The Debt Corner, Housing Finance Reform: Will 2015 Bring Change?

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

In March of last year, 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 they had crafted. After a good deal of initial attention, publicity regarding the bill died down as the year progressed and it became evident that government housing finance reform was a back burner issue.

With the mid-term elections behind us, and with Republicans controlling both the Senate and the House, it is possible that 2015 will see some movement toward change, subject to a potential White House veto. Expect 2015 to be very interesting on this front, with numerous discussions and proposals, and with much back and forth. It is still possible that any meaningful change may be delayed until there is a new Administration, which should make the conversations in 2015 even livelier. In the meantime, for those of us in the multifamily business, Fannie Mae and Freddie Mac continue to provide very consistent and attractive liquidity to the multifamily markets.

The Federal Housing Finance Agency (“FHFA”) proposed its GSE Housing Goals for Fiscal Years 2015-2017, and on August 15 issued its “FHFA Strategic Plan: Fiscal Years 2015 – 2019.”

Interest Rates Outlook

The Treasury market continues to surprise investors and has yet again rallied considerably (even with some recent backing off). A flattening of the U.S. Treasury yield curve has continued over the past three months.  While the short-end of the curve has sold off a bit, likely in anticipation of possible Fed moves later this year, the long-end of the curve has rallied.  The 7, 10, and 30-year Treasury yields are down roughly 25, 40, and 50 basis points, respectively, since last October 31.

Last year, I wrote about expected growth and inflation as likely being causes to the flattening of the yield curve. While those causes are seemingly still at play, the larger cause could be the fact that in the past three months there has been a dramatic drop in European sovereign yields because of the European Central Bank’s decision to initiate a quantitative easing program.  For example, the German 10-year Bund is currently yielding below 0.40%, while the U.S. 10-year is at 1.95%. The extremely low rates in the high-credit European sovereign bonds make U.S. Treasury yields relatively attractive, and likely a target for carry trades, which helps keep the U.S. yield curve flat.

Fortunately, spreads on Fannie Mae, Freddie Mac and FHA paper have held relatively constant during the past three months relative to Treasuries.  With the further flattening of the yield curve, there is more investor interest in longer-term (e.g., 12 year, 15 year, etc.) loans.

GSE and HUD Volume

Fannie Mae and Freddie Mac multifamily loan volumes finished 2014 strongly and impressively, especially considering the slow start they both had in the first quarter of 2014. Together, multifamily volume for the two GSEs exceeded $57 billion in 2014 ($28.3 billion and $28.8 billion, respectively), up from $54 billion in 2013. All indications are that 2015 multifamily loan production has started out strongly for both.  Year-over-year FHA multifamily volume was down by 37% in calendar 2014 to about $14.5 billion. The lower volume in 2014 is understandable given the higher interest rate environment in the first half of 2014 versus the first half of 2013 and the fact that 2013 had a significant volume of 223(a)(7) refinancings, which 2014 did not. Given current interest rates, it will be interesting to see what “(a)(7)” volume will be in 2015.

Both GSEs continue to have a strong appetite for affordable housing, thus far in 2015. Despite the FHFA’s 2015 multifamily loan caps of $30 billion and $26 billion for Fannie Mae and Freddie Mac, respectively, neither GSE has a volume cap on the amount of affordable housing production it can close in 2015. As a result, the 2015 multifamily volume caps will not restrict the GSEs’ multifamily affordable housing production.

Product Enhancements and Initiatives

Fannie Mae and Freddie Mac continue to work extremely hard to win business through various initiatives, product enhancements, and one-off transaction evaluations. Freddie’s very low-income housing (VLI) initiative continues to offer favorable pricing compared to other products. Freddie has also announced programs for pre-stabilized properties and for 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.

Fannie Mae recently closed its first MBS Bond Collateral transaction.  This product allows borrowers to access MBS rates which are approximately 50bps inside like-maturity tax exempt bond rates and allows a 2% to 3% transaction cost savings when compared to traditional Bond Credit Enhancements or the Cash Collateral bond structure.  Fannie Mae also recently announced its Streamlined Early Rate Lock product, which allows borrowers to set their interest rate upon loan application, as well as the “Near Stab” product which allows borrowers to lock their interest rate when a project only has 75% physical and 60% economic occupancy, as long as there is the expectation that the property will be fully stabilized within 120 days of rate lock. Fannie Mae has also enhanced the conversion feature of its Structured ARM product in order to provide the ability to convert from an existing floating rate loan to a new fixed rate loan with streamlined underwriting, 30-year amortization, priced at market at the time of conversion, and which allows for cash take out proceeds.

FHA, of course, continues to focus on affordable housing finance. On January 30, HUD issued a memorandum clarifying its position and status on numerous multifamily topics and asserted that Low Income Housing Tax Credit housing is a top priority. In that memorandum, HUD notes that it has made “three significant organizational changes to support affordable housing finance:” 1) Single Underwriter Model; 2) Dedicated Rental Assistance Demonstration (RAD) Teams; 3) Expansion of the Pilot Program to 221(d)(4) Projects (in California only, thus far).

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.