Agency Lender Adjustments: What They Mean Today

September 16, 2015

Over the last several months we have been watching the unfolding agency lender drama as the Federal Housing Finance Agency (FHFA) has worked to both support and direct the multifamily lending activities of the agencies, Fannie Mae and Freddie Mac. The extraordinary demand for multifamily financing this year had the agencies on track to reach their 2015 lending caps well before the end of the year.

With the agencies under government conservatorship, the FHFA could not politically support raising agency lending caps. However, the regulator was able to free up significant agency lender capacity by redefining the types of loans that would be exempt from the caps. In particular the definition of what qualifies as affordable and the ability to prorate exclusions for the affordable portions of loans originated this year, has both added lending capacity and has fundamentally refocused the agencies’ lending activities. The agencies have not yet released exclusion adjusted volumes however, recent statistics from Fannie Mae provide some insight into what those adjustments might look like.

For the first half of 2015, 30% of all units funded were affordable to renters at 60% of area median income (AMI) or less, meeting the minimum affordability test for properties nationwide. An additional 52% of all units were affordable to renters with incomes between 60% and 100% of AMI. Locations identified by FHFA as “high cost” (25 markets) are considered affordable at up to 80% of AMI, while properties in “very high cost” locations (24 markets) are considered affordable at up to 100% of AMI.

So at least 30% of current volume qualifies as affordable and would be excluded from the caps. Presumably the final exclusion adjustments will higher depending on whether or not individual properties are in “high cost” or “very high cost” locations. Freddie Mac’s property characteristics are generally quite similar, so we presume a similar level of exclusion.

Daily indicative pricing on Fannie Mae loans reveals spreads over 10-year treasuries are approximately 35 basis points higher today than in January. Most of the increase occurred from late March through April, as the volume cap issue came into the spotlight. Retaining the higher spreads make agency loans far less attractive to owners of Class A properties in strong, competitive markets. At the same time, the higher spreads are not as problematic in less competitive, secondary and tertiary markets where property values and rents are lower and more units are likely to qualify as affordable.

We have also noticed a shift in the loan types being promoted by some of our correspondent, agency approved lenders, with a greater emphasis on the exempt, small balance loan programs (loans on 5 – 50 unit properties). Most recently, we have seen an increase in lenders promoting loans under Fannie Mae’s Green initiative.

Market activity suggests that the FHFA has succeeded in refocusing the agencies attention on the pursuit of affordable rental housing. This is good news for many, especially in many under-served markets across the country. Meanwhile, we’re sure that the conduits, banks and life companies enjoy having one less contender in the market for Class A properties.

by Brian Whitney, Commercial Mortgage Banker