Changes to Agency Lending

Fannie Mae and Freddie Mac delegate their lending partners to underwrite, approve and service loans while setting the program underwriting guidelines and agreeing to purchase the mortgage at a future date. Before Covid-19, rates were sitting around 3% for most loans in most markets. These two government backed loan programs are the largest source of capital to the multifamily loan market. In fact, towards the end of 2019, Fannie and Freddie announced a pull back in originations because the private lenders with whom they shared risk were writing so many mortgages that they were approaching their yearly loan cap too quickly. Strong property values, low interest rates and solid market fundamentals kept demand up for both multi-family acquisitions and refinances. Delinquency rates were at record lows. Then the declaration of a national pandemic turned the commercial markets upside down- and almost all commercial lending took a breather to figure out pricing and leverage- and what the world might look like after the stay at home orders were lifted and the economy opened back up. While Fannie and Freddie continue to put out loans, they have implemented some new underwriting changes in light of the market chaos.

The major ones are as follows:

Reserves-  Fannie is asking for 12 months of P&I, taxes, insurance, and replacement reserves. If the loan is under $6M, that reserve for P&I jumps up to 18 months’ worth. Freddie is requiring 9 months of P&I only. Loans under their Small Balance program will require a 12-month debt service reserve and taxes and insurance impounds for the life of the loan, and all properties with more than 50 units will require a replacement reserve.

Both lenders are calculating the P&I on a 30-year amortization schedule- even if the loan has an Interest-Only Component.

Underwriting-  DSCRs and max LTVs haven’t been announced programmatically for large loans, but they are more conservative overall and both are deciding on a deal by deal basis. Freddie Mac has identified five markets that have an increase in DSCR and reduction of 5% leverage from base guidelines.

Pricing-  Fannie’s full leverage loans are at 3.5%, Freddie is at 3.75%, with breaks given for market size, affordability, etc. Small balance loans are pricing around 3.75-4.00%.

Commercial Income-  Freddie Mac is not counting commercial income unless the tenant is credit rated or critical to supply chain. Fannie is responding similarly, and excluding all income unless it is a grocery store or, on a case by case basis, a restaurant with delivery.

Timing on new deals-  Fannie is taking a few days to respond, while Freddie is a week out.

Both Fannie and Freddie have rolled out very specific and detailed guidelines for both large balance and small balance loans, and we are happy to go over more of those specifics with you in person, and discuss how your multifamily project may fit into the amended programs. The good news here is that the volume caps have not yet been lowered, and there is still money available for apartment financing at a great rate. AREC can help you navigate the process of understanding and accessing this capital in an efficient manner.

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