No Action in Housing Finance Reform, But Mortgage Rates Fall

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In my April column, I discussed the status of proposals to dismantle or significantly restructure Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs).

Shortly afterwards, Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho) unveiled a bipartisan GSE and housing finance reform bill that they had crafted, though publicity regarding the bill has since died down.

Discussion of GSE reform has been put on the back burner in Washington as the November elections near. At this point, it is likely that no significant discussion on housing finance reform will take center stage until a new administration is in the White House. This is very good news for those of us in the multifamily business as Fannie and Freddie continue to provide very consistent and attractive liquidity to the multifamily markets nationwide.

Meanwhile, the Federal Housing Finance Agency (FHFA) has proposed its GSE Housing Goals for Fiscal Years 2015-2017, and on August 15 issued its “FHFA Strategic Plan: Fiscal Years 2015 – 2019.” FHFA is soliciting public comments by January 12, 2015 on the Strategic Plan, which emphasizes the need for support for affordable housing in the U.S.

(To view FHFA’s Strategic Plan, go to

Year-to-Date Activity, Interest Rates

The U.S. 10-year Treasury yield began the year at roughly 3.0%. While many prognosticators then pegged the 2014 year-end yield at 3.25%-3.75%, the Treasury market has surprised investors this year by rallying considerably. From February to mid-September the yield bounced between 2.40% and 2.80%. However, in the past month the Treasury market has rallied hard to a 2.00% yield. The sharp drop in yields can be explained by the increasing tensions in the Middle East, Ukraine, and Hong Kong, along with economic slowdowns in Europe and China and fears about the spread of the Ebola virus.

Fannie Mae and Freddie Mac multifamily loan volumes this year, as of September 30, are down by 28% and 20%, respectively, compared to a year ago. FHA volume is down by about 40% through the end of the third quarter. The lower volumes are understandable given the higher interest rate environment in the first half of 2014 versus the first half of 2013. What will be interesting to see is if the recent selloff in the Treasury market creates an opportunity for more transactions in the fourth quarter of 2014.

One interesting trend has been the flattening of the yield curve since January 1. While the 5-year Treasury yield has declined by 0.48%, the 10-year and 30-year yields have declined even more – by 1.03% and 1.14%, respectively. Perhaps this disparity reflects a belief by the capital markets that low inflation and slow growth will be the norm for the next few years. This flattening of the yield curve makes longer-term and fixed-rate loans relatively more attractive.

Product Enhancements and Initiatives

Fannie Mae and Freddie Mac are working hard to win business through various initiatives, product enhancements, and one-off transaction evaluations. Freddie’s very low-income housing (VLI) initiative offers favorable pricing compared to other products. Freddie has also announced programs for pre-stabilized properties and bridge financings of value-add opportunities. Fannie offers a similar program, allowing borrowers to lock in their mortgage interest rates and loan amounts sooner than previously possible.

FHA’s Tax Credit Pilot Program also remains available. The agency has renewed interest in transactions involving moderate rehabilitation and has made continuous process improvements as the result of joint dialogue between HUD and lenders. The Pilot Program has seen tremendous growth since its inception, with production volume increasing yearly. In 2013, the volume was approximately $1 billion, double that of 2012. Based on concept meetings and transactions currently under review, HUD projects 2014 volume of approximately $2 billion.

Recent changes made by HUD for Pilot Program transactions and for all Section 223(f) transactions involving new low-income housing tax credit equity include:

  • Debt limits, including subordinated loans, remain at 92.5% of value, but HUD will waive this requirement if the additional debt meets certain requirements, such as only being payable from up to 75% of Surplus Cash. Total debt exceeding 92.5% of value cannot be recorded or secured by a lien against the property, can carry no foreclosure provisions that would affect the first mortgage, and must be subject to automatic subordination and re-subordination to HUD’s first mortgage. This applies to all 223(f) LIHTC projects.
  • Identity of Interest (IOI) sales transactions may be treated the same as non-IOI transactions.
  • A minimum of 20% of the tax credit equity is required at initial closing.
  • The completion of assurance requirement has been reduced from 20% to 10%, provided there are detailed costs submitted and a well-defined scope of work.
  • Tax abatements that are tied to the Sponsor, and not to the land, can be considered in the calculation of the maximum debt service mortgage, especially if the loan is a Section 202 refinance, a Rental Assistance Demonstration (RAD) program transaction, or has a Housing Assistance Payments contract covering 90% of the units and mitigating circumstances such as a large rent advantage as compared to market rents and a low LTV.
  • Davis-Bacon wages are required for all public housing conversions.


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: 3.95% (plus MIP) Loan term: Up to 40 years Amortization: Up to 40 years


FHA/HUD – Taxable Acquisition or Refinancing Loan Sizing Parameters [Section 223(f)]

DSCR: 1.15 to 1.20 LTV: up to 87% Rate: 3.55% (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: 75% to 80% Rate: 3.75% to 5.60% 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: 4.75% to 5.60% 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: 2.10% to 2.50% over 1M LIBOR Loan term: 5 to 10 years Amortization: 30 years


  • All rate quotes above assume a full leverage transaction. Transactions with LTV of 70% or less can generate interest rate savings of between 15 and 40 basis points.

Source: Timothy R. Leonhard is the Managing Director of Affordable Housing at Oak Grove Capital, a Fannie Mae, Freddie Mac, and FHA multifamily lender based in Dallas, Texas. Figures as of October 15, 2014. Leonhard may be reached at 817-310-5800,




Managing Dircetor Specialties: Multifamily, Debt & Investment Sales Timothy Leonhard has been involved in the development and financing of affordable housing since 1998. To date Tim has closed more than $8.0 billion of affordable housing financing and investment sales in more than 40 states. Tim has extensive experience with Fannie Mae, Freddie Mac, and HUD loan programs having financed properties that have combined a variety of subsidies including, federal low income tax credits, state low income tax credits, tax-exempt bonds, federal historic tax credits, state historic tax credits and various forms of subsidy financing from local, state, and federal sources such as IRP decoupling, Tax Increment Financing, various HUD community redevelopment funding sources, tax abatements, tax exemptions, and PILOTs. Additionally, Tim has leveraged this experience to help maximize the value of and has successfully participated in the acquisition financing and sale of several hundred affordable housing assets at or near the end of their initial compliance period. Tim’s tenure includes managing director at MMA Financial, vice president at Glaser Financial Group, vice president at Charter Mac, and project manager at HRI Properties.