Rising Interest Rates Haven’t Slowed Agency Activity
The agencies are seeing another strong year. To date in 2018, Freddie Mac has funded $22.9 billion, an 18% year-over-year increase, and Fannie Mae is on par with the tremendous volume that it did in the first part of 2017. While interest rates are likely to rise, they remain at historic lows and are not expected to have a significant impact on agency activity. GlobeSt.com sat down with Aaron Beck, vice president at NorthMarq Capital, and Eric Flyckt, senior vice president at NorthMarq Capital, to get a mid-year update on agency activity and a look at the year ahead.
GlobeSt.com: How has Fannie Mae and Freddie Mac’s activity in the first half of the year compared to activity during the same time in 2017?
Eric Flyckt: Fannie Mae’s year-to-date volume through May is $20.1 billion versus $25.2 billion through May of 2017. However, 2017 figures were anomalous, due to a huge January rollover from 2016—$9.3 billion of volume in January 2017 versus $4.6 billion in January of 2018. April and May 2018 figures exceed same-month production from 2017 by a healthy margin. Through May, Freddie Mac funded $22.9 billion, an increase of 18 percent over the same period last year.
GlobeSt.com: What is continuing to drive agency demand this year?
Flyckt: Low rates, innovative product enhancements and a flexible underwriting. Though US Treasury yields have increased considerably, Fannie Mae is aggressively pricing quality business. Fannie Mae continues to introduce new product and process enhancements. Their near-stabilization execution has been a very popular driver of new business this year. Fannie Mae has also exhibited a flexible approach to credit, allowing its DUS lenders to stretch to win the right business.
Aaron Beck: There are a number of factors driving multifamily demand. Top among them are the demographics of today’s renters. Baby boomers and millennials are entering the rental market in increasing numbers. A growing portion of the nation’s boomers are looking to downsize, while many millennials want to start new households. Today’s millennials are slower to reach major adult milestones than past generations, paving the way for a solid renter base in the years ahead. Last year, about half a million young adults moved out of their parents’ homes, the majority likely choosing to rent. Yet, close to another million are still residing with their parents. This existence of these “shadow households” implies that there is still significant potential for growth in the number of new renter households, absent any further economic or demographic changes.
In addition, a growing number of households are showing a preference for rental housing. In Freddie Mac’s recent survey of America’s renters, the company found that a total of 67 percent of renters view renting as more affordable than owning a home. With rising interest rates, that percentage is likely to increase, particularly amongst first time homebuyers. Almost three-fourths of millennial renters say that they will continue renting due to financial reasons. That number was at 59 percent just two years ago.
GlobeSt.com: Do you expect this activity to change as interest rates rise?
Flyckt: Intuitively, it seems like a sharp increase in interest rates would result in an attendant decline in production volume. That said, treasury yields have increased approximately 50 basis points since the beginning of the year; however, Fannie Mae is experiencing a banner year in terms of year-to-date production volume. The increased Treasury yields perhaps have encouraged some Borrowers off of the fence. In addition, Fannie Mae has employed aggressive pricing waivers to help make deals work in spite of the rising yields.
Beck: To date, increasing interest rates have not had much of a negative impact on multifamily or commercial transaction volume. This should continue to be the case in the near future due to the lack of properties available for sale, plenty of available capital, multiple buyers competing for properties, and a strong tenant demand and economy.
GlobeSt.com: What programs within Fannie Mae have been most popular this year, and why?
Flyckt: Fannie Mae’s near-stabilization program has been a very big seller this year as a result of the large number of new construction and renovation deals approaching stabilization. The near-stabilization program provides the ability to lock the rate and fund the loan upon reaching 75 percent occupancy. This has been an effective means for Borrowers to take interest rate risk off the table without waiting for full stabilization and without reducing loan proceeds since Fannie Mae sizes the loan assuming stabilized occupancy.
Beck: Freddie Mac continues to see dramatic success in a number of core programs including its small balance loan business, for properties with five to 50 units, targeted affordable housing, for properties where some or all the units have rent restrictions or receive government subsidies, and green lending, which is exceeding last year’s volume. Freddie Mac’s Green products finance energy- and water-saving improvements.
GlobeSt.com: What is your outlook for Agency production in the second half of the year?
Beck: Both Fannie Mae and Freddie Mac have significant ‘dry powder’ vis-a-vis their regulatory production cap, so we expect the Agencies to be poised to continue to compete aggressively for business through the balance of 2018. Absent some material unforeseen disruption, we expect a strong finish to the production year and volume to be consistent with last year’s outstanding performance.