David Leopold, vice president of targeted affordable sales and investments at Freddie Mac, discusses the year ahead and what the company is working on.
What are your expectations for the affordable housing market in 2018?
January feels like a long way away because we’re probably going to close $2 billion or more over the remainder of 2017. I’m pretty optimistic we will continue to see growth in preservation. The tax credit market has settled down. We should not have the same disruption that we had this year, because the market has figured out how to deal with potential tax reform. That’s a good thing. At the same time, we have some headwinds in the form of rising construction costs. I think we’re going to see more of that, particularly in the wake of hurricanes Irma and Harvey. Overall, I’m optimistic, but there are some headwinds that may dampen new construction.
What’s one key change you expect to see in the debt market next year?
The hurricanes are going to affect a portion of the market next year. One, we will likely see a rise in construction costs. Two, we’re going to see a number of resources going there. Hopefully, there will be new resources aimed directly at those disaster areas, but either way they’re going to be absorbing some resources. Freddie Mac will certainly be focusing resources on hurricane-impacted communities in the year ahead.
What was a change or trend you saw this year?
In addition to the slowdown of the tax credit equity market at the beginning of the year, I’ll bring up two other trends. One is the exhaustion of the volume cap for tax-exempt bonds. This year we saw more state and local issuers exhaust their allocations of volume cap bonds than we’ve seen in the last several years, maybe the last decade. The second is the trade of large multiproperty portfolios. This year, we have seen a significant number of large affordable portfolios trading on the market. Last year, there were a couple big portfolios. So, this is a continuation of a trend—the trade of large portfolios from companies either getting out of affordable housing—or for other reasons. Those large portfolios tend to attract institutional investors in a different way. It also represents consolidation in the industry.
In the past, you’ve said Freddie Mac would dig more into preservation deals. Did you?
We sure did. We’ll do over $2 billion in preservation this year.
We’ve already funded more preservation loans than we did all of last year. We define preservation as financing any project that’s currently affordable where the affordability restrictions will be extended. It is a critical priority for us and for the market. It’s also where we have seen the majority of our growth. Freddie Mac is aggressively providing capital to support owner-operators that want to improve their units and sign up for longer-term restrictions.
Traditionally, our standard cash mortgages are sized to a 1.25x debt-coverage ratio. For preservation, we’ve really moved the dial so the majority of our preservation mortgages right now are at 1.20x. That lean in to preservation has worked well.
What has been your largest success so far?
It was the lean in to preservation. By the end of August, we exceeded our total 2016 volume for preservation. But let me also highlight our largest success so far this year. Earlier this year, we issued the first-ever securitization of a tax-exempt loan portfolio—known as our ML Deal. It was very well received. That securitization in June proved something we’ve always known: that the market for the securitization of tax-exempt loans is there—and it is deep and aggressive. Immediately following our first ML securitization, we were able to reduce rates on our tax-exempt loans because the securitization went off so well that our cost capital went down. We’re passing that savings down to borrowers. We will be back in the market before the end of the year with our next securitization.
Do you expect to introduce any new products or make changes to existing ones next year?
In 2018, we will be rolling out something that we call TAH (Targeted Affordable Housing) Express. Any preservation deal below $10 million is going to get accelerated treatment—streamlined processing and underwriting and reduced transaction costs. Stay tuned for more details. We will pilot it in the last quarter of this year and launch it in 2018.
We are also seeking Federal Housing Finance Agency approval to invest in the low-income housing tax credit and to launch a mezzanine lending product to support affordable housing. I hope to have more to say about these in the future.
How much affordable housing business are you on pace to do this year?
We’re going to set a record by exceeding our 2016 volume, which was a record year. I am projecting our volume will exceed $5 billion of affordable housing financing, over 90,000 units. Our diversification of products and our simultaneous focus on both preservation and new development have allowed us to continue to grow despite market volatility.
