Credit parameters are loosening at the government-sponsored enterprises (GSEs) after two years of continual tightening.
The loosening seems to indicate a growing confidence on the part of Fannie Mae and Freddie Mac in the economy. GSE lenders are reporting a big spike in activity on both the acquisition and refinancing sides over the past six weeks, after a dismal first quarter. As cap rates on high-quality assets continue to compress, and many markets stabilize across the country, the GSEs have grown more flexible.
Today, partial Interest-Only (IO) loans are routinely being offered, while some full-term IO loans are available on lower leverage transactions. In general, waivers are being granted more readily, as both Fannie and Freddie tweak their programs.
“The general theme is a willingness to look at waivers,” says Don King, who runs the GSE platform for Boston-based CWCapital. “It stems from the comfort level that we’re at the bottom and, in some cases, seeing improvement, and we have a better feel for values because we’re seeing properties trade.”
And the good news keeps on coming: Borrowers looking to lock a rate should probably look no further.
With the yield on the 10-year Treasury at 3.2 percent, all-in rates on standard 10-year deals are between 5.25 percent and 5.5 percent, as low as they’ve been in awhile. What’s more, rates drop into the 4 percent range for lower leverage deals from the GSEs.
Underwriting Changes
The GSEs have also made some underwriting changes in the past few weeks, and they’re generally borrower-friendly.
Word on the street is that Fannie Mae had a very poor first quarter and is now getting a little more aggressive to win back some business from Freddie Mac. For instance, Fannie Mae has lowered the underwriting floor on some fixed- and floating-rate executions, which allows borrowers to qualify for more proceeds. This lowering of underwriting floors—a tool for sizing loans—has had a big effect on seven-year deals in particular.
“Freddie Mac had a huge advantage on seven-year terms, but that delta’s been narrowed dramatically now,” King says. “Fannie was sizing to an underwriting floor that at one point was 80 to 90 basis points higher than what Freddie was sizing to.”
Fannie Mae is also currently undergoing a reorganization of its multifamily business to compete more effectively with Freddie Mac. One advantage Freddie Mac has historically had is a willingness to engage in borrower differentiation—that is, large premier borrowers can get better deals than smaller borrowers. But Fannie’s DUS model didn’t lend itself well to that dynamic.
So Fannie Mae is now taking a different approach, separating its multifamily production into two channels: Heidi McKibben will run Fannie’s large borrower channel, which will target those borrowers with a greater volume of business. Meanwhile Manny Menendez will run the more general lender channel for the GSE's other borrowers. The move is expected to be officially announced soon.
But Freddie Mac is busy, too. The company is working on adding its seniors housing program, and conventional structured finance, into its Capital Markets Execution (CME) program, for a rollout later this year. And it made some changes to its CME program this year to make it a more flexible execution.
In April, Freddie Mac officially rolled out a menu of waiver options, allowing for more variation from the loan documents and baseline requirements—everything from getting insurance waivers to requesting that the B-piece not be sold. Each waiver option comes with a price. Some options, such as deferring an escrow request, will have little or no impact on pricing, while others, such reducing or waiving insurance coverage, will have a much bigger impact on rates.
“We learned that borrowers were willing to pay a little extra for more options, so we enhanced the CME product by increasing flexibility,” says David Brickman, vice president of multifamily CMBS and capital markets at McLean, Va.-based Freddie Mac.
The company believes that a certain volume of borrowers will gravitate toward the same combination of waiver requests over time. Brickman likens it to pizza—plain cheese pizza was all that was offered initially, with toppings being individually selected. But the company will track which combinations of waivers are most popular, and may offer a pre-packaged option, akin to a meat lovers or veggie pizza.
“Once we get a sense of these combinations, we may begin to offer them as packages so borrowers can quickly get what they need without having to manually select each option repeatedly,” Brickman says.
