After lending at a furious pace during the first quarter, Fannie Mae and Freddie Mac’s multifamily business divisions were in serious jeopardy of exceeding annual loan production of $30 billion apiece — the mandated cap for the agencies in 2015.
Fannie Mae provided $10.4 billion of multifamily loans in the first quarter alone, while Freddie Mac nearly matched that total with $10 billion. Compared to the first quarter of 2014 when Fannie’s multifamily loan volume was $3.5 billion and Freddie’s was $3 billion, the agencies have posted a year-over-year growth of 197 percent and 233 percent, respectively.
Due to the heavy deal volume already generated by the two government-sponsored enterprises (GSEs) this year, the consensus among capital markets experts was that the Federal Housing Finance Agency (FHFA) — which regulates their activity — would raise the cap.
Instead, in early May the FHFA revised its list of exclusions, thereby expanding the types of multifamily properties that don’t count against the lending cap. The FHFA’s newly revised exclusions now include properties with units affordable to renters at 60 percent of area median income (AMI) in all markets, 80 percent of AMI in “high-cost” markets, 100 percent of AMI in “very high-cost” markets and assisted living properties at 80 percent of AMI.
The FHFA will continue to exclude affordable housing loans, loans to small multifamily properties (five to 50 units) and loans to manufactured housing rental communities.
As conservator of Fannie Mae and Freddie Mac since 2008, FHFA sets the cap annually to ensure the agencies don’t dominate the apartment lending market. The cap also helps direct the agencies to focus their business on the affordable housing sector, which is instrumental in the agencies’ charters.
“A key priority for FHFA is for Fannie Mae and Freddie Mac to play a strong role in supporting the financing needs of affordable rental housing,” said FHFA director Melvin Watt in a prepared statement.
“By revising and clarifying these affordable housing lending categories, we expect the enterprises to dedicate the necessary time, attention and resources to support this important part of the multifamily market,” adds Watt.
Some experts, such as Grace Huebscher, president of Capital One Multifamily Finance, aren’t sure how the new exclusion list will play out for the remainder of the year. Much depends on how the agencies and lenders interpret the exclusions.
“It’s too early to tell. We will know more when the FHFA and the agencies define high-cost markets and very high-cost markets,” says Huebscher.
“We’re going to have to get more information before we know fully how much relief it will provide, but it will certainly help,” adds Joe Mosley, executive managing director of Fannie Mae and Freddie Mac lending at Greystone, a multifamily lender and originator based in New York.
Affordable Housing Focus
Both Fannie Mae and Freddie Mac expect the amount of loans targeting affordable housing and small properties to increase for the remainder of the year as a result of FHFA’s announcement.
“We’re going to focus both on affordable housing and small loans for the balance of the year, both because they’re important to us and they don’t count toward the cap,” says Hilary Provinse, senior vice president of multifamily customer engagement at Fannie Mae.
“We’ve always been really active in those areas, but we rolled out a bunch of product enhancements to continue to be competitive there,” explains Provinse.
Hilary Provinse, Fannie Mae
Among those new enhancements from Fannie Mae is a moderate rehab program for affordable housing, index bonds for the tax-exempt, floating-rate bond market and a new adjustable-rate mortgage (ARM) product for small loans.
Freddie Mac will continue to provide multifamily securitizations through its K-Deal program — which recently passed the $100 billion mark since its official launch in 2009 — as well as its new Small Balance Loan initiative.
In addition to Fannie Mae and Freddie Mac pivoting more heavily into affordable housing and small loans, FHFA’s exclusions will also free up the agencies to stay competitive in lending on other assets that don’t fit the exclusion criteria.
David Brickman, executive vice president of multifamily business at Freddie Mac, says that the agencies were in a “capital-rationing mode” in the month leading up to FHFA’s announcement.
“Having some additional capacity under the cap enables us to take our foot off the brake a little bit. We were putting our foot on the brake hard as we were approaching our estimate of the cap and restricting our liquidity flow to the market,” says Brickman.
David Brickman, Freddie Mac Multifamily
The desired effect of the cap is for the agencies to provide liquidity to the segments of the multifamily market that need it most. Once the agencies and their corresponding lenders show consistency in lending on those assets, some experts expect FHFA to lift the cap.
“Fannie and Freddie are looking to make loans that fit the exclusions. The consensus among the folks that produced the loans, like myself, is that when enough volume is created, there’s a better potential to lift the cap to show that they’re making loans in all sectors [of multifamily],” says Charles Foschini, vice chairman of South Florida Markets at CBRE Capital Markets.
Compelling First Quarter
The commercial real estate lending market, especially the apartment sector, experienced a significant amount of lending volume in the first quarter.
