Capital Corner: Agencies gain steam for the second half of 2021

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The annual National Multi-Housing Council conference in early June marked the mid-point of 2021, which spurred many changes in underwriting and programs for Fannie Mae, Freddie Mac, and FHA/HUD. Those changes are expected to fuel increased volume for the agencies, helping them achieve both the mission-driven lending and the overall lending cap put in place by FHFA.

This month’s Capital Corner provides insights on those updates from NorthMarq’s agency production leaders. Patrick Minea, executive vice president/executive managing director – debt and equity, leads the conversation with NorthMarq’s heads of production: Scott Suttle, Fannie Mae; Sharon Plattner, Freddie Mac; and David Schmidt, FHA/HUD.

According to Minea, NorthMarq had good representation at the conference, with many productive meetings with investors and capital sources. Overall, capital is plentiful and investors continue to pursue multifamily across all sectors and markets.

Pat Minea: Give us an update of where your agency is so far in 2021

Scott Suttle: Fannie Mae had 66% of all agency lending in the first quarter of the year, so for the second quarter, they basically coasted through, trying to get their run rate back to the $70 billion 2021 allocation. In the past several weeks, we’ve seen them get back in and get more aggressive, which makes us anticipate a very busy summer and fall.

Sharon Plattner: Things at Freddie Mac are strong. It was a little slow in the first quarter, which we think was due to the competition with debt funds and Freddie’s inclusion of the debt service reserve. But NorthMarq’s pipeline is 10 percent up in from production from last year, with April and May sign-ups picking back up.

David Schmidt: HUD is dealing with an unprecedented amount of volume, which I think is well known. That volume crunch has caused the things to slow up more than normal, but we’re dealing with it at NorthMarq. To give some perspective to the wave of business at HUD, they are looking at volume of about $35 billion this year, which is up from about $20 billion last year. For NorthMarq, we’ll be at around $400 million rate locked and closed by the end of the first half of the year, which is well north from where we ended last year.

Minea: Some metrics I heard at NMHC were that records are being set across the country – from Denver to Nashville. As we shift into the second half of 2021, what are some changes you anticipate to help borrowers compete going forward?

Suttle: Fannie and Freddie announced they are bringing some of the Covid-suspended programs back online. For instance, Fannie Mae instituted the debt-service reserves, which they are no longer requiring. They also had suspended the early rate-lock program, and put on the shelf the near-stabilization program, which was a big production generator for Fannie Mae. Finally, they had suspended underwriting on commercial income. For the last 30-45 days, Fannie has put all of those programs back online. Instead of having one arrow in the quiver as we head into the summer, we’re back to having most of the arrows in the quiver.

Plattner: With Freddie, the big new was the full release of the debt service reserve, as well as the return of some of Freddie’s well-used programs including the lease-up program, adding back commercial income and value-add. Moving forward with Freddie, they are super-competitive with spreads right now. They did have a little bit of a slow start to the first half, not getting the signs ups that they wanted, so that’s leading to the spreads that are being quoted. We expect that to carry on, at least through the third quarter.

Schmidt: It’s almost an example of what HUD did not do in the last year versus what they can update. What they did not do was get conservative with the debt service coverage and/or loan-to-value during the pandemic – they kept those at 85% loan-to-value and a 1.17x coverage. Because FHA didn’t tighten up their parameters, we were able to be very aggressive on a number of deals. In one instance, we did about a $12 million cash-out (on a $40/m loan) – and I’m pretty sure we gave the borrower all of their equity back plus some. HUD doesn’t move very fast, so I don’t expect to see many changes. They have talked about releasing the debt service Covid-reserves, but it hasn’t happened yet. It’s slow and steady with FHA.

Minea: Is there a current deal, pricing example that is indicative of the changes?

Suttle: With the no more Covid-reserves plus the pricing from the agencies, we’re working on five credit facilities. We’re seeing the Fannie fixed-rate spread on 10-year paper showing up in the low 130’s and in one case, the high 120’s. As Sharon noted, I think the agencies are ready to jump back in. The IO is still there on transactions, which is consistent with Fannie’s focus on the exit. We’ve gotten deals in the door in the last few weeks that we wouldn’t have been able to look at with the Covid-reserves still in place.

Plattner: One recent example is a deal we’ve recently signed up in Phoenix, done by Brandon Harrington and his team. With this one, it’s an acquisition that is at 70% LTV, 125 debt coverage, with seven years of IO on a 10-year term. That’s definitely outside of the box and one of the first deals with a waived debt-service reserve.

Schmidt: Most of the deals we’re looking at on the refinance side are cash-out, which dovetails HUD’s ability to do the high-leverage, low coverage and drives our volume. We’re still seeing lots of activity in the D4 space, with new construction/permanent loan side of the business and unprecedented in the market and unique to HUD. It’s slow and steady with FHA, but very aggressive with pricing and leverage points.

NorthMarq is experiencing record volume in investment sales and debt and equity this year, with the agencies helping to drive production.