With an increased focus on mission-driven housing, Fannie and Freddie are providing favorable financing options to affordable housing investors.
Fannie Mae and Freddie Mac have continued to sharpen their focus on mission-driven housing—and it’s a boon for investors who are increasing allocations for affordable housing. The agencies are providing favorable financing options for affordable deals.
“As the Agencies’ affordable housing goals continue to increase, this will continue to squeeze out the opportunity for market rate deals. Agencies will be selective in pricing market rate deals and likely reserve that portion of their cap for priority borrowers and lower leverage deals,” Pamela van Os, SVP of agency production at Greystone, tells GlobeSt.com.
The favorable financing terms will no doubt generate interest in affordable housing investment this year. The sector also offers healthy yields and higher cap rates than market rate deals. “Agencies are also looking to programs to offer competitive pricing with borrowers that have sponsor-initiated regulatory agreements, placing maximum level of rents throughout the loan term,” adds van Os.
This year, Freddie and Fannie have a 50% mandate for mission-driven housing as it did last year. The Agencies also increased capacity this year. “With the increase in the Agencies’ allocation for 2022, this increased capacity will fuel the Agencies to compete aggressively for the 60% AMI goal, in both price and certain credit terms,” says van Os. “While this has been an ongoing trend, the agencies’ mission-driven goals continue to be defined and targets increased.”
On the market rate side, investors are more frequently turning to bridge financing. “Bridge loans will likely continue to be in high demand as investors look for leverage in this low cap rate environment,” says van Os. “Acquisition financing with Agency debt is yielding 65% leverage versus bridge debt leverage at over 75%.”
Van Os doesn’t expect this trend to change in 2022, despite inflation and rising interest rates. “Overall demand for bridge should remain high in 2022,” she says. “However, as interest rates increase this will put continued pressure on proceeds and lenders looking closely at exit/take-out assumptions. Investors will need to look at their capital stack and assess other options like preferred equity and mezzanine debt.”
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