The Obama administration has blocked Goldman Sachs’ bid to buy a significant amount of low-income housing tax credits (LIHTCs) from struggling Fannie Mae, according to several sources.
While a sale may have cut the government costs related to Fannie Mae, there was reportedly concern that it would have drained more revenue as Goldman used the tax credits against its profits.
In a recent third-quarter report to the Securities and Exchange Commission (SEC), Fannie Mae said it had entered into a nonbinding letter of intent to transfer equity interests in its LIHTC investments. “Under the terms of the transaction as currently contemplated, we would transfer to unrelated third-party investors approximately one-half of our LIHTC investments for a price that exceeds their current carrying value,” said the report.
As of Sept. 30, the carrying value of Fannie Mae’s LIHTC investments was $5.2 billion.
The Treasury Department on Nov. 6 notified Fannie Mae that it is not consenting to the transaction.
“We are evaluating whether Treasury’s decision changes our prior determination that we continue to have the intent and ability to sell or otherwise transfer our LIHTC investments for value,” said Fannie Mae in an SEC filing Monday. “While our conservator has directed us to continue to explore options to sell or transfer these investments for value consistent with our missions, we believe this will be difficult given current constraints and market conditions.”
The company went on to say, “While we have not made any decision with respect to whether an impairment of these assets is required under generally accepted accounting principles, if we are unsuccessful in selling or otherwise transferring these investments for value, we are likely to record additional other-than-temporary impairment in the fourth quarter of 2009 that could reduce the carrying value of our LIHTC investments to zero.”
Fannie Mae does not identify Goldman Sachs or any other firm as the buyer of its LIHTCs, and Goldman Sachs has been mum on the deal.
The Wall Street Journal reported that Warren Buffett’s Berkshire Hathaway, Inc., had joined Goldman Sachs in the bid for the tax credits.
A sale of LIHTCs by Fannie Mae or Freddie Mac has raised worries in the affordable housing industry that it could hurt the overall LIHTC market by sapping investor money from new investments. The market has seen a sharp drop in capital in the past year.
There are two key questions to evaluate from the public policy standpoint, said David Smith, CEO of CAS Financial Advisory Services, a Boston-based financial services company that specializes in multifamily transactions, last week. One, does it help improve the demand-supply imbalance, and two, is it good for taxpayers?
From the point of the affordable housing industry, would a trade reduce the need for Goldman Sachs or another firm to buy housing tax credits in the primary market?
“If this trade did not go through, would Goldman Sachs need to buy retail tax credits elsewhere? Or is this purely a discretionary purchase on a yield basis? If it is the latter, then it probably doesn’t reduce demand and wouldn’t be seen as worsening the supply-demand imbalance,” Smith said before news of the Treasury’s rejection of a deal. “However, from the government side of the equation, what would happen to the tax credits in the absence of a sale? Would Treasury cancel them? Would Fannie Mae claim them against future tax credits, or would somebody else buy them?”
It makes sense for the government-sponsored enterprises to be interested in a sale, according to Smith.
“If I were a manager at Fannie Mae, and I have an asset of low value to me right now, I could be remiss in my duties if I don’t attempt to increase the value of my assets,” he said.
Stories in The Wall Street Journal don’t bode well for the transaction, Smith said. “It seems likely that it would put pressure on Treasury to reject the deal. Certainly, it’s hard to see that story helping the case for the transaction.”
