Citi Community Capital tops AFFORDABLE HOUSING FINANCE's list of top lenders, originating about $1.8 billion in debt in 2007, or more than $400 million more than it posted in last year's survey. That climb was due to its acquisition of Capmark's Affordable Housing Debt (CAHD) group at the beginning of 2007. The acquisition brought Fannie Mae and Freddie Mac licenses to Citi as well as tax-exempt bond expertise, a business line that Capmark developed over 28 years. It also allowed the company to establish a bigger presence in the Northeast, where Pennsylvania-based CAHD was focused.

But in 2008, the company's debt volume was down about 70 percent from 2007 due to the dislocation in the tax credit equity market. Citi will take a conservative approach in 2009, focusing more on existing clients than on finding new ones. “Our No. 1 priority in 2009 is to manage the risk in our portfolio,” says Hal Kuykendall, a managing director at Citi. “We're also trying to take care of the new business of our best clients.”

Citi reports that its portfolio of affordable housing loans is performing very well. But a lack of tax credit equity, trouble finding soft money from government agencies, and volatility in the capital markets will make 2009 a tough year for developers.

“We are as bullish on affordable housing as we ever have been; it's a very good business and is fundamentally sound,” says Kuykendall. “The only issue today is, with the volatility in the capital markets, how do you get deals done?”

One of the biggest problems Citi faced in 2008 was in tax-exempt bond credit enhancements, a business line that accounted for nearly 40 percent of its 2007 volume. Fannie Mae, previously one of the largest credit enhancers in the business, dropped out of the market for variable-rate bond credit enhancements in 2008, just as investor interest in the fixed-rate bond market waned.

While Freddie Mac stayed in the market last year, it was also growing much more conservative. In fact, Freddie was reportedly re-evaluating its position in the variable-rate bond credit enhancement world as 2008 came to a close.

Freddie Mac also raised its fees, making it more difficult for tax-exempt bond deals to pencil out. Freddie used to charge 15 basis points (bps) for a liquidity fee on tax-exempt low floaters. It now charges 100 bps. And the company once charged an annual guarantee fee of 25 bps, which shot up in 2008 to 60 bps.

Freddie Mac is less likely to underwrite 4 percent deals at a 1.15x debtservice coverage ratio, moving closer to a 1.25x standard. And 35-year amortization terms, which Freddie once routinely offered, are now closer to 30-year terms. The underwriting changes are good from a safety standpoint. “But the problem is, it causes gaps in funding, and these gaps are a big challenge for 2009,” says Steven Fayne, a managing director of Citi. “With the increase in fees, it becomes harder to make the numbers work.”

The uncertainty in the capital markets affects every type of loan and has startled both Kuykendall and Fayne, two battle-tested veterans of the industry. “The volatility in pricing is something none of us have ever seen before. There really is no certainty in the business today,” says Kuykendall. “You get new pricing guidelines almost on a daily basis. Whether it's the equity, our government-sponsored enterprise partners, or bond holders, there's just uncertainty all around.”

Still, the affordable housing industry's long-term future is bright despite the shortterm gloom.

“The sun is going to come out again. The volatility in the capital markets is the issue, not the product itself,” says Kuykendall. “We're in a storm because of the capital markets, and everyone's hunkering down now to get through the storm, but the buildings are holding up very well.”