Q&A with Bob Simpson, Fannie Mae’s Head of Affordable Housing

Fannie Mae had a big year for affordable housing production in2011, as the agency rejuvenated its offerings and re-engaged the market.

The company is on track to record about $1.7 billion in volume for the year spread among preservation, New Issue Bond Program, and low-income housing tax credit (LIHTCs) deals, according to preliminary estimates by agency lenders. The figure would far surpass Freddie Mac’s estimated $1.1 billion.

It’s a stark turnaround for Fannie Mae, which had fallen behind in recent years on the multifamily affordable side. But Fannie Mae sharpened its approach in early 2011 as Freddie lost a step in underwriting flexibility.

Affordable Housing Finance recently sat down with Bob Simpson, Fannie’s head of affordable, to talk about its banner year and the year ahead.

AHF: I hear that you guys expect to double your affordable housing production year over year. What drove the increase?

Simpson: We’re definitely going to far exceed last year’s production. Production was strong starting in the first quarter, and each quarter has been successfully better than the last. We’ve seen deals coming from markets throughout the country, which wasn’t as much the case [in 2010]. And this was the first year of several in which you’re going to see the preservation market picking up.

At the beginning of the year we focused on providing our lenders with more flexible products, both in the bond space and the immediate space. We wanted to get more competitive on pricing and to make sure above and beyond everything else that we provided the best execution in the market. On the bond side, obviously that’s an area we definitely wanted to improve on this year, and I think we’ve done that, especially when it comes to mod-rehab.

AHF: You’re not capping the amount of per-unit rehab dollars anymore, but give me some other examples of how you guys tweaked your mod-rehab program?

Simpson: We’re much more willing to look at the 35-year amortization, we’re a little more flexible in terms of partial IO. One of the things about our products is that the manner in which we securitize—it’s a single asset securitization—allows us to be a little more flexible with our products on specific deals. That really helps in the affordable space because all deals are different, and, if they’re different on the front end, they’re going to be different on the back end. And that helps particularly in the mod-rehab space because those deals can get complicated.

AHF: Did you introduce any other product enhancements this year?

Simpson: In the latter half of the year we rolled out, both on the conventional and the affordable side, an ARM 7-6 product, an adjustable-rate mortgage. It’s been a very attractive option for affordable borrowers that are looking to acquire or refinance properties but want the option of going back in for new credits in a couple of years.

We’re also starting to see traction with the Green Refinance Plus product, which is our partnership with FHA. In a low rate environment, a lot of people just went for the standard affordable preservation execution. But I think increasingly folks are looking for additional proceeds that can be used to improve the property, to make it more energy efficient. We expect to see more business for that product in the year ahead.

AHF: How will Fannie Mae’s focus on preservation manifest in 2012? What are you working on for next year?

Simpson: We’ll continue to provide a flexible approach to specific deals, and do it very quickly. We’re going to continue to look for ways to enhance our existing products to meet the market, and the one thing borrowers can always count on is our execution. We’re not going to re-trade our borrowers. And if they have a date certain by which they need to close, they can rely on the fact that we will get that deal done in time.

AHF: Do you expect the momentum on the 9 percent LIHTC side to continue in 2012?

Simpson: I think you might see some leveling out. There’s an inflection point—at some point the spread between the yield and the 10-year makes the difference. If you’re a yield-driven investor, there reaches a point where yields can only go so low, and I think we’re reaching a point where we might be leveling out a little bit. In the coastal markets, you’re seeing some pretty aggressive pricing for credits, and yields have gone down in the non-Community Reinvestment Act markets too, and I wouldn’t expect that trajectory to continue.

AHF: What are your concerns for the affordable housing industry for 2012?

Simpson: The availability of gap financing is still a concern. The gap financing has been reduced over time, and you’re probably going to start seeing that really impacted at the local level in 2012.

I think new construction is going to continue to face some headwinds, both because of the lack of gap financing and also because there’s more competition for credits by existing properties.

Overall, though, I think you’re going to see more competition in that market across the spectrum—from investors, borrowers, lenders—and with that competition comes increased pressure. You’re going to see more pressure on proceeds, terms, sponsor expertise. Regardless, we’re always going to stay true to our underwriting principles.