For many affordable housing lenders, 2010 was a comeback year.

Federal stimulus money helped to drive new construction early in the year while equity pricing in the private sector improved a little more each passing month.

A backlog from 2009 spilled into 2010, as deals using the Tax Credit Assistance Program (TCAP) and Tax Credit Exchange Program started breaking free from their bureaucratic chains. Construction debt volumes soared as a result, and last year's record low interest rates on permanent debt also drove a sizable refinancing market.

A sense of optimism pervades the affordable housing debt industry after rebounding from a dismal 2009. But that optimism is tempered, as financiers ponder what effect the expiration of TCAP and the exchange program will have on the affordable housing market.

“That's a key question for the industry going into 2011,” says Priscilla Almodovar, the national head of community development real estate lending for JPMorgan Chase. “The stimulus programs were a large driver of the production we saw in 2010, particularly in secondary and tertiary markets. But it's still not clear whether the recent increase in equity pricing will be sufficient to make up the difference that was filled by the stimulus programs."

About 20 percent of Chase's deals in 2010 were driven by the exchange program. But it's not just the exchange program that will be missed. As many state and local governments grapple with budget problems, questions abound around the availability of soft debt this year in the absence of TCAP.

Still, the positive momentum that started last year has led to a much more competitive market for construction and permanent debt. All-in rates on construction loans from Community Reinvestment Act (CRA)-motivated banks continue to drop, and Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) will duke it out on preservation deals this year.

“If you go back a year and a half, we didn't see a lot of competition for deals— clients were just happy to have access to capital,” says Kyle Hansen, an executive vice president who leads the affordable housing debt division of U.S. Bank. “But today, especially on the coasts, a lot of competition has returned to the market. Pricing and structure have certainly responded accordingly."

The rankings

Most of the lenders on the Top 25 list saw a marked improvement last year. But the award for comeback player of the year has to go to Citi Community Capital. Citi regained the mantle of top affordable housing lender, improving from $551 million in 2009 to nearly $3 billion in 2010 in a dramatic reversal of fortune.

The company took a cautious approach in 2009 given the dislocation of the credit markets. But 2010 was a much different story. While the bulk of its volume, about $1.8 billion, was in construction financing, nearly $650 million came in bond credit enhancements, driven by the New Issue Bond Program (NIBP).

“We were probably one of the few lenders and investors to really understand and help those few issuers who had the foresight to secure an NIBP allocation for multifamily,” says Steven Fayne, a managing director for Citi. “We closed more than 50 percent of the NIBP bonds issued in California by both number and volume."

The company is cautiously forecasting a similar volume for this coming year. “The only caveat, other than the economy in general, is how aggressive the competition will be,” says Fayne.

The good news for borrowers is that competition is growing aggressive, especially on the construction debt front. For instance, JPMorgan Chase rolled out its first construction-to-perm program in mid- 2010, driven by competitive pressures.

Chase was much more active on the West Coast last year, an outgrowth of its acquisition of Washington Mutual in 2008. In 2009, Chase only closed eight affordable housing deals on the West Coast. Last year, the company closed more than 30.

“The construction-to-perm product was largely driven by our markets on the West Coast, and the need to compete in those markets both in terms of price and product set,” says Almodovar.

About 15 percent of Chase's volume went through the new program, which features an 18-year term, 30-year amortization, and a 1.20x debt-service coverage ratio. While the program targets tax credit deals, Chase is looking to roll out a similar product this year for developments using taxable bond financing.

U.S. Bank also had a revival in 2010, growing its debt volume by 75 percent over 2009. Of its $700 million in volume last year, roughly $525 million was through the company's construction-toperm product, with the remaining 25 percent through bond deals.

As banks grow more comfortable issuing construction debt, all-in rates slowly continue to fall. As of early February, spreads on construction loans were in the mid-200 to low-300 basis point (bp) range.

“Spreads have come down a little bit over the last year due to increased competition and the normalizing of the market," says Maria Barry, who runs the community development banking division of Bank of America.

Bigger fish in the pond

The banking industry has seen much consolidation over the last three years, leading many top lenders into new markets.

U.S. Bank opened a new community development office in Orange County, as the bank focuses more on the Southern California market, which it entered when it acquired three small local banks in Federal Deposit Insurance Corp.-brokered transactions. And U.S. Bank will focus on breaking into more new markets in 2011.

The bank acquired First Community Bank at the end of January, which will allow it to expand into New Mexico—its 25th contiguous state.

