Freddie Mac was still providing competitively priced permanent debt for 9 percent low-income housing tax credit deals and actively quoting variable-rate bond credit enhancements in mid-December 2008.

Freddie's pricing was inside of Fannie Mae's by an average of about 10 basis points (bps). For an immediate funding on a 9 percent deal, Freddie Mac was pricing all-in rates in the midto high-6 percent range, while forward commitments were coming in at about 100 bps higher.

“Their pricing is coming in a little tighter than Fannie Mae's, and they end up doing longer amortizations, which helps to make more deals pencil out,” says Phil Melton, a senior vice president focused on affordable housing for Grandbridge Real Estate Capital.

Another advantage Freddie touts is its willingness to provide variablerate bond credit enhancements. As of mid-December, Fannie was not actively quoting floating-rate bond transactions due to concerns over bond market volatility. In fact, Fannie was in and out of that market throughout 2008, frustrating many Delegated Underwriting and Servicing lenders, as other capital sources reined in their bond credit enhancement activity.

As a result, Freddie has seen an increase in these deals. “The competition is not what it was, there are just far fewer active players out there and others that are in transition,” says Paige Warren, a principal of Prudential Mortgage Capital who runs the company's affordable mortgage division. “We've had a very good year on the bond side with Freddie Mac.”

Freddie is quoting fixed-rate bond deals, but there was less demand for them at year's end, as variable-rate bond deals were being priced from 50 to 75 bps lower than fixed-rate bond deals. Variable-rate bond credit enhancements with an interest-rate hedge such as a swap were being quoted in the midto high-5 percent range, as opposed to fixed-rate bond deals, which were priced in the low- to mid-6 percent range in mid-December.

But lenders report that Freddie has become much more conservative in the types of deals it will do, while rates were very volatile at the end of December. Over the last year, Freddie raised its liquidity and application fees for variable- rate bond credit enhancements substantially, making many deals more difficult to pencil out. And debt-service coverage ratios on 4 percent tax credit deals moved from 1.15x to about 1.25x.

Conventional loans

Freddie's pricing advantage also applies to conventional loans, where it is quoting on average between 5 and 15 bps below Fannie Mae—sometimes even lower for the strongest deals that appeal to the company.

“There's enough of a gap to make it interesting. For deals that they really want, they can get well inside of where Fannie is,” says Melton. “It seems like Freddie is looking at an opportunity at expansion and believes that they have more ability on their balance sheet to take on some of this risk.”

Although the 10-year Treasury was in a state of severe flux in mid-December, agency all-in rates were not fluctuating rapidly. On Dec. 17, the yield on the 10-year Treasury dropped to 2.16, the lowest it's ever been. But lender spreads were rising in lockstep with the Treasury drops, as rates for 10-year deals from Freddie were still being priced in the low- to mid-6 percent range.

Borrowers would do best to ratelock during the small window of time between Treasuries dropping and agency spreads increasing. There's usually a reprieve—maybe a day or two—between the corresponding movements, giving borrowers a small opportunity to ratelock before the agencies increase their spreads. “I would not be surprised to see spreads widen tomorrow because of the yields dropping today,” says Melton.

Still, the Treasury Department's use of $500 billion to purchase agency mortgage- backed securities has already lowered single-family mortgage prices, and some in the multifamily industry believe there might be a similar effect on multifamily deals in the first half of 2009. If rates for 10-year loans were to go below 6 percent, that would lead to a wave of refinancing— and may help to jump-start the stalled transaction market.

Targeted Affordable Housing program

Freddie announced in the fall that all of its affordable housing deals must be done through its Targeted Affordable Housing program, a delegated risk-share model that it continues to develop.

Prudential Affordable Mortgage Co. was the latest firm to graduate to fully delegated status, joining PNC, Wachovia, and Centerline in November. Four other lenders are close to graduating from the pilot phase. By graduating to fully delegated status, companies can originate Freddie loans more quickly and with more certainty than under the former “prior approval” process.

In the process of applying to become a Targeted Affordable Housing lender in December, Grandbridge hopes to enter the pilot program in the first half of 2009. Lenders must originate at least eight affordable housing loans before going to fully delegated status.

Despite dislocation in the tax credit equity market, Prudential's affordable mortgage division had a robust year of debt volume from the governmentsponsored enterprises (GSEs), processing about $500 million in GSE debt last year, more than doubling 2007's tally.

But the composition of the company's business has changed along with the times. Tax-exempt bonds were the company's bread and butter, comprising about two-thirds of its business in past years. But in 2008, the company had done about 70 percent of its business on the taxable side, focusing on preservation deals or debt for developments with Sec. 8 subsidies.

“We will be very focused on Sec. 8 and preservation business in 2009 like we were in 2008,” says Warren. “Our platform is not focused on 9 percent deals because we didn't start as an equity platform. We've done a lot of 501(c) (3) business, bond business, and preservation business in our past, and that diversified base is serving us well.”

After becoming fully delegated in November, Prudential received about six applications for Freddie Mac affordable housing debt products, which will most likely close in the first quarter.