After record multifamily mortgage-purchasing volumes by Fannie Mae and Freddie Mac in 2015, what can market-rate apartment owners, builders, and buyers—and competing lenders—expect from the government-sponsored enterprises (GSEs) and their originations networks in the coming year? In a word: more.
As is perennially the case, Fannie and Freddie multifamily higher-ups, working with their originations networks around the country, will pursue more strategic tweaks, providing borrowers more options on existing GSE programs as well as more new-product innovations to meet more-diverse financial needs.
But it’s another keyword that should make even more of an impact this year, pushing the GSEs’ combined projected multifamily loan-buying growth to double digits and perhaps even to 12-figure dollar-volume territory. That keyword? Caps. As in potentially pivotal adjustments to the GSEs’ regulator-imposed annual multifamily activity caps that took effect Jan. 1.
It’s not so much the arguably modest boosts to the primary dollar caps, from $30 billion in 2015 to $31 billion this year, that the Federal Housing Finance Agency (FHFA) imposes on each GSE that are driving the optimistic funding-growth expectations. Rather, it’s three modifications to cap-related calculations that could prove especially conducive to growth in Fannie’s and Freddie’s market-rate and overall multifamily loan purchases in 2016.
Per the FHFA’s 2016 Conservatorship Scorecard, the potentially potent provisions include:
• The FHFA’s determination to consider excluding certain important nonsubsidized workforce-housing properties from the caps.
Fannie’s and Freddie’s respective multifamily chiefs, along with active participants in the GSEs’ Delegated Underwriting and Servicing (DUS) and Program Plus originations networks, concur that these changes should boost overall multifamily finance activity in 2016, as well as that of certain high-priority, underserved segments.
More particularly, along with continued strong borrower demand for funds to purchase and refinance standard market-rate apartments, experts anticipate more activity financing sizable workforce-housing properties in higher-cost markets, and also in niches such as small properties, assisted-living and manufactured-housing communities, and energy- and water-efficiency retrofits.
While the consensus is that any long-term resolution terminating the GSEs’ contentious seven-year federal conservatorships isn’t about to get finalized during an election year, the immediate-term outlook, as alluded to above, is for double-digit growth over the GSEs’ unprecedented 2015 volumes. In fact, well-versed sources are projecting that combined activity could end up swelling from last year’s approximately $85 billion ($45 billion from Freddie, $40 billion from Fannie) to something approaching $100 billion—with 60%-plus of it likely covering market-rate units subject to the caps.
“If borrower demand and market momentum continue with the strength we’re experiencing today … I think the agencies will be able to make a good case to the FHFA that the marketplace will really need the additional liquidity they can provide in 2016,” observes veteran mortgage banker Mike Kavanau, senior managing director at high-volume Freddie Program Plus originator HFF.
Amid a continued highly active, competitive, liquid multifamily finance arena, the GSEs are almost certain to continue maintaining a combined market share of at least 40%, notwithstanding their stringent underwriting and approvals procedures compared with most competing debt sources. Even more encouraging is that the marketplace should be able to avoid the volatile interest-rate spread quoting seen in early 2015, now that FHFA officials will look to adjust the GSEs’ caps upward every three months if warranted by unexpectedly voluminous borrowing.
Kavanau, for one, wouldn’t be at all surprised if each of the GSEs’ multifamily activities comes close to the $50 billion mark in the coming year. In addition to the FHFA’s new policy allowing for quarterly boosts to the caps, Kavanau cites landlord-favoring supply–demand fundamentals; minuscule distress in GSE multifamily loan and repayment guarantee portfolios; heavy scheduled 2016 mortgage maturities; the still-prevailing historic low-rate environment; and attractive risk-adjusted lender and mortgage bond–buyer returns.
Various lender-type challenges will likewise keep the Program Plus and DUS networks in favorable competitive positions, Kavanau says. Most commercial banks don’t want to hold longer-term debt on their portfolios, and life companies are generally unwilling to risk high-leverage commercial mortgage lending. Plus, conduit lenders are seeing disappointing CMBS issuance volume relative to early-year projections.
But Jeff Hayward, the executive vice president overseeing Fannie’s far-flung multifamily mortgage activities, nevertheless expects the DUS and Program Plus networks to face a highly competitive market-rate lending arena in 2016. The sector’s risk-mitigating fundamentals and compelling renter-propensity demographic trends continue attracting fresh sources of capital into the marketplace, he elaborates, adding that overall multifamily originations nationwide could very well end up exceeding $200 billion.
