Copyright America's Community Bankers Feb 2005| [Headnote] |
 Fannie Mae and Freddie Mac Executives Offer a Glimpse at Upcoming Growth Opportunities in a Vital Market |
Beginning in 2005, the Department of Housing and Urban Development significantly raised the bar on the affordable housing goals for Fannie Mae and Freddie Mac.
The government-sponsored enterprises also saw a hike in their subgoals specifically targeting multifamily lending-to $5.49 billion per year for Fannie Mae, up from $2.85 billion, and $3.92 billion per year for Freddie Mac, up from $2.11 billion.
"These new affordable housing goals will help the GSEs achieve the standard that Congress intended-leading the mortgage finance industry in helping lowand moderate-income families afford decent housing," said HUD secretary Alphonso Jackson. "These new goals will push the GSEs to genuinely lead the market." HUD projected that to meet the increased goals, the GSEs together would purchase an additional 400,000 goal-qualifying home loans during 2005 through 2008.
What will these changes mean for community banks looking to sell multifamily housing in the secondary market? To find out, Community Banker spoke with representatives from the two companies. Excerpts from those interviews follow.
Rental Market is Key to Freddie Mac's Affordable Housing Efforts
The multifamily market, and specifically the rental section of the market, is an important part of Freddie Mac's efforts to meet its affordable housing goals because, "the simple fact of the matter is, renters, by definition, make considerably less money than owners," said Mitchell Kiffe, vice president of Freddie Mac's multifamily loan production department. "So, yes, the apartment market is much more 'affordable'-rich than the for-sale side."
Freddie in 2004 had one of its best years ever in satisfying one of its three main affordable housing goals. Historically, about 90 percent of the multifamily units the company finances are affordable by HUDs definition. But, as last year was drawing to a close, the rate was in the "mid90 percent range" and holding, Kiffe said.
However, with higher standards ahead in all three affordable housing categoriesmortgages for low- and moderate-income people, loans in geographically targeted areas, and mortgages aimed at very-lowincome people and neighborhoods-even that won't be good enough. Consequently, Freddie Mac is planning a major effort to increase the supply of rental units.
"As a GSE with a broad public mission, we cannot sit by and pretend the supply of affordable housing doesn't matter, even if our direct influence on it is less," Richard Syron, Freddie Mac's chairman and chief executive officer, said in announcing the initiative at a symposium on workforce housing late last year.
In an interview afterwards, Kiffe, who was hired away from the commercial banking division of GMAC Mortgage Corp. in 1992 to help rebuild Freddie Mac's sagging multifamily business, elaborated on that initiative, which will include greater emphasis on small loans, tax credit financing, manufactured housing, rural lending, and a partnership with the AFL-CIO.
Freddie Mac has always been interested in small mortgages in the $3 million to $5 million range, but largely on a pool basis that forced commercial lenders and savings banks to keep the loans on their books until they could aggregate enough volume to sell them to the company. Now, said Kiffe, the company is in the process of developing "an execution" that allows lenders to sell their smaller loans as they write them.
"We're trying to do more on a whole loan and flow basis," he said, noting that the company hoped to announce the new product in January or February. "That way, lenders can sell us their smaller loans as they go along."
Freddie Mac also has been a big investor in low-income-housing tax credits, the primary vehicle by which affordable rental properties are financed. In fact, it is one of the largest corporate investors in lowincome-housing tax-credit funds sponsored by non-profit and for-profit syndicates. And now it plans to be an even larger player-on a flow as well as a structured pool basis.
To help accomplish that goal, the company will rely on a new delegated underwriting initiative in which it will accept a seller/servicer's approval in return for the seller/servicer's assumption of a portion of the credit risk. In so doing, Freddie Mac will be able to provide commitments more quickly.
"Multi-family borrowers seeking debt financing or credit enhancement for taxcredit properties are typically on a tight schedule because of tax-credit-allocation timelines specified by state housing agencies," Kiffe said. "The new delegated underwriting initiative will provide borrowers with a Freddie Mac financing decision earlier in the underwriting process to assure that allocation deadlines are met."
The company also is "looking closely" at manufactured housing, a segment of the affordable housing market in which it has not been very active, and is working to expand an initiative with the Department of Agriculture to rehabilitate and preserve rural rentals.
Announced in August, the USDA partnership calls for Freddie Mac to buy new loans secured by properties in underserved rural areas that are backed by Section 515 rental housing mortgages. Over the years, some 17,000 properties have been developed with section 515 loans. But a majority of them were built in the 1970s, and are now in need of modernization and repair.
Unfortunately, the program "hasn't progressed as fast as we would have liked," Kiffe said. But Freddie Mac isn't giving up on it. "It may take a little longer to get off the ground, but I don't think the effort is in jeopardy," he said.
Meanwhile, back in the big city-or a dozen big cities, to be exact-the company is joining with the AFL-CIO to build 10,000 new apartments. The specific markets haven't been chosen yet. But because the GSEs are required to bring liquidity to all markets at all times, the AFL-CIO "will have the larger input" in making those decisions.
