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Freddie Mac, Fannie Mae Refocus on Workforce Housing Lending

Freddie Mac and Fannie Mae will continue to be major proponents of permanent loans for apartment properties—including luxury properties—in 2022. But as multi-family investors continue to break records on prices, volumes and cap rates, the two government-sponsored agencies will be bound by tighter limits on whether they can buy loans for pricey, Class-A apartments. How much can they spend so that they can focus more on support? Affordable and middle market housing.

At least half of Freddie Mac and Fannie Mae’s lending business in 2022 should be “mission-driven,” according to federal officials. It will focus on lending them workforce housing properties, giving them less leeway to compete when it comes to lending to luxury buildings.

As investors spend more and more to buy Class-A apartments, they will have to find new sources of financing for their deals.

“Freddie Mac and Fannie Mae’s market share will be one of the lowest we’ve seen in a long time,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council. “The natural fund to fill the gap this year is debt funds.”

Lending cap leaves less room for luxury

According to CBRE, investors spent a record-breaking $335.3 billion on multifamily properties in 2021. This was almost double the previous record of $193.1 billion in 2019. And already some of that activity took off from Freddie Mac and Fannie Mae. “It wasn’t financed by Freddie Mac and Fannie Mae — they were constrained.”

Freddie Mac and Fannie Mae must operate within strict limits set by the Federal Housing Finance Agency (FHFA), which has overseen the mortgage giant since being placed in custody by the federal government during the Global Financial Crisis in 2008.

The FHFA will allow Freddie Mac and Fannie Mae to purchase up to $78 billion in loans for apartment properties in 2022. That’s an 11 percent increase from the $70 billion cap in 2021. Market players expect the demand for financing from multifamily borrowers to exceed this. That in 2022, creating opportunities for other multifamily lenders.

In addition, at least half of the loans purchased by Freddie Mac and Fannie Mae must be for communities whose rents are affordable for low- and middle-income households. Lending limits require Freddie Mac and Fannie Mae to lend even more for deeply affordable apartments—25 percent of their loans should be for properties that require up to 60 percent of the area’s median income. Affordable rent for earning families. This is over 20 percent in 2021.

Of course, Freddie Mac and Fannie Mae lenders are still offering loans for luxury apartment buildings. “There is still a substantial amount of lending cap available to finance Class-A properties,” says Evan Blau, president of the agency lending and affordable housing practice at Cassin & Cassin.

The limits allow Freddie Mac and Fannie Mae to purchase up to $39 billion in loans for more expensive (less affordable) apartment properties. But even that huge amount may not add up as the demand for loans from apartment borrowers increases. And rising demand for loans is likely to allow Freddie Mac and Fannie Mae to increase the interest rates they charge and still win enough businesses to cover the amount of Class-A lending allowed by the FHFA. .

“Their appetite for this type of product has waned, at least for now, as they fill their workforce housing buckets,” says Kyle Dreger, senior managing director of capital markets for CBRE. “As they become more comfortable they will hit their FHFA scorecards and housing target goals, they will become more aggressive with these types of deals.”

Freddie Mac and Fannie Mae may offer low interest rates for affordable housing properties. “These deals are getting the best pricing quotes,” Drager says. “At this point in the year, the more affordable the deal, the better the bid.”

The FHFA’s lending range also recognizes apartment properties that are more energy efficient.

“Freddie Mac and Fannie Mae are both still focused on this type of deal and they offer price discounts of about 10 to 20 basis points, depending on the deal,” Draeger says.

In addition, apartment borrowers of all types worry that interest rates are likely to rise throughout the US economy. Federal Reserve officials say they may raise their benchmark interest rates several times in 2022.

Freddie Mac and Fannie Mae loans will be subject to these rising rates like all other lenders. “What they’re both trying to do is lean a little bit on the underwriting of net operating income from properties to try to keep the loan income going as rates rise,” Dreger says.

Debt funds fill the gap

Since Fannie Mae and Freddie Mac lenders can’t accelerate lending their luxury apartments to meet growing demand, borrowers are looking for financing from other lenders. Private Equity Debt Funds are one such group that is stepping in to help borrowers finance these deals. Debt funds are flush with capital, Borsos says, and they can be aggressively underwritten to offer borrowers relatively high income. Debt funds are also offering more competitive interest rates than they were a few years back. According to anecdotal reports from NMHC members, spreads float by at least 175 basis points above the safe overnight financing rate (SOFR) and often range between 200 and 300.

“The spreads are so amazing,” Borsos says.

However, debt fund loans are floating-rate loans, which can be nerve-wracking as interest rates are likely to be higher in 2022. “It will start raining on the debt fund parade,” says Borsos.

Many buyers of apartment properties may also prefer long-term, fixed-rate financing. “Debt funds don’t provide long-term financing… it will eventually have to be filled,” says Borsos. But despite this, debt fund financing has allowed many borrowers to close their purchases of apartment properties.

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