If you’re looking to lock up some long-term debt, you should probably look no further than Fannie Mae and Freddie Mac.
All-in rates from the government-sponsored enterprises (GSEs) continue to plummet and have now reached historic lows. Standard 10-year deals were being quoted in the mid-4 percent range, with seven-year loans closer to 4 percent, and five-year deals hovering around 3.5 percent as of late August.
“Those rates are down about 50 basis points just in the last month,” says Don King, head of agency lending for Needham, Mass.-based CWCapital. “Spreads have tightened a little bit, but the real movement has been the Treasury.”
Indeed, on the 10-year Treasury bill, which is used as a benchmark for setting 10-year interest rates, yields were 3 percent at the beginning of August but have since fallen closer to 2.5 percent.
And it’s not just rates that have improved. In the second quarter, the GSEs began loosening up some underwriting parameters—most notably by offering interest-only (IO) terms again—after two years of continual tightening. For instance, CWCapital recently locked a 4.3 percent rate on a 10-year deal with full-term IO at 70 percent leverage, something that couldn’t have happened six months ago.
While Freddie Mac was more aggressive in the first half of the year, the pendulum has swung back to Fannie Mae in the last month. In fact, Fannie Mae made some changes in the second quarter—both technical and organizational—that seem to be paying dividends.
First, the company lowered its underwriting floors on some executions, which made them much more competitive on some deals. An underwriting floor is a tool for sizing loans, and at one point earlier in the year, Fannie’s floor on seven-year deals was 90 bps higher than Freddie’s—meaning it offered much lower proceeds than its chief competitor.
But Fannie also reorganized its multifamily division earlier this year, in part to address a long-standing weakness. Freddie Mac has always been very good at assessing an individual deal based on its own merits, whereas Fannie Mae often painted weak markets with a broad brush. Good assets stuck in a bad market, even those that consistently outperform that market, would often see much more favorable deals from Freddie Mac.
But in separating the multifamily division into two channels—one that works on borrower relationships, and the other focused on its network of lenders—the company has changed its approach. “Fannie is now taking a very hard and individual look at each piece of business,” King says. “Earlier in the year, they weren’t quite as good at doing that.”
Last year, CWCapital did about $1.3 billion in its agency business (which includes Federal Housing Administration business), and this year, the company expects to top that mark.
In early July, Fortress Investment Group announced its intention to buy CWCapital, a sale that’s expected to close within the next week. Since then, CWCapital and its new parent have been working on ways to further grow its agency lending business, and expects to announce some new programs later this year.