Fannie and Freddie fuel multifamily lending

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Ask a Lender
September 27, 2017


Key Points

Government-backed multifamily loans

  • Fannie Mae and Freddie Mac are among the largest owners of multifamily debt.
  • Known as GSEs, they buy loans originated by banks and sell securities backed by the loans.
  • In addition to apartments and co-ops, the GSEs support seniors housing and student housing.
  • The vast majority of units funded by the GSEs are considered affordable housing.
  • Low-income housing is exempt from a government cap that limits GSE lending.

The U.S. government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are a significant part of the commercial real estate business through their backing of multifamily mortgages.

Fannie Mae and Freddie Mac are chartered by Congress, but are considered private corporations. They purchase mortgages, both residential and multifamily, made by private lenders, which gives lenders the liquidity necessary to continue making loans. The loans are packaged and securitized by the GSEs, and the resulting mortgage-backed securities are, in turn, sold to investors.

In 2008, in the wake of the financial collapse, many of those securities turned out to be worthless, or “toxic,” as a result of lax loan-underwriting standards. The federal government took over the GSEs at the height of the financial crisis and spent $187 billion to bail them out. Since the takeover, the U.S. Treasury has swept up some $239 billion in profits from Fannie and Freddie, which remain wards of the U.S. government through an ongoing conservatorship.

The two agencies have similar roles in the commercial mortgage business and support similar types of loans. Although they don't lend money directly, the GSEs buy so many loans that their mortgage standards have a major influence on lending terms offered by banks and other institutions.

As of mid-2015, Fannie and Freddie owned a third of the multifamily debt outstanding in the U.S., roughly equal to all the multifamily debt owned by banks and thrifts. Fannie Mae's multifamily mortgage holdings amounted to about $200 billion, and Freddie Mac's holdings stood at about $150 billion.

The GSEs multifamily mortgage guarantees dropped sharply during the financial crisis and have been recovering since 2010. Under federal law, the agencies' new multifamily loan purchases are capped at $30 billion apiece for 2016, but low-income housing, some rural developments and energy-efficiency upgrades are exempt from the cap, and those exempt categories amount to about 20 percent of the GSEs total loan portfolio.

That GSEs purchase loans throughout the multifamily market segments. The GSEs support tilts in favor of multifamily projects that involve affordable housing — defined by the U.S. Department of Housing and Urban Development (HUD) as ranging from moderate-income housing affordable to renters making 100 percent of the local area median income to extremely low-income housing, available to those earning as little as 30 percent of the median income. According to the Urban Institute, more than 80 percent of the multifamily units supported by the GSEs meet the HUD definition of affordable.

The GSEs loan terms vary, depending on the type and size of multifamily projects being funded, but there are some guidelines that apply across the multifamily markets.

For instance, underwriting standards for Fannie Mae loans include:

  • A maximum 80 percent loan-to-value ratio (LTV);
  • A minimum 1.25 debt-service coverage ratio (DSC) in most markets;
  • Required on-site property inspections and independent third-party reports that describe both current and future physical needs of the property, which is considered the primary loan collateral;
  • A statement showing the borrowers' property-management experience, financial resources and FICO scores for those seeking small-balance loans (defined as between $750,000 and $3 million for Fannie Mae-backed loans, and $1 million to $5 million for Freddie Mac-backed loans); and
  • An exit plan showing the ability to repay a loan, including the balloon payments that are common with most GSE-supported multifamily financing.

Other terms of the GSEs multifamily loans vary, according to the length of the payback period. Terms of Fannie Mae-supported loans offered by the Commercial Real Estate Finance Co. of America, for instance, range from 5 years, with an interest rate of 4.11 percent, a 55 percent LTV and DSC of 1.55, to a 30-year term at 5.65 percent interest, an 80 percent LTV and DSC of 1.25. Both GSEs also offer interest-only loans, as well as loans with prepayment penalties.

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