Agency multifamily origination volume this year could hit $80bn now that the Federal Housing Finance Agency (FHFA) has redefined the affordable lending targets for Fannie Mae and Freddie Mac, speakers said last week at the National Association of Real Estate Editors (NAREE) annual conference in Miami.
The FHFA last month revised the income threshold criteria for affordable housing and excluded certain housing from $30bn annual origination caps set earlier this year for each of the agency lenders, or government-sponsored enterprises (GSEs).
“With overall multi-family loan volume at record levels, the GSEs were on track to hit their FHFA imposed ($30bn) limits before year end,” said Brian Stoffers, CBRE’s global president of debt & structured finance. “The regulator worked with the Freddie and Fannie to redefine their affordable lending targets while leaving the cap in place.”
The GSEs originated $57.2bn of the $185bn in total multifamily origination in 2014. Fannie Mae provided $28.9bn, up slightly from its $28.8bn in 2013; and Freddie Mac had its second largest year ever with $28.3bn, up from $25.9bn in 2013.
But, driven by low interest rates, increasing demand for rentals and construction, Fannie Mae and Freddie Mac originated $10.4bn and $10bn, respectively, in the first quarter of this year alone, a record pace that would have seen them hitting the $30bn caps by the third quarter.
With the revisions in place, Stoffers estimated that each of the GSEs will originate between $6-$8bn in additional volume in 2015, but that they could potentially originate as much as $40bn each if multifamily fundamentals remain strong.
Strong they have been: total commercial mortgage lending rose 49% year-over-year in the first quarter, with multifamily up 71%, according to data from the Mortgage Bankers Association.
Among the new rules, a portion of affordable housing and assisted living housing for seniors will be excluded from the caps, and income thresholds for affordability have been increased.
“By revising and clarifying these affordable housing lending categories, we expect the ‘enterprises’ to dedicate the necessary time, attention and resources to support this important part of the multifamily market,” said FHFA director Melvin Watt last month.
Without a loosening of the rules, costs to borrowers would likely have increased further: the agencies were already forced to adjust pricing several times in April alone, and if they were to hit the lending caps borrowers would be have been forced to call on private lenders. That however would have worked in the favor of specialty finance and other alternative lenders.
“Agency spreads have widened, narrowing the spread against other financing sources,” said Russell Frahm, a vice president with Mesa West Capital, at the NAREE conference. “As that spread condenses it gives specialty finance folks like myself an opportunity to make the case that borrowers should choose a private bridge lender who can move much faster than the agencies. Speed and surety of execution are everything in today’s market.”
Others have pushed for more influence from the GSEs because they are arguably more likely than private lenders to support affordable housing; they financed more than 850,000 units in 2014, many of which are affordable to households earning low or moderate incomes.
The GSEs’ market share of multifamily loan originations in 2014 had dipped below “normal” levels, financing just 30% of the total market, compared with approximately 70% in 2008 and 2009, according to the Urban Institute.
“GSE market share has been shrinking since the recession and private capital has been more than happy to serve a larger role,” Karan Kaul, a researcher with the think tank, told Real Estate Capital in April, noting that lower-income and “underserved” segments of the market were the most impacted.
“It’s good that private capital has come back, but… pure private capital, currently the predominant source of multifamily financing, tends to focus on the more profitable mid- to high-end market,” he said.
The new criteria address these concerns and are meant to encourage a strong role from the GSAs in supporting the financing needs of affordable rental housing. As laid out by the FHFA:
A pro rata portion of multifamily loan amounts purchased by the GSEs in 2015 will be excluded from the caps based on the percentage of units in a property affordable to renters at 60 percent of area median income;
In higher cost areas, the income threshold for affordability will be increased to 80 percent of area median income; or very high cost markets, the income threshold for affordability will be increased to 100 percent of area median income;
Assisted living units for seniors will also be excluded from the caps as long as they are affordable at 80 percent of area median income;
The calculation of specific loan amounts excluded from the caps for mixed income targeted affordable housing properties will also be modified.