The Time Bomb That Ticks No More: GSEs’ LIHTC Portfolios Shrink

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The possibility that Fannie Mae and Freddie Mac might dump a massive volume of existing low-income housing tax credit (LIHTC) investments into the market at some point in a fire sale is virtually non-existent now, even with their return to substantial profitability and various legislative proposals calling for phasing out the two mortgage companies.

In September 2008, the two troubled government-sponsored enterprises (GSEs), each with LIHTC portfolios in the billions of dollars, were placed in separate conservatorships under the supervision of the Federal Housing Finance Agency (FHFA). Prior to that point, Fannie Mae and Freddie Mac combined accounted for an estimated 40% of total annual LIHTC investment.        After the two GSEs were placed in conservatorship, there were fears in the tax credit industry that Fannie Mae and Freddie Mac might try to sell all or large portions of their housing credit portfolios in secondary market sales, thereby depressing demand and prices for primary LIHTC investment product.

In 2009, Fannie Mae attempted to sell about $3 billion of its $5.2 billion LIHTC portfolio but was barred by the U.S. Treasury. Freddie Mac was blocked from a proposed substantial LIHTC sale as well. In early 2010, after consultation with Treasury, FHFA told Fannie Mae and Freddie Mac that they could not sell or transfer their LIHTC assets and that there were no disposition options. As a result, and unable to utilize the credits themselves, the GSEs subsequently wrote down the value of their LIHTC assets to zero.

Since returning to profitability, Fannie Mae and Freddie Mac have restored the value of their remaining LIHTC assets to the balance sheet of their financial statements.

FHFA’s policy barring the two GSEs from selling or transferring their LIHTC assets remains in force – but has two exceptions: The GSEs can sell a LIHTC partnership interest to address a fiscal shortfall in an underlying project or in a fund in which they are an investor, or as individual projects reach Year 15 and are sold by the syndicator until the fund that held the properties ultimately closes down.

Fannie Mae has gradually sold off about $1 billion in LIHTC investments since being placed in conservatorship and has just under $2 billion in housing credit flow remaining, Woody Brewer, Vice President of Affordable Housing Lending Channel, said in a recent interview. Brewer previously oversaw asset management of Fannie Mae’s LIHTC portfolio.

Brewer said the sales – in multiple transactions – have generally raised cash to cover shortfalls in underlying LIHTC projects or at the upper-tier level of tax credit funds in which Fannie Mae is an investor.

“Working with our conservator and regulator, FHFA, we’ve sold our [partnership] interests when it was in the best interest of the company in the long run, in terms of the tax credits or the syndicator,” says Brewer. “Meaning there might have been a difference in the position in the syndicator or with the deal, or the deals were going south, or something that led to the sale. So we’ve only been selling in conjunction with a loss mitigation reason.”

Brewer said the LIHTC partnership interests have been sold to other corporate investors at prices that have been “very, very good.”

He indicated Fannie Mae could engage in additional future sales of its remaining LIHTC investments. But he indicated there are fewer cases today of shortfalls to merit a sale and there are not many years left of credit flow on the remaining investments. “Time is of the essence if you want to monetize credits,” said Brewer, noting Fannie Mae’s remaining LIHTC investments are generally in proprietary funds managed by syndicators.

In a recent interview, Freddie Mac executive Shaun Smith said she was not aware of any new effort by the company to sell its LIHTC investments. Unlike Fannie Mae, Freddie Mac generally invested in multi-investor LIHTC funds in which it held less than a 25% interest.