Rebuffed Credit Sale Leaves Questions About GSE Housing Credit Portfolios Still Hanging
By Caitlin Jones
5 min read
Tax Credit Advisor, December 2009: The U.S. Treasury Department’s disapproval of Fannie Mae’s proposed sale of a chunk of its existing low-income housing tax credit (LIHTC) investments prolongs concerns about the “elephant in the room” – namely what is going to happen to the large volume of housing credit investments held by Fannie Mae and Freddie Mac, and how might any sale or sales impact the LIHTC equity market. Those questions appear likely to remain unanswered for a period of time.
The issue has festered for more than a year, since Fannie Mae and Freddie Mac – the major government-sponsored enterprises (GSEs) – first reported huge losses and were taken over by the federal government in September 2008 and placed in separate conservatorships under the Federal Housing Finance Agency (FHFA). The money-losing GSEs, once said to account for as much as 40% of all annual LIHTC investment, are now unable to benefit from their existing housing credit investments nor likely to need tax shelter any time soon.
In a statement on 9/12/08, FHFA sought to calm worries in the LIHTC industry about potential large secondary market sales of the GSEs’ credit investments and the disruption it was feared this would cause. FHFA said then that Fannie Mae and Freddie Mac would continue to do “business as usual” in their single-family and multifamily businesses, adding “We also do not expect either company to liquidate its portfolio of LIHTC or mortgage-revenue bonds.”
On 11/6/09, Treasury Department rejected Fannie Mae’s proposal to essentially lease some $2.6 billion worth of its existing LIHTC investments to a group that included Goldman Sachs and Berkshire Hathaway Corporation. Treasury explained that the loss in federal tax revenues from the transaction would be greater than the reduction in future capital contributions by Treasury to Fannie Mae.
The disapproval came one day after FHFA gave the deal a green light. In a statement, FHFA noted the changes in conditions from September 2008 and indicated that the proposed transaction was consistent with Fannie Mae’s mission.
In a news release dated 11/5/09, in which it explained the proposed transaction, Fannie Mae said it had entered into a nonbinding letter of intent to transfer to unrelated third-party investors approximately one-half of its current LIHTC investments for a price exceeding their current market value. Upon completion of the transfer, the investors would receive substantially all of the tax benefits for these LIHTC investments for a specific period of time. At a specified future date, which the release didn’t specify, the percentage of tax benefits received by the investors would be reduced and the percentage received by Fannie Mae increased by the same amount. In addition, Fannie Mae could have the obligation to acquire all or a portion of the transferred interests.
Fannie Mae said its current LIHTC investments had a carrying value of $5.2 billion as of 9/30/09.
Next Step Uncertain
Asked to comment on the proposed transaction, a Fannie Mae spokesman instead just referred to the company’s latest SEC filing. On 11/9/09, Fannie Mae indicated it isn’t sure what its next step will be regarding its LIHTC investments. “We are evaluating whether Treasury’s decision changes our prior determination that we continue to have the intent and ability to sell or otherwise transfer our LIHTC investments for value.” Fannie Mae said it believes it will be “difficult” to transfer or sell its investments for value “given current constraints and market conditions.” It warned it might have to write down the value of its LIHTC investments to zero in the fourth quarter.
Fannie Mae has sold some of its existing LIHTC investments in the past. In 2007, Fannie Mae sold about $654 million in LIHTC investments in March to Citibank, and another $254 million in July. In 2008, Fannie Mae sold another LIHTC portfolio of about $930 million.
Freddie Mac
Freddie Mac, meanwhile, is developing its own plan for possible transactions.
Company spokeswoman Patricia Boerger, who said Freddie Mac’s current LIHTC investment portfolio is about $3.4 billion, said Freddie Mac has been searching for ways to support the LIHTC market and bring new investors into it.
FHFA “has authorized us to work on a plan to sell our LIHTCs in a way that wouldn’t adversely impact the LIHTC primary market,” she noted. Boerger said any sales would not be to institutions covered by the federal Community Reinvestment Act (i.e. non-banks) or that have received TARP funds, and not to organizations that have invested in LIHTCs in the primary market in the past 10 years.
She said no specific transaction has been finalized or approved by FHFA and Treasury.
Goldman, Berkshire
Goldman Sachs spokesman Michael DuVally confirmed that Goldman Sachs has invested in LIHTCs in the primary market, but wouldn’t comment on the recent proposed transaction. Berkshire Hathaway similarly didn’t provide comment.
Berkshire Hathaway has invested in LIHTCs in the past, including in tax credit funds organized by the National Equity Fund. Through year-end 2007, Berkshire Hathaway had invested $245 million in various NEF funds, according to an October 2008 document.
