Thriving Times: Debt Financing Plentiful at Low Rates, but Possible Impacts on the Horizon
By Timothy Leonhard
13 min read
Debt financing of many different types for affordable multifamily rental housing properties will continue to be plentiful in 2014, according to industry sources. But keep an eye out on interest rates, developments at the Federal Housing Finance Agency (FHFA), and the progress of the multifamily office realignment efforts at the U.S. Department of Housing and Development (HUD).
“I think what Mel Watt decides to do at FHFA and how quickly HUD progresses with office closures and realignment will be the two big stories of the year,” says Timothy Leonhard of Oak Grove Capital, a Fannie Mae, Freddie Mac, and FHA mortgage lender.
Watt, formerly a senior Democrat on the House Financial Services Committee, and a long-time supporter of affordable housing, was sworn in January 6 as the new director of FHFA, which oversees and very much controls Fannie Mae and Freddie Mac, including setting annual housing goals for the two government-sponsored enterprises (GSEs), approving any new products, and imposing caps on the size of their portfolios. Watt hasn’t indicated yet what if any policy changes he might make at FHFA, but has appointed as a senior advisor Bob Ryan, formerly chief risk officer at HUD and senior advisor to Secretary Shaun Donovan. Another wild card regarding Fannie Mae and Freddie Mac is whether Congress passes housing finance and GSE reform legislation in 2014.
Meanwhile, HUD is about to start relocating field office staff to the Fort Worth and Kansas City Hub offices as it moves to create five regional Hubs and transition to a new risk-based lending business model under its Multifamily Transformation Plan. (See p. 38 for related story.)
Industry sources generally expect long-term interest and multifamily mortgage rates to rise a bit more during 2014 as the Fed continues winding down its quantitative easing program and as the economy strengthens. “I think most of the experts forecast around a one-half percent increase in rates,” says Leonhard. Tax-exempt bond underwriter John Rucker III of Merchant Capital LLC anticipates no more than a 100 to 125 basis point increase in long-term borrowing rates, but expects short-term rates to stay the same.
While long-term borrowing rates have risen some since mid-2013, they are currently still at very favorable levels, say sources, boding well for the industry looking forward. (See rate chart on p. 34.)
“I think the availability of debt financing for affordable is going to remain brisk,” says Leonhard. “Fannie and Freddie are going to remain very much in place and aggressive. FHA, they’re workloads have slowed down so their turnaround times are going to be a lot better than they have. So I think the outlook remains bright and rates are going to remain attractive versus historicals.”
The primary debt options for affordable multifamily rental housing developments, including those assisted by low-income housing tax credits, are programs of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Banks are a traditional source of construction financing and sometimes also permanent financing and have become more aggressive in the past year, said some sources, particularly major banks pursuing business in hot Community Reinvestment Act (CRA) markets. Some syndicators directly or indirectly offer debt financing. And for rural projects, USDA’s Rural Development (RD) Section 538 guaranteed loans are a possibility for new LIHTC projects. Tax-exempt financing is available nationwide, but most offerings these days, say sources, consist of cash-collateralized short-term bonds that are paid off after the construction period but qualify a project for 4% housing tax credits.
Variety of Popular Products
Multifamily mortgage lenders are originating a variety of products popular with borrowers these days.
Red Capital Group, the top FHA/Ginnie Mae lender in 2012, has been doing brisk volume in originating FHA Section 221(d)(4) loans for new construction and substantial rehabilitation affordable projects (nearly all LIHTC developments), Section 223(f) loans for acquisition and refinancing with rehab in some cases, and Section 223(a)(7) loans to refinance existing FHA mortgages, according to Tracy Peters, senior managing director at Red Capital Markets, LLC.
“We have a number of nonprofit and for-profit owners that are able to work with us primarily on FHA product because they have the time to do those deals,” he said.
FHA loans take considerably longer to obtain than Fannie Mae and Freddie Mac mortgages. But FHA mortgages for new developments offer both construction and longer-term permanent financing, a longer amortization period, and a lower borrowing rate, though the rate advantage has shrunk a bit in recent months.
Red Capital Group has also seen interest in Fannie Mae’s 7/6 adjustable-rate mortgage (ARM) product, a 7-year loan with prepayment flexibility that is popular for acquiring existing properties, including to syndicate or re-syndicate them in the future with housing tax credits.
Red Capital Group also offers “balance sheet lending,” using its own funds to make bridge loans to developers or lenders to enable them to acquire a property and tide them over until they can close on an FHA or Fannie Mae mortgage.
Finally, the company also underwrites and purchases tax-exempt multifamily housing bonds.
