Both Fannie Mae and Freddie Mac posted big multifamily financing volumes in 2016, with a significant amount of business coming in affordable housing.
The activity is attributed to strong market conditions as well as product innovation from the government-sponsored enterprises (GSEs).
“The vast majority of the year we had continued low interest rates and high (low-income housing) tax credit (LIHTC) pricing,” says David Leopold, vice president of affordable housing production for multifamily at Freddie Mac. “The market dynamics were favorable for new transactions.”
However, any momentum gained in 2016 is likely be slowed this year as tailwinds have shifted into headwinds for the industry.
Several factors could reduce the number of transactions this year, including rising interest rates and falling LIHTC pricing. In addition, several states are delaying their LIHTC allocation rounds as they wait for the market to settle after being jolted by the prospects of tax reform. Concerned that Congress will overhaul to the tax laws that drive the LIHTC program, housing credit investors have cautiously stepped out of the market or have been repricing deals in early 2017.
In light of the different changes, leaders at both GSEs say they will be digging in to do more preservation deals this year.
Others agree that the industry in general may shift toward doing more preservation projects if new construction transactions become tougher to finance.
“A drop in the amount of LIHTC equity in deals, due to the anticipated drop in the corporate tax rate reducing tax credit investors’ yield, could make it tough to finance new construction projects without having quite a bit of soft subordinate debt,” says Frank Baldasare, senior vice president at Walker & Dunlop, a Fannie Mae and Freddie Mac lender.
Overall, both GSEs will have an emphasis on doing “uncapped business,” which includes affordable housing deals, as well on financing deals that incorporate green construction and green renovations, says Baldasare.
“Both Fannie Mae and Freddie Mac are offering discounts off their standard spreads if you’ll follow one of their green programs,” he says.”
Fannie Mae reported providing $55.3 billion in financing to support 724,000 units of all multifamily housing—the highest volume in the history of its Delegated Underwriting and Servicing (DUS) program.
Just in its affordable housing program, the GSE posted $5.6 billion in overall production, including $4.3 billion for rent-restricted properties and properties receiving other federal and state subsidies. These are properties that serve residents earning no more than 60% of the area median income (AMI). Fannie Mae saw this area of business increase from $3 billion in 2015, a 43% hike.
The company also provided $1.3 billion in financing for properties with rent restrictions between 60% and 80% of the AMI, a big increase of 101% from $648 million in 2015.
States and local governments are working to increase affordable housing in their communities, including putting in rent restrictions, regulatory agreements, and incentives to preserve units in this 60% to 80% income range, say Bob Simpson, vice president of affordable, green, and small-loan business at Fannie Mae.
“We’re going to continue to do more to support those efforts in 2017,” he say. “We think it’s a growing part of the market.”
However, housing with deeper levels of affordability will remain the GSE’s primary focus.
“We’re going to do more between 60% and 80% AMI, but our affordable bones run deep in the income spectrum below 60% of the AMI, and we’re not going to stop doing that,” Simpson says.
He attributes Fannie Mae’s recent gains to the “product innovation” that it brought to the market in early 2016, including a significant amount of growth in the amount of business the company did through its structured ARM (adjustable-rate market) and capped ARM products.
“I also think being able to provide a declining prepay option on all of our executions across the affordable spectrum significantly increased our competitiveness, so we saw a nice pickup on our declining prepay options,” says Simpson, noting that Fannie Mae also saw growth in its tax-exempt bond pass-through product in 2016.
Freddie Mac reported a record $56.8 billion in total new multifamily loan volume last year, financing approximately 738,000 rental units. This included $6.3 billion in targeted affordable housing loans, of which more than $2.4 billion was for multifamily bond credit enhancements, and other guaranteed transactions.
“We added four new targeted affordable seller-servicers,” says David Leopold, vice president of affordable housing production for multifamily at Freddie Mac. “We also diversified our product mix. More specifically, we did over $1.2 billion in preservation loans. That was a record high.”
Leopold expects to see even more preservation deals this year. “We will still be aggressive about new tax credit deals, but because there may be fewer of those we hope to make up the difference by leaning into preservation,” he says.
Freddie Mac has grown its targeted affordable seller-servicer network from 11 to 17 in the last two years, according to Leopold, adding that any of the recent top nine would have made the top three just three years ago.
The recent moves to expand its network and diversify products position the company to be in strong shape going forward, he says.
The biggest piece of Freddie Mac’s $6.3 billion in targeted affordable housing production is its tax-exempt loans (TELs). The company recently rolled out its Flex TEL product that allows for a float-to-fixed structure that works well with acquisition-rehab transactions, which have a more constrained NOI (net operating income) for a period, according to Leopold.
Under the program, Freddie Mac can “float” for as long as three years and then flip a loan to a predetermined fixed rate.
Most of the firm’s TEL volume continues to be “forward” financing commitments. In these deals, Freddie Mac partners with an entity that provides construction-period financing and LIHTC equity. The partner is able to receive Community Reinvestment Act credit for both the construction loan and LIHTC investment, and Freddie Mac is then able to come in and provide a fixed-rate permanent loan.
Duty to Serve
Looking ahead, it will be interesting to follow the GSEs’ implementation of their Duty to Serve requirements. Fannie Mae and Freddie Mac are required to provide leadership to facilitate a secondary market for mortgages on housing for very low-, low-, and moderate-income families in three underserved markets—affordable housing preservation, manufactured housing, and rural housing.
In December, the Federal Housing Finance Agency (FHFA) issued a final rule on the GSEs’ Duty to Serve. The rule cracks open the door for Fannie Mae and Freddie Mac to potentially re-enter the LIHTC market in rural areas. Once major LIHTC investors, the GSEs have not been in the market since going into conservatorship.
At this time, the rule does not permit the GSEs to make new LIHTC investments. Instead, it says that investments in rural areas would be eligible for Duty to Serve credit subject to approval of such investments by FHFA.
Leaders at Fannie Mae and Freddie Mac have expressed their interest to get back into the LIHTC market.