Despite COVID-19, Affordable Housing Lending Remains Strong

While the COVID-19 pandemic and the resulting economic downturn ravaged the U.S. last year, the nation’s affordability crisis and the need for safe and affordable housing were boosted even further into the spotlight. Amid the uncertainty, lending volume remained strong for affordable housing, buoyed by historically low interest rates as well as support from Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (HUD).

“COVID-19 has impacted nearly every industry, and, with housing, it has brought additional light to the recognized need for more affordable housing,” says Rob Likes, national manager of Community Development Lending & Investment at KeyBank Real Estate Capital. “We made the decision to continue lending both on our balance sheet and in government-sponsored enterprise (GSE) capital markets through 2020 at an increased level from previous years, understanding that the pandemic would only intensify the need for the most vulnerable.”

Affordable Housing Finance’s Top 25 affordable housing lenders provided over $53.6 billion in permanent and construction loans to developments that serve households up to 80% of the area median income (AMI) in 2020. This is up from the AHF Top 25 lenders’ $41 billion in 2019 and $35.2 billion in 2018.

Citi Community Capital retains the No. 1 position on the lender list, having lent just over $7 billion to affordable housing properties last year. This is almost a billion dollars more than in 2019.

“Developers, and local and state governments, made extraordinary efforts last year to facilitate the large number of projects that were financed. The pandemic made the need for all types of housing even more critical, but the challenges of having people on construction sites and rehabbing occupied units along with pressure on the availability of subsidy made for a very challenging set of circumstances,” says Richard Gerwitz, co-head of Citi Community Capital. “We felt that it was more important than ever that we make the capital available to fund the new construction and preservation of affordable rental projects.”

Wells Fargo, with $4.3 billion, remains at No. 2, followed by KeyBank Real Estate, which lent $3.7 billion in 2020. Rounding out the Top 5 affordable housing lenders are Bank of America and JLL Real Estate Capital.

A new name to the lender list at No. 6 is Lument, the combined organization of Hunt Real Estate Capital, Lancaster Pollard, and RED Capital Group.

Top 25 Lenders of 2020

Company	2020 (in millions)	2019 (in millions)
1. Citi Community Capital	$7,002.4	$6,091.6
2. Wells Fargo	$4,309.6	$4,749.2
3. KeyBank Real Estate Capital	$3,704.0	$2,656.3
4. Bank of America	$3,532.4	$2,987.0
5. JLL Real Estate Capital	$3,438.7	$1,925.9
6. Lument	$3,048.8	$1,544.7
7. JPMorgan Chase	$2,671.0	$2,425.0
8. Walker & Dunlop	$2,438.0	$1,344.0
9. Greystone	$2,273.2	$1,116.5
10. CBRE	$2,242.0	$1,228.0
11. Rockport Mortgage Corp.	$2,230.0	$537.6
12. Merchants Capital	$2,209.9	$1,060.8
13. Capital One	$1,581.0	$1,366.0
14. PNC Real Estate	$1,452.9	$646.1
15. U.S. Bank	$1,416.0	$905.0
16. Deutsche Bank Securities	$1,339.8	$1,103.2
17. M&T Bank	$1,299.1	N/A
18. Berkadia	$1,144.0	$921.0
19. Bellwether Enterprise	$1,100.0	$935.0
20. PGIM Real Estate Finance	$1,063.3	$787.0
21. RBC Capital Markets	$940.1	$406.8
22. R4 Capital	$928.9	$495.8
23. Stifel, Nicolaus & Co.	$838.7	$4,163.0
24. Red Stone Tax Exempt Funding	$817.6	$768.0
25. Barings	$613.0*	$680.0

COVID-19 Challenges

The biggest threat to the lending market is the nation’s continued road to economic recovery and how fast the country can rebound from effects related to the pandemic, says Lisa Gutierrez, senior vice president at U.S. Bank.

“Many pandemic-related factors correlate back to the low-income housing finance industry, such as market-rate rent deterioration in urban/metro markets and the ability to maintain rental savings; appetite for tax credit investment from financial institutions/institutional investors, given the many federal, state, and disaster recovery credits flooding the market this year; and local/state pandemic-related expenses straining budgets, which could halt or diminish soft subordinate lending and subsidy programs,” she says.

Likes adds that COVID will continue to threaten lenders and borrowers in different ways and is expected to do so throughout this year.

“Political policy and social challenges as well as fiscal budget issues at state and local levels will be important to watch. The affordable industry needs policy support at every level to continue to bring additional resources and make projects feasible for developers,” he says. “We are hopeful that with the election behind us and a COVID vaccine becoming more widely available, that will help mitigate these threats and allow for more stability in the marketplace.”

While the pandemic has had an impact on every industry, many lenders point out that the affordable housing industry has not been hit as hard and has shown its resiliency.

Lument senior managing director Paul Weissman says it has had much less effect than anticipated on the affordable housing space. “Collections have been surprisingly resilient for our affordable portfolio. Borrowers have had to contend with COVID reserves for transactions that don’t have Section 8 or new low-income housing tax credits (LIHTCs).”

James Spound, president of R4 Capital Funding, echoes that sentiment.

“With the exception of the capital markets turbulence last spring, the industry has been resilient, and our investor base has remained committed to affordable housing,” he says. “From a risk perspective, there has been ever more monitoring on the construction side, evaluating a project’s capacity to absorb development delays and cost spikes. However, fundamental underwriting standards are not impacted by the pandemic.”

