GSE Outlook Stays the Course

Fannie Mae and Freddie Mac are coming off a banner year for multifamily loan purchase and loan guarantee volumes, but while the government-sponsored enterprises (GSEs) anticipate plenty of activity, their executives anticipate similar numbers rather than another giant step forward.

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“We’re expecting 2018 to be roughly flat,” said David Brickman, executive vice president & head of Freddie Mac’s multifamily business. “Obviously, it’s still relatively early. We could be a little bit lower or a little bit higher, but as of now, it looks like we’ll be pretty much equal to where we were last year.”

Fannie Mae provided more than $67 billion in financing and supported in excess of 750,000 multifamily units in 2017, the most ever for its Delegated Underwriting and Servicing (DUS) program. For its part, Freddie Mac financed a record $73.2 billion in loan purchase and guarantee volume for 2017—a 30 percent year-over-year increase. That represents support for more than 820,000 units.

Judging by the results for early 2018, however, things may be slowing down. During the first quarter, Fannie Mae provided $11.3 billion in new multifamily financing, down from $17.4 billion in the first quarter of 2017. Meanwhile, Freddie Mac’s $13 billion first-quarter volume brought mixed news: a 53 percent dip from the record-setting fourth quarter of 2017, but a slight year-over-year uptick of 2.4 percent.

Cap compression

In November, the Federal Housing Finance Agency (FHFA) announced new multifamily lending caps for Fannie Mae and Freddie Mac starting in 2018 in an effort to ensure that the GSEs provide liquidity for the multifamily market without impeding the participation of private capital. Under the new guidelines, each GSE is capped at $35 billion, down from $36.5 billion in 2017.

Certain loans in the affordable and underserved market segments are excluded from the caps. For green financing, FHFA is now requiring multifamily loans that finance energy or water efficiency improvements through Fannie Mae’s Green Rewards and Freddie’s Green Up/Green Up Plus programs to provide 25 percent energy or water savings for borrowers and/or residents. Some GSE programs are evolving as a result of these changes.

Freddie Mac’s most active programs are still affordable housing, Green Advantage and small balance loans, in which the company set records last year. At Fannie Mae, the Green Financing, Structured Transactions, Seniors Housing and Multifamily Affordable Housing programs all set new marks.

Setting new paths

Fannie Mae and Freddie Mac are stepping up their efforts to address the affordable housing crunch. Last November, both GSEs announced their re-entry into the Low-Income Housing Tax Credit (LIHTC) program. “Few programs are as mutually beneficial as LIHTC,” Brickman said. “It incentivizes private investment in affordable housing, delivers much-needed cash equity to owners of affordable properties and, most importantly, encourages the development and preservation of critical affordable housing in underserved areas throughout the country.”

Both agencies put forward new initiatives in the last couple of quarters. Last December Freddie Mac unveiled Duty to Serve, a new plan to tackle the U.S. affordable housing crisis. The program focuses on underserved markets by financing rural and manufactured housing and preserving more affordable housing.

This April, Freddie followed up with Targeted Affordable Housing Express, a new offering designed to provide faster, simpler and lower-cost financing for the preservation of smaller affordable rental properties. Available to properties with loans of $10 million or less, TAH Express is an extension of Freddie’s Targeted Affordable Housing platform, which generally finances properties that provide rent-restricted units. A combination of condensed pre-screening, simplified legal documents and standardized underwriting permits Freddie Mac to offer discounted transaction costs.

Fannie Mae’s recent efforts to tackle the affordability challenge include Healthy Housing Rewards, introduced in mid-2017 to promote healthy design in newly constructed or rehabilitated affordable communities. “We believe that the strength of an affordable rental housing property is directly linked to the health and stability of the people and families who live there,” said Bob Simpson, Fannie Mae vice president of affordable and green financing. Participants can save between $15,000 and $75,000 per year by incorporating features that improve air quality, encourage physical activity and provide common space, community gardens and playgrounds.

Berkadia arranged the refinancing of 600 on Broad, a former warehouse in Philadelphia that was redeveloped into apartments about five years ago.

Jonathan Rose Cos. and Columbia Residential closed the first Healthy Housing Awards deal in January 2018 with their purchase of Edgewood Court Apartments, a 204-unit affordable property in located in Atlanta’s Edgewood neighborhood. Following an $18 million makeover, the community will remain affordable, with all apartments designated for residents whose income is at or below 60 percent of the area median. New elements include energy conservation and sustainability measures; a community and leasing center, with a computer lab and fitness facilities; a community garden and playground; refreshed building facades; roof and gutter replacements; repaved roads and walkways; new ADA-compliant units; and interior upgrades.

“Edgewood Court represents a terrific opportunity to work with residents to revitalize and preserve this community amidst a rapidly transforming neighborhood,” said Nathan Taft, managing director of acquisitions at Jonathan Rose. The project is slated for completion in early 2019.

In January, Fannie unveiled Enhanced Resident Services, the next stage of Fannie’s Healthy Housing Rewards initiative. The program offers discounts of as much as 30 basis points to sponsors that offer day care, job training, education programming and other services.

During the first quarter, Berkadia arranged an $18.2 million, 12-year financing with Fannie Mae for PMC Property Group on 600 on Broad, a loft conversion in Philadelphia. The 12-year, $18.2 million refinance, which closed in the first quarter of 2018, was for a 12-year term. While GSEs prefer originations on single assets, PMC Property Group also owned an adjacent commercial property that is not securing the loan.

“We worked with Fannie to structure around it,” said Kimberly Cozza, Berkadia’s managing director, GSE lending. “We had the existing owner ground-lease the apartment-building parcel to a newly formed special purpose entity. It was a conventional deal and counted toward the GSE cap, but we were still able to get competitive terms.”

Oversupply on the radar?

Freddie Mac’s Brickman noted that interest rates are more volatile in 2018 than they were last year, and the resulting uncertainty has slowed both refinancing and investment sales. However, he does not regard another much-discussed concern to be a major hurdle.

“As demand remains strong, we believe what little bit of oversupply that might be in certain markets will get absorbed,” he explained. “And, given that the predominant source of our business is the Class B and C space, oversupply doesn’t much affect our posture in terms of markets and where we’re willing to purchase mortgages.”

Fannie Mae’s Simpson concurs. “We anticipate that the market is going to continue to be strong,” he said. “But the market ebbs and flows, and we might see a little bit of a slowdown from last year.”

You’ll find more on this topic in the June 2018 issue of MHN.