Commercial Mortgages: Fannie Mae and Freddie Mac
to require higher percentage of loan volume classified as affordable housing
BY ANDREW LITTLE - Special correspondent 14 hrs ago
Robbie Robertson and The Band probably weren’t thinking about the two largest multifamily lenders in the country when they produced “The Weight” in 1968 with the epoch line “take a load off Fanny.”
The Federal Housing Finance Agency is looking to do just that.
The agency, which oversees Fannie Mae and Freddie Mac, recently set new guidelines which will reduce their multifamily loan output by $20 billion from 2020 to 2021.
In addition to purchasing the debt that backs cheap financing for single-family housing across the country, Fannie and Freddie also have dominated multifamily lending over the years by purchasing debt that backs both market rate and affordable multifamily projects.
While the reduced volume guidelines won’t change Fannie and Freddie’s dominant position in multifamily lending, many other lenders see the change as an opening to get more multifamily backed loans on their books.
In addition to announcing that the lending caps on the two giants would effectively be reduced from $160 billion to $140 billion, the agency also increased the percentage of volume that they would like to see that is classified as mission-driven or affordable housing. The percentage was moved up from 37.5% of their purchase volume to 50%.
The increase in mission-driven business is a step toward addressing complaints many critics have made over the years that Fannie and Freddie enjoy an unfair competitive advantage because they are backed by the credit of the U.S. government, but they compete for loans backed by market rate, luxury apartment complexes.
Importantly, with the increase in mission-driven goals, the agency also changed the definition of what constitutes mission-driven. Now, FHFA will count as mission-driven the pro rata portion of the loan amount based on the percentage of units in a complex that are affordable at 80% of the area’s median household income or below.
That is likely to put cities like Richmond and Norfolk in the target zone for Fannie and Freddie lending even more so than they are today.
The reason is that the area median income in the Richmond and Norfolk areas is relatively high in relation to average rents. That means that the overall income averages for residents in an apartment complex can’t be more than 80% of the median salary in the area, or no more than 80% of roughly $89,400 in the Richmond region and $82,500 in the Norfolk area.
For the sake of comparison, area median income in Los Angeles County is $77,300 and is $103,000 in Orange County. Both areas, however, have much higher average rents than Richmond or Norfolk.
The bottom line is that multifamily is still the hottest property type for most lenders and any void created by these changes to Fannie and Freddie is likely to be filled quickly by other lending sources. Currently, 10-year multifamily loans price anywhere from 2.75% to 3.25%, depending on leverage.
Capital for both multifamily loans and other property types is still readily available and cheap. The 10-year mortgages for commercial property backed loans price anywhere from 3% to 3.75%, depending on quality and leverage.
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