At Centerline Capital Group, a Fannie Mae, Freddie Mac, and FHA lender, the most popular multifamily debt product in 2013 was 10-year Fannie Mae and Freddie Mac loans and, for acquisition, Fannie Mae and Freddie Mac 7-year ARMs, said executive Jim Gillespie. Also popular were FHA Section 223(f) and 223(a)(7) loans. Gillespie said ARMs have been popular for acquiring properties with the intent to hold them for a future tax credit syndication or resyndication.
Centerline has also provided FHA or GSE loans in conjunction with cash-collateralized tax-exempt bond executions to provide funding for 4% tax credit new construction or acquisition/rehab projects.
Mortgage banking firm Lancaster Pollard, within the affordable housing space, is providing mostly Fannie Mae loans for refinancings and acquisitions while originating FHA mortgages primarily for transactions involving identity-of-interest resyndications, said executive David Lacki. He said the borrowing rate for a 35-year fully amortizing FHA mortgage is about 125 basis points less than a Fannie Mae loan with an 18-year term and 30-year amortization period. However, the drawback, is that it can take five to six months or sometimes longer to get an FHA loan from the time of application to closing. “We can close a Fannie Mae deal in 90 to 120 days,” he says.
Lancaster Pollard is also a Rural Development lender, and closed nine Section 538 guaranteed loans in 2013 for tax credit projects.
Lacki reported that Lancaster Pollard has closed two loans so far under HUD’s FHA LIHTC pilot program, which provides for expedited processing of Section 223(f) mortgages for tax credit projects.
Red Capital Group, Centerline Capital Group, Oak Grove Capital are among nearly 40 participating pilot program lenders, as is Greystone.
Jeff Englund, head of the Affordable Housing Group at Greystone, said the greatest volume of permanent debt that Greystone originated in 2013 for affordable multifamily projects were FHA, Fannie Mae, and Freddie Mac loans. These were primarily for the acquisition or refinance of properties with Section 8 contracts and of expiring use LIHTC properties. Englund said the majority of the Fannie Mae loans were structured with a 10-year term and 30-year amortization period, adding that 7-year term product became more popular as spreads widened over the course of the year. “The pricing is more competitive between the 7-year and the 10-year money,” he said. “However, 10-year transactions will typically generate higher loan proceeds.”
Englund said the 7- to 10-year fixed-rate Fannie Mae loans are for projects without new tax credit allocations.
Greystone is originating 18-year GSE loans for 9% and 4% tax credit new construction or acquisition/rehab projects; on the 4% LIHTC deals, cash-collateralized tax-exempt bonds are issued.
Greystone also has a popular new proprietary debt product for 9% tax credit projects. Capitalized by dollars from a pension fund, it is a permanent mortgage with a forward commitment where the fixed rate is locked in for up to three years in advance. The current all-in interest rate is in the low to mid 6 percent range, said Englund, adding, “We’re seeing significant demand for this product right now.”
All of the lenders reported that they have done a lot of business in the past year originating mortgages to refinance properties.
Activity at the GSEs
At Fannie Mae, much of the multifamily loan volume over the past year has been in the preservation area, providing 7- to 10-year fixed-rate mortgages to finance the acquisition of properties, generally without any rehab, and providing 15 to 18 year permanent mortgages for 4% and 9% tax credit acquisition/rehab and new construction projects.
On 4% deals, the short-term bonds issued are collateralized during the construction period by the proceeds of a Fannie Mae mortgage. On these 4% acquisition/ rehabilitation projects, both Fannie Mae and Freddie favor a moderate level of rehab such that the current tenants remain in place during the renovation period.
In the preservation area, says Fannie Mae official Georgia Hessick, ”Right now our sweet spot is within our 10, 12, 15-year deals fixed rate. But there are certain borrowers that do like our 7/6 ARM execution.”
Hessick and Woody Brewer, vice president of Fannie Mae’s Affordable Lending Channel, said the company expects to roll out in the next few months a revised version of the existing green refinance loan product it now offers with HUD. To be called Green Preservation Plus, it will still be a fixed-rate loan allowing additional funds to be borrowed to make energy efficiency improvements to an existing affordable multifamily property but permit borrowers to take some cash out.
Freddie Mac’s most popular product in the preservation business has been its cash 7-year floating rate mortgage, which can be securitized, said Shaun Smith, senior director of targeted affordable production. “It’s particular effective for a sponsor who wants to purchase a building and then later resyndicate,” she says. She said the processing time for these loans is typically 90 days or less.
In addition, Freddie Mac is providing 15- to 18-year fixed-rate permanent mortgages with 30- to 35-year amortization for 9% and 4% tax credit new construction or acquisition/rehab projects. In the case of 4% deals, Freddie Mac frequently uses its short-term bond execution under which it purchases a long-term cash mortgage, the proceeds of which provide the collateral for the tax-exempt bonds. The bonds are paid off after the project has been constructed and placed in service.
