanded to forwards. Right now, forwards are about 75% of our total tax-exempt loan volume. We’re now up to $2.5 billion in total commitments under the TEL program and in 27 states.
This past summer we rolled out what we’re calling “Flex TEL,” which is a variable-rate period to a fixed-rate period product. It’s available for acquisition-rehabs and similar deals that need a little more cash flow during the rehab period. Flex TEL offers a maximum three-year variable-rate loan that will fix to a pre-established fixed. Flex TEL can also accommodate an interest-only period.
We also introduced our Green Advantage suite of products in August. It’s already exceeded our expectations, which were pretty high. We’ve quoted approximately $2 billion worth of potential deals in that space, and we’ve rate-locked $800 million, since we rolled out Green Advantage. It’s essentially an add-on to any of our existing products that provides pricing benefits and increased proceeds for financing improvements projected to cut water or utility costs by at least 15%.
Green Up, the flagship, can increase loan proceeds by up to 50% of the projected savings while Green Up Plus can recognize as much as 75% of the projected savings. The main difference is the type of analysis used to estimate the savings, but either way we’ll cover all or part of the analysis’ cost. Green Advantage also discounts pricing for properties with one of eight industry-standard green building certifications and at least one affordable rental unit.
What trends will be you watching next year?
We’re all going to be watching interest rates. We’re all going to be watching tax credit pricing. And we’re all going to be watching the preservation refi business, which, as I mentioned, is something we think will continue to grow.
How much affordable housing business are you on pace to do in 2016?
This year, we expect to have a record year. We’re projecting to approach $5 billion in total affordable housing business.
