Multifamily Borrowers Look to GSEs for Much-Needed Stability

Marcus & Millichap's Paul Lewis and M&T Bank's Mark Gould on why agency lending will play an even bigger role this year.

Paul Lewis

The long-expected end to an unprecedented 14-year run of low interest rates materialized in 2022 as the Fed initiated an aggressive campaign of hikes to battle inflation in April. The Federal Reserve raised the target range for the federal funds rate by 50 basis points to 4.25 percent to 4.5 percent during its December 2022 meeting, marking a seventh consecutive rate hike pushing borrowing costs to a new high since 2008. After four consecutive 75 bps increases, the latest move by the Feds indicates a belief that previous increases have been successful in slowing inflation as intended; however, interest rate increases are expected to continue, albeit at a slower pace, through at least mid-2023.

With the outlook for this year still very much in flux, agency lending will become an even more important source of capital for multi-family property owners than ever as the liquidity and stability of the agencies are strengths in markets under duress. Fannie Mae, Freddie Mac and the Federal Housing Administration provide stable liquidity, and unlike other capital sources, are required by federal mandate to be in the market at all times.

The advantages of agency debt include stable and reliable capital in turbulent markets, with no re-trades or pulling of commitments as we see with other capital sources. Agencies can provide flexibility through loan terms as short as five years, modified prepayment structures, variable rate executions and supplemental loans that can be easier and cheaper capital than mezzanine loans, C-PACE loans and preferred or common equity.

Marcus & Millichap Capital Corp. working together with M&T Realty Capital Corp. recently leveraged the agencies’ financing flexibility to help a client maximize loan proceeds despite having retail space that was leased but not fully occupied at the time of the financing. We were able to structure an option for the client to obtain an agency supplemental loan at competitive pre-negotiated terms if the property reaches stabilized retail occupancy within six months of closing of the first mortgage. This level of flexibility would not be available through other non-agency lenders.

Mark Gould

Agency debt remains a competitive non-recourse option, especially for mission business. Agency long-term debt reduces borrower refinance risk as compared, for example, to the wave of bridge debt cash-in refinances (or defaults) that are anticipated. Agency debt may prove to be a better economic choice in 2023 than using short-term debt today to kick the can down the road and face possible refinance risk should interest rates remain elevated or the economy enters a recession, which has become more likely.

In a time when there is a critical shortage of attainably priced rental housing in the U.S., affordable housing products available through agency lenders are more important than ever, including Sponsor Initiated Affordability launched by Fannie Mae in March of 2021. Working with  its network of Delegated Underwriting and Servicing lenders, Fannie Mae seeks to find creative solutions to  address the nation’s shortage of affordable multifamily housing.

The SIA incentives, in the form of lower borrowing costs, are available to borrowers who agree to preserve or create a minimum of 20 percent of units in a multifamily property affordable to residents earning 80 percent of area median income or less, adjusted for family size, with rents not exceeding 30 percent of adjusted AMI for unit size, over the life of a loan. The rent and income restrictions are documented in an affordability agreement and require annual certification. These incentives aim to preserve naturally occurring affordable housing and workforce housing and support socially responsible investing. See for additional information.

Photo courtesy of Fannie Mae

Last year, Marcus & Millichap entered a strategic alliance with M&T Realty Capital to enable MMCC to provide clients with increased access to M&T Realty Capital’s affordable and conventional multifamily agency financing through a highly streamlined process with dedicated resources. The alliance allows both firms to provide clients with the most competitive capital markets solutions secured by multifamily properties throughout the United States. M&T Realty Capital is a Fannie Mae DUS and MAH lender and an approved Freddie Mac multifamily lender for Freddie Mac’s Conventional and Targeted Affordable Housing loans.

We expect that a favorable agency market in 2023 will help us to deliver $3 billion plus this year, though current volatility is pushing our clients to favor more flexible prepay capital in anticipation of a more favorable long-term financing environment in the next one to two years.

 Paul Lewis is senior vice president and national director of Agency Programs at Marcus & Millichap. Mark Gould is national production manager, M&T Realty Capital Corp.

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