By Todd McNeill
There has been a lot of speculation going around on the current status of FNMA and Freddie Mac in the marketplace. As most everyone is aware, both FNMA and Freddie Mac were placed into Conservatorship shortly after the Great Recession. Soon thereafter, Congress was urged by Obama to wind down the affairs of FNMA and Freddie Mac. In the midst of the back and forth between those who want to keep government subsidized mortgages and those who do not want government intervention in the mortgage market, an annual cap of $30 billion dollars was placed on the agencies. Thus, once $30 billion dollars of mortgages were issued in any one year, these agencies were not allowed to loan any more for that fiscal year.
With the surge in multifamily construction and sales, the agencies have reportedly reached $30 billion already in 2015. As of April 2015, FNMA led new multifamily production at $14.9 billion while Freddie Mac registered new volume of $14.3 billion. This translates to a 231% increase for FNMA and a 266% increase for Freddie Mac. It is widely expected that the agencies will reach the $30 billion cap by 3rd Qtr. of 2015.
There are several factors that have contributed to increased lending from the agencies, such as the overall demand for apartment units and the all-time historical low interest rate environment. Another factor is that the agencies approached their cap in late 2014 but delayed some of the closings until early 2015 to accommodate the cap issues, translating to an enormous 1st qtr. volume from the agencies.
In an attempt to slow the volume, both agencies increased spreads by 50bps, making current rates for 10-year fixed mortgages around 4.5%. The jury is still out as to whether this has worked to slow the origination volume.
Both agencies have petitioned Congress to increase the $30 billion cap by $5 billion. It is believed that this cap will be increased.
There are exclusions to the Cap that these agencies can make mortgages at will. These include:
- “Targeted affordable housing”, which are properties that have affordable units that equal to 50% or greater. If a property has affordable units but that are less than 50% of the total units, the agency is able to count 50% of the loan towards the Cap;
- Small Multifamily properties – those properties with 5-50 units;
- Manufactured Housing;
- Affordable Senior Housing – The same % of residents that are 80% or below of the average medium income “AMI” can be deducted from the Cap total;
- Unsubsidized Market Rate Affordable – The same % of residents who are 60% or below the average medium income “AMI” can be deducted from the Cap total;
- Unsubsidized Market Rate affordable in high-cost or very high-cost markets – The same % of residents at or below 80% of the average medium income “AMI” can be deducted from the Cap total. These markets include certain submarkets of Boston; Los Angeles; Miami; New York City; San Francisco; Bridgeport; Chicago; Riverside/San Bernardino; Washington, D.C.; Seattle; San Jose; and San Diego.
As you can see, the exclusions for the Cap encourages more volume in affordable/workforce housing.
Previously, Freddie Mac and Fannie Mae loans in these redefined high- and very high-cost areas were generally in the capped category. By excluding these loans from the cap, the agencies are able to provide more liquidity to these high-demand housing markets.
The immediate effect of all this has translated to increased multifamily lending volume from the CMBS sector. The long-term effect is unknown, however, with less credit available in the multifamily sector surely leading to higher borrowing costs. Should Congress pass a bill to eliminate FNMA and Freddie Mac, the costs to borrower will assuredly go up. Some would argue that property values would go down via a cap rate increase to absorb the higher borrowing costs.
This could not have come at a worse time with the robust multifamily market in high gear. With so much uncertainty in the multifamily lending market, it is critical to be advised by an intermediary that understands and has a handle on all the current information that is changing rapidly. Metropolitan Capital Advisors has access to numerous agency and CMBS lenders and can secure information rapidly on how a deal may be treated in the market for permanent fixed-rate mortgages. We welcome the opportunity to review your multifamily finance requirement, and we are highly confident in our ability to execute the best financing options with (or without) the agency lenders in the market.
The author, Todd McNeill, is a 16-year veteran and principal of Metropolitan Capital Advisors.