Recent Developments in the Multifamily Agency Financing

For those of our readers not aware, in recent weeks, some new developments have occurred in the world of Fannie Mae and Freddie Mac due to some allegations of fraud that have surfaced in loans done through a large brokerage shop. We have received a lot of intel from various sources regarding what potentially took place and how this will impact the lenders view of “brokered business,” which has typically been a significant source of deal volume.

Fannie Mae and Freddie Mac exist to promote affordable housing in the US, mainly through their efforts in the capital markets. On the single-family side, without Fannie and Freddie, consumers would not be able to get a 30-year fixed-rate loan. Fannie far outweighs Freddie in this market, and the GSEs (Government-Sponsored Enterprises) have been the proverbial 800 lb gorilla in this space. On the multifamily side, the loan portfolios of Freddie and Fannie are comparable in loan scale, however, they are now hands down the largest lenders in the apartment sector. This dominant position was not always the case. As recently as 2014, JP Morgan Chase was the leader and the number one lender in terms of dollar size originating in the multifamily sector. This position was remarkable, considering JPM was primarily active on the East and West Coast and a handful of cities throughout the central US. Over the last nine years, the GSEs have overtaken every other private lender, including banks, life companies, and CMBS, to become the two largest lenders in the multifamily space. It’s an interesting coincidence when you consider how acute the lack of housing affordability has become in the United States over the last ten years. Yes, there was a period during the GFC when apartments and home building fell off a cliff, but so did household formations. To that end, household formation has generally declined in the United States since the late 70s. Is it more than a coincidence then that housing affordability has become more of a national pain point as Fannie Mae and Freddie Mac have increasingly become bigger and bigger players in the multifamily financing space?

The biggest change in the last few weeks is greater scrutiny with mortgage broker business submitted to the Seller Servicer/DUS lenders – what Freddie and Fannie refer to as their conduits. One senior industry professional I spoke with this week summed it up nicely. His take was that fraud was going to happen when you are doing that much volume, and everyone is a grown-up so it’s not as if people don’t understand that and try to make sure it doesn’t happen. The difference was a few years ago, when times were good, rents were increasing, and so were values, so it was harder to detect. Now values are dropping, rents are stagnant and/or declining in markets, and with higher interest rates, deals that need 70% leverage on a refinance only pencil to 50% leverage, for example. A lot of money is on the line, or stands to be lost, so some bad actors are being exposed more. In this instance, it has resulted in the broker or correspondent business being put under the microscope.

One could conclude that this could only be bad for mortgage brokers, which it likely will be for some firms and individuals. Having been both on the lending side and brokerage side, I have been a firm believer that not all brokers are created equal, and this will impact those brokers mostly dependent on agency financing. I could also see the volume of business drop that the agencies finance every year for no other reason than they are prescreening deals and underwriting them with greater attention to detail.

But I see this as a positive development from where we sit at Slatt Capital, but maybe even for the housing market more broadly. At Slatt Capital, we pride ourselves in providing a diverse range of lenders to our clients for each property we work on. We excel in all areas of the debt capital markets including life insurance, banks, credit unions, debt funds, and agencies. This change could be a wonderful opportunity to introduce more agency borrowers to other forms of debt financing, as two lenders in the form of FNMA and FMAC do not fit all multifamily borrower’s needs. Going further, I could easily see the agencies regrouping and focusing more on promoting and financing affordable housing “mission-driven business,” which would mean market rate and new construction non-affordable multifamily property owners will need to explore other options for debt. After all, leadership at the agencies has changed a lot since 2008, when they were taken under conservatorship by the federal government. Remember, these companies were once publicly traded, but there was a solid push to roll these companies off the government’s books and make them private again. That push has all but disappeared under the Biden administration, and I believe these two companies will continue to focus on “mission-driven business,” which is tied to public policy going forward.

One thing is for certain however, we will continue as a company to provide access to a diverse pool of capital market solutions to all our clients that is rooted in honesty and transparency.

John Darrow
Principal
john.darrow@slatt.com