Fannie Mae and Freddie Mac had a different strategic focus for affordable housing debt this year, mostly out of necessity.
Freddie honed in on winning New Issue Bond Program (NIBP) business ever since that program began at the end of 2009. By virtue of an aggressive approach—not to mention its ability to provide a variable-rate credit enhancement—Freddie became a clear winner for NIBP deals. The NIBP program, which provided a big boost to the affordable housing industry by offering rates of less than 2 percent, ends in December.
Fannie became more competitive on bond deals in 2011, though its lack of a variable-rate product was a handicap. Fannie chose to focus instead on a longer-term horizon—on conventional preservation deals. And Fannie outpaced Freddie on preservation deals in two key ways this year.
First, Fannie had a faster process, turning deals around more swiftly than Freddie by about three weeks, according to agency lenders. Fannie’s delegated process lends itself to speed, while Freddie Mac’s prior approval model has a tendency to slow things down. Freddie is working on it, though, and lenders expect to see a more streamlined process next year.
But the second advantage was that Fannie Mae offered a more flexible product.
Securitization differentiation
Both of the government-sponsored enterprises (GSEs) securitize their loans, but the way they do it is different.
Fannie Mae permanent loans run through its Mortgage Backed Securities (MBS) program, which are individual securities sold to investors. And 2011 was the first full year that Freddie Mac began offering immediate fundings through its Capital Markets Execution (CME) program. CME is sold to investors as a pool of mortgages, dozens of loans all packaged together.
Why is that important to the borrower? Because the way your mortgages are sold on the back end directly affects the rates and terms you receive on the front end.
Porting its preservation loans to the CME program made a lot of sense for Freddie. The company had to reduce its balance sheet volume—a condition of conservatorship. And CME interest rates were a bit lower than what Freddie could previously offer through its on-book portfolio execution.
But since CME investors are buying securities backed by a whole bunch of mortgages, they have to understand more than one mortgage at a time. And investors have been slow to warm to, and fully grasp, the complexities inherent in an affordable housing deal, as compared with a market-rate mortgage, agency lenders said.
“It’s a new product for CME, and a lot of buyers of CME are not as affordable housing savvy,” said Phil Melton, senior managing director of affordable housing debt products for Centerline Capital Group. “CME is a great concept, and it has helped pricing in some regard, but there’s an education process that has to be done to differentiate conventional from affordable product to those people buying the CME.”
The CME program had some growing pains in 2011 on the affordable side. The program just couldn’t offer the same kind of underwriting flexibility that Fannie could feature through MBS.
“There are some inherent challenges to an affordable deal going CME,” said Tim Leonhard, managing director of affordable housing debt production for Oak Grove Capital. “If you want to customize yield maintenance or go to a lower debt-service coverage, CME has limitations that Fannie doesn’t have to deal with via an individual MBS issuance. I’m confident Freddie will adjust, but there’s some work to be done.”
FHA delay
Fannie’s focus on preservation inspired some creativity, too. In May, Fannie and the Federal Housing Administration (FHA) launched the Green Refinance Plus program, which provides very favorable terms for energy- and water-efficient upgrades and other renovations. The program offers debt-service coverage ratios as low as 1.15x and loan-to-value ratios of up to 85 percent.
For its own part, the FHA continues to undercut the GSEs in pricing, featuring rates as low as 4 percent on preservation deals, compared with GSE rates of around 4.75 percent as of early November. But of course with the FHA, the concern is not about their rates or terms. It all has to do with timing—the FHA can take about six months to turn around a Sec. 223(f) loan.
“If you can wade through the process, you are rewarded at the end. It’s just a matter of their bulbous pipeline and the ability to move the food through the belly of the snake,” said Jay Blasberg, executive vice president for Fannie Mae lender Alliant Capital. “But in all fairness, FHA is looking to see what it can do to improve, and I’m expecting in 2012 and 2013, improvements to their MO.”