Smith said Freddie Mac has also been working on some new executions in bonds under what it calls its direct placement execution. Under this, a Freddie Mac targeted affordable housing lender making a construction loan to a tax credit project buys long-term tax-exempt bonds issued for the development. Freddie Mac credit enhances the bonds for 15 years. The advantage of this mechanism, says Smith, is that lenders get to treat the bonds as GSE risk rather than real estate risk under capital rules and thereby have to reserve less capital for the loan.
Freddie Mac is especially competitive in the pricing of its loans for properties with very low-income (VLI) units, defined as rental units affordable to households making 50% or less of the area median income. “We get very interested when at least 25% of the units are affordable to very low-income tenants,” says Smith.
Other Products, Bond Financing
There are a multitude of other proprietary products in the market as well.
One example is a new short- to mid-term debt product offered by Boston-based Affordable Investment Advisors, which also provides consulting services to housing tax credit developers, owners, and investors.
AIA’s “community reinvestment housing facility” is a flexible loan program targeted to experienced developers and owners that are creating or preserving multifamily properties restricted to tenants at 80% or less of AMI. Under the program, AIA offers fixed-rate loans of at least $750,000 with terms of 6 months to 10 years and a maximum loan-to-value ratio of 95%. Loans can be used for predevelopment, acquisition, mezzanine, and permanent financing.
According to AIA partner Greg Judge, the loan rate is around 10% and there are a couple of points upfront.
He said the creation of the product was spurred by requests from some developers for a subordinated junior or bridge loan product that would provide additional capital beyond a senior loan to acquire a tax credit property or a property they planned to acquire and renovate with tax credits.
“There’s a need for that, and there’s not a lot of people who are doing this find of financing,” Judge said.
In the area of tax-exempt multifamily housing bonds, Merchant Capital’s John Rucker says the predominant type of offering by far remains short-term cash-collateralized bond executions, noting rates on the bonds are extremely low, in the range of 35 to 60 basis points.The bonds, typically with maturities of one to two years, are redeemed when the project is placed in service.
Rucker said the bonds in most of these kinds of offerings in 2013 were collateralized by HUD Section 221(d)(4) mortgages. However, he said in the latter part of the year, more and more of these deals utilized Fannie Mae and Freddie Mac mortgages instead.
In a new twist, he said his firm has now begun structuring cash-collateralized bond issues in which newly originated Rural Development Section 538 mortgages are providing the collateral.
All in all, sources expect the good times to continue in the affordable housing debt market in 2014 – for developers, owners, and lenders.
“We like the market,” says Fannie Mae’s Woody Brewer. “We’re in it 24/7. We’ve never exited the market. And this is the bread and butter of what Fannie Mae does, which is affordable housing finance.”
Current FHA, Fannie Mae, Freddie Mac Financing Options
FHA/HUD – Taxable New Construction or Sub Rehab Loan Parameters [Section 221(d)(4)]
| DSCR: 1.11 to 1.20 | LTC: 83% to 90% | Rate: 4.50% (plus MIP) | Loan term: Up to 40 years | Amortization: Up to 40 years |
FHA/HUD – Taxable Acquisition or Refinancing Loan Sizing Parameters [Section 223(a)(7), 223(f)]
| DSCR: 1.15 to 1.20 | LTV: 85% | Rate: 3.75% (plus MIP) | Loan term: Up to 35 years | Amortization: Up to 35 years |
Fannie Mae/Freddie Mac Taxable Acquisition or Refinancing Loan Parameters (without new LIHTC)
| DSCR: 1.20 to 1.25 | LTV: 70% to 80% | Rate: 4.00% to 6.25% | Loan term: 5 to 30 years | Amortization: 30 years |
Fannie Mae/Freddie Mac Taxable Acquisition or Refinancing Loan Parameters (with new LIHTC)
| DSCR: 1.15 | LTV: 90% | Rate: 5.50% to 6.25% | Loan term: 15 to 30 years | Amortization: Up to 35 years |
Fannie Mae/Freddie Mac Taxable Adjustable Rate Acquisition or Refinancing Loan Parameters (without new LIHTC)
| DSCR: 1.20 to 1.25 | LTV: 75% to 80% | Rate: 2.50% to 3.65% over 30-day LIBOR | Loan term: 5 to 10 years | Amortization: 30 years |
Source: Timothy R. Leonhard is Executive Vice President of Oak Grove Capital, a Fannie Mae, Freddie Mac, and FHA multifamily lender based in Dallas, Texas. Figures as of January 20, 2014. Leonhard may be reached at 817-310-5800, tleonhard@oakgrovecap.com
