Category: Financing

Attracting Institutional Capital to Affordable Housing Debt Markets

Impact investing as a category is attracting institutional investors with diverse goals to seriously consider adding impact to their portfolios. In the ESG landscape, there is an opportunity today to expand beyond the plentiful array of “environmental” funds to explore “social” impact—specifically, affordable housing as an investable asset class.

The question is, how can affordable housing lenders attract institutions to multifamily, affordable rental housing in a way that reflects fundamental requirements of institutional investors (from risk profile to financial performance)? Below are several criteria to consider.

CONSISTENCY AND TRANSPARENCY

Investors want to know what they are buying. To dedicate resources to an investment opportunity, institutions need scale and that means, more than big dollar amounts, replicability. It means that they look for assets with similar economic returns and risks. This allows the assets to be considered “similar” and allows investors to apply a consistent investment analysis to them.

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    Wall Street Investors Increase “Big Short” Bets on CMBS Retail Loans

    In 2015, “The Big Short” movie based on the Michael Lewis book chronicled a handful of investors who struck it rich by betting on the failure of subprime residential mortgages. Some investors are making a gamble that retail-backed CMBS loans could be the next “big short.”

    Hedge fund company Alder Hill Management is one high-profile player shorting CMBS with high concentrations of retail loans. The Wall Street Journal first reported on the hedge fund’s short 18 months ago, followed by a more recent story in early August that said the hedge fund made an additional short investment on 2012 and 2013 era loans. Earlier this spring, Bloomberg also reported that Deutsche Bank and Morgan Stanley had both recommended buying credit protection against, or shorting, segments of CMBS with heavy concentrations of retail loans.

    Some people are looking at retail loans as the next “big short”, says Manus Clancy, senior managing director and the leader of applied data, research, and pricing departments at Trepp. “There are some similarities, but there are a lot of differences,” he notes. One difference from the subprime short is that there were very few investors taking those short positions. “In this case, you have a pretty good amount of people on either side, meaning longs and shorts,” says Clancy. In addition to Alder Hill there are about two dozen investors that have either already taken a short position or are looking at the opportunity, he adds.

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      Fannie-Freddie Overseer Scraps Program for Rental-Home Investors

      (Bloomberg)—The U.S. regulator for Fannie Mae and Freddie Mac is shutting down a controversial program that subsidizes loans for firms investing in single-family rental homes, saying the market can function well without the support.

      The Federal Housing Finance Agency said Tuesday that the two mortgage giants will dial back their participation after a two-year “test and learn” pilot program designed to gather information on the market and best practices. The agency said in a statement that it also sought industry feedback on market challenges and opportunities, and conducted its own impact analysis during the pilot period.

      “What we learned as a result of the pilots is that the larger single-family rental investor market continues to perform successfully without the liquidity provided by the enterprises,” FHFA Director Mel Watt said in a statement.

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        Private Lending Goes Public

        For many people the investment real estate market is off-limits. They can’t buy and they can’t invest because they lack access to traditional lenders, the banks with big vaults and lots of ATMs. For investors, especially flippers, the situation is worse simply because they represent more lender risk.

        This is a problem because for many Americans the most direct route to personal wealth has been real estate. For most property owners the numbers have been pretty good but for a few the returns are spectacular: home flippers had an average 49.8 percent return on investment (ROI) in 2017 according to ATTOM Data Solutions. Not quite as good as 2016 when the flipping ROI hit a record 51.9 percent, but still the second-highest average home flipping ROI since 2000 — the furthest back data is available.

        But the situation is changing as a growing number of lenders catering to the investment property world emerges. ATTOM reports that 207,088 U.S. single family homes and condos were flipped in 2017 and of this number 34.8 percent were financed — a total of 72,000 units. The dollar volume for financed flips was $16.1 billion, up 27 percent from 2016 to a 10-year high.

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          Banks Get More Generous with Construction Loans for New Apartments

          It’s getting a little easier to find a construction loan to build a new apartment property, compared to the end of 2017.

          Banks are getting more aggressive,” says David Webb, vice chairman of debt and structured finance with CBRE Capital Markets, based in Washington, D.C. “It is getting easier to get deals done.”

          Last year, many banks cut back on how much they were willing to lend on new apartment projects. Now, many larger banksare once again taking on new customers for construction loans. The size of these loans remains relatively small compared to the total cost to develop a project—but the loan amounts have stopped shrinking. And other lenders, including private equity debt funds, have rushed in to fill the gap in developers’ budgets with products like mezzanine financing.

