For many affordable housing lenders, 2009 will be remembered as a year not worth remembering.
The continued erosion of the low-income housing tax credit (LIHTC) market cut deeply into debt origination volumes, and many lenders posted their worst numbers in years. In short, a falling tide sinks all boats.
The Top 10 Affordable Housing Lenders of 2009(in $millions)
1. Bank of America Merrill Lynch
2. New York City Housing Dev. Corp.
3. Chase Community Development
4. Citi Community Capital
5. U.S. Bank
6. Prudential Mortgage Capital Co.
7. Community Preservation Corp.
8. Capital One Bank
9. Oak Grove Capital
10. New York State HFA
One bright spot came in the form of refinancing opportunities for expiring tax-credit or Section 8 deals, but those volumes often weren’t enough to offset the precipitous decline in new construction business.
While the volume of 4 percent transactions fell off the table, a flurry of 9 percent deals using the Tax Credit Assistance Program (TCAP) and exchange program began filtering in to lenders in the fourth quarter, which brought hope that 2010 would be a little better than 2009.
But TCAP and exchange deals come with their own challenges, and lenders generally find those deals much harder to underwrite and close. The absence of a syndicator and investor in exchange deals causes lenders to require much higher reserves, or to underwrite them much as they would a conventional market rate deal, with lower leverage levels and higher debt service coverage ratios.
Still, many lenders are hopeful that the federal programs will help spur more production this year. Less than 10 percent of Chase’s 2009 debt volume was for exchange deals, but the company ended 2009 with a much stronger pipeline than it had seen in years.
“A lot of deals are now getting closed because of those programs, so we’re optimistic about this year in terms of playing some catch up,” says Martin Cox, a Dallas-based executive who leads the Community Development Banking business at Chase. “We’re anticipating and budgeting a return to 2008 levels, so that would be a meaningful increase over what we closed in 2009.”
Bank of America tops this year’s list, catapulting over Citi Community Capital for the first time in our third annual rankings. Bank of America maintained a steady volume for the last three years, originating over $1.5 billion in affordable housing debt. Much of that came in construction financing, though the lender also continues to offer its direct placement tax-exempt bond business, unlike many large institutions.
“We’ve stayed so steady the last two years because of our ability to execute,” says Maria Barry, who runs the Community Development Banking division for the Charlotte, N.C.-based Bank of America. “People came to us because they knew when they received a commitment letter from us, that we would keep our terms deliver.”
That consistency is a true commodity in today’s market. On one hand, it’s hard to fathom that Bank of America had such a good year where so many other large institutions saw declines. But the bank may have the largest CRA footprint of them all, with more offices, total deposits and assets than the field, by a wide margin.
There are some notable absences on this year’s list, for good reason. Former heavyweights Wachovia, Washington Mutual, MMA Financial, and Corus Bank no longer exist. Wells Fargo, which now owns Wachovia, declined to participate in the survey.
Chase’s Community Development division was bolstered through the company's acquisition of Washington Mutual in the fall of 2008. In the past, the company’s footprint only went as far West as Arizona, but the acquisition expanded Chase’s reach into the West Coast.
The acquisition also brought a Fannie Mae license with it, which Chase has not yet re-activated, though it is considering doing so for market-rate deals. And unlike Chase, which focuses on construction loans, Washington Mutual was also a very active permanent loan provider for affordable housing projects. “It’s caused us to take a second look at whether we would ever want to get into the permanent loan business ourselves, and we’re still evaluating that,” Cox says.
Oak Grove Capital, which purchased MMA Financial’s agency debt group at the beginning of 2009, makes its first appearance on the list.
Most lenders are budgeting flat or modest gains this year. Much depends on how the TCAP and exchange programs play out, and whether the equity market can find a reasonable equilibrium.
But there are several wildcards in the mix that could dash all hopes. A climbing benchmark 10-year Treasury or LIBOR rate could conspire to further roil the market. And then there’s the little matter of the GSEs.
“The pink elephant in the middle of the room is what happens with Fannie and Freddie,” says Byron Steenerson, president of Alliant Capital. “Whatever form they finally take probably has the most dramatic affect on housing as anything we could talk about.”
Another source of concern for many lenders is the affect that the recession has had on state and local finances. In early 2009, California’s Pooled Money Investment Board, which provides loans to bond-funded projects, voted to defer all bond expenditures indefinitely. The cap was eventually lifted, but not before scuttling many deals ready to break ground.
“State subsidies and financing for affordable housing projects are very important gap fillers for many projects,” Cox says. “If state and local governments run into deeper fiscal trouble and start reducing their budgets for their affordable housing programs, that's almost as big or a bigger problem as what we have in the tax credit market now.”
Editor's Note: For an expanded version of this article, which includes the complete ranking of the Top 25 Affordable Housing Lenders of 2009, see the March issue of Affordable Housing Finance.