Talking Heads, David Leopold, Freddie Mac: Creating New Investor Products
By Darryl Hicks
9 min read
After almost two decades at Bank of America Merrill Lynch, most recently managing tax credit equity investments, David Leopold maintained a passion for multifamily affordable housing but was looking for something new. This past spring he was offered an irresistible opportunity: He joined Freddie Mac, as Vice President of Affordable Housing Production, where he manages all lender relationships, transactions, and deal negotiations for the multifamily affordable housing business.
Despite the move, Leopold remains a banker at heart and he hopes to leverage his experience at BAML to make Freddie Mac the largest financing source for affordable housing in the country.
Leopold sat down with Tax Credit Advisor to discuss his goals and objectives for 2015 and beyond.
Tax Credit Advisor: I understand that you have some innovative ideas for making Freddie Mac’s multifamily products more competitive. What excites you most about your current product line and what sorts of innovative products can we expect from Freddie in the future?
David Leopold: Before I joined the company, Freddie Mac was already an innovator in the multifamily space through its risk distribution/securitization platform. We are now securitizing most of (90 percent) what we originate (purchase), which this year will be well over $30 billion. That securitization methodology means that Freddie Mac can distribute risk by utilizing institutional investors in a way that has never been done, particularly on the affordable housing side. What I am most excited about is focusing more of that multifamily securitization strength on affordable housing. This already is being done with our taxable mortgage products but the next step is to bring that technology in a deeper way on the tax-exempt side. The product that I am most excited about is our Tax-Exempt Loan (TEL) program. TEL is a more efficient tax-exempt execution. It looks like a direct placement as opposed to a publicly-issued bond. We are not issuing securities, and that’s important, because the costs of issuance are wrung out of this structure, and we are delivering a more competitive rate due to securitization. It is the most innovative thing that we are doing.
TCA: How is it working so far?
Leopold: Great. We are quoting on a daily basis and aggregating loans. We are doing a lot of these as forwards and that’s important to remember. These are forward commitments. We don’t fund until the property stabilizes. That creates a lag in our aggregation, but it also makes it a more important product for the market.
TCA: With so many multifamily financing products available in the marketplace today how do you differentiate Freddie Mac’s suite of products?
Leopold: There are other private placement providers, but we are now the only one that has the technology to aggregate tax-exempt loans, and we are the only one that covers the entire country. I would also point out that when you compare Freddie Mac to other secondary market players, we can deal with complexity better. We are not a prior-approval shop that says ‘if it fits in this bucket, you can do it, we’ll approve it later.’ We get involved with our partners, our seller-servicers, right up front which means that we have assigned a team of underwriters to figure out how best to structure a deal that results in a “yes.” That means we can deal with bigger, more complex transactions. This year, our smallest deal will be around $3 million and our biggest deal will be $500 million.
TCA: Did that flexibility come from you, given your background in banking where complex affordable housing transactions are common, or did you compliment a level of thinking that already existed?
Leopold: I was fortunate to join a very well-established team of experts, so when I say that Freddie Mac has an ability to work out complex deals, that pre-dates me. What I bring to the job is a reinvigoration of engaging earlier on and working through those issues in partnership with sellers and borrowers (developers) together. In other words, a willingness to get our hands dirty early on.
TCA: How has your banking background helped you transition into this new position at Freddie Mac?
Leopold: I came from the primary to the secondary market. One of the big differences in the primary market is an ability to get your hands dirty and slog through the issues and deal with matters that are less uniform. That interest in, and desire to bring customized solutions, is a directional push that I am bringing.
TCA: Besides TEL, are you working on any additional multifamily products?
Leopold: We are looking to get more aggressive in helping developers acquire and preserve affordable housing. We are already aggressive in the area of preservation, in terms of how we size and structure mortgages for such deals, but we are going to add to that a suite of products focused on acquisition, with an eye toward re-syndicating and preserving existing affordable housing. There is already increased competition to acquire affordable housing and the ability to preserve it as affordable means that those borrowers who have the intent to maintain affordability need to be able to compete with other buyers who may not have the same incentive. Our guys, the ones who want to maintain affordability, need to have access to quick, aggressive capital. This has not been an area where Freddie Mac has traditionally played, but that is one of the areas that I want to focus on.
TCA: What does your rollout timeline look like?
Leopold: People will see a new acquisition/preservation product within the next 90 days.
TCA: What type of multifamily volume do you anticipate Freddie Mac will originate this year? How much of that will be affordable?
Leopold: Multifamily volume will be well over $30 billion and targeted affordable will be over $3 billion.
TCA: How is Freddie Mac embracing energy efficiency and sustainable development practices?
Leopold: We wholeheartedly embrace these practices. Later this year we hope to begin injecting an energy efficiency number into our securitizations so that we can start tracking successes against energy efficiency factors in line with the Environmental Protection Agency’s Energy Star score. This will help us evaluate credit quality and capital markets performance, in other words how aggressively investors are willing to bid by “green” score. By doing that over time, I think we will be the first capital provider to be able to assess investor interest by energy efficiency level. The details are still being flushed out.
TCA: What are your personal views on the Supreme Court’s ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project and its future impact on affordable housing development?
Leopold: I am not going to comment on individual court rulings, but what I will say is that I am personally committed to promoting affordable housing in every market throughout the country. The housing affordability crisis in this country is not about this community or that community. It’s about every community.
TCA: Midway through 2015, what noteworthy trends are you seeing in affordable housing/tax credit financing? What markets are you seeing the most development activity? What product types?
Leopold: The biggest trend I’m seeing isn’t with tax credit financing, but tax credit equity. The capital markets are awash in equity. We are seeing pricing in excess of a dollar in most markets. To me, that means that tax credit equity has become more commoditized. The customized solutions in the tax credit equity space have become less valuable as pricing has gotten to a point where people ask ‘how quick can I get it?’ and ‘what’s the dollar per credit?’ This means that there is more value than ever in being able to provide customized solutions for the debt structure. In response to your second question, the markets that tend to have “soft” money drive transactions, places like New York, California, and possibly Colorado, which is talking about launching a new soft debt program. In these areas, bond deals are becoming more viable and that’s what is driving transactions.
TCA: I’ve interviewed some of the nation’s largest affordable housing developers and they all say the same thing— more funding sources are needed to keep pace with the demand for affordable housing. What is Freddie Mac doing to resolve this crisis?
Leopold: Freddie Mac’s goal is to become the number one capital provider for affordable housing in this country. In specific jurisdictions, our role is to listen to the needs of communities and tweaking our products to accommodate those needs. To the extent that California wants to roll out a new subsidy, we will look at our products and figure out the best way to maximize the value of that program. Everything we do involves public and private dollars and our product set needs to maximize the value of those public dollars for creating and preserving affordable housing. It’s a different answer for every jurisdiction. One of the reasons I talk so much about the Tax Exempt Loan program is its flexibility. It can be funded immediately, it can be funded as a forward commitment and it can be variable or fixed. It allows for a lot of different structuring options to meet the needs of local jurisdictions.
TCA: While you talk a lot about flexibility, Freddie Mac is still under the conservatorship of the Federal Housing Finance Agency. Does that create any constraints on what you’re able to do?
Leopold: Like any financial institution in this country, we operate under a regime of regulatory constraints. If we introduce a new product that supports affordable housing, the FHFA needs to approve it, but they are very supportive of our efforts in this area.
