As affordable housing developers get set to ramp up dormant projects, Fannie Mae’s and Freddie Mac's high rates on forward commitments are forcing many to look elsewhere for debt.

Fannie Mae’s rates on immediate fundings are competitive, in the low- to mid-6 percent range, and the government-sponsored enterprise (GSE) is seeing a lot of refinancing business on existing tax credit deals and Sec. 8 properties. But new construction deals are another story. Fannie’s rates on forward commitments have been high all year and climb higher each month. For funded forward commitments, Fannie Mae currently offers a rate of around 9 percent, and unfunded forward commitments are closer to 9.5 percent, as of mid-August. That’s up from around 7.75 percent and 8.25 percent, respectively, in early March.

Freddie is getting costly, too. Freddie Mac’s rates on forward commitments were well inside of Fannie’s for most of the year, at times by as much as 100 basis points (bps). But currently, the GSE offers pricing in the 8.75 percent range on forwards.

The steep yield curve is one reason for the higher rates. But industry watchers believe that the GSEs’ current business models are partly to blame. The companies are under a congressional mandate to reduce their portfolio holdings, and forward commitments have traditionally been held on their balance sheets. But the companies are now pricing the executions based on investor interest with an eye on getting these executions off of their books.

“The agencies are pricing forwards today as if they had to sell it immediately,” says Tim Leonhard, who heads up the affordable housing debt platform for St. Paul, Minn.-based Oak Grove Capital. “The market for this paper is very limited, and the people that are buying are commanding a premium. I think that’s the reason you’ve seen such a significant rise in spreads the past 18 months.”

In addition to offering lower rates on forwards, another big advantage of Freddie is the company’s willingness to do 35-year amortizations. Fannie Mae now only offers 30-year amortization, and will only go to 35 in a handful of the strongest markets in the country. But Freddie Mac will programmatically offer 35-year amortizations, and if a borrower chooses a 30-year am, Freddie offers a modest reduction, maybe 5 bps, on the interest rate.

A Coming Wave    

Given the high rates from the GSEs, borrowers are increasingly turning to the Federal Housing Administration (FHA) as well as banks to fund tax-credit developments. The FHA made some big changes last year in how tax credits can work with its Sec. 221(d)(4) program, and those changes have gone a long way toward attracting tax-credit developers. Plus, Sec. 221(d)(4) deals are being priced about 200 bps below Fannie and Freddie, and the FHA will still go up to 90 percent loan-to-cost and down to a 1.11x DSCR.

Additionally, many banks are now poised to steal market share from the GSEs, fighting amongst themselves to fulfill CRA requirements in a market that features very few new deals. “The [GSE] pricing is ridiculous,” says Thomas Booher, executive vice president at PNC MultiFamily Capital. “There are CRA-motivated banks in strategic markets that are 150 bps lower on a forward, they’re able to undercut the agency pricing pretty significantly.”

Many banks offer “mini-perm” loans, or construction loans with a permanent term extended throughout the compliance period. There are certain costs associated with a GSE forward commitment, including an origination fee, standby fee, site inspections, and survey requirements. If a borrower used a construction lender and a separate GSE lender, they would have to pay many of these costs twice.

Holding Pattern

Affordable housing developers are now in a holding pattern, waiting for the tax-credit exchange and tax-credit assistance programs to be finalized. Once the IRS releases all of the corresponding regulations and the state housing finance agencies wrap up their plans and procedures, a wave of new tax-credit deals are expected to come.

The GSEs are expected to soon adopt underwriting policies around the tax-credit exchange and assistance programs. But the absence of a LIHTC investor will likely cause the agencies and their lenders to be more conservative, perhaps underwriting at a 1.20x coverage instead of 1.15x.

“We will definitely treat those transactions differently and a little more conservatively if we don’t have a syndicator there to ultimately provide some financial support and some management and compliance oversight,” Booher says.

Still, the GSEs are expected to revamp their forward commitment programs as developments start breaking ground again in the fall. “I think they’ll react as quickly and aggressively as possible to capture as much of that market share as they can,” Leonhard says. “But right now, it’s hard to offer a product to a market that hasn’t set itself yet.”