Like the rest of the world, most lenders are breathing a sigh of relief that 2020 is ending, given the uncertainty across markets due to inconsistency in the Covid-19 approach. All lenders are in the mood to get out of the gates of 2021 quickly, keeping liquidity in the market and offering new programs to capture the best opportunities early in the year.
Key trends that will carry over into 2021 include continued macro challenges in some markets as businesses move to more business-friendly locations like Texas, Florida, and Arizona, and a deeper digging into the property level fundamentals of occupancy and rent collections. If a second federal stimulus package is delivered in late 2020 or early 2021, we expect the borrowers to benefit from better pricing and new structures for both acquisition and recapitalization transactions.
GSE’s, with reduced caps for 2021, have already shifted focus into affordable properties along with true workforce housing in the B and C categories. We expect to see continued activity from FHA/HUD, which became an even more important capital source in 2020.
The search for yield will drive some traditional life companies to seek alternative structures in addition to the historically long-term, low-rate loans. Construction, bridge, and preferred equity/mezzanine debt are gaining traction with some of the life companies. In addition to a continuing interest in multifamily, a select group of the life companies is seeking to lend short- and long-term capital for retail assets, with grocery-anchored retail, and neighborhood service at the top of the list.
We expect allocations for commercial mortgage loans will be strong as the search for yield within the life companies could be limited if the corporate debt markets are in flux. Corporate America will be dependent on the economy, but the unknowns of the recovery due to Covid, the effects of the vaccine, and the continued impasse in Washington DC could make that slow to occur.
Some of the lending activity will be impacted by expected consolidation within the life company industry, which will continue in 2021. Until we know where that consolidation happens, it’s hard to predict where the impact will land, but suffice to say the life company landscape should prove to be dynamic in the coming year.
With the holidays now upon us, we have our eyes firmly fixed on 2021 business, and FHFA’s newly announced scorecard has set the table for another productive year at Fannie Mae. Despite some changes to the volume cap, we do not foresee any disruptions to our business in the New Year. The 12-month cap was reduced from $80 billion to $70 billion, and the mission-loan benchmark increased from 37.5% to 50%. These may seem like significant changes, but the $70 billion cap is in-line with Fannie Mae’s origination volume in 2019 and 2020, and the definition of “Mission” has been expanded to include a broader base of affordable properties. Neither change is likely to limit the scope of our business, nor cause material changes in the structuring or processing of our DUS loans. As such, we expect to be as competitive as ever in 2021.
As the year winds down, Freddie is focused on funding their full $80 billion allocation for 2020. While they manage through their very large pipeline, indications of carryover into 2021 are still being calculated. That number will be important, as the FHFA has reduced their cap for 2021 down to $70 billion. Freddie continues to remain sheepish on student housing, value-add, and lease-up properties.
Overall spreads have increased, but remain competitive on properties that meet the new affordability guidelines outlined by FHFA. Those guidelines now require that 50 percent of the business must be mission-driven broken down as 30% at 80% of AMI and 20% at 50% of AMI. It should be noted that Freddie Mac would have met those guidelines over the past three years.
The high volume of FHA transactions has remained steady as we head toward the end of 2020. With relatively stable (and historically low) interest rates, borrowers continue to take advantage of locking rates for the longest loan terms available in the market, generally 35 or 40 year, fully-amortizing terms.
FHA continues to be an attractive option for to-be-built multifamily assets as developers can secure the construction and permanent debt, in a single transaction, and eliminate any refinance risk. In the first quarter of 2020, FHA eliminated the “three-year rule” restriction for multifamily assets. This rule had prohibited FHA from providing permanent loan financing for newly built multifamily assets that were less than three years from final completion. This resulted in a surge of new multifamily loan opportunities for FHA, and this wave is expected to continue for the foreseeable future. Another significant contributor to FHA loan activity in 2020 were two loan modification programs offered by FHA – 223(a)(7) and IRRP. These programs allow borrowers with existing FHA loans to efficiently and expeditiously refinance their FHA loan to a new loan with much lower rates.
NorthMarq is poised for a near-record year in FHA loan volume in 2020 with nearly double the FHA loan closings compared to 2019. As we close 2020 and, look to 2021, our FHA pipeline is extremely robust and we are prepared to assist any borrower with their FHA financing needs.
We expect to see the momentum from Q4 2020 continue and accelerate in Q1 2021, with most lenders already poised to come out of the gates aggressively. We’re watching for new programs from all lenders that will address specific niches and investment strategies, which we expect to bode well for borrowers. However, the speed of the activity will likely be impacted if the federal government doesn’t come through with some type of stimulus program to support the fundamentals within our economy.