As for the long-anticipated interest-rate “lift-off” the Fed is setting into motion, GSE specialists generally doubt that gradual and modest hikes in short-term rates will have much, if any, meaningful effect on permanent multifamily-financing rate quotes—or, in turn, activity volume—in 2016. And any potential rate-driven slowdown in property trading over the coming 12 months would likely be temporary.
Quarterly Reviews, New Exclusions
Meanwhile, property finance experts welcome the FHFA’s new quarterly cap review schedule, which should serve to boost borrower belief that sufficient debt dollars will be available from the GSEs throughout the year. This activity-driven mechanism should likewise help the GSE origination networks avoid the pipeline-slowing spread widening seen early last year.
Unexpectedly heavy early mortgage placement raised concerns that Fannie and Freddie would reach their caps long before the end of 2015, prompting their lenders to widen out spreads in order to decelerate dealmaking and help ensure that funds would be there in the typically frantic fourth quarter. As quoted spreads in early spring started coming in notably wider than comps over the winter, activity indeed slowed accordingly, and both GSEs were expecting to hit the $30 billion limit in capped activity over the holiday season.
This year’s quarterly review process should help alleviate market-disrupting fears of another looming liquidity crisis should activity once again far outpace early-year projections, relates Don King, the executive vice president overseeing Fannie and Freddie lending platforms at Walker & Dunlop.
“I think that’s going to be a huge factor” in preventing market-stalling spread volatility, as the FHFA will be able to “adjust the cap far more quickly” when activity levels dictate, King elaborates. While the 2016 GSE Scorecard doesn’t address optimal combined GSE shares of the multifamily finance marketplace, King expresses what appears to be widespread sentiment about the regulator’s preferences.
“My impression is [FHFA officials] are trying to more closely track the size of the market and keep the GSEs’ combined share at 40% or below,” says King. “They don’t want to see it ballooning to 60 unless there’s another true liquidity crisis.”
Activity volume in 2016 should likewise get a boost from a couple of key additions to the roster of apartment segments that are excluded from the GSE loan-purchasing caps. Experts also anticipate stronger activity ahead in some of the collateral categories that were added to the exclusion roster amid the volume-driven market disruption last spring.
In essence, every GSE-sourced dollar used to purchase a mortgage in any of the excluded segments—which logically include formally subsidized “dedicated” affordable projects—frees up another buck for newly issued debt secured by more, ahem, conventional apartment properties. And loan-purchasing activities within the excluded affordable and “underserved” categories (many of which often feature market-rate units) aren’t subject to annual activity limits.
In addition to dedicated income-restricted affordable properties such as low-income housing tax credit (LIHTC) projects, small-balance loan and manufactured-housing mortgage exclusions were already in place at the beginning of 2015. Then, last spring, the FHFA retroactively added assisted-living units affordable to residents earning up to 80% of the area median income while also liberalizing the income thresholds (for exclusion purposes) of market-rate workforce housing units in the nation’s most expensive markets.
And now, with the just-released 2016 Scorecard, the FHFA is also excluding qualifying energy- and water-efficiency retrofit/upgrade loans, along with an auspicious new provision potentially excluding many more market-rate workforce-housing communities from the caps. The agency, on a case-by-case basis, will consider excluding loans secured by properties that meet affordability and mission goals but do not meet the exact definition of targeted affordable housing.
Assuming the FHFA approves requests to exclude workforce-serving properties, King, for one, sees the potential to free up substantial “breathing room” for market-rate loan purchases subject to the cap.
This new policy offers Fannie and its DUS lenders “a great opportunity” to write more uncapped business—and, in turn, more capped conventional activity—as they continue working closely with municipal bodies that pursue affordability goals based on rent levels and related market characteristics, Hayward stresses.
David Brickman, the executive vice president overseeing Freddie’s multifamily operations, emphasizes that cap exclusions help further target GSE-sourced funding toward some of the underserved workforce-housing segments. To wit, Freddie’s loan purchases since the additional exclusions were implemented last spring clearly reflect these focused efforts, Brickman is quick to point out.
“We, in turn, have been highlighting [excluded categories] to our seller network, so there’s been a definite shift in favor of those particular segments,” Brickman continues. “Our final mix of business for 2015 will demonstrate growth in small-balance, assisted-living, and manufactured-housing,” as well as affordable communities generally.
The growth in cap-exempt niches appears to bode well for newly excluded segments, with green-retrofit financing activity now looming sharply in GSE crosshairs, experts suggest. This uncapped segment excludes full principal amounts of energy- and water-efficiency improvement loans such as those flowing from Fannie’s Green MBS and new Green Rewards programs, along with Freddie equivalents likely including the fairly new Green Rebate program and others in development.