Fannie Mae Plans to Sell, as Well as Buy LIHTCs in 2006; Reports Tax Credit Purchases of $1.8 Billion in 2005

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Tax Credit Advisor March, 2006: Fannie Mae, currently the largest single investor in Low Income Housing Tax Credits, plans to begin selling selected LIHTC investments in 2006 as well as making additional purchases, according to Ed Neill, vice president for Multifamily Affordable Housing.

Mr. Neill said that Fannie Mae was “moving from a buy-and-hold approach to a portfolio-optimization approach where we will be a buyer and seller of credits depending on market conditions.”

Fannie Mae did not provide a target amount of LIHTC investments that it might consider selling. Most of Fannie’s housing tax-credit investments are through equity funds put together by syndicators who buy tax credits directly from developers. The company does business with local and national syndicators. In 2005, Fannie Mae worked with twenty-five syndicators, a number that has stayed relatively steady for the past few years, according to Mr. Neill.

After reporting flat growth in its LIHTC portfolio in 2004, Fannie Mae actually increased its investment in 2005 by six percent to $1.8 billion, from $1.7 billion, according to information recently released by the company.

Fannie Mae is the largest single private investor in LIHTCs, having invested approximately $5.2 billion over the past three years, and $14 billion since 1998. By comparison, Freddie Mac invested $1.3 billion in LIHTCs in 2005, the same amount as it had in 2004. (See Tax Credit Advisor, December 2005.)

The Strategy Behind Selling LIHTCs

Fannie Mae’s decision to become a seller as well as an investor in LIHTCs is linked to its strategy of providing a wide range of affordable housing services to its banking customers, said Neill.

In choosing to sell some of the credits that it has invested in over the years – and redeploying the proceeds into other affordable housing initiatives – Fannie Mae has found another way to demonstrate the value of its LIHTC investments and its commitment to finding new ways to help its customers meet their own affordable housing and community reinvestment goals, he said.

Specifically, for years Fannie Mae has bought Community Reinvestment Act qualifying mortgages from lenders, funding the purchases with either cash or in exchange for securities. This has provided liquidity to lenders that allows them to increase their purchases of CRA mortgage loans. Now, by launching its new practice of selling LIHTCs, Fannie Mae creates an additional way of providing opportunities to help lenders make CRA-qualifying investments.

“We think that we can help a number of our existing bank customers to meet their Community Reinvestment Act objectives,” Neill told TCA.

While LIHTC investments help financial institutions that are subject to the CRA requirements meet their regulatory objectives, Fannie Mae – subject to affordable housing goals mandated by the Department of Housing and Urban Development – does not receive similar regulatory credit. Fannie Mae and Freddie Mac have maintained, however, that investments in LIHTCs are a core part of their business of financing affordable housing.

Selling Credits on Seasoned Properties

Anthony Freedman, an affordable housing attorney and partner in the Washington D.C. office of Hawkins, Delafield & Wood LLP, believes that Fannie Mae would likely sell tax credit investments in seasoned projects.

“I’ve seen a few (secondary market) transactions with tax credits on seasoned properties from other investors,” said Mr. Freedman. “They are usually priced quite well because the projects are up and running.”

By selling credits for seasoned projects, Fannie Mae benefits from the fact that buyers would be willing to pay more because lease-up risk associated with new deals is not an issue.

Priorities in Purchasing LIHTCs

As for buying LIHTCs in 2006, Neill said that of Fannie Mae “wants to partner with anybody who has an interest in providing more affordable housing and has the infrastructure to properly manage the complexities of the business.”

He added that Fannie Mae was particularly interested in participating in deals that involved the preservation of existing affordable housing; and that helped to finance housing for previously homeless persons and individuals with special needs.