Runway is Clear for Agency Financing in 2020Paul Winterowd
We are now a month into 2020 and wanted to share a few exciting updates about Agency (Fannie Mae and Freddie Mac) loans for this year. In a nutshell, Agency loans provide a great non-recourse alternative to recourse bank loans with additional bells and whistles like 30-year amortizations, interest only periods and low interest rates, all of which combine to increase your net cash flow.
Both Fannie Mae and Freddie Mac announced their year-end 2019 production volumes last week. As such, it’s worthwhile to share a summary of these year-end 2019 Agency volumes in the hopes that they will assist you as you plan for potential refinancings and multifamily acquisitions this year.
First off, multifamily Agency production volumes totaled more than $148 billion in 2019, with Freddie Mac financing more than $78 billion and Fannie Mae more than $70 billion of this total. This figure is noteworthy as it relates to the FHFA’s new scorecard released last September. It allows for continued volume growth for the Agencies in 2020, while remaining below the volume caps put in place under the new scorecard.
These new multifamily volume caps gave each Agency a $100 billion cap for the five quarters – starting Q4 2019 and ending 12/31/2020 ($200 billion total between Fannie and Freddie). There are no exclusions from this volume cap, and a requirement that a minimum of 37.5% of all multifamily originations be “mission-driven, affordable housing.”
In other words, the Agencies will compete hard for loans on workforce housing. Typically your B & C class properties where the rents comply with their affordability standards. That means incredible terms for you!
Assuming Fannie and Freddie did roughly $20 billion each in fourth quarter 2019 financing (they were likely slightly below this level), that leaves $160 billion in cap space for 2020, which would be an 8.1% increase over the $148 billion the Agencies financed in 2019. Reading between the lines – once again their pencils are sharp, and terms are getting more attractive.
From a strategic perspective, Agency loans are a valuable tool for investors looking to grow their portfolio. Because they are non-recourse, it allows virtually unlimited growth. It gets you out from the burden of the unlimited personal guarantee that comes with bank loans. With regards to future financing, having a portfolio of properties financed with agency debt makes you a more attractive borrower to all types of lenders, recourse and non-recourse alike!
Additionally, there are a lot of different flavors and programs within the Fannie and Freddie umbrellas. Multiple term options, programs incentivizing “Green” properties, rate discounts for Low Income Housing, Assumability, Value-Add programs, different pre-payment structures, Interest Only options, Rate Lock options, the list of loan customizations to meet your needs is robust.
Of the common Agency loans, there are really two buckets the loans fill. Small Balance and Conventional. Freddie Mac has led the charge regarding the Small Balance Space. This program is a streamlined process with lower costs than the conventional program. There are nuances in loan pricing based on the regional market and also the location of the property within that region. This program offers loans from $1 million to $7.5 million.
Fannie’s Small Loan Program has been more competitive outside the urban cores and will go up to 80% LTV. Loan size with this program is $1 – $6 million and has amortizations up to 30 years. It has proved to be a great option for investors trying to maximize leverage in smaller markets.
Fannie Mae & Freddie Mac are also very competitive lenders in the Seniors Housing, Manufactured Housing and Student Housing space. Below are links to term sheets on the programs:
- Fannie Mae Seniors Housing Program
- Freddie Mac Seniors Housing Program
- Fannie Mae Student Housing Program
- Freddie Mac Student Housing Program
- Fannie Mae Manufactured Housing Program
- Freddie Mac Manufactured Housing Program
Typical Agency loans require the combined Sponsor team to have net worth equal to the loan amount and liquidity equal to 10% of the loan amount on deals over $10 million, or 9 month’s principal and interest payments on loans less than $10 million.
The Agencies want their borrowers to have prior experience owning “like-kind” assets meaning if you want an agency loan on a multifamily property, they would like to see that you have owned one multifamily asset for 2 years, or 2+ multifamily assets for at least 1 year. We have ways to help you work through this if you are just starting out.
Once you have done an agency loan, you are “in the club”. The Agencies highly value repeat borrowers because they appreciate a proven track record. One you have that established, it is both easier to get Agency loans, and to get the best terms.
Finally, what we are seeing over the course of the last few months, is both Fannie and Freddie are actively quoting and winning business. Things have normalized and are as competitive now as they were when they took their foot off the gas last summer due to volume cap concerns. Game back on.
With the mandate both Agencies have to continue to grow their annual multifamily production volumes over 2019, 2020 will be another great year for Agency Financing and hopefully you will benefit from it.
There is a lot to wrap your head around with all the different Agency options so please feel free to reach out to me, if you have any questions or if there is anything we can do to assist at present. We look forward to great success in 2020!