Fueled by a torrential second half, Fannie Mae and Freddie Mac both announced that their multifamily volume in 2007 hit record highs, at $60 billion and $44.7 billion respectively.

The government-sponsored enterprises (GSEs), which had lost much market share to conduit lenders through the first half of the year, found themselves the beneficiaries of the mid-year meltdown of the commercial mortgage-backed securities (CMBS) market.

“It was almost a tale of two years,” said Heidi McKibben, Fannie Mae's vice president and head of multifamily production. “We saw a shift in August, with much more volume directed toward the agencies.”

But it was a mixed bag for the affordable housing industry. Each company experienced a sharp decline in its volume of low-income housing tax credit (LIHTC) investments. Fannie Mae's LIHTC investments were nearly halved in 2007, to $1.1 billion from $2 billion the year before. Freddie Mac's LIHTC investments dropped a less severe $50 million in 2007, to $450 million.

GSEs' 2007 Multifamily Production

Freddie Mac:
New multifamily business LIHTC investments Acq-rehab/upgrade Affordable housing Seniors housing
$28.8 billion 500 million N/A 1.2 billion 1.5 billion
$44.7 billion 450 million 800 million 3.7 billion 1 billion
Fannie Mae:
New multifamily business LIHTC investments DUS program Affordable housing Seniors housing
34.3 billion 2 billion 20.4 billion 2 billion 2.2 billion
60 billion 1.1 billion 30.3 billion 2.2 billion 5.9 billion

The GSEs' absence from the LIHTC market during the last nine months has been conspicuous, and the corresponding drop in LIHTC prices over that timespan has caused much anxiety in the affordable housing industry. LIHTC prices have fallen to about 85 cents per tax credit dollar in some markets in the first quarter, compared to about 95 cents a year earlier. Many expect this trend to continue through the first half, if not all of, 2008.

On the plus side, the GSEs upped their affordable housing debt activities last year. Freddie Mac more than tripled its affordable housing debt volume, to $3.7 billion, from $1.2 billion the year before. Fannie Mae saw a modest increase in its affordable housing debt volume, to $2.2 billion, from $2 billion the year before.

2007 highlights

Fannie Mae overhauled its Delegated Underwriting and Servicing (DUS) guide to make its program more competitive in 2007. The standard 1.25x debt-service coverage ratio (DSCR) became a 1.20x DSCR—even down to 1.15x in strong markets—and the guide was boiled down from more than 200 pages to just 50, speeding up deal cycle times by giving more authority to the GSE's network of lenders.

Fannie Mae also released its Community-Investment Mezzanine Moderate Rehab product, which combines a mezzanine loan with a permanent DUS loan. Introduced in June, that product financed $180 million in mezzanine loans, and led to $1.7 billion in permanent DUS loans. Fannie Mae also saw a significant increase in its seniors housing business, to $5.9 billion from $2.2 billion the year before.

One highlight from Freddie Mac's 2007 was its volume of more than $800 million in Acquisition Rehabilitation/ Acquisition Upgrade products—a huge figure when you consider that those products weren't introduced until October.

The acquisition-rehabilitation product is aimed at substantial rehabs of up to $30,000 per unit and features a loan-tovalue (LTV) ratio of 86 percent and a DSCR of 1.15x (down to 1.10x for the interest-only portion of the loan). The acquisition upgrade product, aimed at more cosmetic rehabs of up to $10,000 per unit, features an LTV of up to 86 percent, and a DSCR of 1.20x (down to 1.15x for the interest-only period).

Freddie Mac also continues to focus on expanding its roster of Targeted Affordable Housing Seller/Servicers. Last September, Centerline Capital Group became the first lender in that network to achieve fully delegated status, meaning it can underwrite affordable housing loans without prior approval from Freddie Mac. And in March, Wachovia was granted fully delegated status as well. Six other companies round out the roster, and four of them are close to achieving fully delegated status, according to Mike May, Freddie Mac's senior vice president of multifamily sourcing.

2008 outlook

Fannie Mae kicked off 2008 by announcing a new small loan program, called Micro Loans, for loans of up to $750,000 on developments of five units or more. The company is also working on some refinancing products slated for a 2008 delivery.

Freddie Mac is busy working on a CMBS execution that it may roll out later this year. The plan is to create and sell bonds backed by a pool of multifamily mortgages, which would be provided by its network of Program Plus lenders. The program is so advanced that the company could have executed a CMBS deal in the first quarter but will first test it out through a pilot program, according to May.

Unlike much of the market, the GSEs are still doing multifamily deals of up to 80 percent LTV. And their pricing is the lowest in the market. The GSEs are quoting a spread over the five-year Treasury rate of around 270 basis points, leading to an allin rate of 5.2 percent. Seven-year loans are going for 250 basis points over the Treasury, and 10-year loans for around 230 basis points over, totaling an all-in rate of about 5.50 percent and 5.87 percent, respectively, in early March.

Many GSE-affiliated lenders expect to ride the surge of agency business throughout 2008. KeyBank Real Estate Capital closed only about $100 million in Fannie Mae business in 2007, but in January 2008 alone, it closed about $125 million. KeyBank's target is to process about $750 million in Fannie Mae business in 2008. The company also plans to close another $750 million in Freddie Mac deals in 2008, up from $250 million last year, according to Dave Shillington, KeyBank's new director of agency lending.