According to the quarterly originations survey index compiled by the Mortgage Bankers Association (MBA), lending across the major property types increased 49 percent year-over-year in the first quarter, with multifamily spiking by 71 percent.
“For multifamily, the asset class has seen robust growth in the first quarter and will continue to do so because of the expansion of the multifamily stock through new construction and appreciation in property values that we’ve had in recent years,” says Freddie Mac’s Brickman.
“We’re now delivering a couple hundred thousand units per year [nationally]. Those units generate $20 billion to $30 billion of additional financing demand,” adds Brickman.
Pricing for apartments is up 16.6 percent from a year ago, surpassing the pre-recession peak, according to Moody’s/Real Capital Analytics Commercial Property Price Indices.
“From a value standpoint, if you think the market is peaking you’re going to sell and try to harvest some gains,” says Fannie Mae’s Provinse. “There are plenty of sellers out there, plenty of buyers and a lot of activity.”
The MBA also reports that its index for loans originated by Fannie Mae and Freddie Mac increased significantly year-over-year in the first quarter — 306 percent. The index measures quarterly loan volume based on a quarterly survey to commercial and multifamily mortgage bankers.
In addition to the new multifamily properties that needed financing and the pricing appreciation in the sector, the drastic increase was the result of a perfect storm of increased acquisition volume, low interest rates and a wave of loans coming to term in 2015-2017.
According to Auction.com’s “Commercial Real Estate Market Monitor,” multifamily deal volume was $19.42 billion in the first quarter of 2015, which is 67.8 percent higher than the first quarter 2014 multifamily acquisition volume.
More properties trading hands results in more borrowers seeking acquisition financing, which historically makes up roughly one-third of the agencies’ multifamily lending volume.
The wave of acquisitions in the first quarter 2015 was a continuation of the strong second half of 2014, according to Greystone’s Mosley.
“The first quarter resulted in a positive period for us. There was a lot of acquisition activity and a lot of money out there looking for yield,” says Mosley.
The primary driver of the increased acquisition activity is the low interest rate environment. A benchmark for long-term financing, the 10-year Treasury yield stood at 2.22 percent on Friday, May 22, down approximately 30 basis points from a year ago. For a large chunk of the first quarter, the 10-year Treasury yield dipped below 2 percent.
In addition to facilitating new acquisitions, low interest rates have also accelerated the rate of refinancing. “Continued historically low interest rates are the primary driver behind the strong first quarter for multifamily lending,” confirms Joel Stephens, managing director of Regions Financial Corp.’s Atlanta office. “While there is an expectation rates will eventually rise, the continued attractive interest rate environment has pulled forward some pending maturities in 2016 and 2017.”
Borrowers who received loans during the height of the commercial real estate boom (2005-2007) are willing to accept pre-payment penalties in return for refinancing their loans early because their total borrowing costs will be reduced. Lenders and agencies expect this trend to continue for the next few years as the wave of 10-year loans produced between 2005 and 2007 come to term.
Says Brickman, “We’ll continue to see double-digit growth in mortgage demand and mortgage originations for the next few years.”
Tight Grip on Reins
The federal government took control of Fannie Mae and Freddie Mac in 2007, when the two mortgage giants teetered on the edge of insolvency and collapse during the global financial crisis.
In March 2013, FHFA first mandated that Fannie Mae and Freddie Mac cut their volume of lending to apartment properties by 10 percent from the prior year’s totals.
Fannie Mae limited its multifamily lending to $28.8 billion in 2013, while Freddie Mac capped its lending at $25.9 billion — still a tremendous amount of financing and second only to the volume set in 2012.
FHFA allowed Fannie Mae lenders to transact a little more business in 2014. That year, Fannie Mae funded $28.9 billion in new business volume for apartment properties.
Meanwhile, Freddie Mac funded $28.3 billion in new multifamily volume in 2014, reflecting a 10 percent increase over the prior year.
In the first year of the caps, Fannie Mae slowed its pace of lending by charging higher interest rates. The strategy worked so well that Fannie Mae realized halfway through 2014 that it had room to lend more, so it cut prices to compete.
The tightrope the agencies must walk in staying under the cap while still providing liquidity is a challenge. Fannie Mae and Freddie Mac have leaned on their lending partners over the years to execute the loans in a highly competitive multifamily mortgage market.
The partnership between lenders and the agencies has been strong since conservatorship, with lenders sharing some of the risk through the Delegated Underwriting and Servicing (DUS) and K-Deal programs.
“The agencies have been great partners to us, and we respect their deep understanding of the multifamily market,” says Huebscher of Capital One Multifamily Finance.
Bendix Anderson contributed to this article. A New York-based freelance writer, Anderson has covered the commercial real estate industry for more than a dozen years.