For many affordable housing lenders, 2009 will be remembered as a year not worth remembering.
The continued erosion of the low-income housing tax credit (LIHTC) market cut deeply into debt origination volumes, and many lenders posted their worst numbers in years.
In short, a falling tide sinks all boats.
“The equity decline that started in 2008 caught up with the debt side in 2009,” says Thomas Booher, an executive vice president who runs the multifamily debt division of Pittsburgh-based PNC Real Estate.
One bright spot came in the form of refinancing opportunities for expiring LIHTC or Sec. 8 deals, but those volumes often weren't enough to offset the precipitous decline in new construction business.
While the volume of 4 percent transactions fell off the table, a flurry of 9 percent deals using the Tax Credit Assistance Program (TCAP) and exchange program began filtering in to lenders in the fourth quarter, which brought hope that 2010 would be a little better than 2009.
But TCAP and exchange deals come with their own challenges, and lenders generally find those deals much harder to underwrite and close. “It really took until the very end of the year for most of the states to get their acts together,” says Booher. “We had a couple of TCAP or exchange deals, and they were somewhat tortuous to get to the finish line.”
The absence of a syndicator and investor in exchange deals causes lenders to require much higher reserves, or to underwrite them much as they would a conventional market-rate deal, with lower leverage levels and higher debt-service coverage ratios.
The presence of TCAP funds can bring additional headaches, as each state has its own requirements governing those funds. And the programs also brought Davis-Bacon wage requirements, “which was an additional complication,” says John McCarthy, executive vice president at the New York City-based Community Preservation Corp.
Despite this, many lenders are hopeful that the federal programs will help spur more production this year. Less than 10 percent of Chase Community Development Banking's 2009 debt volume was for exchange deals, but the company ended 2009 with a much stronger pipeline than it had seen in years.
“A lot of deals are now getting closed because of those programs, so we're optimistic about this year in terms of playing some catch-up,” says Martin Cox, a Dallas-based executive who leads Chase Community Development Banking. “We're anticipating and budgeting a return to 2008 levels, so that would be a meaningful increase over what we closed in 2009.”
Federal stimulus efforts have had another effect: Housing finance agencies (HFAs) emerged as a source of competition for lenders. While it varies state by state, some HFAs are offering first mortgages with 40-year terms and 4.5 percent interest rates—unbeatable in the private sector. These programs are often backed by stimulus capital, so some may be short-lived, however.
Going forward
Many developers who are finally able to procure equity—either through renewed interest from investors or through the exchange program—are unable to find construction debt. Suddenly, the debt side has become the bottleneck, though the dearth of construction financing is not exactly a new phenomenon.
“Because no one could get equity, there was no reason to talk about the lack of construction financing,” says Nick Gesue, a senior vice president and director at Lancaster Pollard. “But the problem really has been present for awhile.”
One of the biggest wrenches in the works last year was the pricing on forward commitments from Fannie Mae and Freddie Mac. Normally a reliable source of debt, the government-sponsored enterprises (GSEs) were offering forward commitments at prohibitively costly prices, and as of January, forwards were up over 9 percent, an increase of about 200 basis points (bps) since this time last year.
And while both GSEs are working on ways to lower the rates—possibly through securitizing forward commitments— there isn't much hope that rates will suddenly plunge any time soon.
Given the prices of forward commitments, many 9 percent deals were structured without any hard permanent debt, instead accessing TCAP or other state and local soft funds to help fill the gaps in the capital stack. Local and regional banks with Community Reinvestment Act (CRA) needs will offer blended construction/ permanent loans that are 200 bps inside of the GSEs' forward rates, but these are being done selectively, not programmatically.
Many banks continue to back away from construction financing, and bigger institutions such as Citi Community Capital and PNC are mostly offering construction debt on those deals for which it is an equity investor.
Banks are generally charging spreads of between 250 and 450 bps over LIBOR for construction loans, while taking a much harder look at a borrower's net worth.
Because of the lack of available financing, the Federal Housing Administration (FHA) has emerged as a key source of liquidity. All-in rates on the Sec. 221(d)(4) program were in the low- to mid-6 percent range in late-January, and FHA lenders expect to see continued healthy demand in 2010.
Smaller lenders expand
While the market for new construction remains sluggish, some smaller, more nimble affordable housing lenders are finding success focusing on preservation deals.
Throughout 2009, Fannie Mae, Freddie Mac, and the FHA offered mid-5 percent debt thanks to a low yield on the benchmark 10-year Treasury note. While all-in rates from the GSEs are around 6 percent, the FHA is still pricing immediate fundings in the low- to mid-5 percent range, as of late January.
One beneficiary of last year's low rates was Fannie Mae lender Alliant Capital. The company more than tripled its affordable debt volume in 2009, closing on about $117.7 million, up from $36.8 million in 2008. Alliant saw a good clip of acquisition deals, particularly as many syndicators sold off parts of their portfolios. But much of its volume last year was in refinances of expiring tax credit properties, preservation deals done through Fannie Mae loans.
