Agency Lenders Approach Loan Caps

April 29, 2015

The financial news world is atwitter over expectations that Fannie Mae and Freddie Mac’s multifamily loan volumes are approaching their annual loan caps, which has resulted in wider rate spreads to slow loan volume. Despite the agencies’ request for relief, the loan caps are unlikely to be raised. This news is creating a bit of euphoria amongst the competing non-agency multifamily lenders, particularly in the CMBS world. While there is room for enthusiasm among the competition, the euphoria may be overdone.

The important fact here is that these agency lending caps only apply to loans on large, market rate properties—not for loans on affordable housing projects or small multifamily properties. As always the devil is in the details.

Since 2001 Fannie Mae has internally defined small loans by a maximum loan balance, $3 million maximum nationwide, and $5 million maximum in high-cost markets. The internal definition used by Freddie Mac is a maximum loan of $5 million for their new small loan program. These internal definitions were not mandated, but rather were selected by the agencies for production and flow management convenience.

So here’s the rub. The original regulatory emphasis on lending for small multifamily projects used the FHA definition for small multifamily as properties consisting of 5 to 50 units. When Fannie Mae launched their first small multifamily loan program in 2000 it was called the “5-50” program. A year later, when they adopted the loan balance definition, the program was re-labeled “3MaxExpress”, for the $3 million maximum loan.

The lending caps imposed on Fannie and Freddie by their regulator FHFA (Federal Housing Finance Agency), are seen by many as the result of post-crash/bailout politics, and may no longer be a market risk imperative. Given the recent strong financial performance of Fannie and Freddie, and their much lower risk profile, it would not be unreasonable to think that the FHFA would accept a return to the 50, or less unit definition for small property loans, as consistent with current regulations.

So, with the agencies spreads trending higher, the non-agency competition may well clean up on lending for the large suburban apartments deals through the end of the year. However, if the agencies revert to the unit count definition for small multifamily, the high rent, low cap rate urban markets like San Francisco and New York may see the agencies grow more competitive. In these markets, where smaller properties dominate, a 50-unit (small multifamily) property might soon be eligible for a loan amount in excess of twice the size of the current balance based limits.

Don’t count on the agencies retreating from the entire multifamily loan market just yet, they may still have plenty of dry powder for select properties in strong markets.

by Brian Whitney