Bob Simpson, vice president of affordable and green financing at Fannie Mae Multifamily, shares his 2018 outlook and the company’s plans for the year ahead.
What are your expectations for the affordable housing market in 2018?
Overall, from a sizing of the market, we think it will be similar to this year. The size of the Sec. 8 and expiring tax credit market will be pretty much the same. There continues to be the potential for corporate tax reform, which could have an impact on resyndication, mod-rehab, and new construction deals, but assuming what we know today, we think the size of that market will be pretty much the same.
We continue to see existing tax credit units coming in from those pre-2008 vintages, back in the days when the tax credit program was creating more than 100,000 units a year. Those units are nearing the end of their compliance periods, which means we’ll still see about the same number of units that will be up for preservation in the next year or so. However, once you start seeing those 2008 and 2009 deals nearing the end of their compliance period, it’s reasonable to assume that we’ll begin to see a reduction in the number of preservation opportunities on the tax credit side simply due to the fact that from 2008 on we only added between 60,000 to 80,000 new units every year through the tax credit program versus 100,000 to 120,000 units pre-2008. As a result, we expect to eventually see the number of tax credit preservation opportunities go down.
In terms of Sec. 8, we’re expecting the number of project-based Sec. 8 units that could be eligible for refinance or recapitalization to be about the same. However, we do expect to see more smaller Sec. 8 deals in 2018 but a similar unit count overall.
There’s the potential that the Rental Assistance Demonstration (RAD) program could increase the size of that market, but that is not likely to happen for a few more years. It’s an area that we’ll continue to focus on.
Finally, we expect to see continued growth in the market for what we would call “workforce housing” deals. These are properties that have some form of state or local rent restriction at income levels above 60% of the area median income. One of the trends that we’re seeing is state and local governments continuing to look for ways in which they can address affordable housing on their own. There are more and more state and local programs that provide some form of subsidy or benefit to borrowers in return for rent restrictions typically at income levels above 60% of the AMI and below 120% of the AMI, depending on the market.
What’s one key change that we’ll see in the debt market?
Everyone will be watching to see what happens with corporate tax reform. That will be a driver of change. We don’t know what’s going to happen there. It’s hard to predict.
At Fannie Mae, we do expect to increase our support for new construction low-income housing tax credit (LIHTC) deals. We reintroduced our 9% unfunded forward commitment product into the market this year. That, combined with our ability to do bond forwards with our MBS Tax Exempt Bond (MTEB) structure will allow us to support more new construction and mod rehab in the 9% and 4% LIHTC space.
We think there’s also an area of potential growth in providing debt financing for properties that have those state and local rent restrictions we talked about. We changed our definition of affordable this year to ensure that we could provide more competitive levels of financing at the pricing level to deal with workforce housing restrictions that state and local governments are starting to provide. In the past, we looked at pricing these deals as affordable deals on a one-off basis. As we saw a growth in the number of deals that came in, we changed our definition so if someone comes in with a state or local housing initiative that restricts rents at 20% of the units at 80% of the AMI or below, we give that deal more competitive pricing than we would have in the past when we treated it as a conventional deal. We expect to see much more in this area in 2018.
Tells us about the 9% program.
It’s similar to what we’ve had in the past, but with more competitive pricing. We had an unfunded forward commitment product, but it wasn’t really priced at a level that was competitive in the market. We made a strategic decision this year that we would provide those 9% unfunded forwards at competitive pricing levels. We’ve been doing that over the past six or seven months, and we’ve seen the product gain market acceptance, so it’s something we’re going to continue to push going into 2018.
Why is this good for the industry?
It helps folks who are developing new affordable units to have the certainty of a forward commitment. It’s easier for them to get construction financing when they have that forward commitment. It means they’ll have a couple of options. They’re going to be able to have folks compete for the deals, and that’s good for the market.
Recently, a big focus for the GSEs has been preservation. Has that changed?
Preservation has been our bread and butter for as long as we’ve had an affordable program, and that’s not going to change. From our perspective, it’s been the foundation of our affordable business. We’re going to have it as one of top priorities. Preservation is great for the market. It helps stabilize the lower- and middle-income segments. If renters can get a rent-restricted affordable apartment, they’re not going to be competing for that naturally occurring affordable unit, driving rents up. It ensures they are paying an affordable rent.
Will you be introducing any new programs in the months ahead?
An area of new focus that we’re excited about is our Healthy Housing Rewards initiative. We believe it is important as an industry to provide financing that ensures properties are designed and operated in a manner that is healthy for the tenants and increases the ability for them to live healthy and stable lives. So, we’re going to be making a big investment in providing financial incentives to borrowers to reinvest in the health and stability of tenants, especially very low- and extremely low-income residents.
In May, we introduced the first phase of Healthy Housing Rewards, in which we provide a 15 basis point interest-rate reduction for borrowers who commit to improving the design of the affordable housing properties through rehabilitation or new construction. We partnered with the Center for Active Design to develop a healthy housing design index. If a borrower submits its property to the Center for Active Design and it gets a passing score on the index, we provide them with a 15 basis point interest-rate reduction. We’re slated to close our first deals in the next few weeks. And we’ll be rolling out a second phase of the Healthy Housing Rewards program later this year.
Given our new Duties to Serve requirements, we also want to make sure that we’re supporting areas of the market that are emerging or were previously underserved. In terms of emerging markets, there’s workforce housing—especially those properties that are being financed with restrictions at the state and local level. We also want to find ways to provide more liquidity to properties participating in the RAD program. And finally, we want to spend more time learning about the challenges that are going on in rural areas, especially as it pertains to Rural Development Sec. 515 and Sec. 538 loans. There’s clearly a need to be providing more secondary-market liquidity for those products.
Where have you seen the most growth recently?
We’ve seen the most growth in both our MBS Tax Exempt Bond (MTEB) product, which allows us to provide the flexibility and competitive pricing of our MBS structure to affordable bond deals, and our Affordable Credit Facility execution. One of the benefits of an affordable credit facility is it provides borrowers with an incredible amount of flexibility as they manage their affordable portfolios. It allows them to ladder maturities, expand the facility as they need it, and substitute assets. So if you’re looking to sell a property that’s in the facility, you can replace it with a like property and retain the same interest rate.
Did the turmoil in the LIHTC market earlier this year, effect what you were doing?
It didn’t effect what we were seeing with preservation deals, but it did have an impact on the market overall—especially in the new construction and mod-rehab space. It took a while for the market to adjust, but it seems like things have settled down for now.
How much affordable housing business are you on pace to do this year?
We’re on pace to exceed last year’s volume, and last year was a record year.
