While the GSEs continue to shy away from market-rate rehab deals, it’s a different story on the affordable housing side.
The affordable housing programs at both Fannie Mae and Freddie Mac are focusing on preservation deals this year—particularly tenant-in-place rehabs—and their Mod Rehab programs are seeing a lot of interest.
Fannie Mae has grown much more creative of late in its approach to moderate rehabilitations. The company no longer puts a cap on per-unit rehab amounts, and has recently gone as high as $50,000 per unit. Fannie Mae is now also offering a maximum two years of interest-only (IO) in such deals, and has also begun to do 35-year amortizations.
“That’s something we didn’t do six months ago,” says Bob Simpson, vice president of multifamily affordable housing for the Washington, D.C.-based Fannie Mae. “We’re definitely seeing a huge uptick in business like that this year, especially in the number of fixed-rate bond credit enhancements, which is where you see a lot of the mod rehab taking place.”
For the company to consider two years of IO and 35-year amortizations, the loan term has to be 15 years or longer. An optimal scenario would be mod rehab with new low-income housing tax credits (LIHTCs) and a new Sec. 8 contract.
Freddie Mac has also been busy on the Mod Rehab side, especially in New Issue Bond Program deals. Freddie Mac has always offered 35-year amortizations, but with Fannie Mae following suit, that’s much less of a competitive advantage now.
In terms of per-unit costs, Freddie Mac’s published underwriting guidelines look at $25,000 per unit, but “depending on the nature of the rehab and the costs in that area of the country, it could be larger,” says Christine Hobbs, director of affordable housing at McLean, Va.-based Freddie Mac.
Freddie Mac also offers interest-only periods for mod rehab transactions, but when pressed, wouldn’t specify parameters. The company does maintain one big competitive advantage over Fannie Mae in the 4 percent LIHTC space: Freddie offers both fixed and variable-rate bond credit enhancements, whereas Fannie only offers fixed-rate.
The Federal Housing Administration also continues to make preservation deals a priority, and in fact is working on expanding its Sec. 223(f) program to include higher levels of per-unit rehab dollars.
The program currently offers light rehab dollars—$6,500 per unit adjusted upward for high-cost areas. Anyone looking to do more has to go through the Sec. 221(d)(4) program, which is a much more cumbersome and time-consuming process. But the agency is looking to scale up Sec. 223(f) to more closely mirror something like Freddie Mac’s Mod Rehab program, with hopes of rolling it out later this year.