Fannie and Freddie are no longer the only games in town.

Life insurance companies have stepped back into the multifamily arena, closing the pricing gap with the government-sponsored enterprises (GSEs).

For much of 2009, life insurance companies were reduced to spectators, watching the GSEs win deal after deal. But in the fourth quarter, the sector stirred as its cost of capital began to lower. By the end of the first quarter of 2010, firms such as Prudential, MetLife, and Northwestern Mutual were back in lending stride.

“Our ability to be more competitive with the agencies on pricing right now is better than it’s typically been,” says Mark Wilsmann, managing director of the commercial real estate operations of New York-based MetLife. “If it fits the agencies’ box cleanly, it’s still very hard for the life companies to compete. But as that box gets smaller, the life companies will be a better alternative.”

Finding Opportunity

MetLife sees some opportunity this year lending for assets that don’t fit the GSEs’ increasingly shrinking credit box. For instance, new properties still in lease-up—which may be just 85 percent occupied—or good properties in “pre-review” markets where the GSEs are less inclined to lend.

For those life insurance companies that also offer GSE debt, the quotes from each side of the house are closer than they’ve been in years. For instance, Prudential has licenses with the GSEs and the FHA and also offers portfolio loans through its general account. When a borrower comes calling, the company runs the numbers through all of its platforms to come up with competitive quotes.

“For a number of years, that was just a pro-forma exercise because our general account was not going to be the most competitive source,” says David Durning, senior managing director at Newark, N.J.-based Prudential Mortgage Capital Co. “The difference today is we are seeing and winning business and the life company pricing is in the mix now.”

And the longer the term, the better the pricing that life insurance companies can offer. “When you get to 10 years, and longer, the life companies are right on top of, or can sometimes even be inside of, where the agencies are today,” says Durning.

Leverage Shortfall

Pricing is one thing, but proceeds are another. Life insurance companies are notoriously conservative in their underwriting, with the majority of deals at 65 percent loan-to-value (LTV) and below. Some, like MetLife and Prudential, will stretch up to 75 percent for the cream of the crop, but those are exceptions that prove the rule.

Life companies have other strengths to make up for this leverage shortfall, often competing more on flexibility. Since they take a case-by-case view of deals—as opposed to the GSEs’ formulaic approach—life companies have more latitude in structuring deals.

“If a transaction involves the need for a different kind of structure or flexibility, nonstandard terms or speed of execution, then the life companies still have an edge over the agencies today,” Durning says.

Another key feature of portfolio lenders is the fact that their debt is not securitized, which makes it much easier for a borrower to communicate with its lender. One of the biggest pitfalls of securitized debt is the inability of a borrower to renegotiate after closing—their debt is owned by various third-party investors with no interest in working with the borrower.

Portfolio lenders, though, often feature one direct point of contact. “The person you do the loan with is the person you’re going to be talking to if anything comes up during the life of the loan,” Wilsmann says. “You always know where to find them. That’s a key point that we sell.”

Broker’s View

Some of the other active life insurance companies today include Cornerstone, Aetna, Guardian, and Cigna, according to brokers. 

“The life companies have always wanted to do multifamily, and they’re ready at a moment’s notice to exploit a hole in the capital stack if they can,” says Amos Smith, a senior vice president at Irvine, Calif.-based Johnson Capital. “They are, by nature, very conservative, but they have much more flexibility in their underwriting.”

One such area ripe for exploitation—and an example of the sector’s flexibility—is in rehab deals, which the GSEs are much less active in today. While life insurance companies overwhelmingly favor stabilized assets, rehab loans are still possible for the right customers.

“For the highest-quality borrowers, you’ll see the largest life companies carve out a bucket of money for deals that need some rehabilitation,” Smith says. “It’s all very structured, very transaction-specific financing.”