The initiative is intended to focus on workforce housing in markets where the cost of housing is the highest, Kiffe said. But the AFL-CIO can be expected to pick heavily unionized places where new construction means new union jobs.
The details of the AFL-CIO/Freddie Mac pact will be announced by summer, if not sooner. But Kiffe said his company plans to back the take-out loans on rental properties, and the AFL-CIO will buy the loans or a security backed by a number of loans when the projects are completed.
Fannie Mae to Increase Focus On Community Bank Lenders
Fannie Mae expects to announce several new multifamily finance initiatives in February, including one aimed squarely at community banks and other smaller lenders.
Details were sketchy at press time, because the nations largest private-sector provider of funds for rental housing is hoping to make a big splash at the Mortgage Bankers Associations annual commercial real estate conference in San Diego. But Kenneth Bacon, the man responsible for managing and marketing Fannie Mac's $95 billion-plus portfolio of multifamily loans and investments, gave Community Banker a sneak preview.
"We recognize that we have to do a better job" in reaching out to community banks, said Bacon, a transplanted Houstonian who may be the only Fannie Mae executive who wears cowboy boots to work. "So we're opening a small-loans channel, and we're hiring people whose sole purpose in life, 24/7, is small loans. And if you are talking small loans, you are talking community banks," said Bacon, the GSE's senior vice president of multifamily lending and investment.
The new channel will offer products and processes designed to help lenders originate and sell loans of up to $3 million, or $5 million in high-cost areas. One such product, dubbed "3Max Express," will offer flexible terms and streamlined processing, including reduced documentation that promises to trim approval times and slice transaction costs.
It's hard to call the effort to reach out to community banks "new." After all, Fannie Mae has always dealt with lenders of all sizes. But Bacon, who joined the company in 1993 after stints with the Resolution Trust Corp. and a couple of Wall Street investment houses before that, freely admits that the little guys haven't always fit well with the GSEs modus operandi.
"Under our business model, we work largely with a small group of lendersincluding a group of 26 experienced delegated underwriting and servicing, or DUS, lenders, who have the authority to underwrite loans for sale to (Fannie Mae) without its prior approval-so we don't have a lot of loans in that space," he said.
But that is changing, in part as a result of a four-year-old partnership between Fannie Mae and America's Community Bankers. The GSE's multifamily arm has "been in a dialogue for the past couple of years with ACB," Bacon said. "We've come to realize the unique expertise community banks bring to this sector. So we are creating a small-loans channel with its own staff and profit and loss statement, and directing them to focus entirely on small loans."
Fannie Mac's main multifamily man warned not to expect a big push right out of the box. "It won't happen right away," he said. "We're slowly going out to people, but we've got to scale up. We're doing more research and development now, and you'll start seeing a greater emphasis on small loans in 2005. But two or three years from now, we'll be doing a lot more business with community banks."
The new initiative is part of a larger reorganization of Fannies multifamily division, a channel that generated $16.3 billion in lending activity in 2004 (through October). Last fall, the department regrouped into three sections:
* Sales and marketing, to market creative, customized deals to lenders and borrowers.
* Business channels, to handle standard flow business, small loans, large or structured transactions, affordable housing, and pools.
* Risk transformation, to provide various risk-sharing arrangements and seamless portfolio executions.
The decision to revamp a unit that financed nearly half-a-million rental units in 2003 alone-and grew its portfolio by 100 percent over the last four years-didn't come easy.
"One of the hardest things in business is to know when to hold 'em and know when to fold 'em," Bacon said, borrowing from the popular Kenny Rogers tune in his Texas twang. "But the market has changed a lot, and we had to change with it. We realized we couldn't service todays market with our old structure, even though it has served us very well."
Fannie Mac's customers, borrowers, and competition have all shifted, Bacon said.
"Our customers have changed tremendously over the last four years," he said. "Our best program is our DUS lender network. It is preeminent in the marketplace. But a lot of large institutions have acquired our DUS lenders, so instead of dealing with what were predominantly small, independent mortgage banks, we now are dealing with larger depositories with a lot of their own capabilities."
On the borrower side, what was once a fragmented business is now dominated by large multi-market real estate investment trusts, or REITs. The apartment sector used to be made up of mostly privately held companies that tended to do a few projects and smaller deals, Bacon said. "Now, huge REITs are doing big deals on a national and regional basis. And the net result is a growing number of large, sophisticated borrowers who want customized loans. They're telling us, 'I know how your products works, but I want it my way.'"
Fannie Mae's competitors have changed, too. "Other people have discovered what we have known all along, that multifamily is an unbelievable business," Bacon said. "There are now tons of players, all looking to outdo their rivals."
Looking ahead, Bacon declined to offer an outlook for his division in 2005. "We never publicly forecast our volumes," he said. "Besides, with what's happening with interest rates, it's hard for anyone to predict what's going to happen."
But whatever the future brings, Bacon said that Fannie Mae will be in the market, providing stability and liquidity like it always does under any economic conditions. Going forward, though, a new and improved multifamily division will be offering an array of new products as the company "steps into some areas where we haven't been as aggressive as we need to be," he said.
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| Freddie Mac is in the process of developing "an execution" that allows lenders to sell their smaller loans as they write them. |
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