An interesting trend was buried toward the end of the Mortgage Bankers Association fourth quarter origination report.
The volume of GSE deals dropped 15 percent from the third quarter to the fourth quarter of 2009, according to the MBA. Yet, overall multifamily originations were up 4 percent in that time-span.
So, where is that nearly 20 percent gap coming from?
The buzz is that life insurance companies, commercial banks and even conduit lenders began to re-engage the multifamily market in the fourth quarter, providing some healthy competition to the government-sponsored enterprises (GSEs).
All-in rates from life insurance companies have closed the gap with the GSEs, and are now in the mid- to high-5 percent range for 10-year deals, down from the mid-6 percent range last October. Some of today’s active life insurance companies include Cornerstone, Northwestern Mutual, Guardian, Cigna, Prudential and Aetna.
But the main difference is in the leverage levels these lenders are willing to provide, compared to the GSEs. Life insurance companies are historically very conservative, cherry-picking only the strongest assets and borrowers, and typically favoring lower leverage deals.
“A life company might do a 65 percent loan at 5.5 percent, where Fannie would do a 75 percent loan in the mid- to high-5 percent range, so you still have a funding gap there,” says Amos Smith, senior vice president at Irvine, Calif.-based Johnson Capital. “But the spreads are getting closer together.”
Conduit lenders have also begun to re-emerge, though their cost of capital is still higher than life companies, banks and GSEs. Firms such as Goldman Sachs, JPMorgan, Bank of America, Deutsche Bank, RBS, and Bridger Commercial Funding are out there looking for deals, but mainly aren’t interested in smaller loans.
“Conduit lenders are looking for larger loans right now, there are very few that are willing to look at something below $10 million,” says Ryan Chapman, vice president for Johnson Capital. “Right now, they’re focusing on transactions that will enable them to quickly fill up a pool.”
Some conduit lenders are offering 10-year loans in the high-6 percent range today. While these rates are still too high to compete with the GSEs, they are a huge improvement from a year ago today. But like life insurance companies, conduits are being conservative, not willing to go much beyond 65 percent. Given the lower leverage levels, the conduits are trying to entice borrowers by lowering the price.
“Everyone who’s buying the paper is still really conservative on the risk scale, so we’re not seeing people getting aggressive on the terms yet,” says Gary Mozer, managing director of Los Angeles-based George Smith Partners. “They’re going to be really careful on the underwriting, and as a result, we’re seeing a lot more competitive pricing.”
Commercial banks are also becoming more active in the multifamily industry again. While construction lending remains stalled, banks are offering very competitive shorter-term loans. “The healthy banks are very anxious to make term loans today,” says Smith. “There is potential for them to make 5- and sometimes even 10-year loans, and they are potentially able to loan even slightly higher than the agencies to good borrowers.”
The 5-year term is an appealing avenue for commercial banks. The GSEs have by and large steered their borrowers to 10-year terms, in part by pricing shorter-term loans much higher. But many banks will offer 5-year loans well inside of GSE pricing, though recourse is required in most cases.
Another capital segment that has grown more active of late are mortgage REITs, such as Starwood Capital Group, Colony Capital and Ladder Capital. These institutional lenders are targeting yields in the low- to mid-teens. “They’re sometimes playing in the mezz space to get those yields, and in other cases they’re willing to make whole loans and sell off the senior piece,” says Chapman.
Taken separately, none of these capital sources will likely cause Fannie Mae or Freddie Mac to lose any sleep. The GSEs are expected to again be the dominant force in the multifamily industry this year. But taken together, the re-emergence of these capital sources gives borrowers more choices, and ultimately speaks to an emerging groundswell of industry confidence that the worst is behind us—or at the least, that the economy won’t get much worse.