The tax-exempt bond market is back in force, though much of the activity is concentrated in major metropolitan areas.

The 4 percent low-income housing tax credit (LIHTCs) market is often overshadowed by the more dynamic market for 9 percent LIHTCs. But as prices for 9 percent LIHTCs continue to climb, and yields continue to drop, more investors are considering 4 percent LIHTCs as a viable alternative.

“The 4 percent market has made a resounding comeback, both in terms of credit underwriting and pricing,” says Mark Dean, managing director for New York-based Citi Community Capital. “In the last 12 months, we’ve seen incredibly aggressive pricing on bond and 4 percent deals.”

Pricing has climbed about 10 cents in the last year, with many 4 percent credits selling in the high-80 cent to mid-90 cent range for deals in major metro markets. And the debt side is heating up: Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have been busy, but the private placement market is beginning to heat up as well.

“We’re out on the market right now putting a private placement program together,” says Phil Melton, who runs the affordable housing debt side of New York-based Centerline Capital. “We believe that’s a market that’s very available now, and will have a high level of appeal.”

Fannie and Freddie continue to battle it out on the fixed-rate side of the credit enhancement market. But Freddie’s ability to provide floating-rate executions continues to be a distinct competitive advantage, particularly for borrowers looking for a greater degree of cash flow than a fixed-rate deal allows. And by using a swap execution on a new construction deal, Freddie is able to significantly reduce negative arbitrage.

Investors have warmed to floating-rate deals as well. “A year ago, we wouldn’t have seen demand for the variable rate product much at all,” says Dean. “But there are investors who will look at 4 percent credits in conjunction with variable-rate bonds, or low floaters, and we haven’t seen that in forever.”

Another distinct advantage for Freddie: Fannie Mae has a much more restrictive policy around which banks are qualified to provide letters of credit on a new construction bond deal. This wasn’t always the case. Many financial institutions have seen their ratings downgraded since the recession, and as those banks lost their AA rating, Fannie Mae whittled its list down to just a couple of banks now.

“It’s become much more challenging to find a qualified bank for a letter of credit for Fannie Mae, because of the criteria they have,” says Melton. “I think that’s going to hinder and hamper their ability to compete potentially on the new construction side.”

And as the FHA dedicates more resources to affordable housing transactions, an increasingly number of LIHTC developers are turning to the FHA. Many agency lenders now offer a “tax-exempt bond to Ginnie Mae” loan structure that gives the borrower a lower rate while taking advantage of the LIHTCs.

Basically, a developer will go for a tax-exempt bond to get the LIHTCs, and then replace the bonds with a taxable Ginnie Mae loan. The bond proceeds are released to the developer to pay for project costs, while a similar amount is drawn under the taxable loan—so the bond holders continue to be 100 percent cash-secured.

By using this structure, developers can take advantage of a much lower interest rate—taxable Ginnie Mae’s are quoting around 4.25 percent, while the tax exempt rate might be 5.75 percent—and can do so while generating LIHTC equity.