The low-income housing tax credit industry can breathe a little easier this year: Freddie Mac is not actively pursuing a sale of its tax-credit portfolio.
Throughout 2009, rumors abounded that both government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae were trying to sell parts or all of their low-income housing tax credit (LIHTC) portfolios.
The rumors sent chills through the affordable housing industry, given how dramatically the prices of LIHTCs had fallen. The fear was that flooding the market with more credits would eat into what was already a tepid demand. Those rumors were confirmed last November when news broke that the Treasury Department had blocked Goldman Sachs’ bid to buy a significant amount of Fannie Mae’s LIHTCs.
But in a wide-ranging interview with Hanley Wood Business Media, the publisher of Apartment Finance Today, Freddie Mac’s CEO Ed Haldeman reiterated that the company is not looking to unload its credits. The Federal Housing Finance Agency (FHFA) told Freddie Mac on February 18 that the company may not sell or transfer the assets, and that it sees no other options for disposition. As a result, the company wrote down the carrying value of its LIHTCs to zero.
During the interview, Haldeman and other Freddie Mac officials also indicated that its preservation business will again be a focus this year. That’s no surprise given the low rates on immediate fundings, which are still below 6 percent.
But the more troubling debt product for affordable housing developers has been Freddie Mac’s forward commitment program, where rates in the first quarter averaged about 8.5 percent range, according to Freddie Mac lenders.
The forward commitment program, which promises a permanent loan in advance of new construction tax credit deals, was once a popular execution. Now, it largely gathers dust, even as more developers receive tax credit exchange funds and ramp up long-dormant pipelines.
“Our costing model is going to dictate where we think the risk is, and the proper reward, and the high interest rate is tough to underwrite, we understand that,” says Mike McRoberts, national head of multifamily underwriting and credit at McLean, Va.-based Freddie Mac. “Banks are very hesitant right now to do an open-ended construction loan. It’s definitely an issue, and we’re working on it.”
The company is trying to move most of its business into the Capital Markets Execution (CME) program, but that may not help the rates on forward commitments. While Targeted Affordable Housing deals will be eligible for the CME program at some point this year, a forward commitment permanent loan wouldn’t go through CME until after the construction period.
“It would be once the mortgage is actually originated, we’d sell it,” says Mike May, senior vice president of the company’s multifamily division. “So the forward risk would still be priced.”
The good news is that Freddie Mac will likely finance more units that serve lower-income populations this year. While the GSEs’ proposed affordable housing goals are not yet finalized, the company expects those goals to include lower area median income (AMI) levels than they have in the past.
“We’re pretty confident that they’re going to be lowering the AMI for the multifamily area,” McRoberts says. He noted that the proposed goals move the previous 100 percent low-income AMI target to 80 percent, and the 60 percent “very low income” AMI target to 50 percent. “Right now, we’re trying to strategically figure out how we can access that market,” McRoberts continues. “When you get down to 50 percent, it’s pretty deep.”
FHFA’s proposed rules also give the GSEs two ways to meet their housing goals. One way is through an absolute dollar amount, which is the historic method, and the other method is as a percentage of the overall market, which is a new—and more logical—option.