Sponsored by Bellwether
By Jeff Patton
The multifamily debt market is estimated to reach $390 billion in 2020, bringing with it some key changes from federal agencies that could translate into opportunities for businesses. With the Federal Housing Finance Agency (FHFA) providing more clarity regarding the multifamily debt that Fannie Mae and Freddie Mac can purchase during the fourth quarter of 2019 and during 2020, both are focusing on mission-driven business and setting the framework for the end of conservatorship.
The FHFA announced significant changes to the annual lending caps for both Fannie Mae and Freddie Mac, including establishing a hard cap of $100 billion for each firm—and eliminating exceptions for affordable and green improvements to multifamily housing. The new structure also contains a requirement that at least 37.5 percent of business during the next five quarters be allocated to “mission-driven” developments. That mandate makes loans on affordable and workforce housing more important, and both firms will have to be more selective about financing class-A properties.
With all of these adjustments at play, there will be more of a focus on core products and a more limited appetite for rehab loans and lease-up programs designed for new properties nearing stabilization. That means there is a major opportunity for lenders in the multifamily debt market to step up and fill that void. In fact, according to a study conducted by the Mortgage Bankers Association, life insurance companies have the bandwidth to fund an additional $10 billion of business in 2020, compared to 2018 volumes. That is a drop in the bucket given the expected increase in demand next year.
End to conservatorship
As Director Calabria stated in November, FHFA wants to end conservatorship by 2024 and is implementing changes to prepare the firms. Fannie Mae and Freddie Mac have been instructed to build capital by retaining earnings, and Director Calabria noted that there could be very large public capital raises in 2021 or 2022. Both will be aiming to highlight the strength of their portfolios and credit performance to demonstrate their ability to effectively manage the businesses after conservatorship. While an end to conservatorship may not change day-to-day operations, it will change how Fannie Mae and Freddie Mac interact with the government and may allow for more innovation. Both are already ramping up efforts to modernize their business models through technology, including better use of data, access to operating metrics, pricing and underwriting, all of which will be powerful tools for their lending partners.
While legislative action is improbable, there could be an administrative solution in the coming years. The four entities—Fannie Mae Single-Family, Fannie Mae Multifamily, Freddie Mac Single-Family and Freddie Mac Multifamily—won’t necessarily come out of conservatorship at the same time and it’s not yet clear which business model is best suited for the post-conservatorship environment.
Overall, the drivers for the multifamily industry are decidedly positive. Urbanization, demographic shifts and delayed household formation all point to increased demand—and the capital to support those projects is readily available. An increased marketplace for multifamily debt, along with a focus on mission-driven properties, will certainly drive a smaller footprint for Fannie Mae and Freddie Mac, which is exactly what the FHFA wants.
Jeff Patton is executive vice president, national director of agency relationships at Bellwether Enterprise.
Learn more at www.bellwetherenterprise.com.