Fannie Mae and Freddie Mac are returning to the low-income housing tax credit (LIHTC) market as investors.
The government-sponsored enterprises were given the go-ahead to invest in housing credits on a limited basis by the Federal Housing Finance Agency (FHFA), which cited several factors for its decision, including furthering the enterprises’ mission to support affordable housing and ensuring that they could provide “a countercyclical role in the LIHTC market in the future if needed.”
Each enterprise will have an annual investment limit of $500 million, less than a 5% market share for each. Within this funding cap, any investments above $300 million in a given year are required to be in areas that have been identified by FHFA as markets that have difficulty attracting investors. These investments are designed to preserve affordable housing, support mixed-income housing, provide supportive housing, or meet other affordable housing objectives.
Fannie Mae and Freddie Mac were two of the nation’s largest LIHTC investors, representing an estimated 35% to 40% of the market, before being placed into conservatorship by FHFA in 2008. The enterprises’ financial condition deteriorated during the housing market crash, requiring government intervention.
“Our intent is to make sure that we serve that part of the market that is not served consistently today,” says David Leopold, vice president of targeted affordable sales and investments at Freddie Mac Multifamily.
This includes investing in rural projects and affordable housing preservation. The participation of the GSEs can help provide stability to regions that have unpredictable liquidity, says Leopold.
In general, large urban areas like New York and San Francisco consistently receive strong interest and high pricing for housing credits primarily from Community Reinvestment Act (CRA)-motiviated investors while rural regions see less investor interest and lower pricing for housing credits.
Both Fannie Mae and Freddie Mac hope to close on their first investments in the first quarter of 2018.
“Our business strategy is to be primarily but not exclusively a proprietary investor,” Leopold says.
“This is something we wanted to do because we believe it’s important, and it’s an important part of our mission,” he says. “Low-income housing tax credits are the number one subsidy for development of new affordable units. In order to do everything that we are charged with under our charter, we need to be actively engaged in what is the largest investment opportunity to promote affordable housing.”
Fannie Mae leaders also said they will resume LIHTC activities “to provide a reliable source of capital for affordable rental housing and underserved markets.”
“We look forward to expanding the productive relationships we have with key partners in the LIHTC industry and enhancing our product line to offer equity financing solutions to support the ongoing needs of the market,” says Dana Brown, director of multifamily customer engagement and program lead for Fannie Mae LIHTC investment activities. “We are ready to hit the ground running, and we look forward to expanding our relationships and forming new partnerships.”
The company will be investing through syndicator partners and will likely be investing in both private-label funds, where it is the sole investor, and in multi-investor funds, according to Brown.
When syndicators have multi-investor funds that align with Fannie Mae’s business objectives and market needs, the company will use that vehicle while private-label funds will allow Fannie Mae to better target specific deals and markets, Brown says.
Leaders at both enterprises say their return as investors will be good for the LIHTC market.
“I think it’s definitely a plus for the overall market both in the near- and long-term because it increases the diversity of the investor base," says Brown. "We’re not a CRA-motivated investor, and we’re not purely economically motivated. Broadening the diversity of the investor base is a good thing.”