Ryan Haase
This fall, several events related to Fannie Mae and Freddie Mac occurred that cumulatively made them less competitive in multifamily lending and created uncertainty around the GSEs moving forward. Since then, banks, life companies, and conduit lenders are fighting tooth-and-nail to recapture multifamily financing market share in light of the resultant agency void.
Fannie Mae and Freddie Mac announced in late August that they had reached their target loan production allocations for 2019. As a result, agency loan production came to a screeching halt, with the few ongoing transactions being executed at far more conservative levels and on a much more selective basis. Quoted spreads widened approximately 70 basis points, leverage levels decreased, and waivers were halted, effectively stalling production and making quotes much less attractive to commercial real estate borrowers.
In the following weeks, issuance of the US Treasury Department's long-awaited plan to end government conservatorship of the GSEs, as well as the Federal Housing Finance Agency's announcement of new lending guidelines for the GSEs, further clouded the current and ongoing multifamily lending operations of the GSEs.
A Historical View of Multifamily Lending
Over the past several years, the multifamily lending sector has been dominated by the agencies. Historically, the agencies have been able to outperform life companies, banks, and conduit lenders due to their low cost of capital and governmental guaranties. While they were created for the purpose of making housing affordable, they have slowly crept into the non-affordable housing space, winning away Class A multifamily housing business that typically had gone to their competitors. As a result, the percentage of multifamily loans on the balance sheets of life companies and banks has decreased over the years.
Coinciding with the emergence of multifamily as a preferred asset class, non-agency lenders have fought hard to maintain their market position, but to little or no avail. The events this fall, however, have opened the window for non-agency lenders to scratch back and regain any multifamily market position they can.
For example, banks, who typically never provide non-recourse loans for multifamily above 65% LTV, have done so up to 75%. Other ways banks have changed course to win deals include drastically reducing origination fees, agreeing to waive prepayment (making loans open at par for the full term), waiving depository requirements for first-time borrowers, and agreeing to rely on older third-party reports at closing. Conduit lenders have stretched on leverage and interest-only periods (often full-term I/O) for multifamily product, while holding spreads even in the face of declining treasuries, often providing debt well below 4%, often 50-75 bps inside of the agencies. Life companies have been aggressive on interest rates as well and have been very creative on prepayment flexibility, winning long-term multifamily debt for borrowers wanting more prepayment flexibility than CMBS can provide.
A Return to Normalcy
While this perfect storm of events came together to give non-agency lenders a big opportunity this fall, I believe things have already begun to return to normalcy for the agencies. Over the past week or two, agency spreads have come back in 40-50 bps, making them competitive again. This moment of bliss for non-agency lenders may be short-lived, but in the long-term there is some hope. An eminent end of government conservatorship, as well as new lending guidelines, project a new direction for the agencies.
The loss of federal backing bodes well for the competitors of agencies, as losses won't be able to be as easily absorbed, bond pricing will likely widen, and agency cost of capital will likely increase. In addition, a move to more "mission driven" lending (minimum 37.5% of total production moving forward) likely signals more of a return to lending in the affordable housing sector, opening the door for life companies, banks, and CMBS to compete for Class A properties. According to industry surveys, both life companies and banks expect to increase multifamily production in 2020, a signal that they also foresee a more balanced playing field moving forward.
Ryan Haase is a director of Capital Markets for Franklin Street.
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