Freddie Mac's Targeted Affordable Housing (TAH) network raked in about $1.5 billion in loan volume last year, pretty much the same as in 2010.
And that consistency is telling. The overall market for affordable housing debt grew last year, yet the TAH network stayed the same. And that means Freddie Mac lost market share in 2011. Fannie Mae, meanwhile, grew its affordable housing volume 282 percent, to $2.3 billion, last year, as it processed preservation deals hand over fist.
Those numbers tell a tale of two different business models—Freddie focused on bond deals the last couple of years, and the New Issue Bond Program (NIBP) fueled its volume. But the NIBP is a limited-time stimulus program. Fannie's focus on preservation deals provided a longer-term horizon and drove its copious production last year.
Affordable Housing Finance recently sat down with Kim Griffith, Freddie's vice president of affordable sales and investment, to discuss how the TAH network will respond to the increased competitive landscape.
AHF: So how's business? What kind of deals are you seeing the most in the first quarter?
GRIFFITH: We're seeing a lot of people that have a bond allocation and want the credit enhancement for their bonds. And we're seeing that on a whole variety of bonds—the 80-20 bonds and forwards for low-income housing tax credit (LIHTC) deals, and we're also seeing it with what we call moderate-rehab deals, where instead of being a forward we provide direct credit enhancement for those bonds.
AHF: Are you seeing more action in the private-placement market? Has it come back in earnest, or is it just talk at this point?
GRIFFITH: It depends on where you sit. If you're in California, I would say it's back in earnest. New York state just amended its legislation to permit unenhanced bonds, so I think we'll start to see it a little bit more in New York once they get the program set up. But it's not everywhere yet. If you think of the major buyers of unenhanced bonds as banks, then that leads you into the Community Reinvestment Act (CRA) footprints, and that leads you to the coasts generally.
AHF: Last year, Freddie Mac did about $1.5 billion in affordable housing deals, pretty much the same as the year before. Why would your volume remain flat in a growing market?
GRIFFITH: There was generally increased competition in the affordable world. If you look back the last two or three years and recognize why Treasury came in and did the NIBP and its temporary credit liquidity facility, it was because the bond market was in disarray. And we have been particularly focused on providing bond credit enhancements, and we had a very substantial market share of bonds, but bonds weren't increasing as much as they had in the past.
AHF: Some have said that Fannie Mae's focus on preservation deals was a longer-term model and that Freddie Mac's focus on the NIBP was more shortsighted. How would you respond?
GRIFFITH: When we were more focused on bonds, [Fannie Mae was] able to slip ahead of us. I would say we ate their lunch in bonds, and they ate our lunch in Year 11 deals. And now we're going to dine at its table on the Year 11 stuff.
We have two focus areas this year. One is to be sure that we stay extremely relevant in bond credit enhancements, and the other is that we become much more relevant in preservation cash mortgages for these LIHTC properties that have cleared their 10-year mark and are now in Year 11.
AHF: How will your focus on preservation deals manifest itself this year?
GRIFFITH: We're focused on making sure our process works quickly. We understand that in order to be successful, we have to be able to review transactions and get back to folks and stay within a timeframe of about two months, start to finish.
Many of these deals are acquisitions, and within two weeks or so of a party signing a contract they have to go hard with their earnest money. So we have to be pretty crisp about an initial look, and then we've got to deliver a commitment within two months from start to finish. We focused on that with our lenders internally.
We also looked at our credit standards to be sure that they were
market-appropriate. And we looked to see whether we were pricing our bid appropriately based on market conditions.
So we're a lot crisper with our lenders about exactly what we're looking for, exactly what we want to do, and where we can jump when they say jump.
AHF: What can you tell me about Freddie Mac's Green Financing Initiative, your partnership with the Community Preservation Corp.? Where is that now? Last year, Fannie started something similar with the Department of Housing and Urban Development (HUD).
GRIFFITH: We hadn't done much business with that, but I will say we are signing our own HUD risk share amendment to put us in a comparable, if not exactly the same, green initiative position with HUD risk share.
AHF: What do you see happening right now in the LIHTC world?
GRIFFITH: In LIHTCs, particularly in the CRA hot areas, it's back almost as much as it was in the glory days. So we're breaking the buck going up, not down—I've heard more than $1.10 in New York recently.
But most important, there was a time when if you were in the “no sea/no sand” states, for almost any price you couldn't sell your credits. There is a big gap between the sea/sand and the no sea/no sand states, and it's driven by the investors. But there is money available in those locations where it wasn't available two and three years ago. And frankly, that's the headline in LIHTCs—that it's back, and it's also back in those areas.
The challenge is going to be, are all the capital needs being covered by hard debt and equity? And there's still a need for soft money in many different properties, and it will be harder to get soft money.