Debt Up, LIHTCs Way Down

Fannie Mae invested $10 million in low-income housing tax credits (LIHTCs) through the first half of 2008, a precipitous drop from the $620.5 million mid-year 2007 mark, and just 1 percent of the $1 billion in investments registered through mid-year 2006.

The absence of both Fannie Mae and Freddie Mac from the LIHTC market has hobbled the rate of affordable housing production this year. Yields to tax credit investors have risen from about 5 percent to as much as 7 percent in the last year, causing a corresponding 20 percent drop in tax credit prices, from around $1 to nearly 80 cents today.

Fannie Mae’s diminished interest in LIHTCs will likely continue in the second half, as the company’s LIHTC appetite corresponds with its tax liability. Because Fannie Mae has posted large quarterly losses since the second quarter of 2007, it has little need for the credits.

According to the company, the LIHTC market’s best bet for short-term recovery is to find a new home for the credits.

“There needs to be identified a new class of investors for these products that are willing to take the credits at the price that they’re offered at, at the moment,” said Jeff Hayward, senior vice president of community lending. “That’s a market dynamic, and, being a secondary-market player, that’s not something we can immediately affect.”

But the LIHTC market may have to get worse before new investors are identified, according to Enterprise Community Investment, Inc., one of the nation’s leading and longest-serving tax credit syndicators.

“We expect that yields will need to continue to rise (and prices subsequently need to continue to fall) to sufficiently attract new capital to this part of the market,” said Paul Cummings, Enterprise’s senior vice president of tax credit syndication. “Enterprise is concerned about the impact of this equity contraction on the community development system and is working diligently to try to identify any interested capital with reasonable yield expectations— either from new or existing investors.”

On the plus side, Fannie Mae processed about $617 million of debt financing for rent-restricted properties targeting households earning up to 60 percent of area median income in the first half.

Overall, Fannie Mae invested $20 billion in the multifamily market for the first half of 2008, down from the $27 billion it recorded in the first half of 2007. The decline was attributed to a slow market and a sharp decrease of investments in commercial mortgage-backed securities, a segment that all but disappeared in the first half of the year.

The company’s network of delegated underwriting and servicing (DUS) lenders delivered $18.2 billion in the first half, up from $14 billion in the same period last year.

The company also posted $5 billion in small loan production, up from $3 billion in the first half of 2007. The company tweaked its small loan program over the last year by streamlining its underwriting guidelines, notably reducing the required amount of borrower documentation and third-party reports.

“With all those changes we’ve made to the program, we’ve been able to be much more active in this space, and the numbers speak for themselves,” said Michelle Evans, vice president of multifamily corporate affairs.

It wasn’t just small loans that increased: Fannie Mae also processed about $3 billion in structured transactions, a 67 percent increase from the $1.8 billion it handled in the first six months of 2007. Structured transactions are typically large, customized, multi-asset transactions.

The company backed about $1.5 billion in seniors housing loans in the first half of the year, an area it will focus on in the second half as well. “We’re devoting additional resources to this area by increasing our staff to give us additional underwriting and structuring capabilities to continue to do seniors transactions,” said Manny Menendez, Fannie Mae’s vice president of multifamily product development.

Additionally, Fannie Mae said it’s committing to invest up to $1 billion in military housing bonds, a market segment currently lacking liquidity.

Second-half outlook

Fannie Mae plans to introduce a Streamlined Rate Lock program, allowing borrowers to lock in interest rates at any point during the underwriting process, in the second half.

Fannie Mae’s current DUS Early Rate Lock program has certain prescribed underwriting processes that DUS lenders must follow before rate-locking a loan. “Here, we’re removing those prescriptions and are delegating back to the lenders that decision as to when they’re ready to rate lock,” said Menendez.

The company also announced it is working with some DUS lenders on a loan program that would combine Fannie’s current construction loan capabilities through its community lending division with permanent DUS financing.

The intent of the new construction/ permanent program is to provide a more seamless construction-to-permanent loan execution. Under the program, “Fannie Mae would participate in the lender’s construction loan and at the same time provide a rate lock for the take-out of that construction loan through our permanent financing through the DUS program,” said Menendez.

First-half highlights

Fannie Mae moved back to a 1.25x debt-service coverage ratio (DSCR) in the first half, after briefly standardizing at 1.20x during the conduit craze.

Fannie Mae also made some borrower- friendly changes to its criteria for underwriting acquisition deals. In the past, DUS lenders used a rigid, formulaic approach to sizing loans on acquisition deals. Lenders would look only at a property’s historical data—the trailing three months of net rental income and the trailing year of expenses—and develop a “baseline” net operating income from which to size the loan.

But a new formula, which went into effect this spring, allows lenders to take the buyer’s projections into account when sizing the loan, which reduces deal cycle time by eliminating the need for waivers, and ultimately increases the loan amount.

The company introduced two new multifamily programs in the first half of 2008. The first, rolled out in January, was the Micro Loan program, which offers loans of up to $750,000 for developments of five units or more.

The company’s conventional smallbalance loan program, 3MaxExpress, was a bad fit for such loans since it required more stringent underwriting than similar programs offered by banks. For the Micro Loan program, borrowers don’t have to submit annual financial statements, and third-party reports, like engineering and environmental reports, are streamlined to save borrowers money.

Micro Loans feature a maximum loan-to-value ratio of 75 percent, and 10-, 15-, 20-, and 30-year amortization schedules. To be competitive with community banks, the Micro Loan program offers a DSCR of 1.10x, compared with the standard 1.20x DSCR on 3MaxExpress loans.

The second new product, rolled out in May, is called Refi Plus. The program allows borrowers to lock in rates for the refinance of existing Fannie Mae loans up to two years in advance of the prepayment period end date, in conjunction with supplemental financing.

Borrowers using Refi Plus are able to get cash out immediately in the form of a supplemental loan; they don’t have to wait for the existing loan to mature. Borrowers also eliminate uncertainty about future rates since they’re locking in the rate of the refinance loan on a forward basis, up to 24 months out.