Which GSE Is Right for You?

Stephen A. Sobin

There are many different types of apartment properties: market rate apartments, affordable housing, student housing, senior housing, manufactured home parks, mobile home parks, etc. Fannie Mae and Freddie Mac, both Government Sponsored Entities, are two of the largest lenders financing these types of apartment properties. Which GSE is most appropriate for your deal? Which GSE has the best rates today? How has the latest rate increase from the Federal Reserve affected agency lending?

This article will attempt to explain the differences between the Freddie Mac small balance program and the Fannie Mae small balance program for apartment loans. Both Fannie Mae and Freddie Mac are “mission driven” to make loans on affordable housing. Both agencies offer discounted rates on apartment properties that offer apartment units at rents that meet their affordable guidelines. While both agency lenders have many similarities, there are key differences which you should know:

Registration and Rate Lock Procedure

Probably the largest difference is that Fannie Mae offers its lenders delegated lending authority, which allows these lenders to approve their own loans, whereas Freddie Mac requires their lenders to submit a complete loan package to their underwriters for credit approval. With Freddie Mac, the loan application is submitted (or registered) with their credit department upfront. Freddie Mac then issues a 35 business day rate hold on the application which allows the borrower and lender time to submit a complete credit package for approval. As long as the package is delivered timely to Freddie Mac, the rate is held as of the original application date.  With Fannie Mae loans, the rate is not locked until commitment, or shortly before closing. In quickly rising rate environments like we are currently experiencing, the Freddie Mac policy is incredibly important to borrowers looking to protect their deals as they move through the application process.

Loan Underwriting and Flexibility

There are many nuanced differences between Fannie Mae and Freddie Mac when it comes to loan underwriting. When it comes to “interest-only” loans, Fannie Mae is much more aggressive on pricing as they don’t increase the rate nearly as much as Freddie Mac. They will even consider full term interest only, whereas Freddie Mac will usually offer only 1-3 years. For customers seeking prepayment flexibility, Freddie Mac might be a better option as they have several prepayment options to choose from, ranging from yield maintenance to soft stepdown options.  When it comes to loan terms, we see another major difference. Freddie Mac offers its borrowers fixed rates for 5-, 7-, and 10-year terms. Fannie Mae offers fixed rates all the way out to 30 years.  For borrowers seeking the longest fixed rate terms possible, Fannie Mae is the better option. Another difference is loan size.  While most Fannie Mae lenders look for loans of $2 million and above, Freddie Mac lenders will often consider loans as low as $1 million.

Property Types

As mentioned above, there are many different types of apartment properties. Both Fannie Mae and Freddie Mac look at market rate apartments and are both aggressively seeking affordable properties. When it comes to student housing, senior housing, and mobile home parks, Fannie Mae is the better option. The Freddie Mac SBL product was developed as a streamlined product for standard apartment properties and was never intended to focus on these other property types.

Loan Pricing

At times, Freddie Mac is priced lower than Fannie Mae, and at other times it is the other way around.  It all depends on supply and demand.  At the beginning of each year, Fannie Mae and Freddie issue annual quotas for year.  When either is over quota, rates tend to rise.  When one is under quota, rates tend to decrease.  Right now, as we begin the third quarter of 2022, we are seeing that Fannie Mae is priced better than Freddie Mac.  The major reason now is that we are in a rapidly rising rate environment and Freddie Mac is very concerned about the potential for higher rates moving forward. Since Freddie Mac holds the rate at application (as opposed to commitment) they are much more exposed to future interest rate spikes.  Accordingly, they are charging higher rates now to protect themselves as we move forward.

For borrowers seeking an apartment loan today, it is important to consider a lender that offers both Fannie Mae and Freddie Mac SBL financing. The lender will assess the loan parameters and the borrower’s needs and determine which agency loan and which agency product is best.

Stephen A. Sobin is the president and founder of Select Commercial Funding LLC, a nationwide commercial mortgage brokerage company. He is a proud member of the InterCapital Group, a nationwide alliance of commercial mortgage professionals.