We’re going to set a record by exceeding our 2016 volume, which was a record year. How much affordable housing business are you on pace to do this year? I hope to have more to say about these in the future.
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We are also seeking Federal Housing Finance Agency approval to invest in the low-income housing tax credit and to launch a mezzanine lending product to support affordable housing. We will pilot it in the last quarter of this year and launch it in 2018. Any preservation deal below $10 million is going to get accelerated treatment-streamlined processing and underwriting and reduced transaction costs. In 2018, we will be rolling out something that we call TAH (Targeted Affordable Housing) Express. We will be back in the market before the end of the year with our next securitization.ĭo you expect to introduce any new products or make changes to existing ones next year? We’re passing that savings down to borrowers. Immediately following our first ML securitization, we were able to reduce rates on our tax-exempt loans because the securitization went off so well that our cost capital went down. That securitization in June proved something we’ve always known: that the market for the securitization of tax-exempt loans is there-and it is deep and aggressive. Earlier this year, we issued the first-ever securitization of a tax-exempt loan portfolio-known as our ML Deal.
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But let me also highlight our largest success so far this year. By the end of August, we exceeded our total 2016 volume for preservation. What has been your largest success so far? That lean in to preservation has worked well. For preservation, we’ve really moved the dial so the majority of our preservation mortgages right now are at 1.20x. Traditionally, our standard cash mortgages are sized to a 1.25x debt-coverage ratio. Freddie Mac is aggressively providing capital to support owner-operators that want to improve their units and sign up for longer-term restrictions. It’s also where we have seen the majority of our growth. It is a critical priority for us and for the market. We define preservation as financing any project that’s currently affordable where the affordability restrictions will be extended. We’ve already funded more preservation loans than we did all of last year.
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We’ll do over $2 billion in preservation this year. In the past, you’ve said Freddie Mac would dig more into preservation deals. It also represents consolidation in the industry. Those large portfolios tend to attract institutional investors in a different way. So, this is a continuation of a trend-the trade of large portfolios from companies either getting out of affordable housing-or for other reasons. Last year, there were a couple big portfolios. This year, we have seen a significant number of large affordable portfolios trading on the market. The second is the trade of large multiproperty portfolios. This year we saw more state and local issuers exhaust their allocations of volume cap bonds than we’ve seen in the last several years, maybe the last decade. One is the exhaustion of the volume cap for tax-exempt bonds. In addition to the slowdown of the tax credit equity market at the beginning of the year, I’ll bring up two other trends. What was a change or trend you saw this year? Freddie Mac will certainly be focusing resources on hurricane-impacted communities in the year ahead. Hopefully, there will be new resources aimed directly at those disaster areas, but either way they’re going to be absorbing some resources. Two, we’re going to see a number of resources going there. One, we will likely see a rise in construction costs. The hurricanes are going to affect a portion of the market next year. What’s one key change you expect to see in the debt market next year? Overall, I’m optimistic, but there are some headwinds that may dampen new construction. I think we’re going to see more of that, particularly in the wake of hurricanes Irma and Harvey.
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At the same time, we have some headwinds in the form of rising construction costs.
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We should not have the same disruption that we had this year, because the market has figured out how to deal with potential tax reform. I’m pretty optimistic we will continue to see growth in preservation. January feels like a long way away because we’re probably going to close $2 billion or more over the remainder of 2017. What are your expectations for the affordable housing market in 2018?