Capital One is also on the rise. The bank's increase in volume last year was mainly attributable to its expansion into new markets like Maryland, Washington, D.C., and Virginia, which came through its acquisition of Chevy Chase Bank. “That's really where we put a lot of emphasis this year, and we saw a lot of growth in those markets,” says Laura Bailey, managing vice president for the community development finance arm of Capital One.

Grandbridge Real Estate Capital also tapped a new market as it increased its debt volume by a whopping $236 million. The company hired veteran governmentsponsored enterprise (GSE) originators Paul Aanonsen and Jack Bauer, formerly of Prudential Mortgage Capital, toward the end of 2009, and it paid off in 2010.

“We now have a really strong presence in Washington, D.C., and that made a significant difference for us,"

says Phil Melton, a senior vice president who leads the affordable housing debt group at Grandbridge. “It's one of the largest per capita areas and probably has the highest per-unit costs across our footprint."

Grandbridge is also looking to offer a new execution to its borrowers this year by pairing the proprietary bridge loan platform of its parent company, BB&T Real Estate Funding, for acquisition or preservation deals.

The agencies

Fannie Mae, Freddie Mac, and the FHA will focus on preservation deals this year. And while the yield on the 10-year Treasury has risen 100 bps since November, all-in rates on 10-year preservation deals were still below 6 percent in early February.

Freddie Mac is winning many 10-year preservation deals, while Fannie Mae has a big advantage in the seven-year space. Freddie's focus on longer-term transactions coincides with the dominance of its Capital Markets Execution (CME) program, a securitized debt platform. Last year, Freddie began offering affordable housing executions through CME, which lowered the allin rates on 10-year deals by about 20 to 25 bps over its portfolio execution.

But Fannie Mae seems to have a much bigger appetite for seven-year deals, undercutting Freddie's prices by as much as 50 bps as of early February.

All-in rates on 10-year immediate fundings from the GSEs were around the 5.75 percent range as of early February, with seven-year deals pricing around 5.3 percent. And not to be outdone, the FHA's 223(f) program continues to offer very aggressive pricing, about 25 bps below Fannie Mae and Freddie Mac.

The FHA is also working on making its construction-to-perm product, the Sec. 221(d)(4) program, more user-friendly for tax credit deals. The agency plans to roll out a tax credit pilot program this year, which will help streamline the processing of those deals.

While the FHA hopes to take a step forward on new construction deals this year, Fannie Mae and Freddie Mac remain stalled. The GSEs' forward commitment programs featured all-in rates of around 9 percent early this year as the companies continue to price the programs out of the market. Many CRA-motivated banks are all too happy to pick up the slack and win that business through mini-perm executions issued from their balance sheets.

New Issue Bond Program

The 4 percent market also improved in 2010, and many financiers expect to see a similar pace of improvement this year. While higher-leverage bond deals, especially those in secondary and tertiary markets, remain a challenge, investor appetite is expected to keep growing. And the continued availability of the NIBP should also help fuel production, at least through mid-year.

Roughly 40 percent of Bank of America's volume last year was through bond credit enhancements. “The NIBP helped to get some deals across the finish line that probably wouldn't have been able to close the financing gap otherwise,” says Barry. “We're pretty optimistic about the 4 percent market. We have a fair number of 4 percent projects that are not NIBP deals in our pipeline right now that look good."

Capital One also reports a pretty extensive recovery in the 4 percent market last year and believes that investor appetite will help fuel more deals this year.

“If you look at national multi-investor funds, you'll see that the portion of bond deals in those funds has come up quite a bit, as high as 40 percent,” says Bailey. “And you're seeing deals get done outside of urban centers—it is not as prevalent, but it certainly happens."

Freddie Mac won a lion's share of NIBP deals in 2010, and that success is expected to breed more success in 2011. The company came out aggressively when the program was introduced, and lenders report there's a comfort level in going with Freddie given their experience on these deals.

Looking out

Debt volumes should continue to rise this year, though everything depends upon the health of the equity market. If tax credit pricing continues to improve, it could be enough to offset the expiration of the stimulus programs. But questions remain about the availability of soft gap financing.

“Tax credit pricing has certainly increased over the last year. When you add the fact that a lot of state and local governments are having budget problems, many deals are still going to have funding gaps," says U.S. Bank's Hansen. “The impact of the fallout of the exchange program is really anyone's guess right now."

And it's a delicate balance. As tax credit prices continue to go up, yields continue to be driven down, and many lenders wonder where the breaking point is.

“At some point, what happens if and when pricing plateaus and new investors aren't there any more?” says Melton. “How low can yields go before people start pushing back, and we lose some momentum? I think you'll find that CRA still drives the day."