Alice Carr, managing director and head of community development banking at JPMorgan Chase, says her team took swift measures to assess the strength of its portfolio and its clients early in 2020 when COVID-19 had created an environment of uncertainty. JPMorgan Chase rolled out a transparent and proactive relief program in April 2020, but realized few clients needed mortgage relief.

“Clients were appreciative of the proactive response and relieved when the program wasn’t necessary in most cases. Not surprising since both our construction and permanent portfolios showed extraordinary resilience with minimal delays and delinquencies throughout the year,” says Carr. “In a typical recession, resources would need to be diverted to focus on workouts and other portfolio management issues. Since this was not the case for the portfolio during COVID-19, the resiliency of our business enabled us to continue to deliver new loans to clients throughout the year.”

Bank of America has been proactively working to identify and mitigate risk to help protect developers as well as the bank.

“During the crisis, we are finding ourselves increasingly in an advisory role to our clients, helping identify risks, gaps, and opportunities to keep transactions and construction viable and on track,” says Maria Barry, national executive of Community Development Banking.

For Citi Community Capital, the most significant change due to COVID-19 has been how lenders look at preservation projects, where access to occupied units can be a challenge.

“As a result, there has been an increased cautiousness projecting the amount of time it will take to complete project renovations. Additionally, concern about tenants’ ability to make rent payments is often resulting in higher reserve amounts being requested and set aside,” says co-head Kathy Millhouse.

In addition, Millhouse says the pandemic has added scrutiny to mixed-income and mixed-use developments.

“In terms of new construction, mixed-income projects have been viewed with a more conservative eye, as rents have softened in many areas, particularly in large urban markets,” she says. “As people have worked from home, or sheltered in place, retail has also suffered, and lenders are therefore heavily discounting, or looking for additional support, for any commercial component of a project.”

Looking Ahead

Most lenders anticipate a strong year ahead—with some calling for an even more active year than 2020—citing a positive economic outlook, low interest rates, continued demand for affordable housing, and the new minimum 4% LIHTC rate passed by Congress.

“There is an increased unmet need for housing—for the population that is homeless and for the 50% to 80% AMI tenants who constitute the majority of the residents who fill the units we finance. Both groups were those that were most affected by the pandemic in terms of loss of work and reductions in wages,” says Citi Community Capital co-head Jeremy Johnson. “With the general expectation that interest rates will continue to remain relatively low, combined with the increased equity available from having the 4% credit fixed, we believe there will be a lot of projects that pencil. It is also quite possible that we’ll see financial and legislative support for affordable housing construction and preservation. The upshot is, we’d bet 2021 could be an even more active year than 2020.”

Cody Langeness, president of Red Stone Tax Exempt Financing, agrees. “Due to the fix in the 4% LIHTC credit rate, interest rates staying low for the foreseeable future, and with more COVID stimulus expected, we expect lending volumes to increase substantially for us and across the industry.”

Others tout more lending opportunities due to the minimum 4% rate.

“The new fixed 4% credit will increase bond volume substantially in 2021, and we anticipate most states will be out of cap in short order pending other legislative changes,” says C.W. Early, senior managing director of affordable housing at JLL Real Estate Capital.

However, Philip Melton, executive vice president and national director of affordable housing and Federal Housing Administration (FHA) production at Bellwether Enterprise Real Estate Capital, warns that bond transactions flooding the market might lead to a decline in pricing and demand.

“Bond transactions early in the year with the new 4% LIHTC fix will flood the market with new deals. Depending on LIHTC investor appetite, we may see a decline of equity pricing as well as demand in the latter part of the year,” he says. “We also believe that preservation acquisition financing will pick up as the market calibrates to the post-COVID impact, with a lot of investors having sat out in 2020 but have significant funds set aside for acquisitions, eager to transact in 2021.”

Lenders expect to see Fannie Mae and Freddie Mac continuing to provide liquidity in the space, but say the lending caps imposed by the Federal Housing Finance Agency (FHFA) could have an impact on the affordable housing space.

“I expect the agencies to continue to be aggressive in the affordable housing space,” says Weissman. “HUD is experiencing a significant backlog of transactions so FHA transactions will generally be focused on those deals that have long lead time.”

Melton adds that while Fannie Mae and Freddie Mac will remain focused on mission-driven lending, private lending options—balance sheet and aggregators–will play a growing role in the affordable housing space.

In addition, he says, “life insurance companies will compete heavily for high-quality assets that meet their criteria and that CMBS could see a significant uptick in volume due to the FHFA caps imposed on Fannie Mae and Freddie Mac.”

Dwayne George, executive vice president and national head of production at Merchants Capital Corp., agrees. “With the caps on the GSEs, we expect bridge, FHA, CMBS, and life companies to pick up a bit for conventional multifamily business.”

Other trends lenders are watching for 2021 include workforce housing and permanent supportive housing.

“We expect more production in the workforce housing segment as more municipalities and sponsors are looking for creative ways to develop properties for that ‘missing middle’—80% to 120% of the AMI,” says Liz Diamond, managing director and head of affordable originations in Berkadia.

Greystone’s Jeff Englund, executive vice president of affordable housing, agrees. “We expect to see more interest in workforce housing transactions for both new construction and preservation, especially in high-cost markets. The GSEs’ Duty to Serve will continue to keep the focus of affordable housing, including naturally occurring affordable housing.”

U.S. Bank’s Gutierrez says she also anticipates permanent supportive housing developments will continue to gain local and state funding support, “especially magnified with the growing homeless populations in cities large and small across the country.”