Multifamily Lending Trends to Watch in 2018

CBRE Vice President Brandon Smith shares his outlook for the multifamily financing market in 2018, and how the recent FHFA update to its housing goals will impact Fannie Mae and Freddie Mac.

FHFA changes to impact multifamily lending

Brandon Smith, CBREFannie Mae and Freddie Mac are making changes to their lending caps and “green” programs in 2018. These green loans, excluded from their caps, have helped increase market share. The FHFA, Fannie and Freddie’s regulator, typically aims for a market share of 40 percent of all multifamily originations. However, their joint market share has crept up near 50 percent this year.

Fannie and Freddie are looking at a record “3-Peat” this year: through September, the agencies acquired $92.6 billion of mortgages, putting them on pace to surpass $120 billion by year-end. That would exceed the $112.1 billion record in 2016, which was up 25 percent from the previous record of $89.6 billion set in 2015.

The current cap for multifamily loans bought by each agency is $36.5 billion, but that doesn’t include mobile home parks, affordable housing or “green” loans. Loans outside the cap now account for 50 percent of all originations. Green loans have been especially successful, accounting for 42 percent of Fannie’s overall purchases and 27 percent of Freddie’s.

In response, the FHFA recently released their update regarding their rules for 2018. The main takeaways are:

  • Actual caps will drop back to $35 billion, from $36.5 billion, which was expected.
  • Green programs will continue to qualify for the cap exclusion, but the minimum energy or water savings has been increased to 25 percent (up from 20 percent).
  • They are adding another tier of affordability – “Extremely High Costs Markets” – which will allow for pro-rata excludability based on units at or below 120 percent of AMI. They have not yet defined which areas fall under this category.

Overall, this is good news. Freddie will no longer have a minimum spend requirement for green improvements. Plus, in high-cost markets, more units will qualify for affordability. These changes will allow for continued liquidity and spread savings.

However, the agencies have asked for clarification on savings requirements for the green programs—if borrowers are allowed to meet savings in both energy and water, instead of having to choose only one category, that would benefit pricing and continue the strong demand for agency loans.

Spreads remain tight as Fannie investors remain active

Prices for multifamily loans have remained low, as investors continue to be hungry for Fannie bonds and agency CMBS bonds in general. The market has been very active and well-bid, averaging $1 billion to $1.5 billion/week of new-issue Fannie bonds, since the beginning of October. Structured adjustable-rate mortgage loans continue to be in demand, as the supply has been off this year, and 12-year, fixed-rate terms remain the best bid. There is very strong interest across the curve that we expect to continue through the first couple of weeks of December.

In the past, the market moved wider going into year-end, as trading volume typically slows during the holidays and market participants start to close out their books. This year has been a little different: Our traders have seen far less volatility in the market and the demand for agency MBS has been robust all year.

One contributor to the increased liquidity—and resulting pricing stability—is the size of the deals. Average loan size is up this year, which, from an investor standpoint, has been a positive in helping grow the investor network as production has shot up. This demand has kept spreads stable. In fact, investor spreads have dropped by half in 2017 versus 2016 and 2015. Investor spreads are a small, but meaningful, piece of the overall mortgage spread.

The larger loan size also makes it more efficient for certain pockets of money, particularly institutional money, to invest in agency CMBS in a meaningful way. This is more of a challenge for Fannie’s one-off deal model.

Wells Fargo Research noted last week that agency CMBS holdings among mutual funds were up 23 percent in the third quarter, driven entirely by holdings of Freddie K certificates. Since K deals are now included in the Barclays aggregate bond index (a benchmark for mutual fund/money managers), fund managers need to maintain positions in mortgages, and Freddie bonds in particular.

Overall, the appeal of higher yields from CMBS compared to treasuries or corporate bonds is drawing attention and benefiting both Fannie and Freddie’s pricing models.