SPECIAL REPORT: First Agency LIHTC Deal May Come Next Month
By Mark Fogarty
5 min read
Now that Fannie Mae and Freddie Mac have been greenlighted to get back into the Low Income Housing Tax Credit market, the big agencies aren’t wasting any time. Freddie hopes to announce its first investment next month, and Fannie says it expects to re-enter the market in the first quarter of next year.
Players in the LIHTC space will have a lot of questions as these formerly prominent companies return as equity investors. But the main one they will want to know is how will agency participation be similar to what it was when they were dominant investors a dozen years ago, and how will it be different?
While it is too soon to know all the details, one difference jumps out. From having 30-40 percent of the market before the Great Recession, the agencies now will be restricted to $500 million in investments a year. While $1 billion a year in new investments would buoy the market, that still means Fannie and Freddie will have only around a ten percent combined share.
There is a further limitation on Fannie’s and Freddie’s LIHTC activity: any investment over $300 million in a year must be in areas targeted by agency regulator the Federal Housing Finance Agency as having difficulty attracting investments. A call to FHFA to define these areas was unavailing.
“We’re thrilled to be back in the market,” says Dana Brown, Fannie Mae’s LIHTC program director. “Fannie Mae is an investor unlike others in the LIHTC market in terms of not being CRA-driven or economically-driven.”
Instead, its focus will be on targeting underserved areas and providing stability to the market. “Fannie Mae has a unique ability to provide stability and liquidity across markets and over time,” he says.
The agency plans to use a variety of syndicators going forward. “We look to partner with the best of class for profits and nonprofits, both national and regional,” Brown says. “We have initiated discussions with a number of potential partners.”
Fannie plans to use its multifamily platform and to use both proprietary and multi-group funds. A source familiar with the company’s plans says there is definitely enough need for it to use all $500 million of its limit.
David Leopold, vice president of Targeted Affordable Sales & Investments at Freddie Mac Multifamily, said Freddie will be using primarily proprietary funds as it re-enters the market.
If it invests more than $300 million, he said the agency will be looking to the Duty to Serve target markets of rural areas and affordable housing preservation. (Manufactured housing is the third included in the DTS mandates.)
“Our primary focus is to invest in a diversified portfolio with a focus on areas underserved by other investors.
Doing so will have a significant positive impact on communities with some of the most serious affordable housing needs,” he says.
Leopold anticipates Freddie will achieve a market risk-adjusted yield. “Since its inception in 1986, LIHTC investing has consistently outperformed all other real estate asset classes—experiencing minimal foreclosure risk. Its overall strong and consistent performance make it a compelling investment, even at a lower return than other competing asset classes,” he says.
Like Fannie Mae, it is looking to provide liquidity and stability to the market.
Industry reaction to the move has been positive to date.
Michael Riechman, partner, managing director, Residential Investment Management at Miller-Valentine Group, Charlotte, NC, says, “It’s always great for the industry to have new investors come in.”
He anticipates the agencies will do about $600 million to $1 billion in annual volume.
“They were much more of a dominant figure [pre-recession]. Banks hadn’t grown to what they are now. Their influence will be less than they had in the past. However, it’s not insubstantial. They’ll have eight to 12 percent of the market, depending on where bonds fall in.”
Riechman thinks the agencies will have more impact “in tougher areas where CRA might not be relevant.”
Another industry executive thinks that all in all, the agencies’ return can be a good thing.
“Prior to the election and prior to the tax reform bill in front of Congress now, I could understand concerns from investors regarding adding more investors to the field. Having said that, with concerns around investor appetite at lower corporate tax rates and some other issues in the current bill as drafted, it may be that we need more investors in this space for equilibrium,” says Tony Bertoldi, executive vice president for syndications at CREA, Boston.
“I think it also helps that Fannie and Freddie will not be competing in the hot CRA markets. 2018 is shaping up to be very uncertain with respect to appetite among existing investors and where sell yields will need to be at lower tax rates that could lead to lower demand, but it’s too early to say. If Fannie and Freddie can absorb some of that lost demand, the industry as a whole will benefit.”
The impetus for Fannie’s and Freddie’s re-entry into the market has come from the Duty to Serve requirements for the agencies mandated by the Housing and Economic Recovery Act of 2008. If the DTS targeting gives any indication of what FHFA considers areas to target, the broad DTS goals are affordable housing preservation, manufactured housing and rural areas.
GSE LIHTC participation began to falter in 2007 as declining profits made tax credits less attractive. Once they were seized by the federal government and put into conservatorship in 2008, they were prohibited from making investments.
FHFA said it will evaluate the agencies’ LIHTC performance annually. It said one of the considerations in its decision was the ability of the GSEs to stabilize the market.
