The New Year will bring some changes for Fannie Mae and Freddie Mac, starting with a new federal regulator.
The government-sponsored enterprises (GSEs) continue to make more than a third of all permanent loans to apartment properties, playing a familiar role as the capital markets get back to what feels like normal.
Fannie and Freddie got a nasty surprise last spring, when FHFA ordered them to scale back lending to multifamily properties by 10 percent in 2013 compared to 2012. FHFA set the limit for Freddie Mac’s multifamily lending at $25.8 billion for 2013, 10 percent less than the $28 billion it made in 2012.
“When we found out our scorecard goal, we had a big management challenge to slow down our business,” says John Cannon, senior vice president for the McLean, Va.-based Freddie Mac.
FHFA limited the total dollar amount Fannie Mae could lend to apartment properties though its program loans to just $30.4 billion, down from the $33.7 billion it lent in 2012. By the end of November, Fannie Mae lenders had made $25.2 billion in apartment loans.
Experts are betting that Fannie and Freddie will both come close to their limits for 2013. If they do, then 2013 will still be one of the biggest years in history for Fannie and Freddie’s multifamily divisions.
“We tried to manage our volume throughout the year, knowing the fourth quarter is always a rush to close,” says Hilary Provinse, vice president for multifamily customer engagement for Washington, D.C.-based Fannie Mae.
Back to the Future
The cap in lending volume for the GSEs seems designed to hurry their loan programs back to their old place in the spectrum of loan choices for apartment borrowers.
“It’s getting back to a normal market,” says Fannie’s Provinse. “The amount of competition [between lenders] is the greatest since the crisis.”
During the recession, Fannie and Freddie program lenders were one of the only sources of multifamily capital, making 80 to 85 percent of multifamily loans, according to the National Multi Housing Council. By 2013, Fannie and Freddie’s market share has shrunk to about 45 percent.
Today, balance-sheet lenders like insurance companies fight in top markets, offering very competitive interest rates for lower-leverage loans. Conduit lenders have returned to finance properties that might otherwise have had more difficulty finding loans. Fannie and Freddie once again provide financing to properties that fall in between those two poles.
To scale back their multifamily lending by 10 percent, Fannie and Freddie pushed a little less to make loans. Most stated underwriting standards remained relatively consistent for Fannie and Freddie—though perhaps loan underwriters did not press so imaginatively against the sides of the credit box.
Both Fannie Mae and Freddie Mac will not make loans larger than 80 percent of the appraised value of a property. Income from the property should be at least 1.25x the cost of servicing the debt on the property, though debt service coverage ratios of 1.35x or 1.40x are more common.
This sizing of loans leaves some room for other lenders to compete. “We don’t want to chase conduits to the bottom,” says Fannie’s Provinse.
Interest rates are likely to continue rising through 2014, though rates paused in their rise towards the end of 2013 and even fell back a little. By the end of the year, typical interest rates for permanent loans to apartment properties were a little more than 200 basis points over the yield on Treasury bonds for typical Freddie Mac apartment loans.
With rates likely to keep rising, both Fannie Mae and Freddie Mac are seeing a lot of action on their early rate-lock programs.
Freddie Mac allows borrowers to lock in the Treasury index when they apply for a loan. The spread over the Treasury yield will still depend on the negotiation between the borrower and the loan officers. But this partial rate lock at least removes the most unpredictable part of the interest rate equation. “The biggest part of volatility is the Treasury yield moving around,” says Freddie’s Cannon.
As borrowers see rates beginning to rise, some borrowers are also asking for longer-term loans. Fannie offers terms as long as 12 years. “We had borrowers who said that with rates so low, they wanted longer than 10 years for their loan terms,” says Fannie’s Provinse. Typical loan terms for Fannie Mae loans are five, seven, or 10 years.
Loan experts also expect floating-rate loans to make a comeback as interest rates continue to rise.
Congress has already begun to answer some questions about the future of Fannie Mae and Freddie Mac, at least in in the short term.
In December, the Senate voted 57 to 41 to confirm the White House’s nomination of Mel Watt to run FHFA. Housing watchers hope Watt will govern Fannie Mae and Freddie Mac with a lighter touch than his predecessor, Edward DeMarco.
A Democrat from North Carolina, Watt has served in the House of Representatives since 1993. It could be a sign of things to come that soon after his Senate confirmation, Watt announced that he would delay the implementation of some new fees scheduled for the GSEs’ single-family mortgage products.
Even during the shutdown of the federal government this October, the Senate Banking Committee continued to hold a series of surprisingly collegial hearings based on a proposal for reform from Senator Bob Corker (R-Tenn.) and Senator Mark Warner (D-Va.). The proposal would separate Fannie and Freddie’s multifamily lending arms into privately-owned businesses that issue bonds backed by apartment loans, much as Fannie and Freddie do today. The loans would have a limited, explicit guarantee from an insurance fund backed by the federal government, according to the proposals described at the hearings.
The bi-partisan proposal stands in stark contrast to an earlier House proposal that would simply eliminate Fannie and Freddie.