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Total multifamily mortgage borrowing and lending is expected to fall to $375 billion this year, a 14% decline from last year’s estimated total of $437 billion, according to the Mortgage Bankers Association (MBA). However, a rebound is anticipated for 2024, with the MBA predicting $456 billion for multifamily lending.

Fannie Mae has a similar outlook. “We currently expect 2023 multifamily originations will land between $385 billion and $400 billion, which is similar to the MBA’s recent estimates,” says a Fannie Mae spokesperson.

For multifamily properties in the first quarter of 2023, originations saw a 55% year-over-year drop and a 44% quarter-over-quarter decrease, according to the MBA’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers.

“While the first quarter is typically the quietest quarter of the year, borrowing and lending backed by commercial and multifamily properties declined in the first quarter to the slowest pace since the first quarter of 2014,” says Jamie Woodwell, head of commercial real estate research at the MBA. “Uncertainty and volatility in regard to interest rates and property values, and supply and demand imbalances for some property types, has led to a logjam in commercial real estate sales and financing markets.”

Sources from Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) share that market conditions have impacted lending volume for the first half of the year but that the agencies, which are built for countercyclical stability, are committed to being a source of liquidity for the multifamily market.

“There’s a lot of interest in agency financing right now,” says Ethan Handelman, deputy assistant secretary for the Department of Housing and Urban Development’s (HUD) Office of Multifamily Housing Programs. “FHA has its own particular niche. If you look at the last three years, we’re coming off of record volumes. Through that we did a lot of work to streamline and clear the queue that was here. We cleared it as of the last calendar year, and there’s no more waiting in line to get assigned to an underwriter. While we did all of that work—adding new staff and streamlining on policy—the macro economy threw us some surprises.”

Handelman says FHA volume is significantly off of the highs of the past several years. As of May 19, it had $8.1 billion of firm commitments, which is low. However, he says he is starting to see applications pick up, an early but encouraging sign.

“What we are focused on in this period is that FHA is available in all markets at all times. It’s part of the countercyclical function that we end up playing,” he says. “In doing so, we are seeing that 40% of volume thus far this fiscal year is serving affordable housing, and 60% is for market-rate rental housing, both of which are really important. We’re pushing on all fronts, ready to serve the need as it comes to us.”

According to Freddie Mac, its forecast for the year has been adjusted slightly down, although the government-sponsored enterprise says it typically sees volume pick up in the second half of the year. It says it expects the same this year with the green shoots that it’s starting to see on acquisitions.

“The slowdown in the investment sales market and sharp increase in the U.S. Treasury rates and SOFR has reduced our volume from last year at this time,” says Kevin Palmer, senior vice president and head of multifamily. “However, we are on track to hit the majority of our affordable, equitable housing, and Duty to Serve goals. Deals are coming in the door, and we are seeing higher than historical inflows, but some borrowers are choosing not to transact at this time.”

Palmer adds that despite the unpredictable market so far this year, as a business, it is quoting, underwriting, and funding deals daily and remains focused on optimizing its $75 billion cap. That’s the multifamily loan purchase cap set by the Federal Housing Finance Agency for Freddie Mac and Fannie Mae this year.

“Affordability is our North Star, and we continue to drive innovation for the creation, preservation, and rehabilitation of affordable and workforce rental housing,” notes Palmer. “Our Small Balance Loans and Targeted Affordable Housing business lines have historically financed properties that are heavily affordable-weighted, and our conventional business is contributing a higher percentage of mission deals, too. Through April, almost 90% of the properties we’ve financed in Freddie Mac Multifamily are affordable to those making 120% of the area median income or less.”

As of April, Fannie Mae’s new multifamily business volume was at $15.1 billion for the year, down from $22.3 billion during the same period in 2022. Its Multifamily Affordable Housing (MAH) acquisitions totaled $1.3 billion for the first quarter.

“Fannie Mae continues to provide broad support for the affordable housing market through our ongoing debt and equity financing activities; preserving affordability through our MAH platform; providing workforce housing solutions such as the innovative Sponsor Initiated Affordability product, and using our low-income housing tax credit platform to create new supply,” says the Fannie Mae spokesperson.

Finding Financing Opportunities

In May, HUD announced the availability of more than $837 million in grant and loan subsidy funding and $4 billion in loan commitment authority for the Green and Resilient Retrofit Program from the Inflation Reduction Act to help reduce energy costs and improve housing quality. Handelman says the grants or loans can apply to everything ranging from a comprehensive retrofit at $80,000 per unit to a more a la carte approach for those choosing some green elements to add to a transaction because the project is underway and in planning. The financing also will help projects be energy efficient, safer in the face of natural disasters, and as a result healthier for the people who live there.

“We can stretch the financing a little further and deploy more capital to help hundreds of properties,” says Handelman. “It’s a pretty big deal. It’s one of the things that will help make some transactions come together effectively. It also has the potential to change the built environment in a way that we haven’t seen in a while.”

Fannie Mae is offering a new option in this time of rising interest rates. Higher rates may reduce the ability of multifamily borrowers to refinance their loans, which generally have balloon balances at maturity. This new option allows borrowers the opportunity to convert existing structured adjustable-rate mortgage (SARM) loans to a new five-year fixed-rate execution, regardless of the remaining SARM loan term.

“This is a great option for borrowers who want to move quickly and need some term/prepay flexibility on the conversion. The Fannie Mae SARM product is designed to provide long-term financing with a competitive variable interest rate while providing flexibility in fluctuating interest rate environments,” says the Fannie Mae spokesperson. “Risks and costs associated with a rising SOFR index rate and replacement cap escrow requirements can be eliminated with a fixed-rate execution.”

Freddie Mac adds that it also has designed some creative options for borrowers. “For example, our five-year fixed program is more popular this year, as we can include prepayment options for those sponsors looking for an alternative to floating-rate debt. In addition, our Workforce Housing Preservation feature, whereby owners set aside units at affordable levels for longer terms, helps make a difference in the affordable housing crisis,” says Palmer.

Handelman’s advice for developers and lenders is to underwrite for today. “Interest rates are higher, but by no means higher than historic standards,” he says. “Deals are harder to pencil out, but there are sources to work with and opportunities to be had.”