Preservation will be the name of the game for affordable housing lenders next year.

Fannie Mae and Freddie Mac, along with the Federal Housing Administration (FHA), are making preservation a priority by adjusting their underwriting to capture the wave of expiring Sec. 8 and tax-credit properties expected over the next few years. 

“The focus on 2011 from a market perspective is on preserving the affordability of existing units,” says Bob Simpson, vice president of multifamily affordable lending within Washington, D.C.-based Fannie Mae’s Housing and Community Development division. “There’s a tremendous preservation market opportunity out there that we think is only going to grow over the next five years.”

When the FHA recently unveiled its sweeping underwriting changes—making it tougher on both market-rate and tax-credit deals—the agency gave the most favorable treatment to projects with 90 percent or more of rental assistance.

And Freddie Mac recently began allowing properties with long-term Sec. 8 contracts, and loan terms of 10 years or more, to use above-market Sec. 8 rents when sizing a loan. In the past, underwriters had to use the lowest of low-income housing tax credit, Sec. 8, or market rents, but this new approach allows for higher proceeds.

Beyond the amount of expiring contracts—not to mention the anemic pace of new construction deals—another reason the agencies and their lenders like these deals is the low amount of risk they present. Capital providers see preservation deals as taking governmental risk rather than real estate risk, given the guaranteed payment stream that a HAP contract provides.

“There are a lot of people recognizing that preservation is the place to really play,” says Phil Melton, who runs the affordable housing platform of Charlotte, N.C.-based lender Grandbridge Real Estate Capital. “We’ve seen Fannie and Freddie get aggressive on those type of deals, and the FHA is focusing there as well.”

The Horserace
For borrowers, the choice right now is between rock-bottom rates and speedy execution on preservation deals. The FHA is offering rates at around 4.25 percent for immediate fundings, compared to the mid-5 percent range being offered by Fannie and Freddie.

So, those looking for a quick turnaround through the GSEs will have to pay a premium for it. But the patience required to deal with the FHA’s processing times would be rewarded with a significantly lower rate.

Elsewhere, Freddie Mac held a pricing and underwriting advantage over Fannie Mae on affordable housing deals in September. The discrepancy seems to be greatest on forward commitments for 9 percent low-income housing tax credit (LIHTC) transactions. Freddie Mac was offering forwards priced 50 to 100 basis points (bps) lower than a comparable Fannie Mae execution, according to agency lenders.

Rates on forward commitments came down somewhat in the late summer thanks to the declining yield on the 10-year Treasury, which is used as a benchmark for pricing forward commitments. But the spread—the difference between the benchmark rate and the all-in rate—was still sky-high, in some cases at more than 650 bps.

It’s a different story on the 4 percent side though. For the past 18 months, Freddie Mac held quite an advantage in this space through its variable rate bond credit enhancement program, an execution that Fannie once offered but hasn’t in quite some time. Now, however, fixed-rate and variable-rate bond credit enhancements are pretty much on par.