“Alliant has been doing acquisitions and refis for 15 years, and so we were poised to take advantage of this slowdown in new construction, and the uptick in acquisitions and refis,” says Alex Pedersen, deputy chief underwriter of affordable housing for Seattle-based Alliant.
To help handle this volume increase, the company opened additional offices in 2009 in San Francisco, San Diego, Chicago, New York City, Washington, D.C., and Anaheim, Calif. Alliant is seeking to broaden its range of offerings with an FHA license, which it expects to receive in the second half of 2010.
Another debt shop that saw a dramatic rise last year was P/R Mortgage & Investment Corp. The Carmel, Ind.- based lender offers Fannie Mae, Freddie Mac, Department of Housing and Urban Development, and U.S. Department of Agriculture Rural Housing Service loans. Last year, the company closed about $145 million in affordable housing loans, up from $45 million the year before. The company says about $60 million of that total came from seven refinancing loans of tax credit deals completed with one borrower.
Lancaster Pollard, a prolific FHA lender, grew its organization last year as well, though its debt volume shrunk to $94.2 million in 2009, from $104.6 million the year before. About $67 million of its 2009 total was in refinances using the FHA's 223(f) program.
The Columbus, Ohio-based company opened its first West Coast office in Los Angeles and brought on 12 more full-time employees (growing its head count by about 20 percent). The company also hopes to open an office in the Pacific Northwest sometime in the next 18 months.
“Since about 2004, we've been covering the United States with transactions and following national developers, and so we're really trying to become more saturated in those markets and expand our footprint,” says Gesue.
Enterprise Community Investment also amped up its originations, due mainly to the fact that 2009 was the first full year it had an FHA license. “Our FHA pipeline is very healthy, and we expect a strong year,” says C. Lamar Seats, senior vice president of Columbia, Md.-based Enterprise's multifamily mortgage fi- nance division. “And we'll continue to expand our products. We will have a strong focus on the workforce sector through our Fannie Mae program.”
Consolidation prize
Bank of America tops the list, catapulting over Citi for the first time in the third annual rankings. Bank of America maintained a steady volume for the last three years, originating more than $1.5 billion in affordable housing debt. Much of that came in construction financing, though the lender continues to offer its direct placement tax-exempt bond program, unlike many large institutions.
“We've stayed so steady the last two years because of our ability to execute,” says Maria Barry, who runs the Community Development Banking division for the Charlotte, N.C.-based Bank of America. “People came to us because they knew when they received a commitment letter from us that we would keep our terms and deliver.”
That consistency is a true commodity in today's market. On one hand, it's hard to fathom that Bank of America had such a good year where so many other large institutions saw declines. But the bank may have the largest CRA footprint of them all, with more offices, total deposits, and assets than the field, by a wide margin.
There are some notable absences on this year's list, for good reason. Former heavyweights Wachovia, Washington Mutual, MMA Financial, and Corus Bank no longer exist. Wells Fargo, which owns Wachovia, declined to be part of the survey.
Chase's Community Development division was bolstered through the company's acquisition of Washington Mutual in fall 2008. In the past, the company's footprint only went as far west as Arizona, but the acquisition expanded Chase's reach into the West Coast.
The acquisition also brought a Fannie Mae license with it, which Chase has not yet reactivated, though it is considering doing so for market-rate deals. And unlike Chase, which focuses on construction loans, Washington Mutual was also a very active permanent loan provider for affordable housing projects.
“It's caused us to take a second look at whether we would ever want to get into the permanent loan business ourselves, and we're still evaluating that,” says Cox.
Oak Grove Capital, which purchased MMA Financial's agency debt group at the beginning of 2009, makes its first appearance on the list. Red Mortgage Capital, another perennial contender, is owned by PNC through its acquisition of National City. While Red continues to operate as an independent entity, PNC is mulling how to integrate the company into its larger debt platform.
As for Corus, it's safe to say the firm isn't coming back in any form.
Potential pitfalls
Most lenders are budgeting flat or modest gains this year. Much depends on how the TCAP and exchange program play out and whether the equity market can find a reasonable equilibrium.
But there are several wild cards in the mix that could dash all hopes. A climbing benchmark 10-year Treasury or LIBOR rate could conspire to further roil the market. And then there's the GSEs.
“The pink elephant in the middle of the room is what happens with Fannie and Freddie,” says Byron Steenerson, president of Alliant Capital. “Whatever form they finally take probably has the most dramatic effect on housing as anything we could talk about.”
Another source of concern for many lenders is the effect that the recession has had on state and local finances. In early 2009, California's Pooled Money Investment Board, which provides loans to bond-funded projects, voted to defer all bond expenditures indefinitely. The cap was eventually lifted, but not before scuttling many deals ready to break ground.
“State subsidies and financing for affordable housing projects are very important gap fillers for many projects,” says Cox. “If state and local governments run into deeper fiscal trouble and start reducing their budgets for their affordable housing programs, that's almost as big or a bigger problem as what we have in the tax credit market now.”
