Freddie Mac has taken a big step toward offering a green rehab mortgage through a partnership with nonprofit lender Community Preservation Corp. (CPC).

The organizations recently announced a $1 billion green financing initiative to offer construction and mortgage loans to multifamily owners pursuing energy-efficient upgrades and retrofits. Half of the funds come straight from Freddie Mac.

The question of how lenders account for energy-efficient upgrades in their underwriting has never been answered, but this pilot program may point the way. Freddie Mac has struggled with this question for years in trying to come up with a green rehabilitation mortgage product.

“Ever since I came to multifamily, I've been talking to people about how to do green mortgages,” says Mike May, senior vice president of McLean, Va.-based Freddie Mac's multifamily division. “We talk a lot about it, but we've never done anything about it until now.”

The biggest problem holding lenders back is a lack of reliable data. While upgrading an HVAC system or replacing windows certainly leads to cost savings, lenders pause when underwriting any additional net operating income (NOI) in the absence of clear metrics.

But this pilot program will monitor the long-term effects of green retrofits to measure their efficiency in conserving heating fuel, electrical, and water usage. A resulting green mortgage product is still far off since it will take awhile for the numbers to be compiled. But the data collected by CPC will be the basis of Freddie Mac's efforts to offer a green mortgage product in the future.

“This is something where I can actually clearly see what I need to get comfortable to create a national program,” says May. “Once we have confidence that there will be a 5 percent reduction in this or that expense, we can create a green rehab program using those statistics to underwrite the future NOI.”

CPC, an affordable housing lender for New York and parts of New Jersey and Connecticut, hopes the program will become a model for other regional initiatives. The organization's “realistic goal is to increase fuel and electrical efficiency of existing apartment buildings by 20 percent or more,” says Michael Lappin, New York City-based CPC's president and CEO.

The program will target low-, moderate-, and middle-income multifamily buildings. The funds will be enhanced by a variety of subsidy programs, including tax abatement and exemptions, and government-provided grants and low-cost secondary loans.

Other funding sources for the program include $300 million from the New York state and New York City public employee pension funds, and about $200 million from private lending institutions.

Low swaps, high forwards

Freddie Mac continues to offer the best execution on the market for tax-exempt bond credit enhancements through its variable-rate swap program.

While the gulf between fixed-rate and variable-rate bond deals narrowed in the fourth quarter, Freddie's variablerate with a swap was priced about 50 basis points (bps) less than a fixed-rate execution from either government-sponsored enterprise as of mid-December.

But forward commitments for 9 percent deals are another story. Through the first half of 2009, Freddie Mac's pricing on forwards was well inside of Fannie's, but prices inched up as the year went on, and both companies started 2010 pretty much on par. And that's bad news for the industry.

Funded forward commitments were pricing at around 8.5 percent, while unfunded forwards were in the mid-9 percent range in mid-December. Freddie Mac still offers 35-year amortizations on tax credit deals, a competitive advantage over Fannie Mae.

Freddie is working on porting its forward commitment product into its Capital Markets Execution program, which would help lower the rates. But investor interest in such a product is unclear, and forward commitments will likely remain a balance-sheet execution for the foreseeable future.

For immediate fundings, the Federal Housing Administration (FHA) has stolen some thunder from the GSEs, featuring all-in rates of about 5 percent, at least 50 bps below what Fannie and Freddie were offering in mid-December. Still, time-sensitive borrowers are tapping the GSEs, since it's a much quicker execution than an FHA loan.

“In the taxable space, the FHA is extremely competitive today, but in the tax-exempt bond space, Freddie's swap execution continues to be a great execution,” says Paige Warren, a managing director who heads the affordable housing platform at Newark, N.J.-based Prudential Mortgage Capital Co.

Prudential has seen its Freddie Mac affordable volume grow from about $127 million in 2008 to more than $200 million in 2009. Like all affordable housing lenders, the company made up for the lack of new tax credit business with preservation deals and refinancings of Sec. 8 properties.

TCAP, exchange concerns

While many in the affordable housing industry are hoping that the Tax Credit Assistance Program (TCAP) and credit exchange can jump-start the market, those in the lending community are skeptical. “There's a lot of hope, but have you seen many real transactions?” asks May. “We haven't seen a lot of success there.”

Warren hasn't seen many deals cross her desk that take advantage of the TCAP or exchange program, either. Part of the problem is the slow implementation of the programs by state housing fi- nance agencies. And another challenge is how Fannie Mae and Freddie Mac will approach those deals.

In the past, tax credit deals always had more aggressive underwriting assumptions than conventional deals, because the presence of investors and syndicators gave lenders comfort. If the property had problems, investors would step in, while syndicators would help ensure compliance.

But for tax credit exchange deals, the absence of a traditional investor and syndicator is forcing lenders to underwrite them as though they were conventional, market-rate deals.

“There's the open issue of how the states implement them, and then there's the open issue of how Fannie and Freddie choose to underwrite them,” says Warren. “None of that has really played out yet. There's been a lot of talk, but there hasn't been a lot of business done yet.”