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With Caps Raised, Fannie Mae, Freddie Mac Are Poised to Lend More

The two government-sponsored enterprises will offer greater incentives for affordability—and will make more loans overall—in 2021.

Investors will be able to get more loans for apartment properties from Freddie Mac and Fannie Mae in 2022. They may also get even lower interest rates on loans to many properties with affordable apartments.

“We are looking to continue to strengthen our ability to protect the housing finance system… advancing both sustainability and affordability,” said Sandra Thompson at a meeting of the Mortgage Banker’s Association, October 18, 2021. She is the new acting director of the Federal Housing Finance Agency (FHFA), which has overseen the mortgage giants Freddie Mac and Fannie Mae since they were seized by the federal government during the Global Financial Crisis in 2008.

The FHFA recently announced its limits on how many billions of dollars Freddie Mac and Fannie Mae lenders will be able to lend in 2022. Apartment investors welcomed the announcement, which included a moderate increase in the amount of lending the government-sponsored entities can do, and strengthened some incentives.

The announcement has already made life better for borrowers.

“Freddie Mac and Fannie Mae lenders can give slightly cheaper spreads now that they now what they have to spend next year, compared to three weeks ago when they didn’t know,” says Kyle Draeger, senior managing director and head of CBRE Multifamily Capital, working in the firm’s Boston offices. “Fannie and Freddie have leaned in a little already on new quotes.”

New leadership provides stability

The new lending limits come after a long, bruising fight to replace the head of the FHFA that went all the way to the Supreme Court. President Joe Biden made Thompson the acting director of the FHFA in July, replacing conservative economist Mark Calabria before the end of his usual five-year term, which began in 2019.

New leadership has brought new stability to Freddie Mac and Fannie Mae. “The past administration was attempting to prepare Freddie Mac and Fannie Mae for a release from conservatorship [the oversight of FHFA],” says CBRE’s Draeger.

The FHFA, under its new director, has also restored, or partially restored, a few incentives that help provide lower interest rates to some properties.

“Calabria and the prior Administration were not as focused on affordable housing,” says Evan Blau, chair of the agency lending and affordable housing practice at Cassin & Cassin, a law firm help structure affordable housing transactions, based in New York City.

Steady as she goes—Freddie and Fannie continue their role

The FHFA will allow Freddie Mac and Fannie Mae to purchase up to $78 billion each in loans to apartment properties in 2022. But at least half of those loans must be to communities with rents affordable to low- and moderate-income households. The new caps are just a little higher than FHFA’s old caps, which allowed Freddie Mac and Fannie Mae to purchase $70 billion each.

“They came in a little lower than what everyone was expecting,” says Draeger. “People were expecting about $80 billion, give or take… That is based on the growth in demand for the loans in the market and roughly a 40 percent market share for the agencies.”

Freddie Mac and Fannie Mae’s new lending limits keep the structure created by the old leadership in 2019, replacing an earlier, more complicated system of caps in which Freddie Mac and Fannie Mae lenders could make an unlimited volume of loans to apartment properties with affordable rents and a limited volume of loans to properties with higher rents.

FHFA demands more lending to affordable housing

The new lending limits give Freddie Mac and Fannie Mae an even stronger motivation to finance apartments with relatively affordable rents—especially in the most expensive housing markets like New York City and San Francisco.

Loans to these properties already receive lower interest rates from Freddie Mac and Fannie Mae. “You probably get 20 to 30 basis points lower for something that has a substantial amount of affordability… that’s on the higher side for properties with deeper affordability,” says Draeger.

Freddie Mac and Fannie Mae offer these lower interest rates to make sure they make enough loans to meet FHFA’s standards.

Affordable housing, according to FHFA, includes apartments in variety of formal affordable housing programs, in addition to naturally-occurring affordable housing properties, in which market-driven rents are affordable to households earning less that 80 percent of the area median income (AMI), often simply because the property is older.

FHFA’s new lending limits will also count apartments as “affordable housing” if they are in expensive housing markets—as defined by FHFA—and charge rents affordable to households earning up to 100 percent or even 120 percent of AMI. “Director Calabria had removed the incentive for ‘high-cost markets,’” that allowed more expensive apartments to still count as affordable, says David Borsos for the National Multifamily Housing Council, based in Washington, D.C.

The new lending limits also require Freddie Mac and Fannie Mae to make even more loans to more deeply affordable apartments—25 percent of their loans must be to properties with rents are affordable to households earning up to 60 percent of the area median income. That’s up from 20 percent in 2021.

“Going from 20 to 25 percent will force them to focus a little more on capital-A Affordable housing… but that is near and dear to their hearts anyway,” says Draeger.

Even lower interest rates for “green” affordable housing

Apartment properties can get even lower interest rates if a certain number of their apartments already qualify as deeply affordable and they also reduce the reduce the amount of energy and water consumed.

“Director Calabria had also taken out the green incentive [to lend to apartment properties than save on water and energy],” says Borsos. The new caps find ways to support some of those properties.

In exchange for the reduction, FHFA will count more of the loan amount as deeply affordable. That will increase the motivation for Freddie Mac or Fannie Mae to lend—perhaps resulting in an even lower interest rate. “Those ‘capital-A’ affordable deals are getting pretty cheap spread to begin with, so it is not going to be not that much more… perhaps 10 basis points lower,” says Draeger.

Fannie Mae is also focused on doing more green business is general—in addition to the motivation provided by FHFA. “They offer an extra 10 basis point discount, give or take,” says Draeger.

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