Fannie Mae has lost some ground in the student housing world, and it intends to take it back.
The company has seen big declines in its student housing volume over the past two years, as stiffer competition from Freddie Mac has eaten into its market share. Last year, student housing was an area of modest growth for Freddie Mac, up $25 million to $800 million. That success appeared to come at Fannie Mae’s expense, as its volume plunged to just $194 million.
The difference in volumes is staggering but illustrates the popularity of Freddie’s more flexible approach. The biggest difference between Fannie and Freddie is in the size of the universities that they’ll serve. Over the past few years, Fannie Mae was interested only in deals near universities with student populations of 20,000, while Freddie set the bar much lower, down to 8,000 students.
And the competitive landscape continues to grow beyond the government-sponsored enterprises (GSEs). Conduit lenders have picked off quite a few student deals this year, and there are a handful of life insurance companies also interested in the sector.
Fannie Mae sees the writing on the wall and has adjusted accordingly. The company lowered its threshold to 10,000-student populations in the second quarter of the year.
“Fannie realized they were missing out on a huge amount of business that Freddie was largely getting, by excluding schools with enrollments between 8,000 and 20,000,” says Will Baker, a vice president focused on the student housing sector for Bethesda, Md.-based Walker & Dunlop.
Once upon a time, 10,000-student populations was Fannie’s threshold, but amid concerns about the sector's demographics, the company doubled that requirement a few years ago. And when it did, Baker ran a test to see which schools would no longer qualify.
“There was a substantial chunk of big, brand-name schools, like UVA, Duke, and Notre Dame, that were excluded from Fannie financing,” he says.
But Fannie has now reopened its doors to a much broader universe of universities. And the opportunities should only increase in the coming years. As the banking sector begins lending again, there’s quite a bit of new student housing just built or under way that will need some permanent debt.
The GSEs tend to take a conservative underwriting approach to newer deals. They often want to see a second round of leasing before they’re comfortable. But as the sector grows more competitive, the GSEs grow more flexible.
“Both Fannie and Freddie tend to underwrite newer deals with limited or no operating history a bit more conservatively,” notes Baker. “But as long as we have a borrower with a good track record and the project is well located in relation to the campus, we will get the deal financed.”