Access to debt and equity for affordable housing developments improved a little bit more each month this year. And that slow momentum is expected to continue, as interest rates on permanent debt remain low, access to construction debt slowly improves, and the New Issue Bond Program (NIBP) continues to fuel more bond transactions in 2011.
Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) all say that preservation deals will be their focus in 2011. And the rates being offered on immediate fundings are expected to stay low in 2011. The FHA was quoting all-in rates of 4.25 percent through its 223(f) program in late October, while the government-sponsored enterprises (GSEs) were coming in at around 5 percent. Still, it typically takes the GSEs two months to turn around a deal, while a 223(f) loan could take five or six months.
Bond Enhancements
Freddie Mac seems to be offering the best underwriting and rates on many executions, such as tax-exempt bond credit enhancements.
The Treasury Department’s NIBP made a big splash this year. The program—a collaboration between the Treasury Department, the Department of Housing and Urban Development, and the GSEs—gave state and local housing finance agencies the ability to provide very low-rate debt on fixed-rate bond deals.
And Freddie Mac has been on the receiving end of much of that business, enhancing about $175 million in bonds though September, with a large wave of new business in the fourth quarter. “Freddie came out aggressively with their terms,” says Tim Leonhard, who heads up the affordable housing debt platform of St. Paul, Minn.-based Oak Grove Capital. “And for the past three or four years, Freddie was the only one doing variable, and doing 35- or 40-year amortizations.”
Things are getting a little better for 4 percent deals in the private sector. About a quarter of Freddie’s bond credit enhancements are conventional, not going through the NIBP program.
Still, for the past few years, borrowers heavily preferred Freddie Mac’s variable rate execution; it was much cheaper than what was being offered on the fixed-rate side. But due to Freddie Mac raising its liquidity fees, and the falling yield on the 10-year Treasury, fixed-rate executions are now running neck and neck with variable. That trend is expected to continue in 2011.
“The end market for tax exempt bonds is improving, and I think that’s going to drive down the coupon to a point where they do remain competitive,” says Nick Gesue, a senior vice president and director at Columbus, Ohio-based Lancaster Pollard. “The appetite for tax-exempt fixed rate deals is going to be an area of opportunity in the coming year.”
Construction Debt
As the banking sector continues to return to health, the access to construction debt should also slowly improve next year.
The largest banks continue to lend, yet are often more interested in funding deals in which they are also the equity investor. Indeed, the availability of construction debt is very CRA-driven. In the strongest markets, it never really went away—but it’s still tough to find in secondary and tertiary markets.
The strongest borrowers were seeing spreads on construction loans of 300 to 350 basis points over LIBOR in late October, but most deals were 75 to 100 bps higher than that, often with interest-rate floors around 4.5 percent.
Though the FHA offers great rates and terms through the 221(d)(4) program, it’s inefficient for tax-credit deals. “The question is, does it make economic sense to go through essentially a year’s wait to get HUD onboard?” says Phil Melton, who runs the FHA platform for Charlotte, N.C.-based Grandbridge Real Estate Capital. “If they come up with a mechanism for expediting those deals, then OK, maybe there’s a possibility. But until they do that, people just don’t have a year to wait.”
And forward commitments from the GSEs for 9 percent transactions are basically a non-starter. Rates on GSE forwards fell in 2010 from the mid-9 percent to the mid-8 percent range. But the lower rates are mainly due to the yield on the benchmark Treasury falling this year, as spreads remain 600 to 650 bps over the 10-year Treasury.
Relief on forward rates isn’t expected any time soon. There has been talk in the industry that Fannie Mae is thinking of charging a higher rate lock fee—currently, an unfunded forward charges 3 points upfront, and funded forwards charge 2 points—to help bring the rates down.
“They’re worried about a deal not delivering, so they’re adding a lot of basis points to cover that risk, as well as the unpredictability of where rates are going to be in three years,” says Steven Fayne, a managing director at New York-based Citi Community Capital. “Those rates tend to be in the 8 percent rage, and that just results in a gap in your financing.”
