They’re Back: Agency Lenders Return to the Market

May 27, 2015

On May 7, 2015 the Federal Housing Finance Agency (FHFA) announced that they would not increase the multifamily lending caps for Fannie Mae and Freddie Mac, aka agency lenders.

No surprise there, raising the caps was a political nonstarter. However, the regulator did specify changes to the affordable housing lending exclusions to be applied to all loans or portions of loans purchased by the Enterprises in 2015, which will have a major impact on lending capacity.

Significantly, the loans that the Enterprises purchase may have a pro rata portion of the loan excluded from their caps based on the percentage of units in the property affordable to renters at 60% of area median income (AMI).

In higher cost areas the income threshold will be 80% of AMI, and in very high cost markets the income threshold will be 100% of AMI. Yet to be determined are the markets that will be identified as high cost and very high cost. With rents increasing far more rapidly than wages in many markets, expect the list of high and very high cost markets to be substantial.

To illustrate, a $10,000,000 loan purchase by Fannie Mae in March 2015 with 25% of the units occupied by families meeting the AMI threshold, would exclude $2,500,000 from the cap.

Re-accounting for all of the affordable units in loans funded prior to the announcement will result in a large increase in the agencies lending capacity. Not to mention the additional purchase capacity through the rest of the year.

Lending capacity will expand further when these changes are combined with the exclusion of loans for small properties of 5 to 50 units, not already excluded by being funded under the agencies’ Small Balance Loan programs. A recent Commercial Mortgage Alert article cited a Barclays research report that estimated these revisions will increase the agency lenders’ effective purchase capacity by approximately $6 billion each. Some industry insiders speculate that the increase could be closer to $10 billion each.

Prior to the FHFA announcement Fannie and Freddie had been widening spreads to slow their loan volume and reserve capacity. Since the announcement, spreads have narrowed somewhat and the agency pipelines are improving. Once the high cost and very high cost markets are identified, and a clear picture of the agencies’ lending path emerges, expect spreads to narrow further.

These changes are good news for the multifamily industry in general, though it won’t please the agencies’ competitors. The FHFA’s actions recognize the important role of the agencies in this market, and have responded in an appropriately measured way to preserve both safety and liquidity. But like a stern parent whose teenager has been grounded for a long time, expect the regulator to closely monitor the agencies’ compliance to the revised rules.

by Brian Whitney, Commercial Mortgage Banker