Community Developments Investments (March 2017)
New Fannie Mae Product Helps in Efforts to Preserve Affordable Housing
Bob Simpson, Vice President, Affordable, Green, and Small Loan Business, Fannie Mae
Woodland Towers, in Collinsville, Ill., was preserved with low-income housing tax credits and tax-exempt bonds and has received new rental subsidies from a Section 8 housing assistance program contract. (Fannie Mae)
As rents rise and wages stagnate for many American households, preserving the physical condition of properties and affordability for renters is essential. Current market dynamics can make it more profitable to convert properties to serve higher-income tenants, diminishing the existing affordable housing stock. An additional problem is that the new supply of affordable rental housing is not keeping pace with demand.
Fannie Mae has helped provide affordable rental housing to low-income individuals and families for nearly 30 years. The Multifamily Affordable Housing (MAH) business segment is defined as those properties with recorded rent and income restrictions and 20 percent of the units reserved for those earning 50 percent or less of the area median income (AMI); 40 percent reserved for those earning 60 percent or less of AMI; or a Section 8 Project Based Housing Assistance Payment (HAP) contract covering at least 20 percent of the units.
In partnership with its Delegated Underwriting and Servicing Lenders, Fannie Mae has delivered over $4 billion of MAH financing in 2016, building on the more than $3 billion in new production in 2015.
Innovation has been a key component of Fannie Mae's strategy to meet these challenges and to capture even more of the affordable housing business. Concentrating first on meeting the unique needs of properties with expiring federal low-income housing tax credits (LIHTCs) that will pursue a tenant-in-place rehabilitation through a new allocation of tax credits, Fannie Mae created a new mortgage-backed security (MBS), the MBS as Tax-Exempt Bond Collateral (M.TEB) execution. M.TEB has all the benefits of tax-exempt bonds along with a lower interest rate and significant savings over the life of the loan. Often the borrower uses this execution to take out a bridge loan while the borrower applies for tax credits.
For example, the Woodland Towers apartment complex in Collinsville, Ill., will use 4 percent LIHTCs along with tax-exempt bonds to significantly improve current property conditions, stabilize ongoing operations, and preserve the property's long-term affordability. In conjunction with the $7.4 million in new financing provided by Wells Fargo Multifamily Capital, a Fannie Mae Delegated Underwriting and Servicing Lender, the 104-unit project also will secure a new 20-year Section 8 HAP contract. With the M.TEB structure, Fannie Mae issues an MBS to serve as collateral for the bonds. Since Fannie Mae guarantees timely payments of principal and interest to the MBS trust, the bondholders enjoy a direct pass-through of the monthly payment, and the borrower captures interest rate savings over what could be achieved with traditional bond credit enhancement. The property will undergo interior and exterior renovations, improving the quality for residents while ensuring the long-term affordability for 30 years through the initial tax credit compliance period and the extended-use period.
Loans to smaller rental properties play a unique role in the rental housing market and are key to preserving units across the country. Fannie Mae recently expanded small loan underwriting, because small loans tend to be more affordable. The company's small loan program offers fixed- and variable-rate financing for loans of $3 million or less in most markets, and $5 million or less in eligible higher-cost markets, on smaller rental properties. The company has provided $15.7 billion of liquidity to this market since 2009.
Demographic and economic shifts require that the industry take a multifaceted approach to ensure that existing affordable properties remain available to the growing numbers that need them, while also doing what it can to support the production of new units. This support includes providing green financing solutions and options for both new construction and preservation of affordable rental stock, as well as enhancing the pricing for these types of transactions.
Winslow Cross Creek, in Sicklerville, N.J., is a newly constructed Energy Star-certified property financed by $1.9 million and $2.4 million in construction take-out loans from Fannie Mae. (Fannie Mae.)
Fannie Mae continues to maintain a significant market share in affordable rental housing finance by providing permanent take-out financing for acquisition, bridge, or construction loans. These tools and enhancements provide resources in preserving vital affordable rental housing stock. Together with its network of affordable and small loan lenders, Fannie Mae is committed to meeting the challenges of the affordable rental housing market in 2017 and beyond.
The advent of the National Housing Preservation Database permits researchers and market participants to conduct new types of analysis on subsidized affordable properties. For instance, by linking the National Housing Preservation Database to the Real Capital Analytics database of multifamily transactions, researchers and market participants are able to better identify sales of multifamily properties involving federal subsidies and assess market trends. In addition, apartment sales can be broken down into various subsidy types at the time of sale.
The following are examples of the market statistics that can be calculated by linking these two databases:
- Confirmed sales of existing subsidized affordable apartment properties totaled at least $9.2 billion in 2015 and more than $5.3 billion in 2016.
- At a minimum, sales of federally subsidized properties, including Section 8, totaled an estimated $2.4 billion in 2015 and another $2.4 billion in 2016
- At a minimum, sales of properties subsidized with LIHTCs were estimated at $6.8 billion in 2015 and another $4.7 billion in 2016.
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Collection: Community Developments Investments
On the cover
Clockwise from top left: R Street Apartments, residents of the St. Dennis Apartments, St. Dennis Apartments, and Galen Terrace Apartments, all in Washington, D.C. (Photos courtesy of the National Housing Trust)
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.