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Fannie, Freddie Are Still Providing Attractive Terms. But Demand from Borrowers Has Fallen.

Not many multifamily investors are eager to take out acquisition or refinancing loans right now.

For multifamily investors that continue to rely on financing to close their deals, attractive loan terms are getting harder to find. Freddie Mac and Fannie Mae lenders can still offer a solution—especially on loans that meet the goals for affordability set for the two government-sponsored entities.

“Both GSEs are active in the market. They are actively quoting loans,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council, based in Washington, D.C.

After all, the entities are meant to provide capital for the multifamily market under various conditions, including a market that’s currently experiencing uncertainty because of rising interest rates and the possibility of a recession. For many apartment properties, Freddie Mac and Fannie Mae are effectively the only attractive source of financing available.

“They are in the market every day providing liquidity,” says Kyle Draeger, senior managing director, multifamily, with commercial real estate services firm CBRE. “A lot of other players are not.”

Little has changed for GSAs, other than interest rates

As the Federal Reserve continued to raise interest rates, by the last weeks of December, the yield on 10-year Treasury bonds was around 3.7 percent, up from around 1.0 percent at the beginning of the year.

However, Freddie Mac and Fannie Mae lenders have not increased the amount they add to the all-in, fixed interest rates they charge to their borrowers. Their spreads still range from 150 to 200 basis points over Treasuries, which works out to all-in rates ranging from 5.0 to 5.5 percent, according to Draeger.

“That is a relatively normal spread range,” he says.

Other loan terms offered by Freddie Mac and Fannie Mae have also barely changed. They still generally tend to cover 55 percent of the likely value of a property, even though higher interest rates typically mean properties can support less debt than they did a year ago. “Property values have come down as well, compared to a year ago,” Draeger notes.

In contrast, many banks are note currently issuing new loans on commercial properties because they already have enough loans on their balance sheets that federal regulators view as risky. Loans from private equity debt funds, in turn, are less attractive to borrowers than usual—debt funds typically offer floating-rate loans and these interest rates are currently higher than fixed interest rates. CMBS loans are also less attractive because the interest rates they offer have risen as investor in CMBS bonds demand higher yields.

Freddie Mac and Fannie Mae won’t meet their caps

Despite being the most attractive lending option left for many potential borrowers, the GSEs are unlikely to end up lending as much as they are allowed to in 2022 under by their government overseers at the Federal Housing Finance Agency (FHFA).

“The FHFA Scorecard established a cap of $75 billion each for Fannie and Freddie, which will likely be a higher volume level than either agency achieves,” says Ted Patch, Bethesda, Md.-based executive vice president and group head of the multifamily finance group at Walker & Dunlop. “We anticipate that both agencies will be about $70 billion each for 2022; however, we won’t know until the final year-end numbers are published” in January.

With interest rates rising and growing uncertainty about the broader economy, relatively few borrowers need or want to take out new loans for apartment properties, particularly for refinancing or acquisitions.

“One of my members said 65 percent of their multifamily lending business has been refinance activity,” says Borsos. “But there are now virtually zero benefits to refinancing unless you have a loan maturing.”

Investors who need to refinance loans at the end of their terms may face unexpected challenges. The interest rate for a new loan will probably be significantly higher than they expected. However, these properties are unlikely to face serious trouble because property values and rental incomes in the multifamily sector have also risen.

“Maturing loans can [usually] still be refinanced and cover the existing loan balance and then some,” says Patch. “In some instances, there is a shortfall, and borrowers are looking for some capital infusion in the form of preferred equity.”

Recently completed and stabilized developments or redevelopments may have deeper problems if they need to replace their construction financing. The properties that may face the worst problems set their construction budgets and took out floating-rate loans in 2021, when interest rates were at their lowest levels after the pandemic.

“The expectation is that there will be some agita—but that hasn’t happened yet,” says Draeger. “There has been no real distress so far.”

Freddie Mac and Fannie Mae are also constrained by the affordable housing goals set by FHFA. They are required to match every dollar they lend to market-rate properties with an equal volume of loans to properties that meeting FHFA’s definition of ‘affordable.’

Freddie Mac and Fannie Mae lenders also typically provide tens of billions of dollars in loans every year to investors buying apartment properties. But since interest rates began to rise, the multifamily investment sales market has slowed down considerably.

“The bid-ask spread between buyers and sellers is pretty wide,” says Borsos.

Most buyers are not willing to pay the same prices they did a year ago, because the cost of their capital has increased and there is a relatively high chance of a recession next year. In turn, very few sellers are willing to bring their properties to market for sale.

“However, acquisitions are still happening. Walker & Dunlop continues to finance via Fannie Mae and Freddie Mac,” says Patch. “With more market stability, the sales market will pick up, and we will continue providing acquisition financing for those transactions.”

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