During the first half of 2019, active participants in the multifamily sector heard rumblings about the current Administration’s goal of re-privatizing Fannie Mae and Freddie Mac (the Agencies), which were brought under Federal conservatorship in 2008. Those rumblings grew steadily louder over the summer, culminating with a memo released last week by the Federal Housing Finance Agency (FHFA) which attempts to provide guidance and expectations for the mortgage lending Agencies for the next year.
Background
The Trump Administration has indicated at several points in time that it prioritizes an exit plan from the government’s control of the Agencies – something it considers a last vestige of the Great Recession. In April 2019, economist Mark Calabria was named Director of the FHFA, and tasked with examining the health, production and sustainability of the two mortgage Agencies. Under Director Calabria’s watch, the FHFA began applying pressure on Fannie and Freddie to dramatically tighten up terms on newly quoted multifamily loans. The result – to the disappointment of borrowers – has been wider spreads, virtually no pricing waivers, lower LTV’s, less interest-only, and a variety of other conservative measures aimed at curbing production volume and increasing profitability.
To provide clarification, last week the FHFA released a memo redefining program priorities and production caps for the Agencies through the end of 2020. The memo stops short of defining any longer-term privatization plans, but does begin to address a number of other questions and concerns regarding near term expectations.
Takeaways From THE FHFA Memo
PRODUCTION CAPACITY TO REMAIN – Each Agency was allocated $100 billion in capped production volume for the five-quarter period from October 2019 through the end of 2020. At least 37.5% of this volume must be for mission-driven, affordable housing. The takeaway here is that Fannie and Freddie will still be given plenty of powder – the $200 billion combined lending cap equates to over $80 billion of annual production for each Agency which would actually represent an increase over previous years’ volume. But the emphasis on affordable housing suggests that we should expect pricing discounts and generally more attention paid to those deals meeting certain affordability criteria.
GREEN REWARDS DISAPPEARING – The FHFA has indicated that special incentives and pricing waivers for the Green rewards program will no longer be available. Since 2016, “Green” loans – those requiring energy-saving improvements to be made to a property – have been excluded from the total lending cap placed on the Agencies, and have grown to over a quarter of originations. Borrowers have benefited from substantial pricing and loan sizing waivers. In the memo, the FHFA likens the Green program to a “loophole” that may have been “crowding out private capital”. By reclassifying the Green program as “conventional,” FHFA no doubt intends to shift a portion of that loan volume back onto balance sheet and securitized lenders in the private sector.
PUSH FOR A “COUNTER-CYCLICAL” ROLE – In the memo, FHFA explains that as the apartment market has grown robustly, the Agencies “share of multifamily loan originations has expanded considerably” (disproportionately so) and has put the Agencies in a “pro-cyclical role” in the market. As discussed above, Green rewards and other incentives have made Fannie and Freddie the de facto choice for borrowers seeking full leverage, non-recourse multifamily loans. The suggestion is that the Agencies have been providing financing terms that are unmatched by the private sector, and in doing so could actually be contributing to over-exuberance in the sector. FHFA implies that during the “good times” Fannie and Freddie should play a less relevant role in the market, and are therefore well-capitalized and in a position to support the market when the economy eventually sours.
Our overall impression of what FHFA appears to be saying is that we should expect Fannie and Freddie to remain in the competitive mix for multifamily finance, however it is unlikely that loans for conventional deals will be dramatically more competitive than other private sources. In our estimation, leverage will likely continue to favor the agencies, but terms such as pricing and interest-only periods may be tempered for the foreseeable future. While this will continue to have ripple effects in the near-term, we believe this approach is a net positive to the sustainability of the sector.
CK Realty Partners will continue dialogue with senior leaders of its Agency lending partners, keeping a close watch as things develop. For borrowers, it is imperative to consider all viable options in the broader market to be confident in securing optimal project financing. Please do not hesitate to contact us regarding this announcement, its implications, and how to best approach the debt market for your current multifamily deals.