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            Home Equity Lines of Credit Increase 14 Percent in Q1 2018

            IRVINE, Calif. – June 14, 2018 — ATTOM Data Solutions, curator of the nation’s premier property database, today released its Q1 2018 U.S. Residential Property Loan Origination Report, which shows that more than 1.8 million (1,813,691) loans secured by residential property (1 to 4 units) were originated in Q1 2018, down 5 percent from the previous quarter and down 3 percent from a year ago.

            • 665,887 of the residential loans originated in Q1 2018 were purchase loans, down 16 percent from the previous quarter but still up 2 percent from a year ago.
            • 799,939 of the residential loans originated in Q1 2018 were refinance loans, down 2 percent from the previous quarter and down 11 percent from a year ago.
            • 347,875 Home Equity Lines of Credit (HELOCs) were originated on residential properties in Q1 2018, up 18 percent from the previous quarter and up 14 percent from a year ago

            The loan origination report is derived from publicly recorded mortgages and deeds of trust collected by ATTOM Data Solutions in more than 1,700 counties accounting for more than 87 percent of the U.S. population. Counts and dollar volumes for the two most recent quarters are projected based on available data at the time of the report (see full methodology below).

            “Putting home equity to work is the name of the game in the 2018 housing market — both for current homeowners as well as homebuyers,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “With interest rates rising and home price appreciation accelerating, current homeowners are increasingly turning to home equity lines of credit rather than refinances to tap their home’s equity. And given that median down payments rose more than four times as fast as median home prices over the past year, it’s not surprising that homebuyers are increasingly getting help from co-buyers — often in exchange for a share of their home’s future equity.”

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              Fannie-Freddie Overhaul Plan Is Dead for This Year, Senators Say

              (Bloomberg)—Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now.

              Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies Wednesday at a Senate Banking Committee hearing with Federal Housing Finance Agency Director Mel Watt.

              Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies’ affordable-housing mandates, and Congress has little time left to consider major legislation before November’s mid-term elections.

              “My sense is that these institutions may well stay in conservatorship for some time,” Corker said, adding that he believed President Donald Trump’s administration might take some sort of action on Fannie and Freddie.

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                Multifamily Investors Face a Cutback in Loan Size

                Rising interest rates are already making a difference for apartment properties. Borrowers can no longer secure the large permanent loans that have become used to.

                “Delivering full-leverage loans has become a challenge,” says Dustin Dulin, managing director in the capital markets platform of real estate services firm JLL. “It is not as easy to underwrite the deals… Back in 2015, almost every deal underwrote cleanly.”

                The change is carving a hole in the budgets of borrowers who need to buy or refinance apartment properties. To fill the gap, borrowers have to come up with more equity, often either from their own balance sheets or from new equity partners. Eventually, higher interest rates are expected to get in the way of transactions—though that hasn’t happened yet.

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                  Commercial Real Estate Deal Volume Up, But Headwinds Are Blowing

                  (Bloomberg)—The value of U.S. commercial-property deals rose 6.7 percent in the first quarter from a year earlier, but higher interest rates and softer demand for office and retail real estate will weigh on the market in quarters to come, Ten-X Commercial said.

                  “Heavy supply is looming in the apartment, hotel and industrial sectors, while technological innovation is crimping demand for both office and retail space,” the real estate transaction platform said in a report that looks at data going back more than a decade. Volume for the quarter, which reached $107 billion, was down 14 percent from the previous three months — though companies often rush to close deals before year-end, making for a big fourth period.

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                    Fannie Mae and Freddie Mac Continue to Dominate Apartment Lending

                    Freddie Mac and Fannie Mae lenders are providing the overwhelming majority of permanent loans to apartment properties.

                    “Fannie Mae and Freddie Mac are probably still the premiere lenders for leveraged apartment buyers,” says Mark Isaacson, co-founder of Redwood Capital Group, a real estate investment management firm focused on the multifamily sector. “Both are very competitive right now.”

                    Agency lenders are making more permanent loans than ever on apartment properties. Borrowers chose loans from agency lending programs for nearly two-thirds of the permanent financings completed in 2017 despite limits set by federal regulators (loans to certain kinds of apartment properties, including affordable housing, are not limited by the caps).

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