Fannie Mae provided $19.8 billion in multifamily debt last year, and Freddie Mac was close behind with $16.6 billion in 2009. The figures represent a steep decline from the previous year. Fannie Mae’s volume was down 45 percent versus 2008 volumes, while Freddie Mac’s was down nearly 30 percent.
Given that the acquisition market was mostly moribund last year, the low numbers were to be expected. But as the overall size of the multifamily debt market shrunk, the government-sponsored enterprises (GSEs) increased their market share. Freddie Mac, for instance, saw the highest market share (37 percent) in its history last year, up from 29 percent in 2008.
Both GSEs made securitization a focus last year. Fannie Mae jump-started the previously dormant MBS market in a big way: More than 80 percent of its business last year, about $16 billion, was done through an MBS execution, compared to just 17 percent, or $5.9 billion, in 2008.
Since Fannie Mae’s MBS program began in the early 1990s, it had a head start on Freddie Mac’s securitization efforts. But Freddie Mac’s Capital Markets Execution program also made a big splash last year, with 27 percent ($4.6 billion) of the company’s overall production going through CME. The company hopes to amp up the program further, and process about half of its volume this year through CME.
“Eventually, we’re going to put all business through CME transactions if we can,” says Mike May, senior vice president of McLean, Va.-based Freddie Mac. “Right now, it’s mostly conventional fixed-rate business, and we’ve moved student housing into it, but we’ll do seniors, targeted affordable, structured transactions, and adjustable rate eventually if we can find B-piece buyers.”
Inside the Numbers
For Fannie Mae, nearly every loan type saw dramatic declines last year, except for one. Loans for manufactured housing jumped modestly, from $1 billion in 2008 to $1.1 billion in 2009. Although Freddie Mac doesn’t currently offer a program for manufactured housing, the company plans to roll out such a product later this year.
But all other loan types were down significantly. Fannie Mae did $4.4 billion in large loans (more than $25 million), down from $6.5 billion the year before. Small loans registered $2.2 billion last year, down from $3.8 billion in 2008. Seniors housing mortgages fell from $2.4 billion in 2008 to just $1 billion in 2009, and bond credit enhancements fell from $800 million in 2008 to only $273 million in 2009.
While Freddie’s numbers were similarly down, there were some key areas of growth. Freddie Mac saw healthy demand for student housing mortgages last year, processing about $775 million in student housing deals, an increase over the $580 million it processed in 2008.
Freddie Mac also closed about $4.1 billion in Capped ARM loans, up from $3 billion in 2008, benefitting from reduced competition. Fannie Mae put much less emphasis on variable rate offerings last year, a trend that by all indications will continue in 2010.
“Frankly, we just don’t see the need given where the fixed rates are,” says Ken Bacon, executive vice president of Washington, D.C.-based Fannie Mae’s Housing and Community Development division. “When interest rates are this low, and you’re thinking they’re going to go up, I don’t think it’s good for the borrower, or for anybody, to do a lot of variable rate stuff, because you’re introducing an element of risk.”
Freddie Mac, though, is more bullish on variable rate product, especially as a way to hedge against downturns. Variable rates often go down when rents go down, and conversely go up as rents also trend up. "Anybody who wanted variable rate product last year came to us," May says. "There is logic in the fact that if rates are backing up, then it's a sign of inflation, and if there's inflation, then rents will follow and go up."
Both GSEs made aggressive underwriting changes in 2009, raising DSCR and lowering LTV ratios. Notably, both companies tightened up their underwriting of cash-out refinancings in early 2009, raising the debt service coverage ratio (DSCR) to 1.30 from 1.25, and lowering loan to value (LTV) ratios to a maximum 75 percent, down from 80 percent.
“All we did was go back to the basics,” Bacon says. “We did the right thing, and I wouldn’t change a thing.”
Instead of programmatic changes, Fannie will target its underwriting adjustments this year at specific submarkets. “The thing we’ll look at most closely is what markets we’re looking at for pre-review, rather than absolute hard and fast DSC and LTV guidelines,” says Heidi McKibben, Fannie’s head of multifamily production. “In this market, you really have to look at it on a local basis.”
But Freddie Mac has begun to think it might’ve gone too far in some of its underwriting adjustments last year. “Refis are an area we’re talking about; we’re wondering whether or not we went too far there, if we’re missing some business because we’re being a little too conservative” May says. “Chances are we’ll stay where we’re at for awhile, but that is an area we’re watching.”